Accounting as the World First Global Profession - Essay Example

IFRS: And Accounting as the World’s First Global Profession By Introduction With the development of financial markets and the growing cross border trade activities, organisations today face troubles in reporting their financial data/information on a consistent manner. The absence of a common accounting system poses potential challenges to multinational corporations who are forced to prepare different financial reports to comply with different national standards. The International Financial Reporting Standards (IFRS) were developed in an effort to address this situation by introducing a common accounting system worldwide. Obviously, this has promoted comparability and comprehensiveness of financial statements across the world. Today IFRS reflects that the outlook for financial reporting is the same for most countries in the world. This paper will discuss how IFRS assisted the accounting to race toward becoming the world’s first global profession. Overview of IFRS International Financial Reporting Standards, commonly abbreviated as IFRS refers to a common international reporting framework that can keep business reports understandable and comparable, and this “encompasses both international accounting standards issued prior to 2001 and International financial reporting standards issued after 2001” (Rich et al, 2009, p.1330). The mounting rate of cross border trade and shareholding activities necessitates the establishment of a common global medium for international business affairs with regard to accounting and reporting. This type of a global reporting framework is extremely helpful for organisations that have a market presence worldwide. Currently the IFRS is replacing other national accounting standards at an enhanced pace. According to a report, shift to the full adoption of IFRS is likely in the U.S “rather than through a gradual convergence of IFRS and U.S. GAAP” (Deloitte, n.d. pp 1). To illustrate, before the implementation of IFRS, nations widely depended on US GAAP because no other potential accounting systems were accessible to them. However, as described in the NYSSCPA website (n.d.), today more than 100 countries have abandoned the US GAAP for IFRS and many others are planning to replace GAAP with IFRS. Currently, the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board are working together to converge US GAAP and IFRS and thereby to promote the harmonization of accounting principles (Ibid). IFRS are to be used by profit-oriented entities in their financial statements so as to give the audience a clear view of the organisation’s financial position (Ibid). Countries Using IFRS Currently a large number countries worldwide use the IFRS framework. They include EU, India, Russia, South Africa, Singapore, GCC countries, Australia, Malaysia, Turkey, and Pakistan, Nepal, Montenegro. In contrast, there are some countries which are still reluctant to follow this system, and among them, US is the most important one to specify here. The US Securities and Exchange Commission press release (28 August 2008) states that more than 113 countries today permit IFRS while 85 countries require it for all home companies. Many countries that have not adopted the IFRS yet are closely watching the accounting operations of companies/nations that implemented this global reporting framework. Accounting professionals believe that this comprehensive financial reporting system would be adopted by all the countries worldwide in the coming years. It is identified that investors and other users of financial statements are interested to get IFRS implemented across the globe because this framework can cut the costs of comparing alternative investment options and improve the quality and accuracy of information. According to the findings of Grant Thornton – Qatar (n.d.), IFRS adoption would benefit companies significantly as it increases the understandability and comparability of financial statements and therefore investors will be more willing to finance investment ventures. Undoubtedly, companies engaging in high levels of international activities will be really interested to support IFRS adoption. Deloitte (n.d.) in its website gives a detailed list of companies that are currently following the IFRS( for more details follow the link: http://www.iasplus.com/en/resources/ifrs-topics/use-of-ifrs#totals. It also explains whether these countries adopt this framework wholly or partially. Creating accounting as a global profession Financial enterprises are looking for more transparent and technically focused mechanisms to function within controlled frameworks. The positive changes in quality expectations make accounting a popular profession in many countries. According to Mackenzie et.al (2013, p.na.), the financial reporting based on IFRS guidance is mandatory for financial statements for ensuring the required standards of the aspects such as reliability, relevance and comparability etc of the financial position of the organisation. Hence, this accounting framework is really helpful for a global audience to analyze and interpret financial statements in a cohesive manner and obtain a shared understanding of the various ideas and processes explained. As these financial statements present relevant facts and figures, they assist the end users to get clear picture of the company. IRFS’ standardisation policies collectively guarantee the qualities of accounting to see that the information is understood by the users, relevant for economic decision making, and free form the prospective of unreliability due to biases and other material errors (Needles & Powers, 2009, p.12). The induction of IFRS as a standard setter has benefited the European Union. According to a report, the gradual adaptation of IFRS system has influenced the organisational culture besides prompting the regulators and auditors to interpret the financial information with an upgraded standardisation mechanism (Rake, 2006, p.1). The IASB’s approval of IFRS as a standard system of financial reporting has helped in relieving the finance department of the burden of preparing mandatory management report inclusive of management commentary as demanded by the local laws (Krimpmann, 2015, p.747). The concept of understandability as advised by the IFRS norms translates the assured accessibility of the users to the information provided in the financial statement, but with accurate care for including the complex matters associated with the economic decision making functions (Wiley-VCH, 2011, p.13). It is clear that the global audience of financial reports may include business executives, economists, stockholders, bankers, suppliers, customers, and common people. All these audience groups may not be able to understand complex accounting procedures or adjusting entries used in an ordinary financial statement. According to a finding, the inclusion of IFRS rules as a compatible standardisation method alongside GAAP requires the multinational companies to make financial statement based on two sets of standards, and therefore, their demand for a single set of standards is on the rise (Kieso, et al, 2011, p.782). Evidently, the development of IFRS has entirely changed the outlook of financial reporting worldwide and currently accounting is becoming the world’s first global profession on the strength of these reporting standards. The IFRS framework promotes fair presentation of financial statements in compliance with IFRS. Financial statements should be the fair presentation of the firm’s fiscal position that includes actual impacts of transactions and events in order to adhere to IFRS framework (Channer & Rogers, 2007, p.94). This feature of the IFRS would greatly assist the users of the financial statements to clearly understand how the firm’s strategic decisions or actions would affect the organisational performance both in short-term and long-term. According to Epstein and Jermakowicz (2010, p.648), the underlying basis of IFRS financial reporting is the ‘going concern assumption’ and this assumes ‘ongoing existence rather than liquidation’. It is identified that global investors are very interested in the comparative information provision set out in the IFRS. According to this rule, firms are required to include comparative information for all amounts presented in the current period’s financial statements ‘on the face of each of the financial statement’ (Bellandi, 2012, p.40). Stakeholders find this feature extremely helpful to compare the current financial status of the firm with that of the preceding reporting period. Consistency of presentation is specified as a general rule in IAS, “and this shall be retained from one period to the next, with specified exceptions” (Ankarath et al, 2010, p.14). To explain, firms following this accounting framework are required to retain the presentation and classification of all financial statement items from one period to the next unless some stated exceptions are applicable. Undoubtedly, the European Union’s bold decision to follow IFRS notably fostered other countries to follow this accounting framework. In response to the EU’s consultation on the effects of IFRS on the EU, ICAEW asserted that “it has had a positive impact on access to finance and investment efficiency” (ICAEW, n.d.). The IFRS framework is really capable of enhancing investment efficiency because it helps investors to be informed of an entity’s actual financial position to take sound investment decisions. This financial reporting system also benefits stakeholders to analyze the firm’s financial growth in comparison to the preceding reporting period. Real life Examples While comparing the real life examples from countries that adopted IFRS with that did not, it seems that the countries following IFRS framework enjoys advantages over others. Nigel Seligh-Johnson, head of ICAEW’s Financial Reporting Faculty, states that IFRS adoption has benefited the EU in a number of ways. Referring to both academic research and responses from the stakeholders of IFRS based financial statements, Seligh-Johnson states that “IFRS adoption has improved transparency, increased comparability across country borders, and helped to create a level playing field within the European Union” (as cited in ICAEW, n.d.). The introduction of the IFRS framework greatly benefited its stakeholders to easily understand the actual financial position of European companies. In the United Kingdom, the IFRS adoption led to improved transparency and disclosures, and as a subsequent trend ‘front half’ of the annual report along with managers’ commentary on business performance and governance report gained importance (PwC, 2013, p.1001). In addition, this framework contributed to better cost of capital and international capital flows. Research evidence suggests that the introduction of IFRS helped nations, particularly European countries, to achieve improvements in financial reporting enforcement. However, countries like United States are yet to adopt the IFRS. However, reports indicate that there is a notable movement toward convergence with IFRS because users of financial statements find this framework an easy way to interpret the actual financial position of the firm. US investors are already the users of IFRS-based financial reports, and therefore the US Securities and Exchange Commission is likely to incorporate these reporting standards into the US GAAP. Many other countries that have not adopted IFRS are now seriously researching on this accounting framework as they began to recognise the potential benefits of this financial reporting system. Conclusion From the above discussion, it is clear that IFRS framework is being adopted by countries worldwide so as to enjoy the potential benefits of harmonised financial reporting practices. The qualitative characteristics of the IFRS approach include ‘relevance, faithful representation, comparability, verifiability, timeliness, and transparency’ (Mackenzie, et al. p.na.). The provisions set out in this framework such as comparative information and consistency of presentation are really helpful for different stakeholder groups, specifically stockholders and investors, to interpret the financial statements in a meaningful manner and to form well-informed investment decisions. In short, the introduction of IFRS added value to the scope of international financial reporting so that accounting is on the cusp of becoming the world’s first global profession today. References Ankarath et al (2010) Understanding IFRS Fundamentals: International Financial Reporting Standards. John Wiley & Sons. Bellandi F (2012) The Handbook to IFRS Transition and to IFRS U.S. GAAP Dual Reporting. John Wiley & Sons. Channer C & Rogers M (2007) CIMA Exam Practice Kit Financial Accounting and Tax Principles. Butterworth-Heinemann. Deloitte (n.d.) International Financial Reporting Standards for U.S. Companies: Planning for IFRS Adoption. Available at: http://www.iasplus.com/en/binary/usa/0808ifrsplanning.pdf Epstein BJ & Jermakowicz EK (2010) WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons. Grant Thornton-Qatar (n.d.) IFRS implementation. Available at: http://www.gtqatar.com/index.php/ifrs-implementation ICAEW (n.d.) IFRS in the EU has improved comparability, transparency and capital-raising. Available at: http://www.icaew.com/en/about-icaew/newsroom/press-releases/2014-press-releases/ifrs-in-the-eu-has-improved-comparability-transparency-and-capital-raising Krimpmann A (2015) Principles of Group Accounting under IFRS. UK: John Wiley & Sons. Kieso DE, Weygandt JJ & Warfield TD (2011) Intermediate Accounting. John Wiley & Sons. Mackenzie et al (2013) Wiley IFRS 2013: Interpretation and Application of International Financial Reporting Standards. US: John Wiley & Sons. Needles B & Powers M (2009) International Financial Reporting Standards. US: Cengage Learning. 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