Financial Reporting Standards - Essay Example

Section/# Financial Reporting Standards: A Discussion Within almost every business, standards and expectations for a baseline of operation exist amongst competitors and stakeholders. The world of finance and accounting is not different with respect to the levels of standardization and expectation that exists within the world of accounting. For instance, the IASB (international accounting standards board) was formed out of a desire to create an independent accounting standard that can be utilized as a baseline of understanding for the way in which financial transactions and accounting for these can be conducted. Delving back even further into history, the IFRS (international financial reporting standards) were implemented as a means of providing a common language and level of expectation that stakeholders, and business leaders, could utilize as a means of understanding common practices and measurements that were suited for widespread representation of asset and liability representation. Whereas it is ultimately impossible to address each and every scenario within such sets of guidelines and/or expectations, the IFRS has the following counsel that it provides to firms that cannot find an existing best practice: “In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework” (D’Alauro, 2013). Within such a framework, the importance of choosing a reporting standard that meets and corresponds with existing protocol and best practice is underscored. As a means of understanding this dynamic to a more full and complete degree, the following analysis will engage the reader with a discussion of how key rules are followed by directors of companies, the manner through which correct and proper application of the IAS/IFRS rules assists stakeholders in delineating up to date and relevant information, and a final discussion with respect to the manner through which certain core criticisms of this approach have been levied. Firstly, with respect to the applicability of the IAS/IFRS to the decision making bodies of a firm, the level of standardization that they provide is oftentimes invaluable. One might reasonably consider the case of a large Fortune 500 firm that has acquired a new CEO or Chairmen of the Board from another large esteemed firm. The understanding and expectation is that this CEO/Chairperson of the Board will be able to rapidly engage with the financial statements of the firm and plan a strategic integration with the market based upon his/her findings (Lapointe-Antunes & Moore, 2013). Yet, in the case that a thoroughly different level of accounting standards are represented within these reports, the overall level of understanding and expertise that the leader can apply will be necessarily limited. However, within the expectation and reality that the accounting methodology abides by a level of similarity and the core rules of the IAS/IFRS, the decision maker(s) will be able to adequately interpret the information and rapidly draw conclusions based upon the numbers that they are presented (Siddiqua et al., 2013). With such a realization in mind, it comes as little surprise that stakeholders within companies around the globe have placed compliance with the IAS/IFRS as a fundamental requirement for their accounting practices and the means through which financial information is related and explicated. The key issue that exists with regards to changing accounting standards is the very real and present risk that stakeholders within the entity will not be able to accurately interpret the way in which these changes in accounting standards are represented; leading to a situation in which inadvertent mis-representation or lack of knowledge might be effected (Zehri & Chouaibi, 2013). As a means of reducing these unwanted externalities, many firms have taken it upon themselves to perform a series of in depth training seminars as a means of effectively explaining the way in which information will be represented differently within a new convention of accounting or other financial representation. A less likely scenario, but one that still exists, is with regards to a situation in which a iven individual invariably one who is in a position of leadership) wants to represent financial data in a way that would be positive or beneficial for the shareholders or himself/herself (Daske et al., 2013). This is especially dangerous as it represents a shift away from an older and better understood financial accounting standard to one that few stakeholders are familiar with. Firms such as Enron and other ignoble companies have utilized such a tactic as a means of hiding horrific losses by shifting the financial accounting standards to those that have a different methodology entirely (Feleagă et al., 2012). This cannot be understood to mean that if a firm seeks to shift its accounting standards that there is necessarily something nefarious that they are engaged in; rather, it is merely an approach that has been utilized within the past by unscrupulous individuals as a means of hiding the reality of how the firm/organization is performing within the marketplace. Perhaps more than any other factor, the ability increase trust and understanding with respect to financial statements has been the primary motivator for firms to engage with standards such as IFRS (Prather-Kinsey & Meek, 2004). From the discussion that has taken place, it is patently obvious that standards in terms of financial reporting serve a fundamentally important role in ensuring the way in which information is represented within the firm and ensuring that shareholders within the general public can create a solid interpretation of the financial reports and data that are being represented. By choosing to ascribe to IFRS and/or the IAS or even other standards, firms have taken a definitive step towards standardizing their approach to financial accounting and significantly reduce the chance that a level of misinterpretation or intentional utilization of a different accounting practice could lead to fraud or the loss of shareholder trust. In such a manner, beyond merely expemplifying an element of simplicity for firms in an increasingly globalized world, the standards that have been discussed are preciated upon the need to instill trust and singularity within a business world that grows more and more complex and interconnected by the day. Bibliography DASKE, H, HAIL, L, LEUZ, C, & VERDI, R 2013, Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions, Journal Of Accounting Research, 51, 3, pp. 495-547, Business Source Complete, EBSCOhost, viewed 4 March 2014. DAlauro, G 2013, The impact of IAS , Intangible Capital, 9, 3, pp. 754-799, Business Source Complete, EBSCOhost, viewed 4 March 2014. Feleagă, L, Feleagă, N, & Răileanu, V 2012, Theoretical considerations about implementation of IAS, Theoretical & Applied Economics, 19, 2, pp. 31-38, Business Source Complete, EBSCOhost, viewed 4 March 2014. Lapointe-Antunes, P, & Moore, J 2013, The Implementation of IAS, Accounting Education, 22, 3, pp. 268-281, Business Source Complete, EBSCOhost, viewed 4 March 2014. Prather-Kinsey, J, & Meek, G 2004, The effect of revised IAS 14 on segment reporting by IAS companies, European Accounting Review, 13, 2, pp. 213-234, Business Source Complete, EBSCOhost, viewed 4 March 2014. Siddiqua, K, Khan, S, & Shams, F 2013, The Disclosure of IAS/BAS to the extent of largest application in Banking Companies’, Middle East Journal Of Business, 8, 1, pp. 7-22, Business Source Complete, EBSCOhost, viewed 4 March 2014. Zehri, F, & Chouaibi, J 2013, Adoption determinants of the International Accounting Standards IAS/IFRS ‘,Journal Of Economics, Finance & Administrative Science, 18, 35, pp. 56-62, Business Source Complete, EBSCOhost, viewed 4 March 2014. Read More