Accounting in Europe - Essay Example

Accounting in Europe Author’s Name Institution’s Name Accounting in Europe Introduction Financial accounting is a major economic field of focus in countries such as Europe. The main role of this paper is to explore on research by different authors regarding how capital providers utilize the existing information. According to the current conceptual framework, it is imperative for financial reports to cater to the needs of capital providers because they mostly use the financial accounting information. However, these providers have had complaints that there is inadequate academic evidence that describes these user needs. According to research, the main objective and role of most financial reports/ records are offering information regarding the financial position and performance in regards to a given enterprise, which is useful in making the consumers make effective economic decisions. To understand and explore on some of the financial reports in Europe, this paper will introduce several capital providers with their economic ideas, and gather information used by each category of capital providers. Lastly, the paper will discuss the findings and conclusions in regards to the implication of our findings in creating a reliable conceptual framework. Heterogeneity amongst Capital Providers The research information that focuses on the needs of consumers/users precisely focuses on equity investors since they are crucial in the field of marketing and economics. Research shows that equity investors play a major role in ensuring that the financial sector within the market is both stable and balanced. The European debt is twice compared to the equity market. This situation challenges European economists to conduct a study and find out why there is a high rate of equity debt in Europe. However, this could be a positive thing since debts are recorded and are a main source of income for most Europe Firms. The main reason is that, when debts are paid, the financial ladder inclines to the right, which is for most firms and companies. Additionally, bank loans and other forms of credit are the main sources of financial aid for the European companies since they represent about 70% liabilities. Unfortunately, most researchers have focused their research on equity market participants, and this has diverted their attention. Before reviewing any other literature source, it is advisable to establish how the contrasting claims can have an effect on the goals of capital owners. Information Usage Additionally, there is quite a difference that exists between equity and debt due to several features. For one, the basic feature that there is a limitation of debt provider’s returns on both the downside and upside is a major contrast. On the other hand, equity returns only face constraints on the downside sector. As a result, different stakeholders face various risk profiles and from this, lenders, as well as bondholders, become sensitive to the downside risk compared to equity providers. Hence, contrast may exist between the risks of both the debt holders and shareholders, especially when the latter (stakeholders) and directors desire to maximize the value of their equity instead of the company’s value. Also, the contrasting differences may cause conflicts to arise between these parties. In this case, for self-protection, debt holders come up with high-interest rates than their competitors to ensure they anticipate for such risks. On the other hand, shareholders protect themselves by introducing certain agreements into the debt contracts. Using these measures, both the debt and shareholders protect themselves from any financial risks that may arise. Financial Decision-making Due to adjustments in the IASB framework, the choices made about certain decisions are highly considered the role of information. Decision usefulness is a general term referring to financial decision making, and it involves making investments or important decisions from the gathered information; hence, it makes use of future-oriented information. Stewardship, on the other hand involves evaluating invested capital using the existing information. Stewardship, therefore, utilizes information from past actions and financial statements. Stewardship, however, receives less attention than decision-making. There exists adequate research that focuses on importance of available information in decision-making. Stewardship on the other hand focuses on information analysis. Both of these evidences are quite important, but there have been some concerns on the role and duties of stewardship. Investors require having information that will help them predict future cash flows as well as associated risks for future returns. Such predictions cannot be possible without stewardship since stewardship assessments can help hold managers accountable for past performance Use of valuation models The two most outstanding models in theoretical accounting literature focus on a firm’s level of income and rate of growth. Both of these models have their foundations in accounting. The residual income valuation model focuses on the value and level of equity, whereas the abnormal earnings model focuses more on growth and earnings. Financial managers mainly use these models in order to control capital usage. These models are used as an initial screening device since they can show earnings valuations efficiently. When there is a change in rules, the valuation methods are the most affected, and this affects the valuation exercise. Using information by investors to Evaluate Stewardship There is inadequate research that talks about utilizing information in assessing stewardship. Most researchers focus on the importance of accounting data; since it can help to monitor financial performance within a given firm of company. According to studies, there is a strong relationship between earnings and compensation. There have been meetings between managers in Europe and capital investors whereby they discuss how to hold company management responsible for accounting and monitoring financial performance. There is evidence that some investors use financial statements for stewardship assessments. Researchers have also tried to highlight on audited accounting information, which assists in debt contracting. This information is useful in the original provision of capital and in the middle of subsequent negotiations that may come up before the end of the contract or financial transaction. Some of the attributes of accounting can influence most of the features found in debt contracts. Therefore, it is advisable to include any form of accounting data to enhance reliable calculations. According to most researchers, it is clear that most financial covenants help in completing most debt contracts. Specifically, these financial covenants may include the rate of interest, collateral level performance nature, financial covenants, restrictions and the pricing level among others. Most economic analysts have raised the question of whether GAAP numbers are useful to the debt contracts. Research evidence shows that GAAP numbers act as a vital reference point. However, lenders tend to make certain changes to documents such as the balance sheet and the statement numbers income they contain relevant financial information of a firm. Information use by credit managers With the assistance of a credit bureau to assess credit risk, credit managers, also known as sales persons determine the terms that exist in a given trade credit contract. A credit bureau refers to any form of exchange mechanism, which is formal that comprises of credit information that is composed by lenders. The main role of the bureau is to gather and compile information regarding borrowers. In countries such as Europe, some credit bureaus provide consumers with credit insurance. Also, non-financial factors have a major influence the credit terms of a given firm. According to some authors, standards set for a given industry determine the credit terms for the UK. However, others refute this statement and claim that only the specific factors of a given company affect its credit terms. Long-term supplies are also common services offered by most firms. Therefore, accounting information has a little or no role to play in determining financial conditions. Credit Bureaus Researchers state that creditors also play a vital role in both Europe and other influential nations such as the United States. Some of the credit bureaus with the most influence in Europe include Euler Hermes, Atradius, and COFACE. The main role assigned to these creditors is to provide consumers with a detailed report, which is needed by lenders. Specifically, these reports contain information about the negative defaults, which defines the outstanding amount at default during the last payment date. Other details contained in the information include positive historical information on both current and closed accounts and the financial records of a given target company or companies. For such information to be gathered effectively, different companies are analyzed to permit the storage of records in databases for users in other analyzes of default. Therefore, credit reports assist credit providers in establishing some of the credit risks analysis that exists within borrowers to stay alert on the credit risks. Findings and Conclusions The above research evidently shows that the aim of this study was to realize the role played by financial accounting information in assisting capital providers, especially those located in Europe’s public entities. The research shows that the accounting information plays a major role in identifying some of the financial characteristics such as loans and debts, which are two sources of income that European countries rely on. From the evidenced presented, researcher reached to certain conclusions. The first conclusion that the researchers highlighted is that capital providers are heterogeneous; therefore, their need and demand for financial information and reports differ systematically due to the existence of different goals. Secondly, capital providers prefer using multiple sources of information, and these sources have a close interrelation. The last conclusion forms this finding is that the evidence used or collected using the other steps should offer support to the standard setters. References Armstrong, C. S., Guay, W. R., and Weber, J. P. (2010).The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50(2), 179-234. Barker, R. G. (1998).The market for information-evidence from finance directors, analysts, and fund managers. Accounting and Business Research, 29(1), 3-20. Read More