International accounting standards - Research Paper Example

Will there be a change to the organizations which set accounting standards and/or a change in the power structures within the standard setting process as a result of the current financial crisis Introduction: The purpose of this paper is to try and understand the implications the prevalent global financial crisis will have on the organizations that are placed in order to determine the accounting standards for firms to follow. Now, in the U.S., the applicable regulations are Generally Accepted Accounting Principles, while in Europe they are the International Financial Reporting Standards. However, we will be focusing more on the International Financial Reporting Standards in Europe which are surveyed and controlled by the International Accounting Standards Board; if nothing but merely due to a lack of space. Now, our strategy in dealing with this topic is going to be as follows: the inner workings of the global financial crisis and what it has become in the present will be critically analyzed as quite frankly, that lies outside the bounds of this topic. Rather, we will pick out some International Accounting Standards that are currently in place and actively applied throughout the world. We will then try to analyze whether a change needs to be made to these standards in order to make them more holistic with regards to the contemporary global financial landscape. [1] For the purpose of this paper, we have chosen International Accounting Standard 1 and 24. Now the reason for choosing these standards is very simple: the first international accounting standard is related to the proper documentation of the financial statements and their proper release to the public. This has been a major talking point during the recent global financial crisis i.e. firms have been alleged by all quarters to have misread and subsequently withheld important information from their investors which led to the escalation of a minute problem; which was the sub-prime mortgage crisis into this global financial crisis. [2] The other International Accounting Standard that we have chosen for our paper is IAS 24 which basically concerns the related party transactions. The choice of this specific standard had been geared by consistent notions running around the financial markets that organizations have used their related ventures of key partners in bailing out an firms which have been in financial distress as part of a setup which may not be wrong according to the letter of the law but is certainly ethically immoral and perhaps socially not optimal; given that such transactions of bailout have occurred. Based on our analysis of these two standards, we will try to rationalize a hypothesis for the question that has been posed to us at the start of the paper. [3] International Accounting Standard 1: The main purpose of the International Accounting Standard 1 is to formulate a sort of best practice for the manner in which financial statements of different companies are prepared for final presentation. This is largely in order to ascertain the seamless comparison vis--vis the financial statements of the organization that have been produced in the preceding years and with the financial statements of other organizations. To achieve this goal, this standard demarcates a holistic set of prerequisites with regards to the presentation of financial statements, principles governing their configuration and the least necessities that have to be present in the reports vis--vis their specific subject matter. A complete set of financials must include a Balance Sheet, an Income Statement, a Statement of changes in Owner's Equity demonstrating all the changes in the equity or changes in equity beside those transactions which have been conducted by equity holders whilst they used their position as equity holders, a Cash Flow Statement and a Notes for Guidance [4] In addition to this, the standard is also very clear on the other issues with regards to the presentation of the financial statements in that these statements must be unmistakably demarcated and must be clearly told apart from any other type of information that is being presented in the same financial reporting document. Also, the financial statements that are being produced must give an impartial financial position of the company and must also be in accordance with the IFRS standards that directly govern their creation. [14] Now, the changes that have been brought to this standard in recent times are basically geared towards the macro landscape rather than the micro landscape as the main focus of the change is to ensure that information depicted in financial statements from this point must be based on the common traits of organizations that do produce financial statements at the end of the year. [5] This can be interpreted in several ways but our understanding from this is the basic formulation of a standard template of financial reporting statements which can be directly applied to all the organizations. In addition, the introduction of a statement of comprehensive income seems to come across as a mechanism of producing a statement which would give a complete picture of the bottom-line of the organization. From this standard, we can clearly see that its basic purpose is the proper and public dissemination of financial information which relates to the performance of the firm. So, this standard basically offers a standard template which is to be employed by all organizations following the International Financial Reporting Standards during the construction of their financial statements. Now, in the aftermath of the global financial crisis, we can see that there is a need for a greater level of transparency between the firms and their investors which leads us to a question: whether the standard is equipped enough to handle robust financial transactions of firms which occur by the hundreds of a thousand in every business cycle. [14] However, due to its use as merely a standard template, we can say that it is still able to perform its specific role regardless of what the financial setup would be in the aftermath of the global financial crisis. The basic purpose of this standard is to enable the investors and the general public to ascertain complete information of a firm which firms would still produce if they were to follow this standard correctly and completely. [6] We can now move on to the next accounting standard that we have chose for our analysis: International Accounting Standard 24. International Accounting Standard 24: Now, we move onto the case of the International Accounting Standard 24. Here to, as with the case of the previous International Accounting Standard 19, it is important that we first understand the significance of the standard before moving onto the specific organizations. The basic objective of the International Accounting Standard 24 is to ascertain complete disclosure of information; however, this disclosure is with regards to a specific entity as the International Accounting Standard says that it should be ensured that an organization's financial statement contains the proper revelations which are necessary for attention to be drawn towards the distinct likelihood that the organization's overall financial position and subsequent performance with regards to profits or losses recorded, may be affected by the presence or random existence of parties related to the organization and also by transactions conducted with these organizations and or any outstanding debit or credit balances that exist between these two organizations. [7] Now, the big question that arises in this scenario is the exact definition of related parties. For this matter, the International Accounting Standard 24 defines related parties as such where if one party has the ability and the influence to control the other party or enjoys the ability to exercise significant influence or joint management of the said organization with regards to making financial and business operations decisions. [8] Now, in accordance with International Accounting Standard 24.9, any party can be related to another entity if by direct or indirect means; which arise through one or possibly a chain of intermediaries, the specific party either manages, is managed by or is under common management with the entity. This spectrum includes parents, subsidies and fellow subsidies or has an interest in the entity which allows it to exert control over the entity or Joint control with another party over the entity. This must be in accordance with the definition given by the International Accounting Standard 28 Investments in Associates, the party fulfils the definition of being as associate of the entity. [15] This must also be in accordance with the definition given by the International Accounting Standard 31 Interest in Joint Ventures; the party fulfils the definition of being a joint venture of the entity if it is in the key management personnel cabinet of the entity or the parent organization of the entity, it is a close personal liaison of any of the entities that have been defined earlier or it is an entity enjoys influence, wither direct or indirect or in collaboration with another party or is somehow significantly swayed with regards to organizational decision making or who enjoys a significant power of choice and veto in such an entity; wither directly or indirectly or through any individual which have been referred earlier or the party offers a post employment plan of benefits for the assistance of the employees of the entity or any entities which are related to it; or itself is the benefits plan for this entity. [9] Now, it is pivotal to note that the revision that had been made to the International Accounting Standard 24 in 2003 removed the exemption offered to state controlled entities from the related party's disclosures which have been mentioned above. Before the aforementioned revision, state controlled entities were offered this exemption, which is why profit seeking state controlled entities that employed International Financial Reporting Standards as their modus operandi was not offered the exemption from disclosing transactions with other states controlled entities to the public anymore. However, the International Accounting Standard 24 also has a corollary 11 which streamlines the essentials of non-relation between a party and an entity such that two enterprises only based on the presence of a common director or key management personnel, two venture capitalists who share joint control over a venture, providers of finance, trade unions, public utilities, government departments and agencies in the course of their normal dealings with an enterprise; and a single customer, supplier, franchiser, distributor, or general agent with whom an enterprise transacts a significant volume of business merely by virtue of the resulting economic dependence. [10] This International Accounting Standard offers a trickier prospect as compared to the International Accounting Standard 1. This is largely due to the fact that this standard, despite the best efforts of the International Accounting Standards Board, has a certain degree of subjectivity attached to it, something that was pivotally missing in the extremely objective International Financial Reporting Standard 1. This proves to be the greatest problem in the face of this standard as many organizations are able to bypass or wriggle past the system and achieve their personal goals which might come at the expense of the investors and in general: the society. Organizations who have two firms operating in different aspects of the contemporary business landscape have the ability to use this standard to finance the activities of one firm with the profitability or merely the revenue streams of the other. [11] For example, if an organization has a subsidiary firm in the banking sector and one in the entertainment industry, then the global financial crisis would see them try to recover their investments in the baking sector firm which is in trouble with the revenue streams of the firm in the entertainment sector as opposed to their own wealth, which in turn has the possibility of rendering the entrainment business in jeopardy. All of this can only occur in the presence of subjective judgment calls which the international accounting standards board tries to completely eliminate in the details of this standard. [12] The Standards setting process: Source: http://www.aasb.com.au/About-the-AASB/The-standard-setting-process.aspx From this structure, we can basically see the accounting standards setting process as it appears for the Australian Market. Now, we can see from the status flow diagram that when an issue is identified at any level of business whether it the individual firms and organizations that are operating in the country, the AASB activities or the international accounting standards organization. Now, the Australian Board for managing international accounting standards first takes note of the issue and shares the information with the firms operating in the country and the international accounting standards setting board. Then the agenda is addressed critically and research is done in order to determine the issues behind the specific agenda and then conduct research in order to ascertain the critical issues of the matter. After the research has been conducted, the issue is then consulted with the shareholder's board and then the case is submitted to the international accounting standards board for final approval. When the case is approved, it is picked up and subsequently applied in the firms in the country. Now in light of the recent crisis, we have seen that this entire process has come under scrutiny. The lag that ensues during the formulation and the subsequent implementation of this process is somewhat extended which has led to a non-real time change in standards with regards to problems and their subsequent solutions. In addition, cases have to be adjudicated by an international accounting standards board which is not necessarily attuned to the conditions inside Australia at any point in time as compared to the AASB which further substantiates the creation of an agency problem of sorts for this specific market as AASB is better positioned to take better decision regarding accounting standards but doesn't enjoy the power that is present with the IASB. Conclusion: Based on what we have learnt over the course of this paper, we can certainly say that the present accounting standards are somewhat up to speed with regards to the prevalent financial market conditions, Three is no doubt over the fact that some tweaking in required but that has more to do with the changing times rather than the current financial market crisis, therefore, we would have to disagree with the topic that has been proposed to us at the start of the paper. [13] Bibliography: 1. Deliotte, (2008) 'IAS 24 Related Party Disclosures' retrieved from http://www.iasplus.com/standard/ias24.htm on May 2, 2009 2. Williamson, Duncan (2002) "Accounting Business Spread sheeting" Available at http://www.duncanwil.co.uk/ias1.html [ Retrieved November 7, 2008] 3. Conti, Cesare (2004) "The Impact of IAS on the Management and Disclosure of Financial Market Risks" Bocconi University 4. Mari Paananen, Mari and Lin, Cecilia (2007) "The Development of Accounting Quality of IAS and IFRS Over Time: The Case of Germany" Journal of International Accounting Research 5. Schipper, K. (2005). "The Introduction of International Accounting Standards in Europe: Implications for International Convergence". European Accounting Review 14:101-126 6. Whittington, G. (2005). "The Adoption of International Accounting Standards in the European Union." European Accounting Review 14:127-153. 7. Bodie, Z. and Alex K. and Alan J.M. (2002). Investments. Boston: McGraw-Hill Irwin. 8. Blumberg, B., Cooper, D.R. & Schindler, P.S. (2005). Business Research Methods. London: Mc. Graw-Hill. 9. Cooper, C.L, Argyris, C (1998) 'The Concise Blackwell Encyclopedia of Management'. Blackwell publishing. 10. Jones, J. (1996). Investments: Analysis and Management (5th ed.). New York: John Wiley & Sons. 11. Lawrence, G. (2007). IFRS: Coming to America. Journal of Accountancy, 203(6). 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