Harmonization of Accounting Theory and Practices - Essay Example

Harmonization of Accounting Theory and Practices The harmonization of accounting standards has been an issuein the international trading policies. The process has been slowly developing with no progress because of various issues among the international standards. This paper discusses the convergence and harmonization of accounting standards and practices. It states the major benefits of harmonization of accounting standards in international trading activities. It also states the problems that the harmonization of accounting standards would solve in case it is successfully implemented. Additionally, the paper focuses on the difficulties and huddles facing the harmonization of accounting standards and practices and provides a possible solution to the problems it is facing. The paper also discusses the various economical issues that deal with intangible assets in an organization. It states the ways in which intangible assets are valued and how they positively and negatively affect the financial statement and status of the organization. The paper further discusses the implementation of the code of corporate governance by using Omantel Company as a case study. It also evaluates how the company has implemented a code of corporate governance. Introduction The harmonization of the standards and practices of accounts all over the world is the process of bringing together concepts of accounting to a common position. In the world, every country and organization has its own practices and standards of accounting. The harmonization of accounting standards all over the world has been a major concern especially among professionals in accounting. This process involves the convergence of different international accounting standards with the aim of coming up with a similar financial statement all over the world. The harmonization of accounting standards has been a major concern among countries that are involved in trading activities with countries with different accounting standards. Because of the difficulties that come along with varying accounting standards, professionals see the need of harmonizing the accounting standards so as to make trading processes easier Ashley, Leatherbury, Machuca and Philips, 2012). Importance of global harmonization of accounting standards If the accounting standards in the world are converged together, the economy of the world will be in a good position in several ways. The coming up with financial statements would be much easier because only a common standard would be used in making the report. As for now, coming up with one financial report statement is difficult because of the use of different accounting standards in the world. The cost of coming up with financial statements would be reduced if harmonization of accounting standards takes place. This is because the different accounting standards makes it difficult for countries working together to come up with a financial report. for example if a country which uses the IASR standard and works with the US, the country will have a hard time in making a financial report and also effective trading would be hindered (Nikhil, 2006). Varying accounting standards make it difficult to evaluate the performance of companies. Due to this, decision making in companies and corporations become difficult. Therefore, the harmonization of accounting standards would make it easier to evaluate the performance of companies making decision making an effective process (McCombie and Hemant, 2009). The financial reporting quality in the world has been poor because of the difference in accounting standards in different countries. Therefore, if the harmonization of accounting standards is implemented, the quality of the financial reporting statements made would be much better and this will provide a more clear scope of the world’s financial status making decision making easier and effective (Goeltz, 2003). The rapid growth and extension of the international trade in the world also poses a need of coming up with a common accounting standard that will cater for the businesses of all countries in the world. If harmonization does not take place, it is likely that the international trade may drop with respect to its value due to lack of corporation and understanding since every country believes that her standards are the right standards. Conflict may also arise because of the existence of different accounting standards among business partners. To avoid this, the existing accounting standards should merge together to form one and a common standard that would benefit all countries. Harmonization of accounting standards will also help in supporting the stability of the international market which is rapidly growing. International convergence of accounting standards would also play a big responsibility in the allocation and distribution of capital and resources in the world (McCombie and Hemant, 2009). Challenges facing harmonization of account standards and practices. The harmonization of accounting standards despites its benefits is facing many challenges making it difficult for it to be implemented. A major challenge is the reluctance of the United States in adopting the International Accounting Standards Committee (IASC). Harmonization becomes difficult because the US is the largest market holder in the world and their lack of involvement may mean no harmonization at all. The United States together with other countries such as Australia, Canada and the UK have joined up to form the G4 group of nations. Because of this group the harmonization of accounting standards has been a huddle because the G4 nations always want their standards to be seen as being the best. The difference in the economic, legal, cultural and social issues in different nations makes it difficult for harmonization of accounting standards throughout the globe (Campbell, Hermanson and Perez, 2002). The different needs and issues found in the different countries may hinder convergence of multinational standards. Additionally, the accounting standards of different countries in the world are different and it may not be easy to bring together their standards to be one especially if some countries do not have any business treaties with other countries. Since IASB standards are meant to cater for the needs of large and capital markets and investors, countries not involved in these activities may not be willing to adopt the harmonization of standards. Additionally, some countries may find it difficult to adopt the harmonization process because merging of the international financial reporting standards (IFRS) and their standards may not work well due to their very unique philosophy of financial reporting. The quality of the financial report produced after the harmonization of accounting standards may be a challenge to its implementation. This is because the quality may not march the needs and requirements of different nations. Many countries fear that if they adopt the system, they will be obliged to follow the rules and policies of the US. This is because the United States of America holds the most top and largest position of the market share in the world and they may use the harmonized standard for their own benefit and manipulate other capital markets and investors. Difference in the formation of accounting standards and their approach also hinders the harmonization of accounting standards all over the world. This is because some countries have their accounting standards based on principles and others based on rules. There is a great challenge because it is difficult for the ISAB to come up with a clear standard that supports both approaches. Since the IASB accounting standards are based on principles, countries that use rules in their accounting standards are likely not to consider adopting the harmonization of standards process. Additionally, the difference on the kind of trades that take place in different countries and the different goals and objectives of countries may make it difficult for the harmonization of accounting standards in the globe. The identification of commonalities in the different countries to allow harmonization of accounting standards has been a difficult task making harmonization impossible as for now. Because of the different accounting standards among nations, harmonization has become difficult since the coming up with a proper financial statement has not bore fruits (Herz and Kimberly, 2005). Understanding the concept of intangible assets in a business Introduction Most of the time, intangible assets are said to be non-monetary assets that are identifiable and are mostly seen as not to affect financial statements. However, intangible assets can be valued and they in a great way affect financial statements. Intangible assets in an organization or company are considered to be the most value generating aspect in an organization. The kind of intangible assets that an organization has will determine the kind of growth that the organization will have in the future. The intangible assets that an organization has include the trademarks, patents, copyrights, brands, economic goodwill and franchises. Mostly, intangible assets are considered to be less valuable than the tangible assets. In real sense, intangible assets play a major responsibility in the failure and success of a business. Although the intangible assets may not seem to affect the financial statement of the organization, they have a role in the finances of an organization. Without the intangible assets of the organization, the functioning of the organization would lose meaning because it will not achieve its objectives of existence. For example, the economic goodwill of an organization is an intangible asset which is made up of the organizations strengths over its competitors such as a good reputation, connections and its strategic location to the target market. The intangible aspects of an organization are what make the tangible assets to come into existence. Intangible assets in an organization are vital because they consist of what makes the organization different and unique from all others. Most of the time, the costs of intangibles are mostly not put down in the balance sheet. Intangible assets are valuation is achieved by identifying the costs spent on the acquisition of the asset and the expenditures used on the asset to make it more useful to the organization (Benjamin, Robin and Stout, 2006). The cost of an intangible asset depends on the value that it has been given within the organization. For example, in Coca-Cola industry, the brand name has been given more value making it more costly than other intangibles (Sanchez, 2010). Effects of intangible assets on the financial statement In the income statement of an organization, the intangible assets are identified by the amortization expenses stated. Intangible assets have an effect on the financial status of an organization. The financial statements of the intangible assets can only be affected when the assets undergo amortization. This is the process of decreasing the value of the intangible assets of a business. Example, an intangible asset’s value decreases after a period of 17 years and is then sold at a cheaper price. This will affect the financial statement of a business because of its depreciating value. If the assets are decreased by $3,000 each, then the company will have to pay for the assets directly from its financial statement. This will negatively affect the financial statement of business. Another example is when a company amortizes its intangible assets by $10,000 and has revenue of $100,000; the financial statement will be affected. This is because the money from amortized assets will be deducted from the company’s revenue and remains with $90,000. This negatively affects the financial statement of the company (Lloyd, 2007). The amortization of intangible assets of a company can positively affect its financial statement. This is achieved when the value of the intangible assets increase. When they increase, the company will claim the increments made on the assets and would use that to pay taxes on the federal returns. With this, the company can use the value of the intangible assets to stabilize its financial status. If intangible assets are not effectively amortized, the company’s financial statements will be negatively affected (Jovan and Milica, 2010). Oman Telecommunications company SAOG (Omantel): corporate governance Introduction There are various codes of governance that guide the practices of business in a company or corporation. These codes should be followed to the later to ensure ethics and professionalism in business corporations. In this section, we will look at a critical analysis of Oman Telecommunications Company in Oman to see the extent to which the company has applied the codes of governance for public listed companies in Oman. Oman Telecommunications Company is a public company which has followed the codes of corporate governance. The code of governance has been mentioned in a separate chapter from the other annual report of the company. Additionally, the company has explained how it has applied the principles and rules of corporate governance (Omantel Annual Report 2013). The company has stated that their code of governance is not authentic because they did not exercise any auditing from external auditors and have also not obtained a certificate to show that they followed all the rules of code of corporate governance (COCGPLC, 2010). The board of directors of the company is made up of eight members with six of them representing the share of the government and two of them coming from the private sector. It consists of non-executive members with two of the members being independent. The board has held a minimum of 11 meetings in 2013 which has met the requirement of the codes of governance which requires a minimum of four meetings in a year. Furthermore, the board has met severally with a maximum interval of three months. However, the company has not mentioned the roles of the boards of directors in its functioning. In its code of corporate governance, Omantel has mentioned the procedures and conditions of selecting the board members. It has stated that the board members from the private sector would be elected during the Annual general meeting (Omantel Annual Report 2013). The audit committee is made of four members. This is in accordance with the code of corporate governance which requires at least three members. The audit committee has also held meetings in the year 2013. The company has also explained the terms of reference of the committee. It has stated the major roles of the internal and external auditors just as stated in the codes of governance of Oman. The external auditor of Omantel has met the requirements of the COCG because its external auditor is KMMG which is a leading accounting firm in Oman. The company has a human resource committee which is concerned with the welfare of employees. The committee has held a minimum of 7 meetings thus meeting the requirement of the codes of governance. The committee also performs any other tasks given to them by the board of directors. Additionally, the company has a regulatory committee just as required by the COCG. The committee has held three meetings in the year 2013. The committee is also made up of three members (Omantel Annual Report 2013). This committee has not met the requirements of all committees according to the codes of governance which requires a minimum of four meetings and a maximum of four members (COCGPLC, 2010). The company also has included its remuneration matters and details of compliance of the company by stating that no penalties were imposed on the company. Omantel has also stated the channels and methods of communications that it uses to reach its investors and shareholders. It has stated the use of local newspapers, website of Muscat and the company’s website. The company also notifies the shareholders of the financial results by sending them the report. The company has also included the details of its market shares by stating the prices of the shares it has. It has also tabled the distribution of its shares and stated the professional background of its external auditors which is the KPMG firm. Finally the company has included an acknowledgement statement from the board of directors in its corporate governance (Omantel Annual Report 2013). Conclusion The process and attempts of the harmonization of accounting standards and practices is a good move especially now that international trades are rapidly growing. This kind of harmonization will help solve many disputes and conflicts that arise in the international market due to varying accounting and economic standards of marketing. For harmonization to be complete, the bodies that are involved should first be able to overcome the major challenges that have made the process difficult. If the difficulties are dealt with, the process of harmonization will be complete and all countries involved in international trade will greatly benefit from the one common standard. Also from the discussion above, it is clear that intangible assets have a big role in an organization and should be properly cared for. If managed effectively, they will increase the value of the organization. Works cited Ashley Harper., Linda, Leatherbury. Ana. Machuca and JoDee Philips. The Convergence of Multinational Standards and Practices In International Financial Reporting. Journal of International Education Research. Vol 8(4):461-466 Benjamin Foster., Robin, Fletcher. And William, Stout. Valuing Intangible Assets. The CPA Journal. Vol 5(2): 15-26. 2006 Campbell, Huston. Hermanson Herz. And McAllister, Perez. Obstacles to International Accounting Standards Convergence. The CPA Journal. Vol 72(5): 45-48. 2002 Code Of Corporate Governance For Public Listed Companies (COCGPLC). 2010 Goeltz Gregory. International Accounting Harmonization: The Impossible Dream. Accounting Horizons. Vol 5(1):85-89. 2003 Jovan, Kristic and Milica, Dordevic. Financial Reporting On Intangible Assets Scope and Limitations. Economics and Organization. Vol 7(3): 335-348. 2010 Lloyd Austin. Accounting For Intangible Assets. Business Review. Vol 9(1):63-72. 2007 McCombie Kellie and Hemant Deo. The International harmonization of accounting standards: making progress in accounting practice and endless struggle? Journal Of American Academy Of Business. Vol 7(3):154-163 Nikhil Chandra. Harmonization of Accounting Standards through Internationalization. International Business Research. Vol 2(2):194-201. 2006 Omantel Annual Report 2013. Oman Telecommunications company SAOG (Omantel): corporate governance. Pg 22-31 Retrieved from http://www.omantel.om/wpresorces/files/AnnualReport/2013/OmantelAnnualreportEnglish2013.pdf Robert, Herz and Kimberly, Petrone. International Convergence of accounting standards- Perspectives from the FASB on challenges and opportunities. Northwestern Journal of International Law & business. Vol 25(3): 631-660. 2005 Sanchez, Penman. Financial Statement Analysis And Security Valuation. New York: The McGraw-Hill Companies. 2010. Read More