The Financial Statement With the Continental Model Emphasizing Creditors Protection - Research Paper Example

Financial Reporting System of United Kingdom and Germany Accounting practices differ considerably from country to country, and have been influenced by prevailing socio-economic-cultural factors. Over the centuries, many countries have contributed to the development of accounting. The United Kingdom e.g. contributed the 'true and fair' view, the United States the concept of 'substance over form', and Germany 'standardized formats' for financial statements, all of which were fuelled by commercial developments. Over a period of time, a number of distinct groups, each having reasonably similar methods of financial reporting emerged. Notable among these is the Anglo-American and the Continental-European forms of accounting. Differences in these systems arose essentially due to factors such as the systems of taxation, finance and jurisprudence being followed within these blocs. However, as world trade and financial markets get more and more integrated, these differences are being either removed or narrowed down leading to the development of a single universally accepted accounting standard. As brought out earlier, accounting practices are shaped by economic, political, cultural and legal factors. It is necessary to understand these differences to have a wider understanding of accounting practices as well as to be better prepared to operate in a globalized market. Some of the salient differences between the systems prevalent in the United Kingdom and Germany are in the fields of: Costing. Although both have traditional costing systems, the German system places greater emphasis on inventory valuation for financial accounts. Budgetary Controls. Budgeting is used for several purposes in the United Kingdom including for cost-control, whereas in Germany, cost-controls are achieved through technological improvements. Investment Appraisal. In the Continental system, non-financial measures receive much more importance. Performance Criteria. The British system uses only accounting data for performance evaluation, while the Continental system uses both accounting as well as non-accounting data. Strategic Emphasis. The Continental system lays greater emphasis on technological advancement and on maintaining a long-term relationship with bankers, suppliers and customers alike, vis--vis the Anglo-American model. One practical difference that comes immediately to mind as a result of the above factors, is the different method of depreciation followed in the United Kingdom and Germany, which are at the opposite ends of the spectrum. Whereas in the United Kingdom depreciation is determined according to custom with, "convention and pragmatism, rather than exact rules[determining] the method of depreciation, estimates of the scrap value and the expected length of life" (Ferrari L 2005). In Germany on the other hand, tax regulations lay down all these aspects in detail, leaving no room for subjectivity or manipulation. Needless to say, the financial statements of the same company prepared using different accounting practices would have different degrees of transparency. The more transparent the financial statement, the higher the quality and the more its value to investors and shareholders. Another difference lies in the realm of public disclosure. On the Continent, shareholdings are likely to be concentrated in the hands of a few institutional investors like banks and contacts between the company and the bank are likely to be kept confidential. Whereas, when there are more diverse shareholders, public disclosure is more common, allowing a greater number of people to asses the financial viability of a company and its future prospects and potential for growth. These differences in accounting practices, however, are a handicap in the increasingly globalized marketplace. Differences between accounting systems make it difficult to compare the relative worth of a company from an investor's point of view, especially when the investor could well be from yet another country. There is thus a move to introduce International Accounting Standards (IAS) which seek to minimize or offset these differences. Adoption of these standards would automatically result in making many, if not all of these differences, between the United Kingdom and Germany irrelevant once these are applied to existing accounting procedures. The main bone of contention would, however be on the focus of the financial statement - with the Continental model emphasizing creditor's protection, while the focus of the Anglo-American model is to make it more attractive to potential investors. References Ferrari, Luciano Aldo (2005), "Financial Reporting". http://www.consrag.it/approfondiment/Financial%20accounting.doc International Financial Reporting Standards The globalization of international trade and financial markets has been fuelled by developments in the field of communications and information technology. Investors from any country can now readily access financial information of any company from anywhere in the world. This brings to the fore the importance and necessity of having a comparable and transparent system of financial reporting to make the globalized economy more effective. To this end, the adoption of International Financial Reporting Standards is a major development with the European Union even proposing that all enterprises listed in the European Union prepare their consolidated accounts in line with the International Financial Reporting Standards. Different financial reporting standards of companies amongst members of the European Union led to complications not only for those preparing the accounts, but also to those charged with auditing such accounts. Not to be forgotten are the shareholders and creditor who now have to interpret financial statements prepared following different norms and formats to arrive at a 'true and fair' valuation of a company. To remove these anomalies it is sought to harmonize or standardize accounting practices. Harmonization seeks to reduce the difference between accounting systems and methods to ensure that similar types of transactions are accounted for and recorded in a uniform manner as and when they occur and yet are legally accepted in their respective countries. This includes accounting standards that deal with measurement and disclosure, disclosures made by publicly traded companies, and auditing standards. The main benefits of adopting International Financial Reporting Standards would be to provide quality information to international investors on which they can base their investment and credit decisions; increasing international capital inflows through removal of barriers and reducing costs associated with financial reporting. As a result of this, access to world financial markets will become easier for multi-national companies based in the European Union, especially with the expanding East Asian Community. Keeping in mind that the European Union is already well-integrated, foreign direct investment is also likely to get a fillip. Adoption of International Financial Reporting Standards will thus assist in better understanding, lower risks for all concerned and more judicious financial allocations that maximize returns on investment. Voluntary adoption of International Financial Reporting Standards by many companies in he European Union is indicative of the benefits of a standardized system hat avoids accidental errors or disputed arising out of differences in perception. Many multi-national companies are voluntarily preparing their financial statements using International Financial Reporting Standards since foreign institutional investors are more familiar with financial statements prepared that way. This is particularly important if these multi-national companies want to be listed in international stock exchanges, with the United States, Securities and Exchange Commission, "endorsing objectives-oriented rules that are conceptually aligned with the principle-based standards promulgated by the International Accounting Standards Board" (Eaton, S 2005). This is an important development particularly for the European Union when one considers that prior to 2001, the United States had not been favourably inclined towards the International Financial Reporting Standards, believing that their own accounting practices in the form of the Generally Accepted Accounting Practices were of a superior nature. This shift in the United States point of view has further paved the way for the early implementation of the International Financial Reporting Standards and in narrowing don trans-Atlantic differences. As the International Financial Reporting Standards become more and more the global norm, it will be imperative for the European Union to implement the International Financial Reporting Standards whole-heartedly if it has to stay ahead in a competitive globalized market. References Eaton, Sarah (2005) "Crisis and the Consolidation of International Accounting Standards: Enron, the IASB, and America". http://www.bepres.com/bap/vol7/iss3/art4 Read More