Correct Use of International Accounting Standards as a Premise of Fair Financial Statements - Case Study Example

The appropriate application of IAS (international accounting standards), with additional disclosure when necessary, results, in ‘virtually all circumstances’, in financial statements that achieve a fair presentation.” Table of Contents Introduction 2 IAS Financial Statement Presentation 4 Fair Presentation 5 Understanding the Nuances of Fair Presentation 6 Conclusion 8 References 9 Introduction Whilst globalisation is an often used and in many instances over used term, its applicability in terms of the convergence of accounting standards represents what Oatley (2004) termed as the opening up of international markets that have removed borders over the past 15 years. The need for international accounting harmonization has been demonstrated time and time again through events such as the United States accounting scandals of Enron, Worldcom and other debacles (Saudagaran, 2009, pp. 14-21). More recently, the need for international accounting standards has been brought forth by the United States subprime mortgage crisis that sparked a global financial meltdown as a result of the use of disconnected credit default derivatives whereby buyers were unaware of what risk they were purchasing as an investment (Mirnoun, 2009, pp. 21-25).   In terms of delving further into the harmonisation of international accounting standards, the purpose and responsibility of financial statements is “… to reflect the effects of transactions and events within and outside the company on its assets and liabilities, financial position and income” (Alexander et al, 2011, P. 23). The fundamental concept of IAS is that harmonisation increases “… the comparability of financial information and creates more transparency for the users …” (Alexander et al, 2011, P. 23). In furthering our understanding of the manner in which IAS is harmonising accounting standards is recognising the differences in country classifications with regard to legal systems, cultural differences, taxation and finance (Alexander et al, 2011, P. 36). As a means to gain a picture of the differences in countries they provide the following:   Figure 1 – Differences in European Accounting Systems (Alexander et al, 2011, P. 37)   The above, plus the need for a common set of standards for stock market and investment standpoints are driving the move toward harmonisation that has seen 100 out of 195 countries as subscribing to International Financial Reporting Standards (IASB, 2009). In terms of convergence, the merging of accounting systems entails the differing standards employed in varied countries, along with the United States FASB (Financial Accounting Standards Board) into the based IASB (International Accounting Standards Board) that is based on IRFS standards (IASB, 2009). In light of the foregoing, this study seeks to ascertain that “… is that compliance with IAS 1 and the International Accounting Standards will normally result in financial statements that are true and fair except “in extremely rare circumstances” (Alexander et al, p. 154).   IAS Financial Statement Presentation Under IAS 1, the objective represents prescribing the foundation as well as basis for the manner in which general purpose financial statements (GPFS) are prepared (Epstein and Jermakowicz, 2008, pp. 22-23). The uniformity as designated under IAS 1 was designed to provide for as well as ensure the compatibility of the financial statements of a company in prior periods, and with the financial reporting of other entities (Epstein and Jermakowicz, 2008, pp. 22-23). In terms of specifications, the following represent key facets in the process and preparation (Mackenzie et al, 2011, pp. 18-27):   Table 1 – IAS 1 Preparation and Presentation of Financial Statements (Mackenzie et al, 2011, pp. 18-27) IAS 1 Presentation and Preparation They are prepared as a going concern unless company management seeks to have the entity liquidated, cease trading, and or have no other alternative but to close the entity. The financial statements, with the exception of cash flow information, are prepared using accrual accounting. The financial statements, with regard to classification as well as the presentation of items are in general retained from one period to the other (or next) The material class of items that are similar are presented separately, with items that are not similar are also presented in this manner, with the exception being if they are immaterial. In understanding the above, misstatements and or omissions concerning items that are material could collectively and or individually influence user economic decisions are material and need to be included. The IFRS does not permit offsetting income and liabilities as well as assets and liabilities unless required. In terms of assets and liabilities, they are presently broadly in terms of their order of liquidity as current and or non-current. Unless the IFRS it either permits otherwise or requires, information that is comparative is disclosed for all the amounts reported in the financial statements.           Fair Presentation In terms of fair presentation as well as IFRS compliance, the financial statements prepared need to be presented fairly with regard to the financial performance, the financial position as well as cash flows of the company (Rolfe, 2007, p. 206). In terms of presentation, the requirements are that the representation concerning the impact and effects represented by transactions, events as well as conditions that are reported in accordance with the recognised criteria and definitions for assets, liabilities, expenses and income set forth under the “Framework for the preparation and presentation of financial statements’ (Kolitz et al, 2009, p. 161). The net application of the foregoing is to result in financial statements under the IFRS that result in fair presentation (Kolitz et al, 2009, p. 161).   Interestingly, owing to the broad range of situations and circumstances that can occur, IAS 1 recognises that there are certain types of circumstances and or conditions whereby management may arrive at the decision where compliance with IFRS mandates might be or would be misleading in that this might conflict with financial statement objectives (Alexander and Archer, 2006, pp. 45-49). The departure of a company from the standard fair presentation requirements and frameworks is reported in the financial statements that include a detailed explanation and disclosure concerning the reasons, nature as well as impact for the departure (Greuning, 2006, pp. 15-17). Critical in the about is that management in the preparation of financial statements need to arrive at an assessment of the ability of the firm to continue as what is termed as a going concern (Opperman, 2009, p. 121). If the management of the entity in looking over the details of the financial statement sees or express serious concerns concerning the ability of the company to continue operations, the reservations and uncertainties needs to be stated (Opperman, 2009, p. 121). If in the assessment and or analysis of the financial and other details arrives at the conclusion the firm is unable to or cannot maintain operations, then under IAS 1 it is required that a series of disclosures relating to the failure to continue as a going concern are made (Finch, 2008).     Understanding the Nuances of Fair Presentation As explained in the above segment, management, after an assessment of the financial status and operations of the firm, makes a determination or acknowledgement of the ability of the firm to continue. In almost all instances, the operating and or financial condition of a firm is either understood and or known to management as a result of their understanding of operations and prior financial statements. (Collins and McKeoth, 2010). In order to arrive at fair presentation, the accounting process consists of varied requirements that allow for the assessment of operations. These component parts represent the compiling of the firm’s assets, liabilities, equity, expenses and income that include losses and gains, other changes as they may occur in equity, and the position of cash flows (Kantor, 2008, pp. 96-99). The foregoing represents the objective and purpose of the financial statement that is comprised of the following:   Table 2 – Components of Financial Statements (Melville, 2008, p. 34) IAS 1.8 Balance Sheet This aspect of the financial statement represents the separation of current and non-current assets and liabilities. Under IAS 1 it states that that “... only if a presentation based on liquidity provides information that is reliable and more relevant may the current / non-current split be omitted” (Bhattacharyya, 2006, p. 34). Income Statement Under IAS 1 under IASB, the wording presently uses the words and statements profit or loss as opposed to net profit or loss. The foregoing are thus the new descriptive terms utilised for the bottom line on the income statement. Equity Statement Under IAS 1 the statements must show the profit or loss that occurred for the period that each item is recognised directly in equity and as the total of these items. The point is, the statement regarding equity reveals changes in equity that show as changes in equity, and or those changes in equity that arose from transactions with equity holders acting in their capacity. Cash Flow and Income Statement Stated under IAS 7. Notes These comprise a summary of accounting policies along with other explanatory notes.   From the preceding it is clear that the fair presentation of information under IAS is dependent on the rules being applies in the same manner, consistently across all firms. This helps to explain the exception as noted by a company that ceases to fit within the definition of a going concern.   Alexander et al (2011, P. viii) advise that IAS is the required format for accounting reporting in Europe for all public companies. In providing a summary primer on what accounting seeks to accomplish. Alexander et al (2011, P. 3) advise that its purpose (accounting) is to tell business owners and shareholders of “… what they have, what they used to have, the change in what they have, and what they may get in the future”. In this vein Alexander et al (2011, P. 4) tell us that accounting consists of two major groups, management accounting that aids in supplying information they need, and external users as represented by equity investors, loan creditors, employee groups, analyst-advisors, suppliers and trade creditors, customers, competitors and rivals, the government (tax and agencies, along with the general public. The preceding aids in understanding the role of financial reporting and the many purposes it serves. The multiple needs of external users in general represent presenting many, but not all of the required information as essentially forward looking, along with meeting the information and content requirements of different user groups where different information is needed about the same items (Alexander et al, 2011, P. 8). In addition, the other responsibilities include meeting the needs of different users in terms of understanding, complexity and length, with the last area represented by the fact that not all of the required information is likely to be contained or included in financial accounts as a result of reporting constraints (Alexander et al, 2011, P. 8). Conclusion In equating the appropriate application of IAS to achieve a fair presentation, the situations and requirements are straight forward as well as clear. The preceding might sound like a foregone conclusion, but when one understands that the standard is international in scope and has been devised to consider the needs, requirements and other facets of in excess of 100 countries, the scope in achieving the above simplistic statement takes on meaning. As brought forth in the Introduction, accounting harmonization under IFRS took into account a broad range of considerations, one of which was fair presentation as stated by Alexander et a (2011, p. 154).   As uncovered through the examination of the requirements as well as rationales for fair presentation, the need and requirement for uniformity defined the process, with Alexander et al’s (2011, p. 154) representing an exception that dealt with a reality. The facts are, many firms cease to exists for a number of reasons and thus there need to be reporting standards that bring forth the details of these types of situations for the general public, investors, and or other interested parties. Thus accounts for the exception statement indicated by Alexander et al (2011, p. 154) whereby that compliance with IAS1 and the International Accounting Standards will normally result in financial statements that are true and fair except “in extremely rare circumstances”. As indicated, the exception is the reporting of a firm that no longer is an ongoing operation.     References Alexander, D., Archer, S. (2006) International Accounting/Financial Reporting Standards Guide. New York, CCH Publishing. pp. 45-49 Bhattacharyya, C. (2006) Indian accounting standards: practices, comparisons, and interpretations. London, McGraw Hill. p. 34 Collins, B., McKeith, J. (2010) Financial Reporting & Accounting. Maidenhead McGraw Hill Education, Epstein, B., Jermakowicz, E. (2008) IFRS 2008 Interpretation and Application of International Accounting. New York. John H. Wiley & Sins. pp. 22-23 Finch, C. (2008) A Student’s Guide to International Financial Reporting Standards Wokingham, Kaplan Publishing, Greuning, H. (2006) International financial reporting standards: a practical guide. New York, World Bank Publishing. pp. 15-17 IASB (2009) International financial reporting standards. New York, IASB. Kantor, M. (2008) Valuation for arbitration: compensation standards, valuation methods. New York, Kluwer Law International. Kolitz, D., Quinn, A., McAllister, G. (2009) A Concepts-Based Introduction to Financial Accounting. London, Juta and Company p. 161 Mackenzie, B., Coetsee, D., Njikizana, T. (2001) Interpretation and Application of International Financial Reporting. London, Juta and Company Melville, A. (2008) International financial reporting: a practical guide. New York. Pearson Education. p. 34 Mirnoun , K. (2009) Impact of Financial Innovations on the Subprime Mortgage Crisis: Causalities. New York. Druck and Bindung, pp. 21-25 Oatley, T. (2004) The Dilemmas of International Financial Regulation. 23, No. 4. Regulation Opperman, B. (2009) Accounting Standards. London. Juta and Company Ltd, p. 121 Rolfe, T. (2007) CIMA Official Learning System Financial Accounting and Tax Principles. London. Butterworth – Heinemann. p. 206 Saudagaran,m S. (2009) International Accounting” A user perspective. London. CCH Publishing, pp. 14-21 Zack, G. (2009) Fair value accounting fraud: New global risks detection techniques. New York. John H. Wiley & Sons P. 21 Read More