Accounting for Decision Makers - Essay Example

Accounting for Decision Makers Name Institution Course Date Abstract Accounting is the process of identifying, evaluating, measuring and sharing of economic information and data for decision making. This paper is based on international convergence of accounting standards. First, the report will provide an overview of the International Convergence of Accounting Standards. Second, it will give a number of reasons that supports the international convergence of accounting standards. For instance, national and regional accounting standards have impacted the debtors,creditors and investors which have led to the introduction of international set of accounting standards. Third, the report will give the benefits of a single set of international standards to users of financial standards. For example, global set of accounting standards has brought about compatibility between organisations around the world which is beneficial to creditors and investors. Lastly, the paper will detail out the challenges that are experienced when trying to create a single set of international accounting standards. Accounting for Decision Makers Introduction Accounting is the process of identifying, evaluating, measuring and sharing of economic information and data to allow informed judgements and decisions from information users (Bae, Tan and Welker, 2008). The information in accounting structures is related to financial data of business transactions presented in monetary terms. The accounting systems and structures allow the generation of forecast and predictions necessary for decision making. In general, accounting offer a medium where marketing, human resource and other aspects of decision may be presented in monetary terms (Bae, Tan and Welker, 2008). The rapid changing and evolution of business environment is significant today. It has led to the change in accounting practices in companies. However, the main functions of accounting have not changed and are to improve the performance and profitability of a business organisation by offering necessary information and data for planning, coordinating, controlling and decision making (Bae, Tan and Welker, 2008). However, there have been some talks about the adaptation of international convergence of accounting standards by organisations. This is because; the international convergence of accounting standards have potential to improve financial transparency and minimize financial statement preparation costs. This essay will highlight the benefits of adapting single international convergence of accounting standards and the challenges that have been seen as a result of the effort to adapt these standards. Overview of the International Convergence of Accounting Standards A more complex business environment is handled by a sophisticated management accounting technique. Different organisations have implemented different management accounting techniques. In the globalised environment, all business organisations have to operate in a very competitive business surrounding (Bayerlein and Farooque, 2012). The witnessed changing business environment into global and competitive environment has impacted how individuals carry out their businesses in organisations either big or small company or either profit or non-profit oriented company (Zeghal, Chtourou and Sellami, 2011). The impacts of intensified competition globalised economy, scarce resources, technological advancements and complex business environment drive organisations to realising the importance of more detailed information and data. In every competitive market, detailed information is the core factor needed for survival. Major information required is global accounting information (Walker, 2010). Accounting processes have to ensure that information and data presented to the managers are useful in carrying out their functions. When companies become more sophisticated and complex, accounting concept becomes more crucial (Walker, 2010). If accounting processes is to be used to maintain its importance, it requires adjustment according to manager’s needs. Accounting process provides relevant and essential information and assists in creating effective decision making vale and offers an integrated perspective to management approach with relevant information (Shima and Gordon, 2011). In recent years, there has been a demand of an international business that has enabled accounting people to change how they create their financial reports. For the first time in a long period of time, a large number of companies have adapted common accounting standards. The vision of global set of accounting standards is clear and accepted by different countries around the world. Today, approximately 100 countries have made an attempt to adopt IFRS by public organisations (Mackintosh, 2014). The world is not at a point where the adoption of IFRS is complete. However, in the years to come, there is a plan to make it a global sensation. The priority of the global set of accounting standards is to improve the financial practices for the benefits of financial institutions and companies. The global accounting standard is aimed at improving the regional accounting standards and reducing accounting differences among countries (Daske et al., 2011). Generally, the International Financial Reporting Standards have focussed on assisting large multinational companies reduce accounting challenges in different countries. Nevertheless, the proposed global set of accounting standards has a number of repercussions for small companies. Reasons for International Convergence of Accounting Standards Today, the business world has changed considerably. The combination of advancement in technology, elimination of trade barriers and financial market liberalisation has contributed to the change of business environment (Hope, Jin and Kang, 2006). Capital markets are now worldly interconnected and competition has intensified. Cross-border transactions today happen very easily and fast as compared to years ago. This evolution to international capital formation brings about challenges to policy makers. In addition, the witnessed global financial recession offers an illustration on how the national accounting approaches are no longer good enough to manage the global interconnected capital market (Hope, Jin and Kang, 2006). This led to the need for a global accounting standard that will eliminate such challenges. The global economy requires a global set of accounting standards. If investors and investee are most at times found in different countries, it is not appropriate for each country to have different accounting standards (Gebhardt and Novotny, 2011). Dealing with numerous reporting requirements is very expensive for multinational companies with different subsidiaries around the world. In addition, different sets of accounting standards impede the distribution of capital as it adds risks as well as costs to investors. For example, a financial analysts working for an automotive sector is required to spot the undervalued shares of the competing companies in the industry (Hope, Jin and Kang, 2006). Today most automobile companies operate internationally and therefore for the financial analyst to spot the undervalued company, he or she will be required to analyse the financial statements of companies listed around the world (Hope, Jin and Kang, 2006). This is challenging and complicated especially when every jurisdiction utilizes different accounting standards. This means that even the basis for coming up with revenue and net profit numbers can be very different. In 1993, the Daimler-Benz transitioned from German GAAP to United States accounting standards so as to be the first company with a secondary listing in U.S. However, the profit of 600 million Deutschmarks which was recorded using German accounting standards was recorded as a loss of 2 billion Deutschmarks using United States accounting standards (Hope, Jin and Kang, 2006). This led to evaluation difficulty among the financial analysts. This explains why almost every multinational company supports the work of IASB to introduce global sets of accounting standards. There is remarkable progress towards the vision of the adaption of the international convergence of accounting standards for financial reporting (Hope, Jin and Kang, 2006). After the creation of IASB in 2001, countries such as South Africa, Australia, and European Union among others made the decision to adapt to the international financial reporting standards. Other countries that followed the wave included Brazil, Russia, Canada and Taiwan. Benefits of International Convergence of Accounting Standards Compatibility One of the major benefits of international convergence of accounting standards is compatibility. Global set of accounting standards has brought about compatibility between organisations around the world. Today, accounting standards differ significantly between different countries (Brown, 2011). Before making any investments decisions, an investor compares available potential investments. Comparing these investments requires him to reconcile the investments on the basis of accounting and this is challenging when the accounting standards used are different. The same problem can be seen among the creditors when they evaluate the creditworthiness since different accounting standards can make different organisations with comparable economic shape to appear contrasting (Brown, 2011). Therefore, the adoption of global sets of accounting system is able to put comparison on equal footing and this will make it easy for companies to effectively evaluate investment options and manage capital. Similar Financial Statement Format Companies that use an international set of accounting standards use similar accounting format for all of the financial statements (Brown, 2011). Debtors, creditors as well as investors can easily compare these financial statements even from organisations situated in different regions of the world. They are able to just place these statements next to each other and compare or evaluate their potential (Brown, 2011). The operating income, the gross margin, the net profits etc. are found in the same locations on every financial statement that has been prepared under the international convergence of accounting standards. The balance sheet as well as the cash flow information is prepared using the same format and therefore end users can easily evaluate the financial statements of different companies located in different countries (Brown, 2011). International Expansion Adoption of a global setoff accounting standards will make it easy for companies to expand overseas (Bischof, 2009). If companies wish to go international, they are required to take into consideration the international costs of compliance as this could mean that companies need to adapt new sets of accounting standards in order to meet the requirements of the new market. Doing this can increase accounting costs for such companies. Therefore, the plan to expand internationally is deterred by the expansion costs brought about by the adaptation of a new accounting system (Bischof, 2009). Generalized Standard-Setting International Financial Reporting Standards are considered very flexible to any changes that may occur in the business environment since they are embedded on broad principles (Nyor, 2012). The broad principles ensure that the standards are accommodative enough to different jurisdictional situations as it has minimal interventions from IASB. The IASB has not paced a specific format to be followed by every company adopting IFRS and therefore, companies can choose the presentation format that suits the needs of the stakeholders and other users of their financial statements (Nyor, 2012). Harmonization and Standardization The global set of accounting standards is harmonized and standardized enough that the investors do not have to pay extra money to process or adjust the financial statements of different companies across the globe (Bischof, 2009). The international convergence of accounting standards promise a simpler financial statement that can be understood by the investors. This eliminates any fees paid by the investors to get the financial statements simplified by analysts. Loss recognition timeliness The adoption of the global international accounting enables the ease of recognising loss fast. This is beneficial not only to the investors but also the stakeholders and the lenders (Nyor, 2012). International convergence of accounting standards not only increase transparency but also loss recognition which enhances the efficacy of corporate governance. With increased transparency, lenders benefits in return as it make it obligatory for organisations to establish the loss immediately (Nyor, 2012). This illustrates the timelier loss recognition ability of the global set of accounting standards. Timelier loss recognition allows an organisation to review its accounting books regularly in order to detect any losses that may be incurred. Relevance International convergence of accounting standards have global relevance which is beneficial due to a number of reasons (Nyor, 2012). The international accounting system reflects more on loss and gains. This puts can put companies which have adapted to this system in a more trustworthy and credible position. Stakeholders will have a true and fair view of all the transactions carried out by the organisation (Bischof, 2009). Under the international accounting standards, the manipulation of accounting figures in order to create hidden reserves is not allowed and this reduces manipulation and makes it more shareholders oriented. Korea is among the countries which have adapted the full global set of accounting standards. It adopted full IFRS in 2011 with the aim of enhancing transparency as well as the corporate international perception (Samir, 2003). This has enabled the country attract more international investors. On the other hand, Malaysia has also adopted the IFRS. The reason for this decision was to ensure that the companies in the country operate in a global scale. At the beginning, the country partially adopted the new global standards but later on opted for full IFRS (Bischof, 2009). The companies in the country now enjoy higher quality of earnings as well as great relevance of their accounting numbers. Risk Reduction The global set of accounting standards has the potential to assist both new and small investors as it makes accounting reporting statements simpler and better quality (Srkant, 2005). This is able to put these investors in the same level as the other experienced investors. It therefore assist reduce risks for new and small investors when making investment decisions. Experienced professional investors are not able to take advantage of these investors during trading due to the simplicity nature of the financial statements created under IFRS (Srkant, 2005). The Challenges of Achieving International Convergence of Accounting Standards Sovereignty in accounting standards In order to yield the benefits of IFRS, countries should be ready to stick to the globally agreed standards and not be tempted to tamper with these standards (Mackintosh, 2014). This can be difficult for elected officials to accept since they are used to establishing rules at a jurisdictional level. The international convergence of accounting standards intersect the concept of sovereignty. Some jurisdictions have endorsement tool that act as sovereignty “circuit-breaker” since it avoids a situation where international accounting standards are automatically implemented into jurisdictional law (Mackintosh, 2014). For instance, Europe chose not to adopt the entire IFRS as a result of the mechanism it has established to first evaluate the interest of the standards to its jurisdictions. However, for the global set of accounting standards to be effective, each jurisdiction should resist the temptation to tamper with it as it will not be a global standard anymore (Mackintosh, 2014). In some countries, the global set of accounting standards have been tampered with in order to modify them according to their specifications (Mackintosh, 2014). Australia has removed some aspects permitted under the IFRSs while Hong Kong has enhanced the application of the standards by converging them with the local accounting standards. In order to determine whether a country will adopt a full or part of the international convergence of accounting standards, there will be need for a global consensus in order to determine the route for convergence (Mackintosh, 2014). International Standardization A huge challenge is to establish a globally consistent means of evaluating financial performance and financial position of an organisation. Although the global accounting system is supported widely, the challenge arises when it comes to defining what that global approach should be (DeFond et al., 2011). This becomes more complicated as a result of factors such as different cultural preferences, differing accounting norms and diverse business practices that are found across the world in developed and developing economies. For instance, although capital markets are globally intersected, business practices vary from one country to another. Organisations both public and private in the United States raise funds by use of Initial Public Offerings. On the other hand, German companies are funded by families and other personal networks (Mackintosh, 2014). Meanwhile, Japanese businesses take part in cross-holdings as they have equal stakes in their associates. These different business practices have brought about preferences in different accounting standards. Therefore, standardization of a single global accounting system may involve the introduction of additional accounting methods that may differ with the existing ones (Mackintosh, 2014). It is thus very hard for a country to change its traditional accounting practices in an attempt to promote international standardization. Lack of Resources One huge challenge that the adoption or global set of accounting standards will face is shortage of human resources. IFRS has new set of accounting procedures that are new to accountants (DeFond et al., 2011). Therefore any company that adopts this system need to have IFRS-trained manpower. For instance, six months before China’s companies adopted the international convergence of accounting standards, there was a huge demand of trained accountants in the country. When the new standards are adopted by all the companies in China and not only the listed ones, the demand for accountants will shoot dramatically (DeFond et al., 2011). The adoption of international convergence of accounting standards has left China with the challenge of meeting the accounting shift deadline due to lack of IFRS-trained manpower. The risk that faces China is the inability for some of its companies to transition on time. Research suggests that China require 300,000 qualified accountants and this amount is likely to increase as more and more companies adapt to IFRS (DeFond et al., 2011). Therefore, huge amount of capital will be required in order to be able to train enough qualified accountants who will be familiar with the new standards. Lack of Adequate Regulatory Support The quality of financial figures and reports is attributed to the quality of accounting standards and the success of the process through which these standards are employed (DeFond et al., 2011). Adequate regulatory support is required in order ensure effective implementation of accounting standards. The process of implementing new accounting is not easy and requires support mechanism for it to be effective. Notwithstanding the convergence of global capital market, there is no apparent assurance that the new accounting standards will be adopted with dynamism in every jurisdiction (Brochet, Jagolinzer and Riedi, 2011). For instance, the United States is reluctant in adopting the global set of standards. This is huge global problem (DeFond et al., 2011). The United States is considered the largest market globally and it is paramount for the new international accounting standards to be harmonized with the already available ones. The United States lobby is resilient and has created the G4 countries with nations like New Zealand, Canada, Australia and UK (DeFond et al., 2011). Even though the new international standards differ slightly from those of the United States, the country treats them as a huge difference. Nevertheless, except for the United Sates, all the G4 nations have implemented the international convergence of accounting standards to some extent. Conclusion Accounting involves identifying, evaluating, measuring and sharing of economic information for decision making. The global set of accounting standards has been accepted by different countries around the world and about 100 countries have made an attempt to adopt IFRS. Dealing with numerous accounting requirements is very costly and time consuming which has led to the implementation of IFRS. The adoption of the international convergence of accounting standards has potential to bring about positive results. Global set of accounting standards has brought about compatibility between organisations and debtors, creditors as well as investors can easily compare these financial statements even from organisations situated in different countries. In addition, international convergence of accounting standards enable international Expansion and are very flexible to any changes that may occur in the business environment. Also, investors do not have to pay extra money to adjust the financial statements of different companies. The challenges in adopting and implementing the global accounting system include lack of regulatory support, lack of trained personnel, and sovereignty in accounting standards among others. 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