Financial Accounting Practices - Term Paper Example

Pros and Cons of Harmonizing Accounting Standards Introduction Financial accounting practices are essential for determining the performance of organizations and their financial situations. Private, governmental and non-governmental organizations use accounting standards to improve their performance (Godfrey & Chalmers, 2007). There are many stakeholders of financial information who have an interest in the financial report for various purposes. Therefore, the method used and the influence of that method to the organization and its financial statement is of great significance to the stakeholders of those organizations (Godfrey & Chalmers, 2007) The document focuses on the advantages and disadvantages of globalization of accounting standards to various stakeholders. The project shall contain an abstract, introduction, the body of the report, glossary, conclusion and list of references. International Financial Reporting Standards (IFRS) is the main accounting systems under consideration for application as an international accounting system (Samak et al., 2012). The expansion of businesses across borders are faced with problems because they are required to used different accounting systems adopted by different nations in preparation of the financial accounts and reporting of financial information. This has compelled various nations to perceive the option of adopting uniform accounting system across the globe in order to ease the challenges of various accounting systems (Irvine &Lucas, 2006). Even though the use of national generally accepted accounting principles (GAAP) is considered to be causing challenges to beneficiaries of financial information the adoption of common accounting standards across the globe will still have various challenges and benefits to the stakeholders and the organization. Background The growth of the economy and subsequent expansion of businesses to different parts of the globe have posed challenges to the accountants and other users of financial information (Winney et al., 2010). Various countries have divergent rules and religious practices that pose challenges in decision making based on the accounting information developed under various accounting systems. However, in the recent past different countries have started adjusting the processes for preparing financial reports and it has become evident that International Accounting Standards (IAS) is most likely to be adopted across the globe (Irvine &Lucas, 2006). IAS refer to rules, laws and regulations offered by various professional and independent bodies in order to specify the procedure for preparing accounting information to achieve uniform output for the users of the financial information (Winney et al. 2010). “Accounting harmonization refers to a process that institutes accounting regulations at an international level to reduce conflicting accounting principles between national accounting standards used in financial disclosures” (Chen, 2009, p. 4). According to Thao (2010), the accounting standards should be appropriate in the sense of being compatible with organization’s objectives of the accounting standards that aim to achieve the liability so that they capable of offering information that satisfies the needs of the beneficiaries of that information. The accounting standards should be clear and understandable by those responsible for preparing financial information and other stakeholders and be able to maintain the consistency and flexibility between those stakeholders (Zimmerman, & Werner, 2013). In order for the accounting standards to maintain consistency, they should be homogenous across different time frame and easy to integrate with the business objectives. Finally, accounting standards should be synchronized with the environmental standards of the society where the business is in operation (Barth, 2007). Therefore, harmonization of the global accounting standards requires the considerations of various business environmental conditions and the establishment of uniform standards that can match with global business environment. However, it might not be easy to have common accounting standards that blend well in all business environments across the globe, and it may involve making compromises on parts accounting standards requirements in favour of the international accepted standards (Diaconu, 2007). That implies there will be advantages and disadvantages of harmonizing global accounting standards. Advantages Comparability of various businesses across the globe The globalization of businesses has made various organizations have operations in various countries. With the current accounting system of accounting standards, a company with its operations across countries has to follow the accounting policies applicable in that country of operation (Barth, 2007). For example, a company that has a branch in UK and in the United States has to use GAAP in it US branch and International Financial Reporting Standards (IFRS) in the other branch operating in the UK (Diaconu, 2007). The two branches in different countries appear different even though their economic status may be similar due to different accounting rules. For example, creditors may perceive different companies being extremely different when making evaluating their creditworthiness due to differences in accounting standards (Godfrey & Chalmers, 2007). Therefore, global harmonization of the accounting principles shall make it possible for the investors to determine the difference in performance of similar companies operating in different countries. It will enable small business owners to compare effectively various investment opportunities available across the globe without incurring the cost of reconciling different companies to the same accounting standards (Elliott & Elliott, 2008). With uniform accounting standards across the globe investors can easily make a comparison of different businesses and decide on the best investment opportunities available for them (Fosbre et al., 2009). The adoption of IFRS in Zambia has resulted to great benefit to Zambia’s financial sector due to “high quality reports, as well as cross-border comparability of financial performance among banks,” and it has helped “India to get the benefits of greater comparability of financial information by attracting investors to invest in Indian firms” (Terzungwe, 2012, p. 100). Expansion of business operations Implementation of the accounting standards incurs the businesses some cost in order to comply with the set standards (Samak et. al, 2012). The cost of compliance with the particular countries accounting standards impedes small businesses from extending their operations to other countries. Companies operating in more than one country incur a lot of expenses because they are required to apply different accounting systems according to the accounting system used in that particular country. However, the harmonization of accounting standards across the globe will reduce the cost of preparing accounting standards and make it easy for companies to extend their operations in different parts of the globe (Godfrey & Chalmers, 2007). The multinational companies shall be required to prepare only one financial report for their subsidiary branches in various countries instead of having various reports for all subsidiary companies. Centralization of authority According to Terzungwe 2012), the current nature of the accounting standards entails different countries setting up their accounting bodies to set and regulate accounting standards. There are challenges of having different bodies to regulate the accounting standards across the globe. Some of the challenges include disagreement among the regulators of accounting standards across the globe and in specific countries. Therefore, harmonization of the accounting standards across the globe will ease the disagreement among the regulating bodies and reduce the cost of compliance with the accounting standards. The use of different accounting systems across the globe has limitations on the operations in various capital markets (Gaffikin, 2007). Some companies are not recognized in the international stock market and cannot be listed in those security markets. For example, companies in Germany were using German GAAP as their accounting standards and could not be listed in the New York Stock Exchange despite using tedious “cost intensive dual accounting” system (Terzungwe, 2012, p. 99) because the system was different from the US GAAP. After the adoption of IFRS, the Germany companies were able to be listed in New York Stock Exchange across the borders. International credibility The harmonization of international accounting standards provides all businesses with level playing field whereby no company feels disadvantaged because of the accounting standards applicable in their country (Jindrichovska, 2001). Various companies use similar requirements when preparing accounting information, therefore, such information is reliable to the various users of financial information. It gives investors confidence that information provided by various organizations reflects true and fair financial position of the respective companies. The adoption of IFRS will create fair presentation of financial statements. The fairness of financial statement should be reflected in the presentation of financial position, business cash flows and financial performance. The fairness implies that those responsible for preparing financial information should be faithful in disclosing the effects of transactions and other conditions in agreement with the logical procedure for appreciation of assets income, liabilities and expenditure laid out in the financial structure (Financial Reporting Council, 2014). IFRS is presumed to conform to the requirement of fair discloser of financial information. IAS 1 requires those making financial statement to make a note disclosing that the items of the financial reports conforms with all IFRS requirements and in circumstances where they fail to comply with the requirements then it should be indicated as not compliant with IFRS (Financial Reporting Council, 2014). In extreme cases of non-compliance, the management should indicate that if they applied IFRS in particular circumstances the IFRS requirements would conflict with the objectives of the financial statement. Under such conditions, the entity should deviate from the IFRS requirement but the management should give an elaborate confession of the issue, rationale and the effect of deviation from the IFRS requirements (Eichengreen, 2008). For example, the going concern principle require the entities used in the preparation of financial statement to be based on the presumption that the business shall be in operation in the foreseeable future. However, if the management have sufficient reason to believe that the business is not likely to continue with its operations in the future they should indicate so at the time of making a financial statement (Alexander & Archer, 2008). Efficient management of multinational companies The use of standardized accounting information will enable companies to get information from international sources and can use that information to increase the efficiency of managing their organizations (Stickney et al., 2009). For example, the use of harmonized accounting standards will improve the sourcing of capital from local and international sources and can facilitate mergers and acquisitions of various companies across the globe. Although this stems from the ability to of investors to establish the performance of different companies across the globe, it has an additional benefit in that the managements of various companies are able to increase the performance of their companies using various approaches such as lobbying for capital from international sources (Nobes & Parker, 1998). The companies will get an opportunity to be quoted in the international security market such as New York Stock exchange. Disadvantages Additional cost to the organization Acquiring different accounting rules will require a business to offer training and educate the staff involved in preparing the accounting information and books of accounts. The cost of training the employees is an additional cost to the organization and small organization and that might be too much for small companies to bear. For example, the firms operating in US will have to re-educate their accounting experts to on the requirements of the IFRS in the accounting process. The financial cost and a lot of time for offering training are very high for the organizations and can result to disruption of business operations (Ball et al., 2000). Furthermore, the cost for those organizations with their operations in one country only will be too high in comparison to the benefits they expect from the harmonization of accounting standards across the globe. IFRS is Lack details unlike GAAP The United States’ GAAP provides detailed accounting information for the beneficiaries of the financial information in comparison to IFRS. Therefore, the U.S. and Canada will find it awkward to abandon a more elaborative accounting standards and acquiring a bit shallow standards for the sake of attaining uniform accounting standards (Kieso et al., 2010). Regardless of whether IFRS, US GAAP or any other accounting standard will be chosen as international accepted accounting standards, all other companies that were not using it before shall have to adjust to it (Guenther & Young, 2000). The small companies will have to incur a high cost owing to their size in order to comply with the international accounting standards requirements. Furthermore, various countries will continue to use different laws and regulations that might hamper the comparability of financial statement across the globe irrespective of the accounting standards being used (IFRS Foundation, 2010). As long as laws and regulation vary across the globe, investors and lenders comparing domestic and international companies might find it misleading to make a comparison of various companies and investment opportunities of those companies across the globe. Discussion The harmonization of international accounting standards is expected to improve the business performance and ease the procedure for the development of the financial statements (Alexander et al., 2003). The adoption of IFRS as the international accounting system will increase transparency, clarity and quality of the financial reports for the stakeholders across the globe. Uniform accounting information will enable investors and lenders to make an effective comparison of different companies and be able to make an informed decision in regard to the capability of the business to generate wealth for the investors and repay the loans and interest to the lenders (Heidhues & Patel, 2012). The adoption of uniform accounting standards across the globe will reduce the “barriers to cross-border trading on capital market and lead to more effective allocation of capital” Chen, 2009, 14). This is expected to increase the flow of resources across the borders and improve the economic growth of the nations. The harmonization of accounting standards is expected to reduce the expense of preparing financial accounts for the organizations carrying out operations across the globe (Kieso et al, 2010). The business performance is likely to increase because of the ease of movement of human resources across the borders. Multinational organizations will be able to hire expatriate workers to work in various branches across the globe thus increase the global competence of the organizations. However, there is evidence to establish whether the harmonization of accounting standards will be to solve “all the differences of accounting practices and standards between countries” (Chen 2009, p. 15). The use of harmonized accounting information will result to additional cost to the small businesses operating domestically beyond the benefits they are likely to get. The high cost of training the accounting staff to adjust to the international accounting standards and cost of compliance with rules and regulations of accounting procedure will increase the challenges of operating businesses (Gaffikin, 2007). Conclusion and recommendation The adoption of harmonized accounting system will require the elimination of differences between various national GAAP in order to develop adequate motivation for the companies adopting international accounting standards. The adoption of uniform accounting standards may consume a lot of time to implement since it requires resources and training of the employees on the new requirements. There is no guarantee to the organizations that uniform accounting standards will generate any benefit to the organizations despite the cost of implementation. Furthermore, various nations have different rules and regulations that might continue to affect the preparation of financial statements for the businesses located in those countries thus affecting the perceived benefit of harmonized accounting systems. For example, it may not be possible for businesses to higher expatriate workers from different countries to achieve higher business competence due to specific nations requirements such as the issues of visa and sanctions imposed on members of some countries for strategic reasons. Harmonization of accounting standards has it benefits and challenges whose extent will be determined by the efficiency of implementation of the selected accounting system. Further research is essential to establish the benefits that small businesses operating in domestic countries will enjoy by adopting the harmonized international accounting system. Bibliography Alexander, D. and Archer, S. 2008. International Accounting/Financial Reporting Standards Guide 2009. CCH. Pp. 1-800. Alexander, D., Jorissen, A. and Britton, A. 2003. An International Financial Reporting and Analysis. London: Thomson Learning. Ali, A. and Hwang, L. 2000. Country Specific Factors Related To Financial Reporting And The Value Relevance of Accounting Data. Journal of Accounting Research. 38(1), Pp.15-27. Ball, R., Robin, A. and Kothari, S. 2000. Effects of International Institution Factors on Properties of Accounting Earning. The Accounting and Economics Journal. 29(1), Pp.1-51. Barth, M. E. 2007. 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