International Accounting Standards - Essay Example

Name Course Tutor Institution Introduction Over the years, the entire world has witnessed a steady convergence towards the international accounting standard. Lots of countries across the world have shifted to IFRS (International Financial Reporting Standard) in order to harmonize the (GAAP) Generally Accepted Accounting Principle with IFRS. Accounting standards are rules and regulations used in the accounting policies. It was issued by the accounting bodies, national as well as the international, specifically for guiding members on how to treat items in financial statements. The enforcement of the standard is an important tool used in accounting professional. Determining a good mechanism will facilitate a uniform accounting standard. According to international accounting standard, all members are required to publish their accounts according to international accounting standards. IASC (International Accounting Standards Committee) established a uniform accounting system in the year 1973 to both private and public business. Reliable, transparent and comparable financial information is important in the smooth running of the businesses. In the global surrounding, the need for a uniform accounting standards in the financial world has become paramount as a result of the dynamic growth in reach, size, number, direct investments and sales of securities. However, as a result of social, legal, cultural, and economic differences among different countries, the accounting standards in many countries vary widely. The credibility of FR (Financial Reporting) becomes questionable if same transactions are accounted differently in different countries. Therefore there is need for a uniform accounting system in both developed and developing world. In many developing countries, compliance with accounting standards is not mandatory. This means that the rules and regulations stipulated in international accounting standards are ignored, thereby giving dissimilar results. Unless there is compliance with IAS, there is very little global harmonization in the accounting framework. Uniform accounting standard will helps to increase the quantity of capital and lowers cost of capital. It will force many firms onto similar standard, thus reduces on welfare. Uniform accounting standards are much better than having different accounting practice Firms differ intensively in their costs as a result of different accounting standard. The main idea dually rest on capital allocation benefit as a result of using a uniform accounting standard. Uniform accounting practice or standard allows investors to compare extensively on different investment chances or opportunities across the world, since financial reports are stated in the same “language.”This tends to draws more investors if not all into the market place, thus, increase capital supply into the economy which will eventually lower the cost of capital of many firms. On the other hand, a uniform standard is more costly for many organizations since it does not take into consideration the variances among firms. Many companies prefer a diverse standard since it lowers their compliance cost. When similar accounting standard is used, it lowers the supply of capital thus lowering the equilibrium price per capital. Uniform accounting standard helps to generate high social welfare unlike the use of a diverse accounting standard. Its Uniformity has the ability of draw capital to the market place. When company’s productivity increases, a uniform accounting standards should be adopted. A higher marginal capital will generate returns when there is high capital level, this takes place where there is a uniform accounting standard, which tends to increase supply of capital to an economy. Experiences from different countries explain that it cannot be appropriate to develop a uniform accounting system, but to my opinion, uniform accounting standard worldwide is an ideal mechanism. The development of international accounting standard has helped executives in public and private firms who do not have a strong accounting standard. Uniform accounting standards paves way for transparency, accountability, efficiency and imposes market discipline to accountants. Transparency may be defined as a principle of establishing an environment where vital accounting information on decisions, conditions and actions are made available to all market participants. The objective of FS (Financial statement) is to provide relevant information to all users of financial statement such as balance sheet, cash flow statement, trading and profit and loss account. The adoption of a uniform Accepted Accounting Principle is a necessary requirement used to facilitate proper interpretation of the financial statement. In the year 1989, IASC (International Accounting Standard Committee) established a uniform framework for presenting financial statement. This framework consists of list of concepts (it stipulates the underlying presentation of financial information to the intended users of the financial statement), Guides (this are the standards setters in establishing accounts) and assists auditors and users of IAS in dealing with matters not covered by the standards. According to IAS, financial statements are prepared on assumption that the business is operating as a going concern. Having a uniform accounting standard will ensure that the accounts prepared regardless of the accountant’s domicile of origin, it will possess the following qualities: relevance, reliability, compatibility and understandability. Uniform accounting standards will encourage relevance. Information is considered relevant when it has the ability to influence the economic decisions of an individual by helping them in evaluating the past, present and future events. Through a uniform accounting standards, audited information used to determine the price of a business if it is to be sold as a going concern will be similar regardless of different auditors who audited the firm. The relevance of a uniform accounting standards helps executive to make vital decisions. Reliability-financial statements prepared and presented at the end of the financial period should be totally free from material errors and misstatements. Uniform financial statements will help to eliminate errors and fraud in the financial statement. Comparability- uniform accountings standards will help to present financial statement in a consistent manner thus enable the intended users to make important comparisons. Uniform accounting systems enhances understandability of business, accounting and economics. Accounting standards and practices of different countries have created a diverse environment, the development of a uniform accounting standards will develop a strong national accents. As a result of the diversity, many firms with lots of investment in different countries if not all, have difficulties in consolidating financial report from multiplicity of different accounting practices. This issues have however, been tabled by professionals to the international congress of accountants. ICCAP (International Coordination Committee for Accounting Profession) was developed with specific aims of instituting or rather developing a uniform accounting standards. In order to improve on comparability of the financial statements, a uniform accounting standards must be adopted. Uniformity strives to increase similarities between accounting policies through setting limits on similar alternatives allowed while handing same transactions. Uniformity differs widely from standardization, in that, the practice allows no room whatsoever for any other alternatives even when there is disparities in the economic condition. This in turn helps accountant to obtain similar or rather same results while dealing with the same transactions in different countries. The IAS (International Accounting Standards) resulting from uniformity has developed important benefits. Investors as well as analysts have benefited from IAS. Multinational firms did not see the need of developing different reports for different countries in which they are party to, for instance, in the developing countries such as Africa, since similar rules and regulation was used in preparing the financial statements. On the other hand, stock exchange benefited from listings their securities transactions worldwide. The IASC (International Accounting Standard Committee) objective was majorly to formulate accepted accounting principle worldwide. The IAS covers different topics on how firms should handle: depreciation, income taxes, leases, investments, interim financial reporting, an employee’s benefits, segment reporting, earnings per share, business combinations, intangible assets and financial instruments. A uniform accounting system ensures that: proper books of accounts have been maintained, the financial statement prepared is in agreement with the books of accounts and sound accounting policies and procedures has been followed in the preparation and presentation of financial statement. IASC standards is however not compulsory. However, its usefulness has gradually increased over the past years, with many organizations stating that its accounts should be prepared in accordance to the IAS.As firms continue to grow, so is the need for a uniform accounting practices and principle. There is generally very little work needed to the financial reporting system, that is, a good accounting system throughout the world. The need for a uniform accounting practices has been there for a long time. One factor that has led to the greater need for uniformity is globalization of businesses. Economic inclinations are offering incentives in order to develop international accounting operations. Increase in global nature is the mother of reason as to why there should be a uniform accounting principle. Uniformity will ultimately result in multinational companies seeking capitals in different countries and the lending institutions will ultimately need financial information from these firms. Therefore, uniformity in the accounting system will help eliminate costly process used in translating information from one country’s language to the other. The idea of international accounting principle has opened a wide range of different interpretations, ranging from strict intercompany to inter-temporal. Uniform accounting plan has helped in the imposition of tax measurement because it facilitates in the national planning and macroeconomic goal. Uniformity can be linked closely with individualism dimension. Uniformity must be inconsistent with desires for strong uncertainty avoidance, which will ultimately lead to concern for rigid code of behavior, need for implicit rules and regulations, notion and respect for conformity, search for absolute truth and values. Uniformity in the accounting system has helped to regenerate similar results in the accounting calculations in different countries if there is adherence to International accounting Standards (IAS). Recommendations It is important to adopt a neoclassical approach in order to understand the economic situations and consequences of generating a uniform accounting standard. Different policymakers have argued that a uniform accounting standard helps to create transparency and confidence among investors. The uniformity of the accounting system must be able to measure market liquidity and cost of capital. It is however very important for firms to evaluate and answer this question, how does uniformity generates benefits to an economy? And what are the effects of multi use accounting standard in different countries? Uniformity should be adopted to enhance similar results across the world. Conclusion Uniformity has helped to reduce the cost to be incurred by different countries as a result of diverse use of accounting systems. Through using similar accounting standard, accountants will be relived from double work, that is, they will not be expected to translate the accounting standards used in preparing the financial statement to countries which do not use it. It is therefore right to say that, a uniform accounting standards has helped to attract different investors in different countries thus reduce on the capital cost to be incurred. This means, different accountant’s preparing and presenting accounting information to its intended users ought to be the same in all aspects, if they were prepared in accordance to IAS (International Accounting Standard). Many countries which have developed accounting standards have ultimately ignored IAS (International Accounting Standard) as a result of the flexibility in their economic systems. It is therefore very essential for IAS to eliminate other alternatives used in dealing with the same matter, or while treating the same accounting question. More should be done in order to provide relevant and timely information to investors. Without any doubt whatsoever, International Accounting Standard has helped in the international flow of capital, thereby improving the world’s economy thus making it a better place to live in. Uniform accounting standards are much better as compared to the diverse accounting standard adopted in different countries. Reference McGregor, Warren, "An Insider's View of the Current State and Future Direction of International Accounting Standard Setting," Accounting Horizons June 1999. Read More