The International Standardization of Accounting Standards Benefits in Different Ways - Assignment Example

Question 1 A. The international standardization of accounting standards benefits in different ways which are as It helps to improve the process of comparing the financial statement of different companies working in different countries. This is due to the fact that having a standardization process ensures that all organization follow a uniform accounting standard due to which it allows the user of the financial statement to make a comparison between different companies. This ensures that the decisions taken by the investors are better and helps to verify the actual result based on which better decisions are taken (McGregor, 1999). This helps the stock exchanges as having uniform accounting standard across all economies ensures that the user of the financial statement are able to compare the share prices. This ensures an easy process for being listed on different stock exchanges and simplifies the overall process through which better decisions are taken. This ensures that the entire process for the share to be listed gains uniformity and thereby permits company to save on the additional expenses that have to be incurred while looking to be listed. It helps to save on the cost for the company as having a standard accounting standard ensures that a particular accounting standard is applicable and accepted. This will ensure that the company will not have to make changes based on the different accounting standards that different economies follow. It will thereby reduce the cost for the organizations and will provide the required mechanism through which a financial statement will be accepted everywhere (McGregor, 1999). Having an international standard proves beneficial especially for developing countries as they don’t have to develop a national standard body and can follow the universally accepted accounting standards. This will help the developing economies to be able to ensure that the scarce resources are not directed towards developing a national accounting standard body but instead following the international (Saudagardan, 2001) Thus, using an international standard for different accounting standards benefits an organization and an economy in different ways which helps to improve the overall productivity of the business. B. The disadvantages of international standardization of accounting standards are as below The major disadvantage of adopting an international accounting standard is that the process of implementing it is costly. This is primarily due to the fact that adopting an international accounting standard will require that the national accounting body undergoes changes and looks towards adopting the international accounting standard. This will require personnel who understand the international standard, proper monitoring and changes in infrastructure through which the new system which looks to match the international standard is adopted (McGregor, 1999). The adoption of international accounting standard requires that standards are developed which are more detailed like the national standards. The fact that the international accounting standard hasn’t been developed and changed as the national accounting standard will thereby require major ramifications and changes through which the accounting standard becomes more detailed. This will help the organization and the user of financial information to be able to understand the different aspect of the accounting standards and ensure full applicability. This is an aspect which is presently missing in international accounting standards and is one of the major drawbacks which is making it difficult to implement it over all organizations (Saudagardan, 2001). C. The six building blocks which are required in an accounting conceptual framework along with their role and importance are as follows (Johnson, 2004) Definition of the Reporting Entity: This requires that the accounting framework should look towards ensuring that the requirements of the different reporting entity are provided. This will thereby require that the reports that are prepared comply with the different accounting standards and GAAP. This will also require that certain changes and special purpose reports are generated so that the specific purpose of the user can be attained. This helps the user of the financial information to be able to use the financial statements and based on it is able to follow the different standards Objectives of General Purpose Financial Reporting: The objective of the accounting framework is to ensure that users based on the financial statement are able to take decisions and has moved away from the traditional objective which looked towards providing certain information to the outsiders thereby ensuring the use of stewardship function. This has helped to improve the purpose of accountability between the parties and has ensured that all the different people working together are held accountable and have to ensure that authenticity in the information that is provided. Perceived user of General Purpose Financial Reporting: The General Purpose Financial Reporting ensures that the different users are able to take valuable decisions based on the information provided in the financial statement. The financial report looks towards attracting primarily three groups i.e. resource providers who are the employees, suppliers, lenders, creditors and others, the recipient of the goods and services who are primarily the customers and finally is the parties who look towards monitoring the functions and are as government bodies and society. Being able to develop financial statements based on their needs ensures that all the users are able to understand the financial statement and based on it take decisions which will ensure that the decisions taken are correct and represent every material fact. Characteristics that General Purpose Financial Reporting should have: The financial report that is prepared should be according to the accounting conceptual frame as it will help to demonstrate certain traits like comparability, reliability, understandability and relevance. This will help to ensure that the user of the financial statement based on the different information which is published in the financial statement will be able to take decisions through which better effectiveness is generated. This traits will ensure that the financial statement matches the requirements of user and will help to take correct decisions which will help to reduce risk for the investors and ensure that overall efficiency is gained in the system Different elements of financial reporting: The financial statement should be able to demonstrate the different elements like assets, liabilities, equity, expenses and income. These are important elements as it helps to shape the process through which decisions are taken. Ensuring that the different elements like assets, liabilities, equity, expenses and income are included will help the user understand the various aspect of the business better. This will help to identify the long term potential that the organization has, its present and past performances and the manner in which the organization looks towards managing its resources so that they are able to manage their resources effectively and gain maximum value. This will thereby ensure that the decision making process is better and will provide an incentive through which measurement is appropriate and provides the correct information to the user of financial statement Ways to measure performance: The financial statement should be developed in such a manner that it helps to measure the performance by comparing it with the performance of the last year. This will also require that the financial statement provides the user different ways through which FASB framework provides the required process through which the performance will be monitored. This will thereby ensure that the financials helps to serve the different purposes and provides the user of the financial statement with an advantage through which the performance is monitored and measured in the most effective way. Question 2 The accounting regulation has looked towards developing different theories which helps to reduce the impact of market failure and looks towards following the different accounting regulations. The details are as The public interest theory looks towards stating that regulations and rules should be developed which will ensure that the society is preserved and decisions that are taken are in the interest of the society. The theory looks towards stating that the regulatory framework should look towards representing the interest of the society rather than the private interest of the people. This will require that he government acts as a natural arbitator and looks towards ensuring that decisions that are taken will ensure that they benefit the society and looks towards long term growth of the people. Despite the manner in which the public interest theory looks towards ensuring that decisions are taken which benefit the society it has certain criticism and objections that are being raised. One of the criticisms according to the theory is that leaving the market to operate independently will result in the creation of inefficiency as the market is not regulated. The theory also raises questions regulation is costless but instead not having regulations could lead towards fatalities and wrong decision. In addition to it the theory proposes that government should act neutrally but instead the government will look towards increasing their wealth and will thereby not act in a neutral manner. The capture theory states that a regulator looks towards ensuring that they act in a manner through which they look to develop rules which are aimed at ensuring that the regulations that are made are advantageous to the parties and are subjected to the regulations that have been made. This regulation also requires that the decisions taken initially help to ensure that the decisions are taken in pursuit of public interest and the regulator looks to remain independent from them. This is done with the perspective to ensure that the regulator acts in a manner where the decisions taken help the society and ensures that they act independently as a regulator. Some of the criticism which has been raised against the theory are that no reason has been identified which will help to understand whether only interest group will be able to influence the regulator or as to why the regulated industry is able to capture the existing agencies rather than creating a new agency. This theory thereby doesn’t highlight the manner in which decisions are taken and thereby will have an effect on the manner the regulator looks towards acting in the public interest and take decisions which benefit them. The economic interest theory states that people will look towards forming groups so that they are able to take decisions through which they will be able to ensure that the interest of a particular group is protected. This will result in creating a situation where group clashes with each other as each group looks towards ensuring that their particular interest are satisfied. This will make the groups to act in a manner that will benefit them and will make the regulators take decisions which benefits them. This theory thereby doesn’t looks towards identifying the interest of public but instead looks towards taking decisions which will benefit the individual groups. The regulator here acts as a natural arbiter and looks towards ensuring that the interest of the private parties are met. The criticism which this theory faces is that the decisions taken here for the private parties and groups and the regulator seems to act neutrally but instead they are influenced by the private parties and look towards taking decisions which will benefit them. The other criticism against the theory is that the decisions that are taken don’t look to ensure that the society or the public is benefitted but instead the decisions are taken which will help the different groups to have better return. In addition to it the private parties have power to influence the regulatory body which thereby results in the decisions to be biased and is not according to the requirements of the different accounting standard. Thus, the different theory highlights different factors and has different criticism being raised against the theory which will thereby require that the financial accounting practices looks towards using different theories which will ensure that correct accounting standards are developed and the long term interest of the society is preserved. References Johnson, L. 2004. Understanding the Conceptual Framework. Retrieved on December 13, 2012 from http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175818770601&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs McGregor, W. 1999. An Insider's View of the Current State and Future Direction of International Accounting Standard Setting. Accounting Horizons June: 159-168. Saudagardan, S. 2001. International Accounting: A User Perspective. Cincinnati, OH: South-Western College Publishing. Read More