Global Accounting Standards - Northern Dynasty Ltd - Assignment Example

Global Accounting Standards Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Insert Date Here (Day, Month, Year) Executive Summary Since last 20th century, globalization presented the world’s economy with open opportunities in greater strides but at the same hand, varying financial reports of the various nations raised the frustration of investors and creditors, when it comes to comparing them. To overcome this obstacle, many countries decided to opt for International Financial Reporting Standards (IFRS). In the year 2006, the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB) came up with the Memorandum of Understanding (MoU) documenting their commitment towards the development of the accounting standards of highest quality for both domestic and cross-border financial reporting. According to the board, the global accounting standards if implemented would make it very comfortable for the investors and capital marketers to compare the financial reports and would also improve quality and consistency of financial information having the most crucial implication on the future globalization of accounting standards. In 2000, the European Commission also decided to adopt International Accounting Standards in their group accounts of all the companies having listed on stock exchanges within the European Union (EU). This induced other companies too to adopt International Accounting Standards within Europe. Many large companies of Germany and Switzerland have already adopted international standards as a substitute to their own local standards and several transition economies, which are lacking in their own set local standard’s had been adopting the use of international standards. Though at one hand, adopting international accounting standard is becoming most advantageous proposition for the companies but at the same hand it has its own disadvantages too. There has also been found the difference between IFRS and U.S. GAAP in actual EU company from 20-F filings, which is used to formulate the impact of the reporting standard. Table of Contents 1. Accounting Standards and you…………………………………………….5 2. Advantages of IFRS……………………………………………………….6 3. Disadvantages of IFRS…………………………………………………….7-8 4. Northern Dynasty Ltd: System of Financial Statement…………………….8-9 5. Difference between US GAAP and IFRS………………………………….9-11 Accounting Standards and You The acceptance of the common robust accounting standards came from various players of the capital markets with many multinational companies and national regulators providing their support, as they are optimistic of better outcomes. The use of common standards will make it very convenient for them to prepare public company financial statements and compare the financial results arising from the reporting entities from various countries and it would also become much easier for investors to comprehend the opportunities better. It would also enable the large public sector companies with subsidiaries in many productive areas to make use of one accounting language and present their financial statements in their almost same language as their competitors. Moreover many also believe the fact that in a global economy, financial professionals including CPS’s and other companies will find themselves more convenient to react to the capital needs of their subsidiaries. Nevertheless many hold the opinion that there would be something missed if International Financial Reporting Standard (IFRS) is fully applied, as U.S. GAAP is the gold standard. (American Institute of Certified Public Accountants 2008: 5) Advantages of IFRS The reforms and changes that could be seen around post –Enron era also advocated the importance business and governments places on the transparency of the financial reporting. Investors at the global level require easy to comprehend and reliable financial statements enabling them to make most efficient decisions on their capital allocations. One global standard would also make it convenient for the companies to make measurements and reports on the companies’ financial position and results making it convenient for them to show their efficiency while transferring their capital and labor between different countries. (Brouwer 2005: 4) Those companies also should be converted to IFRS if they are subsidiary to the foreign companies or if they have investors from foreign lands. Besides it would be beneficial for the company if they want to raise their capital from more than one country. (American Institute of Certified Public Accountants 2008: 3) As taxes are also imposed on the global economy of the organization, it would be a great help to the national tax authorities all over the world if the net income is computed on the accounting principles and practices on the similar grounds. It would also be very convenient for the companies to perform their operational analysis required to run their business. It would also make it convenient for the multi national companies to meet their disclosure requirements for stock exchanges all over the world. Disadvantages of Global Accounting Standards If the global accounting standards have created many opportunities for the companies to use with ease their financial statements in this competitive world, it is also not without its disadvantages. Many U.S issuers having their customers or operational activities outside the United States may find themselves resisting IFRS because they must be devoid of the various market incentives to make preparation of the IFRS financial statements. Some of these issuers have to remain confined themselves to the U.S GAAP because it’s use in the fillings with other regulators and authorities. Many analysts are concerned about the countries claiming themselves to convert to international standards are in fact not complying fully with the standard. Many of the companies exert their right to make modifications in the standard, which they do not consider conducive to their own national interest. This action is against the basic concept on which IFRS stands for causing incomparability in the financial statements. Lack of accountancy on the professional level in many countries and the differences in their political and economic systems make these nations show their reluctance to cede their control of their financial matters towards outsiders. Many countries also show their inhibition towards the economic and cultural difference that prevent these companies from adhering to the simple interpretations, even though figures have been generated by making use of the same accounting principles. Accounting standard is also based on the society’s needs for e.g. in British and United States accounting rules demand the companies to adopt fairness and substance over form as contrast to the Napoleonic Code which is more compliance oriented. Different economic, social and political needs of the various nations also create hindrance on the part of the nations to create harmonization and coordination between each other. Divergent needs of the small and large sector enterprises especially in the developing nations also create hindrance in the path of proper coordination and adoption of the set accounting standard. Moreover, high cost is involved by the issuers to bring in the changes in the accounting principles or keeping a separate set of books for multinational offerings. These hindrances create a notion among many nations that adopting of the set standards is not desirable alternative and the benefits states of the same are over exemplified. It has been shown that for e.g. if a specific financial market feels the need for too much of the accounting information and has many regulatory burdens, it is high time that firms will definitely migrate to other regions, however, if there is very little of the accounting information then private firms would feel in their interest to supply more. Northern Dynasty Ltd: System of Financial Statement Northern Dynasty Minerals Ltd, mineral exploration and development company having its base in Vancover, British Columbia and publicly trading in Canada and the United States, as on March 2009 decided to adopt International Financial Reporting Standards (IFRS) as early as possible as per their National Instrument 52-107, which has got their approval by the applicable Canadian Securities Administrators. In the month of February 2008, the Canadian Accounting Standards Board has given it confirmation on the IFRS to change the Canadian generally accepted accounting principles (GAAP) for all enterprises for the financial periods on or after January 1, 2011. The United States Securities and Exchange Commission has also given authorization to the foreign private issuers to file their financial statements using IFRS without incorporating US GAAP reconciliation. With the use of the IFRS, the costs will be reduced and would also bring in consistence in the financial reporting all over its subsidiaries and joint ventures. The Company has set up a steering committee with the convergence plan to control the management of the transition and for providing updates on egular basis on progress of the convergence project to the Company's Audit Committee and Board of Directors. (Yahoo Finance 2009: Online) Difference Between US GAAP and IFRS Accountants are fully aware of the fact that differences can arise between IFRC and GAAP. In the United States, financial accountants, auditors, and analysts are aware of the U.S GAAP and in the requirements of the International Financial Reporting Standards (IFRS) constituted by the International Accounting Standards Board (ISAB). In today’s globalized environment, candidates must prepare their financial statements according to the IFRC and therefore to make correct evaluation of their financial statements and net income, they must understand difference between the US GAAP and the IFRS to be able to make estimation of the impact these differences could create. These differences in American have been estimated by taking the short-term convergence as well as long-term convergence projects in view. In the short term convergence projects like, under Impairment, IFRS has its value based on future discounted cash flows; while United States GAAP makes the use of the undiscounted cash flows to show where there is any impairment. There are also differences to see where goodwill is impaired. For this purpose, U.S. GAAP requires the need for two-step method while IFRS needs the use of one-step method. While considering the income tax, the difference between the IFRS and U.S. GAAP is in the treatment of the IFRS’s in all its deferred tax assets and liabilities as non-current. The differences between the rates are also quite common and so are the differences between the tax effects charged directly to equity (IFRS) and only to operating income (U.S. GAAP). In the area of joint ventures, United States GAAP feels it necessary to make use of the equity method; IFRS makes use of either the equity method or proportional consolidation. In research and development, IFRS makes it mandatory to make use of the capitalization of development costs; U.S. GAAP needs this to be expensed except when they apply to internal software and website costs. Differences also exist in the areas of the property, plant, and equipment whereby IFRS permits companies to revalue their property, plants and equipments to fair value while GAAP is dependent on the historic cost. There are also differences in the share based payments for e.g. in the treatment of volatility, the measurement date, and the determination of expense when awards are modified. (Hughes & Sander 2007: 4) In the Long Term convergence projects, in the business combinations, differences can be found in consolidations whereby GAAP depends on the main ownership to show the consolidation status; and differences can be found in fair measurement, liabilities and equity distinctions, liquidities and assets. There are also differences in post retirement benefits, revenue recognitions, deregulations, intangible assets or leases etc. On 21st June, 2007, the Securities & Exchange Commission restated again for the United States to file their regulatory reports on the bases of IFRS. These developments further focus on the need for the United States accountants to make themselves acquainted with the two set of standards. Some studies also shows that by converting IFRS net income to its U.S. GAAP equivalent generally leads to the decrease of the net income. There are significant changes in the change of the net income. There is a greatest scope that the Accountants belonging to the United States who are likely to enter into situations with customers, suppliers, or potential acquisition candidates that may require an understanding of differences they might see in the U.S. There is no doubt of the fact that it may take several years to really into the mould of the attaining high quality standards, but taking out the time to find out the differences between the two set standards would help companies in making better decisions. Reference List American Institute of Certified Public Accountants. 2008. International Financial Reporting Standards (IFRS) [Online] Available: http://www.ifrs.com/pdf/IFRSUpdate_V8.pdf [8 May 2009] Berkeley Resources Limited. FINANCIAL REPORT FOR THE HALF-YEAR ENDED 31 DECEMBER 2005. [Online] Available: http://www.berkeleyresources.com.au/reports/060316%20Half%20Year%20Accounts.pdf [8 May 2009] Brouwer, R. 2005. International Accounting Standards: Do They Make Business Sense? [Online] Available: http://www.kpmg.ca/en/news/documents/Speech20051128.pdf [8 May 2009] Chua, W.F., & Taylor, S. L. 2008. The rise and rise of IFRS: an examination of IFRS diffusion. Journal of Accounting and Public Policy, 27: 462-473. Cox, C. 2008. International Business—An SEC Perspective. [Online] Available: http://www.sec.gov/news/speech/2008/spch011008cc.htm [8 May 2009] Hughes, S.B.& Sander, J.F. 2007. A U.S. Manager’s Guide To Differences Between IFRS And U.S. GAAP. Management Accounting Quarterly, 8(4). [Online] Available: http://www.imanet.org/pdf/Qsummer07hughes.pdf [8 May 2009] Street, D.L. 2008. The Impact in the United States of Global Adoption of IFRS. Australian Accounting Review 18(3): 199-208. Whittington, G. 2005. The adoption of international accounting standards in the European Union. European Accounting Review, 14:127-153. Yahoo Finance. 2009. Northern Dynasty Early Adopts International Financial Reporting Standards. [Online] Available: http://finance.yahoo.com/news/Northern-Dynasty-Early-Adopts-prnews-14592152.html?.v=52 [8 May 2009] Zeff, S. 2008. IFRS developments in the USA and the EU, and some implications for Australia. [Online] Available: http://www.frc.gov.au/reports/other/Ken_Spencer_2008.asp [8 May 2009] Read More