International Finance Reporting - Assignment Example

INTERNATIONAL FINANCE REPORTING [Insert al Affiliation] Question critical evaluation of Mackintosh’s ment The 2007/08 global economic crisis candidly indicated that economies are interconnected and the mutual dependence that exists between different world economies became evident when the American mortgage market was at the verge of collapsing and the global economy practically tumbled. The scale of international transactions has increased significantly as compared to the 1980s particularly due to economic globalization which ordinarily implies an intensification of cross-border shipment of capital, technologies, services, and goods. Apparently, modern economic globalization is strongly steered by the need of information hence the need of a standardized system of reporting financial information. The power equilibrium between technologically advanced and developing countries has changed significantly as a result of reduction in trade barriers, a move premiered by the world trade organization to ensure transnational trade prospers amid the contemporary economic challenges facing various world economies. The increase in economic globalization necessitated the utilization of standardized accounting and reporting procedures by IFRS, standards that have proved effective overtime, and many countries are adopting the IFRS stipulations. Hence, while the IFRS cycle is not complete as some countries are yet to implement IFRS specifications, Ian Mackintosh’s statement that “Global standards are not only achievable, but an inevitable consequence of continued economic globalization” is apparently true considering the current economic policies being implemented worldwide. As time elapses, financial reporting guidelines are progressing and harmonizing. Mackintosh’s statement is informed by the happenstances in the world of economics. About 10 years after the occurrence of the 2007/08 global economic crisis, ACCA conducted a comprehensive research and found that chief financial officers (CFOs) in mainland China, Malaysia, Hong Kong, and Singapore strongly advocated for the espousal of IFRS and indeed many other countries urged those that had not adopted the standards to adopt (Ian, 2011). The aforementioned countries believe that IFRS adds value to the Asian capital markets. According to the research, IFRS allows a principles-based approach and creates a clear system of comparability helpful and attractive for potential western investors (Joshi, Bremser & Al-Ajmi, 2008). Apparently, CFOs in the US and Europe too agreed on this, citing various benefits of global reporting standards that makes it worthwhile for countries to implement IFRS. Firstly, the CFOs uphold that the required transparency and easy comparison required in transactions that cross jurisdictions and borders can only be attained through the adoption of global reporting standards. Ostensibly, this is the strong reason why countries are adopting IFRS as transparency has become inevitable in the current corporate world. This is “an inevitable consequence of continued economic globalization”, as Mackintosh puts it, and any economy wishing to participate in the international arena cannot afford to disregard IFRS standards including the IAS 17 (Accounting for leases), IFRS 7 (Disclosures), IAS 12 (Income taxes),IAS 38 (intangible assets), and IAS 36 (Impairment of assets) (Greuning & World Bank, 2006). Moreover, adoption of the standards aid in elimination of translation and settlement costs, costs that previously attested to be a key turn off for companies operating internationally. Global standards further seal the opportunities for supervisory arbitrage, giving companies a good reason to smile due to the reduced costs of cross-border trading. What’s more, global standards are becoming achievable as companies continue strategizing on the most efficient sources of financing. They are continuously adopting IFRS as they strive to entice capital from a broader pool of investors and drive the costs of capital towards zero. Consequently, as every company strives to survive in the current world economy where cross-border mergers and acquisitions are becoming a common scenario, probably to beat competitors and build a strong capital base, they find IFRS standards as the most trusted standards that can attract capital lenders and investors. The reduction of costs of capital as a result of adoption of global standards become a known reality after a study conducted by ACCA in 2011 revealed that since the introduction of IFRS in 2005, UK companies had experienced a decline of between 1%-2% in cost of capital. Similarly, the EU region as a whole had witnessed a 1% reduction in the cost of capital, a factor that informed many economies that IFRS is worth pursuing. While many companies wondered how implementation of IFRS leads to reduction in cost of borrowing, research indicates that IFRS improves the quality of corporate disclosure bolstering investors and lenders’ confidence hence the reduction in costs of capital comes as a reward. Another important fact that informs Mackintosh’s statement is the continual push for a standard reporting procedure that has often been advocated by the G20 (great 20) in the last few summits. Global reporting standards have been the center stage of attention for world leaders who are driven by the desire to thwart reoccurrence of the devastating 2007/08 crisis that brought the world economy to its knees. For them, adoption of globalized standards such as common capital requirements is the best way of protecting the world economy. Considering the fact that the G20 have invested so much money, time and efforts to ensure reporting standards are standardized worldwide, Mackintosh, as well as other professionals in the world of economics, strongly believes that the standards will ultimately be attained and the IFRS cycle becomes complete (Greuning & World Bank, 2006). This reasoning is also attributable to the sheer fact that the G20 have an unsurpassed capability and aptitude to influence other small countries particularly developing countries such as India, Yemen, Afghanistan, El Salvador, Korea, Madagascar, Nepal, and 95% of African countries which are still striving to attain global dominance through creation of a stabilized and powerful economy. The head of policy at ACCA, Ian Welch, noted in April 2011 that 122 countries were using the globalized IFRS with an even greater number adopting ISAs (International standards on auditing). The revision of ISAs brought in clarity which proved successful in many world economic blocks including the EU (Ian, 2011). Similarly, the adoption of the standardized reporting procedures by the US, a very strong world economy, has since seen many smaller economies genuinely adopt the global system. Other important benefits of IFRS such as its effect in reducing negative impacts on the environment due to the stipulated guidelines on environmental reporting makes it inexorable for all countries to implement it considering the importance that governments and humanitarian agencies currently attach to environmental sustainability. The full convergence of home reporting standards such as US FASB and international reporting standards such as those stipulated by IASB has proven to be somewhat impossible due to divergent imperatives between boards (Tokar, 2005). While home standards often converge with international standards, complete merging remains a paper plan, even though, many countries believe that such a convergence cannot be a substitute for globalized standards (Ian, 2011). Consequently, many countries are overriding their home standards and adopting international standards as its effect on reported performance has been proven by many scholars to be substantial. What was previously thought to be a prank is now quickly being accepted as a reality and, ultimately, all countries will adopt IFRS. In the statement, Mackintosh is so confident that global standards will be attained. While it seems that Mackintosh is oblivious of the economic interests that exists between countries, Mackintosh seems to understand so well that the current world is reimagining the present reporting standards and probably comparing its pros with that of previously used standards such as the IASs that were previously offered by IASC (International Accounting Standards Committee), the body which gave birth to IASB in 2000. In evaluating Mackintosh’s statement, Steve Burkholder (2015) notes we have to “reimagine accounting so that we minimize differences in standards and maximize global investment and access to capital.” From Steve Burkholder’s analysis, it is clear that Mackintosh is well-informed about the unabated reevaluation of accounting standards and ‘reimagining’ the entire financial reporting concept will culminate in a scenario where all countries will find it appropriate to adopt IFRS. The action will be driven by the need to gain competitive advantage and the need to create an appealing corporate image. The current corporate environment requires an accounting regime that is centered on helping corporations move forward while delivering quality to stakeholders. It is these needs that are pushing companies to adopt IFRS and as the need for transparency and accountability equally increase, Mackintosh implies that the entire world will soon ‘get there’. Nevertheless, while Mackintosh’s view is substantial as the desirability of global reporting standards is clear and indeed strong, we must admit that there are several factors that are continuously offering resistance to adoption of IFRS (Neil, 2014). According to Sunder (2002), these factors offering resistance to the implementation of IFRS are mainly four and unless standard-setters find a way of curbing this resistance, it might be hard to attain complete adoption of IFRS. Firstly, accountants in the current world gratify the obliviousness and misinterpretation of the public instead of educating it (p. 220). Moreover, forcing firms to uniformity may expose some firms to liquidation risks since business environments vary across industries, economies, and countries, a factor that makes harmonization of reporting standards a far dream (p.220). Additionally, managers have the potential to manipulate the insights of the non-expert public (p. 220). Sunder (2002) suggests that this obstacle can be eliminated by having accountants helping members of the public in simplification and comparison of financial statements. Sunder (2002) gives the last factor that hinders adoption of standardized accounting principles as the lack of information by standard setters who make it hard for them to assess the consequences and advantages of unconventional accounting standards. Hence, while the desirability of total adoption of IFRS is there, Mackintosh needs to offer a considerable though to the aforementioned factors highlighted by Sunder (2002). In conclusion, as Ian Mackintosh’s statement can be considered true placing it in the context of economic globalization as illustrated in the above explanation, his vision of attaining full adoption of IFRS unless the obstacles addressed by Sunder (2002) are addressed by standards-setters. While Mackintosh expresses his idea in a fairly simple language, his statement bears much relevance when placed in the current multifaceted corporate sector. Noteworthy, many states have already adopted IFRS in totality, and many are in the process of adopting the same. However, I believe that FASB should not overlook the competition offered by other competing bodies such as US FASB, but should strive to consider their suggestions as this will be an important step towards harmonization of financial reporting. Question 2: Accounting for Intangible Assets based on Recognition criteria and Initial measurement Accountants are often faced with a puzzle when they are required to account for intangible assets like patents and copyrights as it is usually complex and it, therefore, requires skilled and knowledgeable accountant to recognize and determine the value of these assets, unlike in the case of tangible assets. But still, the ability of measuring and identification of these assets is still possible though it is based accounting methodologies for that are theoretical and impractical. However, IASB has issued guidelines on policies and procedures of identifying and valuation of these assets. This is usually meant to reduce inconsistencies that exist in the recognition which might arise during the process of measurement and recognition. Accountability and the performance of these instruments are, consequently, evaluated at what is nearly seen to be fair and true value of the asset. The intangible asset would hence contain an entrenched offshoot which may otherwise need to be separable. This conception here however remains inadequate for the intangible asset valuation and recognition, but the guidelines and procedures issued by the ISAB have proved to be more accurate and reliable. Various standards have been prescribed by IASB and FASB, which are comprised of IAS 38 and SFAS 142. The methods of recognition and asset measurement are therefore as discussed as follows. To start with the guidelines that have been issued by the two accounting bodies are almost identical, and for our case we will consider the principles that will illustrate mainly the significant characteristics. It is important to note that the accounting for any asset including tangible asset, first begins with the recognition before the asset is valued at a fair value. Based on the IAS 38, intangible assets usually meet the acceptance criterion when the asset is in the capacity of achieving separation from the business entity either individually or jointly with the contract in relation, contingent, liability or any asset. The management of the benefits derived economically arises from the intangible and can be warranted through contractual obligation and other rights legally existing to the asset. In many instances, the probabilistic criterion for recognizing the intangible is satiable. For instance, the price attached to the business entity usually pays independently to acquire an intangible asset which reflects anticipation of the possibility which is expected to synthesize the embodied benefits in the intangible which will therefore flow towards the organization. Additionally the measurement is reliable to the user of accounting information. This is usually in particular when the intangible purchased is in the monetary consideration or cash proceeds consideration. On the other hand, the IAS 38 stipulates that in case the asset is possessed as a combination of an entity, then the probabilistic criterion is abstractly different as indicated below. The criterion about the probabilistic identification or recognition is in most cases satisfied to an extent of identifying the asset according to the criterion. Also, it is significant to recall that the intangible is identified as at its fair and what appears to be the actual value of the asset. The assumption here is that the true and fair value of the asset is measurable with reliability (High Ridge Park, 1980). As looked upon of the intangible instruments which are generated internally, the standards of accounting predominantly have restrictions which encompass provision for special exclusions about the probability of identification the intangible assets that generated internally as goodwill. To be more specific, these assets circumvent the trademark recognition and other intangible assets such as mastheads for newspaper, rights for editing among others and the charges that incurs in the process in the initial stage of an entity, for employee development, advertisement and reorganization of the firm either partially or entirely (High Ridge Park, 1980). In addition to the above discussion, the intangible assets after identification are henceforth classified into various categories for justification of their existence. Intangible assets are categorized into; Marketing-related; comprising of trademarks, non-competitive covenants, collective marks among others. Customer-related; consisting of order, lists for the customers, agreements with customers, relationship with customers and backlogged production. Artistic-related; consisting of books copyrights, graphics like pictures and images, theater plays, filming materials, musical records such as lyrics jingles and vocals, programs in the telecommunication and other audiovisual instruments (Daum, 2003). Contractual-based; comprising of advertisement, standstill contracts, licenses, contracts for leasing, franchising treaties, supply pacts, management pacts and other servicing covenants like contracts for employment, right to use a property among others. Technology-based; includes the patents, computer software, computer and management databases and secrets for trades such as formulae (Eisen, 2000). After the recognition of these assets, measurement is usually of great essence in determination of the true and fair value and, therefore, crucial in evaluation and examination of the entity’s state of affairs. Additionally, measurement is essential to determine the risk exposure of the intangible asset that is recognized and any proceed or loss as a consequence of measuring is reflected in the financial statements and comprehensive statement of affairs. According to IFRS 9, there are two bases of measurement to determine the fair value of the asset and the amortization cost. For instance, an enterprise or an organization can either use the model for cost or model for revaluation. In case the latter is accounted using the model for revaluation, the other existing assets within the class are usually accountable using identical modeling except there is presence of the market which is active for the instruments (assets). For the market to be considered active, it must have homogeneity of items that are traded in the market, willing purchasers and sellers should be easily accessible and last the price ought to be known to the public (Tracy, 2008). Another point to note is that an entity can decide to measure and evaluate its items after recognition using the model for cost analysis. In a case where the asset is evaluated using, the cost analysis the intangible asset is usually measured by getting any depreciation that has accumulated and any impaired loss that has already accumulated and subtracting these amounts from the cost of the asset. The asset (intangible) after being recognized will be carried to the amount that is revalued, that is, the fair and accurate value of itself. Under provisions found in IAS 38, the true and fair value ought to be determined by referencing to the dynamic market. On the other hand, the model to revalue an intangible will not permit the items that failed to be recognized or were not known as assets. Additionally the model will not allow the assets at the sum (amount) except the cost of the latter. The regularity of revaluating will depend on the riskiness of the fair and true value of the assets in the process of revaluation. There are incidences where the fair and true value of the asset that was reevaluated fails to agree materially, and thus an extra revaluation must be done (Tracy, 2008). The IAS 16 also stipulates that in case the amount that is carrying rises due to revaluation, the upsurge requires to be a direct credit entry under a T-account entry (Haber, 2004). Nevertheless, a gain or loss will be acknowledged thereby reversing the reduction of that asset that was prior recognized. In conclusion, the methods prescribed by the accounting regulatory bodies, that is IASB and IFRB will ensure reliable recognition and measurement of these intangible assets though the methods prove to be very complex. These methods, therefore, need to be computed by a competent accountant to determine the fair and true value of these assets. Question 3 Depreciation = However, since no salvage vale is given, depreciation can be obtained by dividing 100% by the useful life (4 years) and multiplying this by 2. The resulting figure is then multiplied by the total cost of the machine. Total cost of the machine= cost of machine + incremental costs £ (‘000’) Cost of machine 5000 Import duty 200 Recoverable VAT (1000) Employees costs in making site ready 100 Direct overheads (400, 000- 20,000 power outage) 380 Legal fees 200 Overhaul cost 1000 Fees to dismantle and restore site 250 Depreciable amount 6130 *2=50% Salvage value = 6130 * 0.5 3065 Thus, depreciation = =483.75 Depreciation = £483.75*1000=483,750 Reference List Daum, J. H. 2003. Intangible assets and value creation. Chichester, West Sussex: J. Wiley. Eisen, P. J. 2000. Accounting. Hauppauge, NY: Barrons Educational Series. Greuning, H, & World Bank. (2006). International financial reporting standards: A practical guide. Washington, DC: World Bank. Haber, J. R. 2004. Accounting demystified. New York: AMACOM High Ridge Park. (980. Accounting for intangible assets of motor carriers: An amendment of chapter 5 of ARB no. 43 and an interpretation of APB opinions 17 and 30. Stamford, Conn. Ian, W. 2011. The importance of global standards. Retrieved from http://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/importance-global-standards.pdf Joshi, P. L., Bremser, W. G., & Al-Ajmi, J. 2008. Perceptions of accounting professionals in the adoption and implementation of a single set of global accounting standards: Evidence from Bahrain. Advances in Accounting. doi:10.1016/j.adiac.2008.05.007 Neil, A. 2014. IASB official: Global accounting standards are “achievable,” “inevitable”. Retrieved from http://journalofaccountancy.com/news/2014/aug/201410739.html Steve, B. 2015. IFRS, a Single Set of Global Standards and the “Aspirational Goal” | Bloomberg BNA. Retrieved from http://www.bna.com/ifrs-single-set-b17179925068/ Sunder, S. 2002. Regulatory competition among accounting standards within and across international boundaries. Journal of Accounting and Public Policy, 21,219-234. Tokar, M. 2005. Convergence and the Implementation of a Single Set of Global Standards: The Real-life Challenge. Accounting in Europe. doi:10.1080/09638180500379079. Tracy, J. A. 2008. Accounting for dummies. Hoboken, NJ: Wiley Pub., Inc. Read More