Accounting System and Financial Reporting Standards - Essay Example

Accounting system Introduction In the of preparation and presentation of financial statements, companies in various jurisdictions use financial accounting standards that consist of methods, assumptions, principles and constraints. They are the authoritative statements for financial reporting. They are the code of practice of regulatory accounting bodies that need to be adhered to while preparing and presenting financial statements. These standards cover various aspects of treatment, measurement, disclosure and presentation of accounting transactions. Their chief role is the elimination of possible variations in the manner in which several accounting aspects are treated in order to bring standardization in the presentation. When the various policies and approaches used by different reporting enterprises are harmonized, inter-firm and intra-firm comparison is facilitated thereby providing qualitative information to investors, creditors, lenders, management, contributors, owners and others useful for making prudent economic decisions. Therefore, financial reporting standards are developed with their chief objective being to generate accounting information that is comparable and reliable. In the contemporary business reporting world, countries have different sources of accounting standards that they require their reporting entities to adopt and use in the financial statements preparation and reporting. Companies can use the accounting standards of their nations or adopt the globally recognized standards developed by the International Accounting Standards and Financial Accounting Standards Boards. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) establish Generally Accepted Accounting Principles and International Financial Reporting Standards respectively. These sources of financial standards provide an accounting conceptual framework whose chief aim is to offer guidelines to the standard setters in times of writing or reviewing accounting standards. Apparently, an accounting conceptual framework constitutes an objective, an elementary and basis for undertaking financial accounting. It is an articulated coordination of interrelated goals and fundamentals that can guide to dependable standards that prescribe the scenario, purpose and restrictions of financial statements and accounts. The aim of this essay is to study the accounting system in Qatar and compare it with that of any other GCC country. After researching on the existing literature work, this article established that the Saudi Arabia was a good country of study since it has been reluctant in fully adopting financial standards from other jurisdictions. Therefore, Saudi Arabia was purposely selected by this essay for the study. Accounting system in Qatar and Saudi Arabia The wave of globalization has significantly and increasingly impacted in the manner in which businesses are carried out. It has advocated the need for an increased uniformity of various practices across the globe. To achieve this, IASB has developed various International Financial Reporting Standards to guide in preparation and presentation of companies’ financial reports across the world. These standards are now being adopted by the Arab countries, particularly those in the GCC bloc with the exception of Saudi Arabia. According to Zoubi and Al-Khazali’s (2010) study, the companies in the Qatar prepare their financial statements and other disclosures in accordance with the requirements of its Ministry of Economy and Commerce and also with the full provisions of the International Accounting Standards Board. On the other hand, Saudi Arabian companies significantly rely on the governmental regulations for companies as well as on the national standards issued by its local accounting body, the Saudi Organization of Certified Public Accountants (SOCPA). Sexton’s (2011) study notes that Qatar has adopted the International Financial Reporting Standards in order to attract foreign investor by making them have confidence on in the Qatar Financial regulatory and reporting regime. Therefore, where there are no national accounting principles and practices, companies in Qatar are at liberty to adopt and implement the International Financial Reporting Standards as national standards. This adoption draws back in 1995 when the Qatar Ministry of Economy and Commerce instructed all public companies to prepare their financial statements in accordance with the International Accounting Standards. The banks were given separate accounting standards and principles by the Qatar Central Bank in 1996, but which are similar to the requirement of the International Accounting Standards Board. According to Pivac’s (2014) research findings, global standards issued by the International Accounting Standards Board are aimed at improving transparency in financial statement reporting, especially after the 2008 financial crisis. Even though Saudi Arabian companies significantly rely on the standards as issued by the Saudi Organization of Certified Public Accountants, the Saudi Organization of Certified Public Accountants approved an International Financial Reporting Standard convergence plan in the 2012 and 2013. Currently, the Saudi Arabian insurance companies and Banks, whose listing is on the Saudi Stock Exchange and their regulation is done by the Saudi Arabian Monetary Agency, are following the International Financial Reporting Standards in preparing and reporting their financial statements. However, other listed entities and the unlisted ones are required to adhere to the national accounting standards generally accepted in the Saudi Arabian Kingdom as issued by the Saudi Organization of Certified Public Accountants. Pivac’s (2014) study established that the adoption of International Financial Reporting Standards in Saudi Arabia, as issued by IASB, would undergo some modifications. First, more disclosure requirement would be added, second the optional treatments would be removed, and third, there will be amendments to provisions that contradict the Shariah law or other local laws, taking into consideration the technical and professional level of preparedness. The time frame set for full adoption of the International Financial Reporting Standards after the amendments stated above are for the periods commencing on or after 1st January 2017 for the listed entities and one year later for the unlisted entities. Objectives and Features of the Presented Financial Statements under the Qatar and Saudi Arabia Accounting Systems Despite the differences in the standards that are majorly used by companies in Qatar and those in Saudi Arabia in their financial statements reporting and disclosure, this essay established that their objectives are similar. The prepared financial reports are presented to the various users of such information about the reporting entity with a purpose of assisting them in economic decision making process and this is contained in the FASB, 2010, paragraph OB2 and OB3, and SOCPA, 1997, paragraph 70 (Al Barrak, 2011). Further similarities are in the content of these financial statements. Al Barrak’s (2011) Ph.D. thesis, reports that under both the Saudi Arabian accounting system and the Qatar accounting system, the provisions of the Saudi Organization of Certified Public Accountants and the International Accounting Standard Boards standards, the financial statements are required to meet certain attributes, popularly called qualitative characteristics to be useful. These characteristics act as the guiding principles when choices regarding the selection of reporting standards are being made. According to Beest, Braam and Boelens’s (2009) paper, the qualitative characteristics are either fundamental or enhancing. The key qualitative characteristics of financial information are relevant and the faithful representation and are the most imperative as they determine the content contained in the financial reporting information (FASB, 2010). On the other hand, enhancing qualitative characteristics include comparability, verifiability, understandability and timeliness and they assist in improving the usefulness of the decision upon establishment of fundamental qualitative characteristics (Beest, Braam, & Boelens, 2009). Relevance This is contained in the FASB, 2010, Paragraph QC 6, QC 8 and QC 9, and SOCPA, 1997, paragraph 314 (Al Barrak, 2011). The financial information is termed to be relevant due to its capacity of creating a difference in the economic decisions made by financial information users (FASB, 2010). The relevance is measured in terms of the information having confirmatory and predictive value of their past evaluations. For instance, investors focus on the earnings quality areas for that informations relevance with respect to the performance of their investments. The financial reporting quality is further enhanced by the increased disclosure in the form of notes. As noted by Beest, Braam and Boelens’s (2009) study, the majority of past researchers operationalized the financial informations predictive value by referring to the past earnings and assessing its ability to guide in making decisions about future earnings. The information presented in financial reports on a given economic phenomenon possess predictive value and thus act as an input to the predictive processes that financial information users, as providers of funds use to make decisions about future expectations. Lenders, for instance, will concentrate on the capital structure of the entity to establish its borrowing history. This would go a long way informing them of the entitys ability to resurface a loan if given. Most financial reports have predictive value, making them relevant. This is seen in the managements forward-looking statement where it describes what it expects in future about the company. This information is thus critical for financial information users as it is from this statement that the management discloses the private information that they have access to and that other stakeholders lack. Another point in regard to the relevance of financial reports presented by Qatar and Saudi Arabia companies to the financial information users is the disclosure of information on the business risks and opportunities as it provides information and insights into likely future scenarios. Beest, Braam and Boelens’s (2009) study further note that the predictive value of financial reports’ information arises from the use of fair values. Fair value accounting offers more relevant information as opposed to the historical cost accounting as it represents current assets’ value instead of purchase prices. In this regard, creditors will be able to see the liabilities an entity has in their most current market value. The confirmatory value makes financial information to be relevant if it can make changes or confirm previous evaluations (FASB, 2010). The financial information contained in the financial reports prepared and presented by Qatar and Saudi Arabia companies is relevant to financial information users because it is capable of providing them with feedbacks about previous events, to assist them to change or confirm their expectations. An investor could have planned to increase his stake, but after review of the information he can either change or confirm his plans. Also, creditors will get information about the entity’s debt history to decide whether to issue debt or not to. According to FASB’s (2010) requirements, the section on management discussion and analysis is usually reviewed as it gives an insight into the financial information’s confirmatory value. Faithful representation This is contained in FASB, 2010, paragraph 12, and SOCPA, 1997, paragraph 317. This is the next fundamental qualitative characteristic and was previously called reliability. According to FASB’s (2010) requirements, given that financial reports serve to represent economic phenomena in numbers and words, they need to represent relevant phenomena only in a faithful manner. For a perfectly faithful representation attribute to be gained, the measurement criteria used is that the depiction must be neutral, verifiable, free from errors and completeness. However, there are arguments by some researchers assessing the annual reports information only in a bid to measure faithful representation is difficult for information on actual economic phenomena is critical to assure faithful representation. In their analysis, Beest, Braam and Boelens’s (2009) study purport that, the assumptions and estimates used while preparing financial reports closely relate to the underlying economic phenomenon, thus enhancing faithful representation. From this point of view and argument, the financial reports information might not ultimately give financial information users the correct status of the economic phenomena because they cannot completely be free from bias because such economic phenomena are usually measured under conditions of uncertainty (Brest, Braam, & Boelens, 2009). Many assumptions and estimates are used in the preparation of financial reports, which might give room for some biases, but if they meet a certain accuracy level as required by the Saudi Organization of Certified Public Accountants and the International Financial Reporting Standards, such presented information would be useful for decision making. Financial information users need to assess the arguments given on various assumptions and estimates made in financial reports (FASB, 2010). In case of valid arguments, then, the represented economic phenomena would be free from bias. The Saudi Organization of Certified Public Accountants and the International Financial Reporting Standards require that professional judgement be made on the selection of the accounting principles used in order to give valid and well-grounded arguments in order to make financial information users fully comprehend the measurement methods. This also greatly minimizes chances of unintentional material errors. Where the accounting principles have been clearly elaborated, it becomes easy for financial information users to detect any misstatements. In order to achieve a faithful representation, a neutral depiction is necessary whereby it should not be weighed, emphasized, de-emphasized, slanted, or otherwise manipulated in a bid to increase financial information’s probability of being favorably or unfavorably received. The preparer of financial information in both Qatar and Saudi Arabia are required to ensure that the representation is done in an objective and balanced manner, in that the preparer includes both negative and positive events. Another important element that financial information users can rely upon in making their economic decisions is the auditors report. This will assure creditors that the amount of liabilities outstanding as at the end of the fiscal period was correct while investors get to know about the growing concern of their business since they are the owners. This section measures faithful representation, especially where an unqualified report is issued. Therefore, the Qatar and Saudi Arabia listed companies, in particular, are required to have their financial records and accounts audited by external and independent auditors that are credited. There is a value addition to the financial information as auditors give reasonable assurance on the degree to financial reports faithfully represent economic phenomena (Beest, Braam, & Boelens, 2009). Financial information users can, therefore, rely on such financial information for economic decision-making. The section on corporate governance report is also vital in proving the reliability of financial information by financial information users. The faithfulness of the presented information is increased by the corporate governance information. Understandability For the financial information to be useful to the various users, it is measured on how it has been classified, characterized, presented and its conciseness (FASB, 2010). The information should be well organized in a manner that will enable financial information users comprehend their meaning. The notes to the financial statements without jargon terms, and the use of charts and graphs serve to simplify complex events by presenting them in simplified terms (Beest, Braam, & Boelens, 2009). For instance, the net earnings trends are usually presented in the form of charts or graphs, making it easier for financial information users to see the entitys profitability. Creditors can use the analysis of liabilities, which are systematically broken down into individual components for easy understanding. Comparability Comparability is measured, focusing on consistency, especially in the use of accounting policies and procedures. The Saudi Organization of Certified Public Accountants’ standards and the International Financial Reporting Standards require that entities in their jurisdictions consistently adopt and apply certain accounting policies and procedures. The information must make users compare aspects of an entity over time and between entities. This implies that, the manner in which transactions and events are measured and displayed should be performed in a consistent manner throughout a firm, and overtime for that firm, and that there is consistency between companies in these regards (Zoubi & Al-Khazali, 2010). The financial information users will be able to compare the profits made by an entity over different periods as well as comparing it to the industry and competitors to assess its ability to survive in the long-run. Verifiability This qualitative characteristic serves to assure financial information users that, the information presented is a faithful representation of economic phenomena being presented (FASB, 2010). Different knowledgeable and independent users of the financial information should be able to reach a consensus that the economic phenomenon being depicted is faithfully represented. For instance, creditors should be able to verify that the amount of liabilities recorded on financial reports and profits reported represents what is on the ground. Investors will also be able to verify the profitability of the entity to ensure that it is real. Timeliness This is contained in the FASB, 2010, paragraph QC 29 and the SOCPA, 1997, paragraph 324 (Al Barrak, 2011). The information must be availed to its users for decision making before its capacity to influence their decisions is lost. Financial information users should look at the reporting entity’s fiscal year end and the auditors’ sign date so as to examine the information’s regarding profitability, gearing, and liquidity levels quality for their decisions. However, even older information could be useful, especially where they would need to assess the performance trend (FASB, 2010, 20). Conclusion This essay sought to study the accounting system in Qatar and compare it with another GCCs countrys accounting system. This article purposely selected the Saudi Arabia. The results of this essay study showed that Qatar has fully adopted the accounting standards as given by the International Accounting Standards Board while Saudi Arabia uses its national standards according to the Saudi Organization of Certified Public Accountants. Further findings indicated that Saudi Arabian insurance companies and banks are using International Accounting Reporting Standards. For other entities, the Saudi Arabia is planning to adopt these standards and converge them to its national standards, but with some amendments like more disclosure requirement being added, the optional treatments being removed, and amendments to provisions that contradict the Shariah law or other local laws, taking into consideration the technical and professional level of preparedness. However, further findings showed that the financial statements are prepared with the same objective and bear similar characteristics of financial information in order to be useful. These include relevance, faithful representation, comparability, verifiability, understandability, and timeliness. References Al Barrak, T. (2011). Value Relevance And Predictive Ability Of Financial Statement Information: The Case Of Saudi Arabia. Portsmouth: University of Portsmouth. Beest, F. v., Braam, G., & Boelens, S. (2009). The quality of Financial Reporting: measuring qualitative characteristics NiCE Working Paper 09-108. HK Nijmegen, The Netherlands: Nijmegen Center for Economics (NiCE) Institute for Management Research. FASB. (2010). Statement of Financial Accounting Concepts No. 8. Norwalk, Connecticut: Financial Accounting Standard Board Financial Accounting Standard Board. . Pivac, D. Z. (2014, November 26). A new set of financial reporting rules. Retrieved May 6, 2015, from Bqdoha.com: http://www.bqdoha.com/2014/11/new-set-financial-reporting-rules Sexton, F. (2011). Accounting Principles and Reporting Requirements. Doha, Qatar: Ernst & Young. Zoubi, T. A., & Al-Khazali, O. (2010). Adopting US-GAAP Or IASB Accounting Standards By The Arab Countries. International Business & Economics Research Journal 3 (10), 65-72. Read More