Nonstandard Accounting Common to the High-Tech Industry - Essay Example

International Accounting Standards Introduction The international joint operation of commonaccounting standards is not an emerging idea. This idea was rather formulated in the late 1950’s in order to respond to economic integrations of several nations in form of cross-border capital flows in the post world war II environment (Oppermann and Binnekade, 34). In this regard, the process was initially focused on maintaining harmonization of accounting principles by reducing the differences that existed in the accounting policies used in capital markets worldwide. In 1990, the harmonization concept was replaced by the convergence concept. The main idea behind the convergence concept was that, all nations would come together and form a unified set of accounting standards that would be applied in major capital markets. Additionally, the IFRS also wanted to ensure that the standards are adequately and rigorously used. More over the international standards formulated by international accounting standards took into account the financial reporting needs of the developing nations as well as small and medium-sized entities (SME’s).The IFRS is also in charge of maintaining the IASB independence and financial autonomy. By 1973 the international Accounting standards Committee was formed and it served as the first international accounting standards setting body. In 2002, it was however reorganized and became an independent accounting standard setter. Discussion Currently, more than 100 countries use the International Financial Reporting standards (that is set and issued by IASB) or a local direct of the IFRS. In the United States, the IASB have been developing Generally Accepted Accounting principles (GAAP) as well as IFRS. Additionally the Asian community (China and Japan) are also formulating their accounting standards to conform to the IFRS (Michael, 77). The IFRS dictates that financial statements must be structured in such a way that they reflect the true and fair view of the organization’s financial performance as well as the fair financial position. In this regard the financial statements must provide accurate information about the assets, equity, liabilities, incomes and expenditures of a given organization as well as the operating profits or loses. Additionally, to other relevant information include cash flow movement, contribution by/distributions to investors, notes. Such information enables a prospective investor to predict with great accuracy on when to invest profitably in the organization based on the prediction of future cash flows. IFRS dictates that financial organizations must make faithful representation of information and must also comply with the recognition and classification criteria of financial information. Additionally, IFRS also dictates that an institution operates on going concern basis where financial statements must be prepared and presented to shareholders unless the management foresees possibilities of liquidation, termination of business where there is no alternative but to prepare the document in alternative format. Additionally, the IFRS advocates for accrual basis of accounting. Here an organization must recognize assets, equity and income when they are earned and not when paid for, and expenses and liabilities when they are incurred and not when they’re are paid for. IFRS also advocates for aggregation and materiality concept in which material items are recorded in groups having similar characteristics and they must be presented separately from others. IFRS also forbids offsetting. However, offsetting can be allowed in special cases such as accounting for defined benefit liabilities (IAS 19) and in the presentation of deferred tax assets and deferred tax liabilities (AIS 12). IFRS also advocates for presentation of financial statement on periodical basis, usually after one financial year. Financial organizations may also publish interim financial statements (IS 34) in which the presentation of these financial statement must observe all other principles of accounting as stated by the IFRS (Joe, 45). IFRS also requires that the information presented in the financial statement be comparative. Usually, all information of the preceding year and the current year are presented in the current financial statement. Additionally, a shorn narrative describing how relevant the information contains in the statement is also included. According to IAS, an additional statement of the financial position must be made when an entity is classified in a different way from the one recommended by IAS or when one uses a different accounting policy. This is evidenced when firms applied the revised IAS19 or when newer consolidation standards are adopted (adoption of IFRS 10/11/2012 by companies located in Europe). IFRS also requires that the classification of items within the financial statement and their presentation be consistent. In this regard the preparation and presentation of financial statement should be retained from one financial year to another. This should occur unless the IFRS standards require that the statements’ presentation be changed or when there is significant change in an organization’s operation in which there is need for review of the financial statements, and an alternative presentation would require change in the presentation in order to meet the criteria for application of IAS 8. Generally, IFRS requires that financial statements must be relevant and have faithful representation which is enhanced by maintaining comparability, understandability, timeliness and verifiability. Despite the international accounting standards being effective in harmonizing the accounting standards of major economies, it has been criticized in equal measure. This is evidenced in the127 page report that was prepared y the united states Securities and Exchange Commission (SEC) staff in which they give their major weaknesses of IAS and the reasons why the US fails to use them (IASC, 54). In this regard, the SEC report discovered that the IASB was not supported by majority of players in the US capital markets and the IAS laws were inconsistent with the methods of incorporations that other capital markets applied. The SEC staff would also research o other methods of incorporations such as convergence of accounting standards issued by FABS and IASB, as well as endorsement mechanism of the two. In this regard, the SEC staff observed that several jurisdictions would measure and evaluate the suitability of these accounting standards set by IFRS and incorporate them on standard by standard basis and not in full to the national accounting frame work. The SEC staff observed that large capital issuers generally supported the adoption of IFRS in US, compared to small issuers. In this regard the issuers also required that the commission should provide clarity in the incorporation of IFRS. However, SEC staff observed that the adoption of IFRS would significantly affect issuers, the change required for the adoption of IFRS is costly, capital intensive and has many priorities. Additionally, it would require adequate management and long time to implement the IFRS in US. This led to adoption of Generally Accepted accounting policies in the US. Another prominent weakness if IFRS is that the accounting policy IAS 29 (Financial Reporting in Hyperinflationary Economies) had no significant positive effects on Zimbabwean economy during the 6 year period in which this country witnessed hyperinflation. This led to criticism on the purpose and the efficiency of such a policy that fails to address inflation issues. In this regard, the IAS29 is still being used in its original form in countries like Belarus and Venezuela despite it being inefficient. However, several accounting bodies have suggested that the policy should be corrected and modified by taking the capital maintenance into consideration the daily indexation which would ensure effective capital maintenance in units of constant purchasing power and would ultimately stabilize non monetary economies during periods of hyperinflation (Marius and Johan,, 45). However, the IFRS to date have not corrected the IAS29 to include daily indexation. Due to the above mentioned criticisms of IFRS, the US has adopted Generally Accepted Accounting Principles (GAAP) which is significantly different from ISRS. In this regard, the GAAP holds the assumption of separate business entity. Here the business is assumed to be separate from its owners or even other businesses. In this regard the assets, liabilities, expenses and revenues of a given business should be kept separate from that of the owners and that of other businesses. GAAP is also based on monetary unit principle in which all financial information is recorded using a stable currency (which is the nominal value of the US dollar) as the unit of record. In addition GAAP also holds the assumption of Going concern Principle. This principle also validates methods of asset depreciation, amortization and assets capitalization. Additionally, GAAP assumes that economic activities of a given financial organization are divided into artificial time periods known as financial periods. The GAAP include the historical principles(recognition of assets and liabilities at cost of acquisition value and not the fair value), revenue allocation principle(this is the accrual basis of accounting where the organization records revenues when they are earned and expenses when incurred), matching principle (expenses are matched to revenues and expenses incurred in the year matched to the current year) and full disclosure principle (where all information disclosed based on amount – cost trade-off analysis). GAAP has laid several constraints in its operations. Such include the cost constraint in which the benefits of reporting specified financial information must be greater than the cost. Other constraints are also raised in the other accounting principle (such as objectivity, materiality consistency and conservatism principles) (Hennie and Marius, 24). Several companies are increasingly using unconventional methods to represent a less fair view of an organization’s financial position and operations. These include the use of non- standard accounting policies that do not address transparency, accuracy and full disclosure of vital financial information in the financial statements. In this regard, organizations such as Twitter inc. has emphasized on using its own set of Non-GAAP policies in which costs such as depreciation and stock payments are not included in its income statement which has resulted to conversion of losses(that would have been presented if the firm adopted GAAP)to profits. Several accounting specialists have argued against such policies that under casts financial expenses and overestimates profits against the rules of both GAAP and IFRS. This, according to critics has detrimental effects to inventors as the financial statements provides misleading information since it does not reflect the inability of the firm to make solid profits. According to Joseph Adamo, a financial specialist, researcher, editor and publisher of Investment Newsletters, analysts are only contented in what they obtain from the financial organizations while the financial organization are only interested in presenting their financial information in a way that reflects good financial performance and high financial position. The regulators only allows financial organizations to modify their customized measures as long as they make full disclosures about these modifications in their financial statements as well as show how the information is reconciled and results obtained conform to GAAP. However, according to Barbara Roper, the director of investor protection for the Consumer Federation of America, continuous misrepresentation of financial information by companies to investors may result to technology-stock bubble that was witnessed in the 1990’s which led to adoption of exotic financial measures to justify excessive stock values that later would latter crashed. Twitter’s stock rose by 73 percent on the first day of trading in 2014 despite the company making a net loss of $133.9 million in the first nine months of 2013. In this regard, the company’s management decided to overemphasize in “adjusted Earnings before interest, taxes, depreciation and amortization” Additionally, the management went ahead to omit stock payment to employees which resulted to financial statements showing a 9month profit of $30.7 million (Rodgers, 45). This was a grief violation of both IFRS and GAAP which would have reflected poor performance by Twitter Inc. Another organization that took non- standard accounting policies was the Textura Corporation, a company in charge of making computer software for the construction firms. Textura Corporation had$39.6 million net loss in the fiscal year ended on 30th September. However the firm’s adjusted net loss declined to $13.2 million. This was achieved when the management reduced among other expenses $3million worth of cash bonuses paid by the company to its employees due to the initial public offer. Interestingly, the company released a 9 page press release showing the 4th quarter earnings in which the firms’ net loss is briefly mentioned in page 6. According to SEC Chief Accountant, the continuous use and increased adoption of non standardized accounting policies and use of metrics that do not conform to IFRS or GAAP has resulted to confusion in the Securities and Exchange Commission. However, according to Cantor Fitzgerald, Twitter Inc. is not expected to show profitability using standardized accounting measures until 2016, therefore, if investment was to be based on profitability (under standardized accounting policies) rather than EBITDA. Then, Twitter Inc. would likely suffer low stock valuation. In this regard, financial analysts (like Fitzgerald and Youssef Squali) hold the opinion that Twitter Inc. may continue using non standard accounting policies but they risk stock devaluation compared to its competitors. This has been expressed by J.P Morgan Chase and Co. in which Twitter has been rated as a “neutral” company that has fundamentally transformed communication and information consumption around the globe. Additionally, organizations such as Apple Company and Microsoft have used non-standardized principles (subscription accounting) with regard to deferment of subscription revenue in order to boost the quarterly revenue and improve the company’s stock price (Rodgers, 45). This, under IFRS and GAAP would convey a stronger financial performance and not reflect the true and fair view of the company’s operations. Conclusion Organizations need to adopt internationally accepted accounting standards. This is because they promote clarity of operation, present possibilities of accounting simplification; promote transparency and comparability of financial performance between organizations at national, regional and global levels. Furthermore, adoption of international accounting standards will promote increased capital flow resulting to international investment which reduces interest rates and lead to global economic growth. Additionally, adoption of international accounting standards at global level will promote timeliness and provision of highly accurate information to investors as well as provide protection mechanisms that will prevent the occurrence of national and international economic/financial crisis. However, the adoption of international accounting standards faces problems such as failure of some states to accept these policies based on cultural, ethical, political, and other perceived reasons (IASC, 54). Additionally, the implementation of a new system of accounting policies and standards may take different time periods that vary from one nation to another. A balance must also be struck between professionalism, uniformity, conservatism, and secrecy (on one hand) and statutory control, conformity optimism and transparency on another in order for the entire system to be efficient. Works Cited Hennie, Greuning and Marius, Koen “International Accounting Standards: A Practical Guide Other World Bank Bks.” World Bank Publications, 2001. International Accounting Standards Committee “International Accounting Standards Explained” Wiley, 2000 Print International Accounting Standards Committee, International Accounting Standards Board “International Accounting Standards” International Accounting Standards Committee, 2000 Print Joe, Wilcox “Accounting rules shouldnt change to benefit Apple, other high-tech companies” Beta news. Sep 22, 2009. Web. 17 October 2014. Marius, Koen and Johan, Oberholster “Analysis and Interpretation of Financial Statements” Juta and Company Ltd, 1999. Michael, Rapoport. “Some Companies Alter the Bonus Playbook.” Wall Street Journal. Feb 26, 2014. Web.17 October 2014. Michael, Rapoport. “Twitter Uses Its Own Accounting, and Analysts Go Along.” Wall Street Journal. Dec 3, 2013. Web.17 October 2014. Oppermann,  Booysen and Binnekade,  Oberholster. “Accounting Standards” Juta and Company Ltd, 2008. Print Rodgers, Paul. “International Accounting Standards: From UK Standards to IAS, an Accelerated Route to Understanding the Key Principles,” CIMA, 2007. Read More