Advanced Financial Accounting Framework - Assignment Example

Advanced financial accounting framework Customer Inserts His/Her Name Customer Inserts Number Customer Inserts Course Customer Inserts Tutor’s Name 25, 04, 2011 Question A The fundamental purpose of IASB and FASB in creating a convergence project was mainly inspired by the increased globalization as many corporations sell their products or services across borders and thus subject to different accounting standards. For instance, McDonald Corporation and Coca-Cola Company with about 65% and 70% of their cumulative sales are from foreign countries apart from the U.S. it is not convenient for these companies to be subject to different international standards. According to Nikolai (2009, p.27) this is because the two available options IASB and FASB produce different financial statements which then makes it extremely difficult for stakeholders such as investors and creditors to make decisions. In the U.S. corporations are obliged to international accounting standards set by FASB. On the other hand foreign companies are governed by international financial reporting standards (IFRS) based on IASB. The resolution of this issue commenced in 2002 when both IASB and FASB commenced their “Norwalk Agreement”. The major purpose for the commencement of this “Norwalk Agreement” was thus based on mutual agreement of committed development of compatible accounting standards of high quality which could easily be used locally and internationally. The short term goal was thus focused on achieving more demanding but easily achievable goals of reducing the difference between the IASB and the U.S. FASB. The rationale for the development of the IASB and FASB convergence project was thus the reason behind the commencement of the IASB/FASB conceptual framework. The development of the conceptual framework was consequently based on the foundational provisions of the convergence project of avoiding different reporting standards and using one local and internationally accepted framework of accounting reporting. The major focus of Conceptual framework project thus fosters the initiative of convergence project through enactment of an internally steady and complete framework. Following the progress of the convergence project initiated in 2002, the Conceptual framework project begun its work in the year 2005 with its focus primarily in setting new foundational unyielding standards of accounting that could favour establishment of other future standards. The two boards have thus split the project into eight namely; i. Objectives and qualitative characteristics ii. Definitions of elements iii. Measurement iv. Reporting entity concept v. Boundaries of financial reporting (Disclosure and Presentation ) vi. Purpose and status of the agenda vii. Application of the structure to not-for-profit entities viii. Remaining issues Currently there are a number of drafts concerning the progress that have been issued to demonstrate the progress of the discussions going on between the two boards. Some of the major issues that have been issued through the progression report are objective and qualitative features and reporting entity preliminary view. Question B There were a number of limitations and of both the GAAP standards and IFRS that led to the development of the new conceptual framework that aimed at merging and establishing new internally consistent, principle based, and internationally joint approach of viewing accounting related issues such as elements recognition and de-recognition, entity reporting and framework status among others. As an example foreign companies in the U.S. had to comply with the GAAP standards in the U.S. and comply with IFRS standards when reporting their financial standards in a country like Australia. This is a major weakness because it wastes time, increased cost of doing business because of the non-uniformity of reporting standards. More so, FASB is rule based while IASB is principle based, a rule based approach enforced by FASB is less efficient as compared to rule based approach fostered by IASB. According to Nikolai (2009, p.24) the other major weakness that both standards lacked in light of the effects of globalization is the standards applicable internationally and meets all the companies’ requirements without impairing their primary functions in their different global market niche. Complying with different standards derails the company’s resources and time and thus increasing the cost of doing business. It is for these reasons and many others that inspired the development of the conceptual framework that could accommodate all companies doing businesses worldwide. A common conceptual framework also provides a substantial foundation for development of a platform which is internally consistent as opposed to the inconsistent standards provided by IASB and FASB. The FASB rule based is not as efficient as IASB principle based approach which the conceptual framework aimed at achieving. Since both IASB and FASB lacked international convergence platform, the conceptual framework provides for the ability to enhance “cross boarder” convergence which both frameworks failed to achieve. The inconsistence of financial reporting standards derails the capital provider’s decision making because of the different reporting standards issued by both boards. Since there is need to ensure that the capital providers are informed, a convergence of standards is necessary and thus the need of conceptual framework project. Question C There are a number of differences between the U.S. GAAP as outlined in FASB and IFRS as outlined in IASB. The major difference between these two standards of accounting as mentioned and explained below. The LIFO inventory is a commonly used in the United States and companies operating in the U.S. are thus allowed to reduce their income taxes when prices increase. According to LIFO conformity regulation, a company that adopts its use in reporting the cost of goods total sales in the tax returns should also use LIFO on its accounting books. On the contrary, IASB firmly prohibits LIFO’s usage by companies that follows its standards (IFRS) (Porter 2010). Despite the similarities in lower-cost-or market rule to account for inventories, the two standards deviate in two aspects. In the GAAP, the definition of market value is considered replacement value which is also described on maximum and minimum perspective. On the contrary, the IFRS implements net realizable value for the analysis of the inventory market value without imposing either lower or upper limits. Secondly, the U.S. GAAP provides that if an inventory acquires new market value which is lower, the figure automatically assumes the basis for that particular inventory. On the contrary, the IFRS provides for reversal of inventories in later dates. In essence, the IFRS recognizes the increase in inventory value upon value appreciation in later date as opposed to the rigidity of GAAP. In terms of cash and internal control, the Sarbanes-Oxley Act of the year 2002 (SOX) institutes strict requirements for reporting if any company’s securities are to be included in U.S. stock exchange. The cost for compliance and yearly requirements to enhance an effective system used for internal control has had significant effect on companies involved. On the contrary the IFRS requires no such compliance (International Accounting Standards Board 2008). The other major difference between IFRS and the U.S. GAAP concerns long term liabilities, notably the application of the rule brings the major difference between these two types of standards. Despite the similarity in rule the criteria for considering a lease as capital is similar in both standards but the difference is that IFRS considers the criteria as a guideline while U.S. GAAP is more rigid in application of the lease criteria. The treatment of current and long term assets also differs in these two standards and thus providing challenges for international companies that need to comply with these two regulations. Question D The IASB and FASB began the reconciliation of their different accounting standards in the year 2002 with the “The Norwalk Agreement” which visualized the need to merger or rather harmonize the two different accounting standards because of the need to consider the modern global market. The two bodies acknowledged the need to enhance their commitment towards developing compatible and high quality accounting standards that can easily find their use both locally and internationally. The two boards promised to ensure that sooner there will be compatible standards of accounting that can easily be used locally and internationally. The convergence project that commenced under “The Norwalk Agreement” came up with some basic proposals which are both short-term and long-term plans to harmonize the two accounting standards (Gowthorpe 2008). Some of the short terms goals set to minimise the difference of these two standards are as follows; i. The two bodies agreed on removing a number of basic differences between the IASB and the FASB. ii. By the year 2005, the two bodies agreed on further removing the differences that remained after the commencement of the “The Norwalk Agreement”. iii. Upon the commencement of the conceptual project, the two bodies reiterated the need to foster their commitment and coordinate their activities effectively with a target of accomplishing the task by the latest date, 2015. iv. The major goal of the two bodies is to find a compatible and high quality solution. The 2005 road map for the convergence process shades more light on the fundamental framework that the two bodies have established in order to address their different accounting standards. Some of the milestones that ought to be achieved by the year 2014 include the following considerations. i. Enhancement of accounting standards, the SEC will determine if the standards are of high quality and comprehensive enough. The determinants of the effectiveness are; is the standard established robust? Is it independent with considerations of the investors and others affected? Is the standard set capable improving the effectiveness of reporting financial information which is useful for investors? ii. The SEC also envisions funding of the IASCF in order to ensure that the foundation is stable, secure and able to function independently. iii. The SEC also proposed the need to adopt the use of interactive data for IFRS reporting which is based on XBRL language of the computer. iv. In order to ensure a successful adaptation of the IFRS standard of accounting, there is need to invest in educating investors, financial managers, financial statement preparers, auditors, specialists among other groups in the United States. v. The SEC targeted to implement the first phase of the IFRS standard in 2009, 31 December. vi. SEC was also to establish the feasibility of the mandatory use of the IFRS in the year 2011 based on the achievements of the milestones mentioned above. vii. Mandatory use of the IFRS standard is targeted to commence in the year 2014, 2015 and 2016 respectively. According to Schroeder (2010, p. 96) notably, the FASB and the IASB have affirmed their commitment of solving their incompatibility issues. The reconciliations process is noted to depend on a number of factors namely; the success of the IFRS implementation in financial statements in companies and other relevant jurisdictions, quantifiable issues in accounting for the progress of handling priority concerns relevant to the IASB-FASB program of Convergence. Question E The conceptual framework aims at updating and also refining the fundamental concepts existing in order to be relevant to the market changes, economic and business practises. The eight phases are to be achieved before the project is fully executed. Among these eight considerations, reporting equity and Objectives and qualitative analysis will be considered in-depth (Robertson 2009). a. Reporting equity The major achievements of reporting equity that was reported by the two boards includes the following aspects. Reporting equity should not be focused or rather limited to entities structured as legal entities alone. The reporting entity should also be broadly referred as a broad area of business or rather circumscribed business area. The report also included lenders, investors and other different provides of capital in the description of the reporting entity. b. Objective and qualitative characteristics The major achievement of the objective and qualitative characteristics are divided into two essential components namely objectives and qualitative considerations as discussed below (Porter 2010). The objectives achieved the need to prepare financial reports that focuses on a wide range of users and thus prepared from an entity’s viewpoint. The framework ought to identify that the primary users of the information and the potential investors and creditors. The two boards considered the need to provide information to users which will then help them in determining the degree of the entity’s solvency and liquidity. The agenda of this objective is thus focusing on the overall users instead of a limited number of users. Qualitative considerations includes the following aspects, relevance where the information provided is in a position to make economic decisions by helping users to analyse past, present and future cash flows. Accurate (faithful) representation of the economy in real world is also another milestone of the qualitative characteristic. Any financial information is also represented accurately and neutrally. Other features include comparability, materiality, understandability and transparency. References Gowthorpe, C 2008, CIMA Official Learning System Financial Analysis, Elsevier, New York. Nikolai, LA & Bazley, JD 2009, Intermediate Accounting, Cengage Learning, New York.PP. 23-29. Porter, G.A & Norton, C. L 2010, Financial Accounting: The Impact on Decision Makers, Cengage Learning, Arizona. Robertson, L 2009, CIMA Official Learning System Financial Management, Butterworth-Heinemann, London. Schroeder, RG, Clark, MW & Cathey, JM 2010, Financial Accounting Theory and Analysis: Text and Cases, John Wiley and Sons, Michigan. PP. 93-110. International Accounting Standards Board 2008, International Financial Reporting Standards (IFRSs®) 2008, Kluwer, London. Read More