International Accounting Standards - Report Example

INTERNATIONAL ACCOUNTING STANDARDS STUDENT’S NAME PROFESSOR INSTITUTION 24th MARCH 2012 Introduction International Accounting Standards is a financial reporting method that states how specific types of transactions and financial activities should be recorded in a company’s financial statements (Eisen, 2000). In the periods that have past, the Accounting principles were given by the International Accounting Standards Committee (IASC) in order to streamline the methods of financial transaction reporting in public companies (Stickney, Weil & Schipper, 2009). This research thesis is separated into two sections; the literature review section and the case study section. The literature review section outlines different topics that are dealt with under the International Accounting Standards heading. The different topics are explained in details, and their application outlined in this section. The literature review section mainly covers and explains the ten Generally Accepted Accounting Principles. In the case study, different situations of financial reporting are considered and the international accounting standard set for that particular situation is put into light. In the literature review section, methodology of research employed is mainly qualitative analysis since it primarily touches on topics and sub-topics that relate to International Accounting Standards. A qualitative analysis of the Generally Accepted Accounting Principles is elucidated under this section. The methodology used in the case study section is ethical analysis where different situations are considered and the most ethical international accounting practice is proposed. Section 1: Literature Review This section will cover and describe the Generally Accepted Accounting Principles that govern the formation and presentation of financial reports. Generally Accepted Accounting Principles ensure consistency in the reporting of corporation financial information so that investors, financing institutions, financial analysts, and institutions such as Securities and Exchange Commission (SEC), can have all reporting companies organizing their financial statements with similar rules and reporting procedures. The Generally Accepted Accounting Principles can be explained as below (Weygandt, 2010). Principle of Regularity This principle can be explained as obeying the enforced rules, regulations and laws. The Principle of Regularity calls for conformity to the rules and regulations laid down that govern international accounting standards. The financial statements presented by a company should consider the laws of the land and conform to the common rules of accounting. The common rules include the rule of double entry. This rule applies where different business transactions are credited in one account and debited in the other account (Bragg, 2010). Principle of Consistency The Principle of Consistency states that when a company fixes a technique of how the accounting of a specific item will be treated, the company will treat all other similar items in the exact the same way. The International Accounting Standards also outline that specific guidelines should be followed in order to ensure that financial statements are similar in their format and presentation. This will ensure clear understanding of the information provided by the statements. Principle of Sincerity The Generally Accepted Accounting Principles state that a company’s financial statements should reflect in genuine faith the reality of the corporation’s financial status. This calls for honesty in the formation and presentation of financial reports. The global accounting principles state that the value of company’s assets and liabilities should be equal to that reflected on its balance sheet. The income statements should be accurate and the profits registered honestly. This information is vital and useful for government taxation, investors, auditors and financial analysts. Principle of the Permanence of Methods This Generally Accepted Accounting Principle aims at allowing consistency and assessment of the financial statements published by a corporation. This ensures that the financial information presented by a company is proved to be accurate and reliable. This is done through auditing. The International Accounting Standards provide that companies should be regularly audited so as to ensure that this principle is followed. Principle of Non-Compensation This principle states that the financial statements of a given company should portray the whole information and details of key transactions. It also states that a debt should be repaid using a company’s assets or revenues compensated with expenses. Principle of Prudence This rule aims at portraying the reality, and therefore a company not should try to show financial information appears prettier than they are. Naturally, incomes should be recorded only when they are certain. Therefore, a provision should be entered for expenses that are probable. The International Accounting Standards outline that expected losses should be recorded as losses but expected gains should not be taken to be gains. This is also referred to as convention of conservatism principle. Principle of Continuity This principle is an assumption that the business of a company will not be interrupted when recording financial information. This principle diminishes the principle of prudence since assets are valued at the price at which they where acquired and not at their disposable value. The International Accounting Standards state that balance sheets should record the value at which an asset was acquired with adjustments of depreciation over the period the asset is utilised. Principle of Periodicity The Generally Accepted Accounting Principles state that all business transactions should be recorded according to the date of their taking place. Where for example a client prepays a lease, the received revenue should be split through out the entire period in order to meet with the Principle of Periodicity. All transaction should be recorded and categorised according to their appropriate periods. Principle of Full Disclosure/ Materiality The International Accounting Standards state that all information and values regarding the financial position of a corporation should be clearly disclosed in its financial statements (Kimmel, Kiesso & Weygandt, 2011). The financial position of a company should be clearly and correctly shown by the financial statements which are governed by the accounting standards. Principle of Utmost Good Faith This principle is in regards to insurance of a company. It states that all the financial information should be revealed to the insurance company before the indemnity contract is entered into by both parties. Therefore, all the financial statements should be correct in order for the information given to be accurate. Section 2: Case Study The purpose of the International Accounting Standards is to lay down the foundations and rules of all-round principle of financial accounting, to guarantee comparability of the financial reports of earlier periods and the financial reports of other companies (Greuning et al., 2001). In this section, an accounting scenario will be analysed and the International Accounting Standard directing the different scenarios explained in details. Different case studies will be considered where the accounting principles will be explained. The International Accounting Standards guiding the presentation and reporting of a company’s balance sheets, income statements, and cash flows will be expounded under this section. Statement of Financial Position (Balance Sheet) The International Accounting Standards provide that a company must periodically present statements of its financial position, showing its current and non-current assets and liabilities (Greuning et al., 2001). This financial report is called a balance sheet. A balance sheet portrays a company’s financial position by measuring its assets and comparing it with its liabilities, therefore showing the value of a corporation. A corporation needs assets in order to carry out its business.The assets can be subdivided into current and noncurrent assets (Puppel, 2009). Consider a corporation such as McDonalds; its current assets may include raw materials, accounts receivables, supplies and cash. These are assets held for trading within a period of 12 months. McDonald’s non current assets may include its cookers, equipments and all the machinery. As shown by the examples, non current assets are those which held by the business for long periods and there for require long-term decision making to acquire. Liabilities are debts which a company my have during its operation. Current debts or liabilities are the expenses to be paid within a short period of time. McDonalds may incur current debts such as wages and salaries to staff, income tax, accounts payables and notes payables. Statement of Cash Flows This is a financial report that projects the inflow of a corporation’s revenue in comparison with the outflow of its expenses which result from its operation, investment and financing activities in a specific period of time (Libby, Libby & Short, 2008). To analyse statement of cash flow adjustment scenario, Bug Busters Exterminating Services’ financial statement will be considered. The actual cash flow must be determined by adjusting the books of account since the business records its financial data on the accrual method of accounting. The adjustments are important since certain accrual accounting transactions are considered in establishing the accrued total gains, even though the costs do not need a cash outlay. To change its accrured profits to its cash flow profit, Bug Busters Exterminating Services must adjust the period’s balance sheet. The period’s income statement will appear as below. Bug Busters Exterminating Service  Income Statement  Sales $267,189 Less: Cost of Goods Sold 132,122 Gross Profit $135,067 Less: Operating Expenses (115,405) Less: Depreciation (4,163) Net Profit $15,499 The company can change its accrued total gains to establish its cash flow for the period by adding depreciation and raises or reductions in payable. Raises or reductions in accounts receivables, inventories and notes payable should be deducted in order to get the net cash flow. Assuming depreciation was 4,163, increase in accounts payable was 653, increase in accounts receivable was (15,186), increase in inventory was (3,099), decrease in notes payable was (15,500), the net cash flow for the period is expected to be (13,470) dollars. Statement of Comprehensive Income Income reports for a given period show profit or loss incurred for that period. This financial report is also called profit and loss account. The International Accounting Standards state that all matters of income and expense identified in a given period must be incorporated in the profit and loss statement except a measure or states otherwise. The items to be integrated in an income reports include revenues, finance costs, tax expenses, share of profits or losses of investors and ventures, and the total comprehensive income. Certain matters should be recorded independently, either in the profit and loss report or in other financial statements. Such items include disposals of investments, discontinuing operations, litigation settlements, and disposals of company property, machinery and equipment. For example, general motors may choose not to disclose items such as depreciation of plant in the profit and loss statement since it does not have an effect on the money flow of the company. It only affects the value of assets in the balance sheet. Statement of Alterations in Equity International Accounting Standards require all companies to present a report which shows the alterations in equity when they occur as a detached document of the financial reports (Greuning et al., 2001). The statement should show the total comprehensive income for the period and reconciliations between the carrying amounts at the commencement and at the closing stages of the period for each document of equity. Other details which should be shown on the statement of changes in equity include the sum of dividends known as distributions. Other related amount per share should also be disclosed. Consider a situation where the management of a company such as BP decides to changes its equity. This decision will ultimately affect its balance sheet and its share capital. Therefore, the company is under the obligation of disclosing a statement showing the changes in equity to the public. Disclosures on Dividends The international Accounting standards state that dividends payable to share holders should be disclosed periodically. A public company such as the HSBC limited is required to disclose the sum of dividends anticipated or affirmed before the financial reports were authorised to be issued and not known as a distribution to shareholders during the period. The dividend payable per share and the amount of any cumulative preference dividends which is not mentioned should also be disclosed. Disclosures on Puttable Financial Instruments Regulations of the International Accounting Standards require companies to disclose any financial statement that can be classified as an equity financial statement. The information to be disclosed include a summary quantity data about the amount classified as equity, information concerning the anticipated money outflow on redemption or reacquisition affirmed of that class of financial instruments (Warren, Reeve & Duchac, 2008). Recommendations The International Accounting Standards act as guidelines of accounting and therefore should be used in all companies. The standards ensure that a company’s financial statements are understandable and are of international standards (Elmaleh, 2005). Companies applying the International Accounting Standards in reporting and presenting their financial statements enjoy transparency and confidence from stakeholders such as the government, shareholders and customers. The scope of International Accounting standards covers up to financial accounting and ignores management accounting. Therefore, recording of management accounting information does not follow the international accounting standards. The scope should be widened so as to streamline the internal accounting practices of a corporation (Greuning et al., 2001). Conclusion The subject of International Accounting Standards has been explained under two sections namely; literature review and case study. In the literature review section, the Generally Accepted Accounting Principles have been used to explain the International Accounting Standards. The topics covered include principles of; regularity, consistency, sincerity, permanence of methods, non-compensation, prudence, full disclosure, utmost good faith, continuity, and periodicity. In the case study section, the essay expounds on the balance sheet statements, profit and loss account statements, cash flow statements, Statement of Changes in Equity, Statements of Disclosures on Dividends, and Disclosures on Puttable Financial Instruments. In this section, case studies where used in order to explain the accounting standards. References Bragg, M. S. (2010). Accounting Best Practices. New Jersey: John Wiley & Sons, Inc. Bragg, M. S. (2011). Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles. New Jersey: John Wiley & Sons, Inc. Eisen, P. (2000). Accounting. 4th Ed. New York: Barron’s Education Series Inc. Elmaleh, S. M. (2005). Financial Accounting: A mercifully Brief Introduction. Union Bridge: Epiphany Communications Greuning, V. H., & Koen, M. (2001). International Accounting Standards: A Practical Guide. 2nd Ed. Washington, DC: The International Bank for Reconstruction and Development. Greuning, V. H., Scott, D., & Terblanche, S. (2001). International Financial Reporting Standards: A Practical Guide. 6th Ed. Washington, DC: The World Bank. Kimmel, D. P., Kiesso, E. D., & Weygandt, J. J. (2011). Financial Accounting: Tools for Business Decision Making. 6th Ed. New Jersey: John Wiley & Sons, Inc. Libby, R., Libby, P., & Short, G. D. (2008). Financial Accounting. New Jersey: McGraw-Hill. Puppel, W. (2009) . Governmental Accounting Made Easy. 2nd Ed. New Jersey: John Wiley & Sons, Inc. Stickney, P. C., Weil, L. R., & Schipper, K. (2009). Financial Accounting: An Introduction to Concepts, Methods, and Uses. Mason: South Western Cengage Learning. Warren, S. C., Reeve, M. J., & Duchac, J. (2008). Financial and Managerial Accounting. Mason: South Western Cengage Learning. Weygandt, J. J. (2010). Accounting Principles. New Jersey: John Wiley & Sons, Inc. Read More