Changes in Accounting Due to Globalization - Assignment Example

 Changes in Accounting Due to Globalization Introduction This research work presents the basic differences between management accounting and financial accounting and highlights its impacts on business. The globalization has brought a number of changes in the way the business is carried out as well as its functional areas including accounting too. This paper describes the impacts of globalization on accounting and it presents different accounting practices adopted by different firms. The international accounting and its significant aspects are also included in this work. Body- 1: Difference between Management accounting Financial Accounting Management accounting and financial accounting are the two basic kinds of accounting information system. Financial accounting refers to information that describes the financial resources, obligations and activities of the business organization. Management accounting involves the development and interpretation of accounting information designed to assist management (Wiliam and Haka, 2005, p. 5-6). These two accounting systems differ in the dimensions of users to whom the information is produced, structure of the information, sources of principles for both, report entity, purpose, need and time orientation etc. Users Financial accounting is basically concerned with producing financial information and reports like financial statements for external users including investors, creditors, government agencies, customers and banks etc. But, managerial accounting is concerned with producing and providing accounting information for all internal users including managers for decision making, planning and controlling (Heitger and Mowen, 2007, p. 6) Khan (2007) emphasizes that the users of information produced by financial accounting other than management are often a faceless group. Normally, the managers of many companies do not personally know the shareholders or creditors etc. But, users of management account are within the organization like managers and those who help managers produce this information (p. 7) Structure The information is presented in different structure in management accounting and financial accounting. Financial account must follow a single and unified structure as the information related or presented in different organizations must be more or less in a uniform structure. Balance sheet, profit and loss account or income statement and cash flow statements are the end products of financial accounting. The balance sheet is a financial position statement of the business for a particular period of time, generally for a financial year. Profit and loss account represents the transactions held in a specified period. The cash flow statement relates to the inflow and outflow of financial resources within a specified time (Khan, 2007, p. 7). The management account is, as stated earlier, accounting information that is useful for the management and hence it can be different from business to business and management to management. In management account, the accounting information is produces for managers’ use and therefore tit can be prepared based on specific requirement of management. There is no uniform structure for management accounting. Sources of Principles Siegel and Shim (2006) described that financial accounting is governed by Generally Accepted Accounting Principles (GAAP) in order to keep financial statements uniform and to protect the outside parties from being mislead. As management accounting is useful only to internal bodies, it is not subject to GAAP (p. 81). GAAP represents rules and regulations that are to be strictly followed while preparing financial record. It provides a framework on how to prepare the financial information that has been evolved over years. On the other hand, the management account is for the use of management and therefore it can be tailored to the specific needs of the management. Need/ Legal requirement There is a statutory requirement for the public limited companies to prepare and produce annual financial accounts. It doesn’t matter whether the management regards this as useful for them or not. Management accounting and spending on it is entirely optional to the enterprise (Drury, 2007, p. 7) Time orientation The ultimate results of financial accounts are balance sheet, profit and loss account and cash flow statement. These represent information about transactions and business deals that happened in the past. Thus, financial accounting is called historical records. Even thought management account records past data of a firm, the major parts of its records are future information of estimation and budgeting and hence it is future-oriented. Report Entity According to Khan (2007), financial accounting relates to the entire business. Even though some firms prepare financial accounts on segmented basis, the emphasis is on the entire business. but in managerial accounting, the business is divided to different responsibility centers like cost and profit and investment. Management accounting prepares financial information on segmented basis (p. 7). The impacts of Financial Accounting on Business The financial account is basically concerned with providing information to the external parties of the business. External users of the accounting information are individuals and other enterprises that have a financial interest in the reporting enterprise. But, their interest is not involved in the day to day operation of the business (Wiliam and Haka, 2005, p. 9). It shows that, sound and efficiently produced financial accounting information can help the business maintain a good success pathway, because, many groups interested in the firm depend on the financial accounting information. The external parties include owners, creditors, government agencies, labor unions, customers, suppliers and trade associations. All these groups require unique information of financial position of the business in order to take their decision accordingly. For instance, customers need to know the financial ability of the business so that they can decide whether to purchase or not from the business. Purchase decision depends on the quality of the goods and it will be affected by the financial ability of the enterprise. Likewise, external parties depend on the financial accounting information in order to take their decisions and evaluate the financial status of the business. Financial accounting helps users analyze the financial strengths of the business that in turn would be of greater help to the investors to take decision regarding the investment. The external parties largely depend upon the financial analysis of the reporting business in order to understand the financial position of the business. Balance sheet, profit and loss account and cash flow statement can help them understand the financial position of the business. Government agencies like Federal Trade Commission may be interested to know whether the enterprise can meet certain governmental regulations that apply to them. The impacts of Management Accounting on Business Management accounting information is designed for internal decision makers including management. Management group may be different like Board of directors, chief executive officer, administrators, and business unit and department managers. The management decision taking is largely depending on the accounting information produced by management accounting. Decision making is a forward looking process. In order to foresee the business operations and activities in the future, management needs to conduct estimation and budgeting etc that can help them identify future trends of the financial position of the business. It shows that business is largely influenced by management accounting. Wiliam and Haka (2005) illustrates the impacts of management accounting on business with examples. In order to meet a production schedule, a producer may design an accounting information system for suppliers detailing about production schedules and plans. The producer can share this information with the suppliers so that they can in turn help the producer meet its objectives (p. 13). The management accounting is designed to help enterprises achieve their set goals and corporate missions. Different types of reports are produced and distributed on a regular basis so that management can update with financial information. The management accounting is a kind of internal accounting system that impacts the overall functioning of the business in a way that it can motivate managers to achieve goals and to evaluate decision making process. Management accounting and its information are intended basically for planning and control decisions in the business. Body- 2: How globalization has changed the way of accounting? When the world economy has become integrated and international trade and business practices have become accelerated, global discourse regarding business and accounting also increased. Globalization has brought a number of changes on the international business. Globalization impacts the way of accounting and book keeping because the leading Multinational Companies have subsidiaries in many of the important worldwide market regions. Drori and Meyer (2006) illustrated that due to globalization, if a country has more organizational linkage to the world, the country will more likely observe the norms disseminated by world society. Many professional associations have made efforts to establish international accounting standards in order to increase the corporate transparency in the world (p. 181). International financial managers need to participate in international accounting and reporting activities. They must decide which accounting system and standard their enterprise will choose from IFRS and GAAP. This is the main change in the accounting practice brought by globalization of business. One of the main accounting standards is Generally Accepted Accounting Principles because, when large firms went global, most global investors were based in the United. But, some multinational corporations could not follow this standard and instead they accepted International Financial Reporting Standard (IFRS). The accounting reports are considered to be the means of internal communication among managers of a firm and its employees and hence it has to follow that standard which is uniform among all enterprises. Generally, it is believed that a uniform standard high quality financial accounting and reporting is highly important especially in the modern changing environment. Globalization has made major changes in the economy that world economy is integrated and hence universal acceptance of a high quality accounting standard can make world’s capital markets more effective. The US GAAP has been considered to be high quality financial standard and accounting report system, but, its acceptance cannot be expected from all over the world. When business world has become increasingly complex and vulnerable to the changing environment, a high quality accounting standard must be able to evolve and improve the business practices. GAAP’s standard is too slow to evolve and accept the changes (Pounder, 2006). There are significant differences in the accounting practice and standard requirement in both Generally accepted accounting practice (GAAP) and International Financial Reporting Standard (IFRS). Recently, public companies in many countries accepted the IFRS standard and the compliance with IFRS has become a requirement for many companies in different countries. The major change in accounting caused by globalization is that the accounting regulations and financial reporting standards in various countries have become difficult to the management of concerned enterprises. Some countries are likely to move to accept IFRS because it is able to mitigate business obstacles. Globalization brings the potential chances of merger and acquisition among various companies worldwide. Merger and acquisition require the financial evaluation and analysis of financial positions of both firms. If both companies that want to merge follow different accounting standards, it can create financial difficulties between both the companies. Razvan and Dumitru (2007) report the case of the acquisition of British Rover cars builder by German BMW builder. The performance of the unit was measured according to German accounting system which was more restrictive. Once the publication showed a loss of 620 million pounds, it caused the anxiety regarding the further running of Rover building (MPRA). In 1993, under German GAAP, Daimler Benz reported a profit of a68 million deutsche marks, but at the same time, under US GAAP, the company has reported a loss of around one million deutsche marks (outlook business, May 2008, p. 34). It is an illuminating example how different accounting standards can bring confusion in the financial and capital market. Companies are increasingly concerning about accounting standards that they have to choose and this can be considered to be the major change cause by globalization. How companies adopt and deal with these new methods of accounting? Different countries and companies adopt either GAAP or IFRS based on the benefits they can obtain by embracing it. For example, Indian companies move to embrace the IFRS standards because of the benefits including lower cost of raising foreign capital and greater cross border investments etc. Prior to 2005, the European Union countries were following their own accounting standards. Once the EU countries identified the difficulties arising from following their own accounting standards, they turned to follow a common accounting framework. They had only two options of International Accounting Standard and US GAAP. The EU decided to follow International Accounting Standard after considering various influencing factors. About 8000 companies listed in EU followed IAS accounting standards (Outlook business, May 2008, p. 34). Later on the IAS has become IFRS. Choi (nd) emphasizes that many of the European companies have switched to IFRS in response to investor and analyst demand for enhanced disclosure and also by considering the financial reporting quality (p. 309). Body – 3: Making accounting more international: Why, How, and How far will it go? The changing environment of the modern business shows that there is a growing trend towards the relevance and necessity of common accounting practice and making it uniform across the national borders. The globalization has brought major in changes in the business and accounting practices and that lead to internationalize and harmonize the rules of accounting. Williams and Haka (2005) stated that the need for comparable information has led to an interest in the harmonization of accounting standards. Harmonization is a term to describe the standardization of accounting methods and principles used in various countries of the world. The Internationa; Accounting Standard Board (IASB) is highly interested in harmonization and is recently charged with the responsibility of setting and gaining acceptance of international financial reporting standard (IFRS) (p. 677) When companies operate within its own borders and in the home country itself, differences in accounting practice bring no significant attention among other enterprises or stakeholders. But, when firms go across the borders, and when it sells or buys goods or services from other countries, there are various aspects that are more likely to be affected by the accounting standards being followed. The lack of accounting comparability becomes thus a greater issue in international markets. When a company deals with cross border financing by selling its securities in other countries’ capital market, the accounting comparability remains to be a concern among the businesses. Because of these issues in the cross border relations, the establishment of a uniform accounting standard has become increasingly important. Ball (1995) argued that the main determinant of accounting rules is the market demand. In many of the market settings, financial statements are widely used to represent trisections with corporations. So, it is up to corporations to incur the cost for preparing them. There are political reasons as well. The relative importance of market and political influences vary from country to country and time to time (p. 2). Accounting rules are being shaped by economics and politics and hence there is always a need that accounting rules to be driven by related developments. Globalization and internationalization of the political influences on accounting are the basic two factors that push to the need for international accounting standard. Internationalization of accounting standards have been accomplished through various organizational endeavor like IAS, IFRS and GAAP. The growing concerns among various international companies regarding the efficiencies and accuracy of these accounting standards and financial reporting show that a uniform and internationalized standard is still to be accomplished. Conclusion This research work on accounting comprises of significant parts of accounting debates including differences between management accounting and financial accounting. This paper highlights how these both accounting systems impact the business. The emphasis is given on the changes occurred in accounting due to the globalization and cross border marketing. References Ball R (1995), Making accounting more international: Why, How, and How far will it go? Journal of Applied Corporate Finance, retrieved from http://faculty.chicagobooth.edu/ray.ball/research/Papers/1995%20Making%20Accounting%20More%20International.pdf Choi (nd), International Accounting, 5the edition, Pearson Education India Drori G.S and Meyer J.W (2006), Globalization and organization: world society and organizational change, Illustrated Edition, Oxford University Press Drury C (2007), Management and Cost Accounting, 7th Illustrated Edition, Cengage Learning EMEA Heitger D.L and Mowen M.M (2007), Fundamental Cornerstones of Managerial Accounting, Illustrated Edition, Cengage learning Khan M.Y (2007), Management accounting: text, problems and cases, 4th Edition, Tata McGraw-Hill, 2007 Outlook Business (2008), The New World Standard, Vol 3, No 10, Outlook publishing Pounder B (2006), How Globalization is Affecting U.S. Accountants, Leveraged Logic, Retrieved from http://www.accountingweb-cgi.com/whitepapers/How_Globalization_is_Affecting_US_Accountants--by_Bruce_Pounder_of_CPEanywhere.pdf Razvan M and Dumitru M (2007), The impact of globalization on regulations and accounting systems, Dimensioning and quantification, Munich Personal RePEc Archive (MPRA) Siegel J.G and Shim J.K (2006), Accounting handbook, Illustrated 4th edition, Barron's Educational Series Williams J.R, Haka S.F and Bettner M.S (2005), Financial and Managerial Accounting, the basis for business decision, 13th edition, McGraw Hill, Irwin Read More