Global Accounting Standards and Conceptual Frameworks - Essay Example

GLOBAL ACCOUNTING STANDARDS AND CONCEPTUAL FRAMEWORKS Student Name Institution Date Introduction Accounting standards refer to the convincing principles for financial reporting that are the main source of the generally accepted accounting principles (Mackenzie eta l, 2013) . The main aim of accounting standards is the determination of how transactions and other activities within the corporate entities are documented, measured and presented in financial statements. Moreover, financial statements are important because they act as the sources of financial information for the investors, lenders and creditors as well as the other corporate contributors. The information provided by the accounting standards is useful in corporate decision making. On the other hand, conceptual frameworks can be referred to as the arrangement of ideas and objectives that are used in the creation of the reliable rules and standards. In accounting, conceptual frameworks are important because they are used in defining the nature and purposes of accounting. Conceptual frameworks in accounting takes into consideration both the conceptual and theoretical perspectives concerning financial reporting and provides a basis for the development of the financial standards. Globally, the accounting standards differ from one country to another. In the United States, for instance, the Security and Exchange Committee (SEC), mandated the Financial Accounting Standards Board (FASB) with setting financial standards for the public companies. Apart from setting financial standards to the American companies, the accounting body also helps in improvement of the set standards and provision of a basis for the training of the public regarding the standards. Other countries such as Canada and Australia also have different accounting principles that govern the corporate entities within those countries. Discussion There has been numerous difficulties for multinational companies with subsidiaries in more than one county in coping with the different financial standards in different countries, hence the development of the International Financial Reporting Standards (IFRS). The main reason for the establishment of the IFRS is to maintain stability and transparency in the financial market, and help individuals and business alike in making informed decisions (Needles and Powers, 2012). Although the International Financial Reporting Standards have been adopted by many countries in the world to help in financial reporting, some countries are still skeptical about adopting the standards. The international standards are applicable in the European Union and parts of Asia and South America. The United States of America, has, however not adopted these standards. There is the need for the adoption of these standards by the financial world to help in reducing the costs and allowing free flow of information. Importance of Global Accounting Standards Having global accounting standards is important in enabling corporate entities to make informed decisions in developing corporate financial statements (Ernst and Young, 2012). One of the reasons why it is important to develop global accounting standards is comparability. Developing a single set of global accounting standards is important in developing a basis for comparing companies. With the current existence of different accounting policies, there is the need for investors to reconcile the two companies with the same basis of accounting. Moreover, the determination of the credit worthiness of a company requires the creditors to subject the companies to different accounting standards. The use of the same global accounting principles can help in making comparisons of different companies easier, helping the business people and corporate entities to assess the international options for investment and cash management. Secondly, the establishment of international standards for financial accounting is important in helping in increasing the chances of international expansion of corporate entities. The existence of different sets of accounting principles in different countries around the world has been a hindrance to the expansion of several companies to multinational levels. The establishment of global sets of accounting principles is important in enabling expansion of companies since the accounting standards applied are universal. In many instances, the expansion costs of moving oversees are high. Thus, the establishment of the international accounting standards is important in removing such biases and enabling expansion of corporate entities. The development of the global capital markets is another important reason why it is appropriate to have the global set of accounting standards. Initially, capital development for corporations was done at the national level by the banks. However, with the increased globalization, liberalization of the financial markets, removal of the trade barriers and the advancements in technology, capital development for companies has reached the global arena, thus, the national and regional accounting policies and standards cannot deal effectively with these developments, thus the need for developing the global accounting standards (Hancock and Robinson, 2015). Another reason why the establishment of the global set of accounting standards is suitable is the establishment of an overall body for setting and improving the accounting standards. World over, there are accounting standards and policies that are specific to those countries, with each country having a body that establishes and regulates the standards of accounting. There is also the International Financial Reporting Standards that regulates the international accounting policies. The development of a central authoritative body is important in ensuring reduced conflicts between nations and the international regulatory bodies as well as helping in cost reduction. Conceptual Frameworks Conceptual frameworks are another important considerations that need to be made in setting global accounting standards. The components of the conceptual accounting standards include the assets, liabilities and equity. One reason why it is important to have global accounting conceptual frameworks is to help in the establishment of global accounting standards (Bragg, 2011). The main role of the conceptual frameworks is the provision of both the theoretical and the conceptual basis for the formation of the accounting standards. Therefore, having conceptual frameworks that have global applicability is important in enabling the establishment of global accounting standards, hence, reducing conflicts. Another importance of the development of conceptual frameworks with global applicability is the provision of uniform ways of developing financial statements. The main aim of conceptual frameworks in accounting is the provision of information to the investors, creditors and the corporate contributors on the investment opportunities. Development of an international accounting conceptual framework is, therefore, important in the provision of information to the corporate entities and individuals. This helps them in making informed decisions regarding investments and cash flows. Another reason why it is important to have accounting conceptual frameworks with global applicability is ensuring improvement of the existing global accounting standards. One of the important characteristics of the conceptual frameworks is that they highlight the discrepancies that exist within the functional accounting standards. Developing an accounting conceptual framework with global applicability is important in developing a mechanism for the assessment of the global accounting standards and improve them. Limitations Although the establishment of global accounting standards and accounting conceptual frameworks is seen as an important step in the transformation of the financial world, there are also other disadvantages associated with it. One of the limitations of using the global accounting standards is the economic constraints on the corporate entities. (Chand and Patel, 2011). The choice of the global standards of accounting may augur well with the some, but not all the companies. In attempting to comply with the set accounting standards, some companies, with accounting systems that work effectively for them may be forced to shift to the new standards. Such companies may be forced to incur costs in shifting to the new systems, causing financial crises in the company. In other instances, the regulations of some countries require the corporate entities to contribute certain amounts of money to fund these global institutions, causing financial strains on the companies. Another reason why standardization of the accounting principles and standards would not be of benefit to the financial market is the difficulty in changing the laws and regulations of countries. Although there is the possibility of ensuring that the accounting principles are standardized, the likelihood of changing the rules and regulations in the different countries to comply with the set standards is difficult. As a result, the difference in the regulations in the various countries will result in the creation of conflicts between the various international regulatory bodies and the compliant countries. Moreover, the development of standard accounting rules and standards poses difficulty in establishing what the standards should actually contain. Although globalization has created a difference in ways of conducting businesses, it is important that the historical ways of conducting businesses are also considered. In America for instance, capital development was done through public offerings while in Germany it was by family funding. With all these in consideration, it is difficult to develop accounting standards acceptable to all nations. Conclusion With regards to the above discussion, it is evident that the development of global accounting standards is important in harmonizing the accounting policies in different parts of the world. However, before developing the international standards acceptable to all countries, it is important that the different aspect of financial statement development in various countries be taken into account. Furthermore, the traditional factors that influence accounting standards in different parts of the world should be taken into account in the development of these standards as well as the conceptual frameworks. References Bragg, S. M. (2011). Wiley GAAP 2012: Interpretation and application of generally accepted accounting principles. Hoboken, NJ: John Wiley & Sons. Chand, P., & Patel, C. (2011). Achieving global convergence of financial reporting standards: Implications from the South Pacific region. Bingley, U.K: Emerald. Ernst & Young. (2012). International GAAP 2012: Generally accepted accounting practice under international financial reporting standards. Chichester, U.K: J. Wiley & Sons. Hancock, P., Bazley, M. E., & Robinson, P. (2015). Contemporary accounting: A strategic approach for users. Mackenzie, B., Coetsee, D., Njikizana, T., Selbst, E., Chamboko, R., Colyvas, B., & Hanekom, B. (2013). Wiley IFRS 2013: Interpretation and application of international financial reporting standards. Needles, B. E., & Powers, M. (2012). A guide to international financial reporting standards. Mason, Ohio: South-Western. Read More