Are Standards Really Necessary - Essay Example

Introduction         The true status and the fair image of how the business performs are being reflected in the financial ment. It normally includes a balance sheet, an income statement, statement of cash flows and statement of changes in equity, and notes as explanation to the financial report. This financial report is the major source of financial information among investors, financial providers, government, customers, etc. Preparing the financial statement is a complicated task which is usually done by a reliable person such as an accountant. After compiling, reviewing and auditing the financial statements, these are delivered to the clients as their basis in making decisions. The tasks in making the financial statement are becoming more and more complicated because of the changes in the disclosure and regulatory requirements. According to the Association of Chartered Certified Accountants (ACCA) (2009), the interest on such regulation has given much attention because of the impact of the financial crisis, issues of accuracy and the increasing number of business and stakeholders today. If the increase of regulatory requirement is a meaningful improvement, then understanding on some of its aspects should be enumerated to see if the regulations have contributed to the problems, and whether companies and financial institutions could have acted more responsibly.         Thus this paper will give focus on whether standards are really necessary in the preparation of financial statements. It will also consider the question if the governing regulations are too much to be implemented. And lastly, whether the company is using the improved or the traditional way, the advantage and disadvantages will be tackled. New Regulatory Requirements The International Accounting Standards Board (IASB) has drawn up and published a new set of accounting standards called the International Financial Reporting Standards (IFRS) which are now applied globally (Weets, n.d., p. 1). According to the International Accounting Standards Board (2007, p. 28), IFRS is developed by an open public observation that involves accountants and different financial statement users around the world. IFRS development and interpretations are all through an international due process. Authorities are establishing this heavy-handed and more complex approach because of the recent failures of regulation. Many countries including the 9,000 public companies in European Union, Middle East, Russia, China, Japan and Australia believe that this new regulation is the appropriate solution along with its benefits (ACCA, 2009). The adaptation of this new set of standard implies that there is a growing need to better understand its implementation. IASB wants to continuously improve the standard because there are topics which are not covered by the current standards. The board is committed to make a harmonious preparation of financial statements instead of using different regulations, standards and procedures (IASB, 2007, p. 34). The preparation of financial statements under IFRS, have to comply with 37 standards and 28 interpretations which are all principles-based (Weets, n.d., p. 1). The credibility of the regulation will be established if there is an involvement between the government and the market. According to McKinsey (n.d.) report, “regulation is about solving problems that society or business cannot solve alone, as well as making trade-offs among different objectives and the interests of various stakeholders” (cited in ACCA, 2009).This is one way to oblige people to update their knowledge on the application of the standards in accounting treatment. The treatment will only rely on the person who is preparing the financial statement which is not merely on its legal form but with the person’s judgment to have a faithful presentation. A complete set of the IFRS financial statements comprises: a statement of financial position (balance sheet), a statement of comprehensive income (P&L account), a statement of changes in equity, a statement of cash flows, and notes summarizing the significant accounting policies used (Weets, n.d., p. 2). The Advantages and Disadvantages Advantages: The proposed way (IFRS) in the preparation of financial statement has its advantages compared to the traditional one (Butod, 2010). In the new regulation, shareholders are not considered as the only primary users of financial statements but only as one of the users. The use of information and the financial position of the enterprise will now be identified by the new presentation. The information can now be used by many users in making economic decisions. These decisions are drawn up by the existing and potential investors if the information is available. By internal reporting, shareholders can now have the direct access to the financial information of the company. With the use of IFRS, the presentation of financial statement and comparing it to its foreign competitors are now becoming easier (American Institute of Certified Public Accountants (AICPA), n.d.). Through these new standards, companies with subsidiaries in foreign countries may be able to use one accounting language, same as to the foreign investors of the company. Raising capital abroad will now be easy for companies with the use of IFRS. Countries that make the adaptation of IFRS mandatory have improved their institutional investors by around 20 in one year. Unlike GAAP, IFRS provides specific instructions and lesser overall details. Disadvantages: Some financial providers are hesitant in the application of IFRS because they believe that the significant costs will outweigh the benefits (AICPA, n.d.). In complying, the impact of the compliance cost is expected to be much greater for smaller companies because of the complexity of the regulation. Implementing the proposed instead of following the traditional way can be more crucial and difficulties will be encountered (Butod, 2010). There will be “high cost of regulatory compliance resulting in an extra burden affecting profits, and limiting necessary financial innovation...” (ACCA, 2009). Changing the traditional way and following the new preparation of financial statements cannot be recognized or known by the country, thus it will become hard to follow by the legal authorities in changing the law based on IFRS. Following Legal Requirements When some countries are now adopting the new set of standards in preparing the financial statements, other countries are not obliged to do the same. Hence, an appropriate set of accounting standards followed by one country is not necessarily an appropriate set of accounting standards in another country (Bae, Tan, Welker, 2006, p.6). Advantages and disadvantages are all presented to properly weigh and analyze the situation. One thing is for sure, if the company is concerned in getting financial and non-financial information about the enterprise, then it should give consideration on the global regulations. Indeed, it is not sufficient for companies to just simply comply with the legal requirements of the country in which they are based. In making decisions in allocating the right resources, high-quality information is necessary to improve productivity. If the company follows the legislation, regulation and common law which are favorable with the part of the external users, they will surely get attracted (New Zealand Institute of Chartered Accountants, n.d., p. 9). At a regional level, regulations and standards can be agreed upon but the supervision and enforcement should be carried out at a national level and be close to the regulated institutions (ACCA, 2009). The aim of the regulation is to make the system global but at the same time, it should respect that different country and regions are in different faces and stages of market development. Initially following the new set of regulation is beneficial to the company as a preparation if ever the proposed way will become mandatory. The Securities of Exchange Commission (SEC) as one of the regulators will soon release a detailed timetable that will mandate all publicly listed companies to use IFRS as issued by the IASB (AICPA, n.d.). Suggestions Financial Statements. The components of financial statements although it reflects different aspects are interrelated in a sense that the information serves as a purpose for the whole financial statement. The balance sheet contains information about financial position while the income statement provides information about performance. Information about the cash movement and the entity’s equity are reflected in the cash flow statement and in the statement of changes in equity (Australian Accounting Standards Board, 2004, p. 15). The information contains in the financial statements must represent every transactions and events in a faithful manner, but because of difficulties either in identifying or measuring transactions, this information is subject to risk. In IFRS, it requires changes in the presentation making it more complicated and more detailed. Financial statements must present with fairness and free from biases. To make this attainable, additional disclosure in the preparation of financial statement is deemed necessary. A financial statement which is partly complying the IFRS is not considered as good unless all the requirements stipulated are followed. If there is a close monitoring on the implementation of this new set of standards, a reliable financial statement is attainable. Regulatory Requirements. The change of structure of the standard brought about by IASB has contributed to the release of IFRS. The adaptation of these new regulatory requirements has evolved internationally which made accounting more consistent. The mandatory adaptation of IFRS shows an increase attraction among the foreign analysts which are one of the financial statement users. Countries that are now adopting the IFRS are having greater percentage of foreign analysts. Regulatory requirements are needed as a guide to have consistency in the presentation. Principle Base (HK). The Financial Accounting Board (FASB) is requiring all companies to prepare their financial statements in a principles-based standard. Under the principles-based, the profits of an entity presented in the financial statements are more volatile than under rules-based standards (Hong Kong Institute of Certified Public Accountants, 2006, p. 28). IFRS which is now adopted by Hong Kong is a principles-based approach which is generally viewed more preferable than the U.S. rules-based approach. The more sustainable alternative is to adopt a principles-base approach, which requires regulated entities to focus on the purpose and objectives of the exercise (ACCA, 2009). Since, financial statements are for the provision of the financial position of the company, and then the preparation must be with accordance to the principles-based that contains high end standard, and accurate on relevant information. Rule Base (US). Recently, the use of principles-based or rules-based has been debated on which is more efficient. The standard found in U.S. GAAP is largely considered as rules-based, while the new international standard IFRS is a principles-based. Many accountants are in favored to follow the rules-based approach in preparing financial statements because detailed rules are listed. They believed that if there are set of rules to follow, accuracy will be increased and ambiguity in reporting will be reduced. On the other hand, the complexity of the rules in preparing the financial statements can cause unnecessary delay. By this reason, the U.S is now planning to move from rules-based to principles-based standards to be more globally competitive (Knowledge @ W.P. Carey, 2008). Rules and principles are both necessary, but with the cited differences between the two; IFRS is much more superior to the rules-based U.S. standards (Epstein, et al., 2007, p. 1236). Is It Too Much Regulation? When the costs attached to a proposed regulatory measure exceeded the perceived benefits, and then the regulation was too much. It is a fact that the acceptance of IFRS is increasing by those who prepare the financial statements (AICPA, n.d.). IFRS is established to achieve a global set of high-quality accounting standards (Line, 2010). The regulation is not too much if it is followed properly. It is for uniformity in global accounting rules and it also increases transparency that will allow investors and stakeholders to have an access on the financial performance not just across industry but also across country borders. IFRS will be easy to engage if there is a comprehensive training before using that will make companies be more familiar and appreciative. Complying with Legal Requirements. More and more companies are now adopting the IFRS. It is easy to just simply comply with the legal requirements being imposed because conflicting requirements like the use of GAAP or IFRS will slow down the preparation of financial statements. Simply complying with the IFRSs is important because they are unifying forces that will show that the company is well managed. The process of change is not that easy because there are a lot of things to be considered, but companies should be persistent about it. Try to prepare the financial statement following the IFRS and be familiar with its features because in the not-so-distant, the SEC might designate a date of voluntary or even mandatory adoption of IFRS. This new standard is important for the future of the accounting. The business is turning global, thus it is important to comply with the requirements so that foreign investors will be able to see the performance of the business. Having a common business language is favorable so that understanding will be created. Other Regulations. Financial reporting in the company will take up to the next level of accountability (Johnson & Wiechart, n.d.). This is a new regulatory requirement wherein everyone is involved. Board of directors, auditors, management, staff and the counsel are aware on the risks involved in filing their financial statements. It is a good way to have transparency, because the regulations translate more in policies, procedures, assessment, analysis and scrutiny. Although the implementation of this new regulation is expensive, companies are focused on the need to comply first. Effect if there is no Accounting Standard. There should have an accounting standard because it is the rule that governed every drawn up account. It lay down principles of assumptions, level of disclosure and set on how numbers should be calculated. These standards are necessary to hold accounting process together, as well as commonality and consistency (Day, n.d.). If these are not present, the system of the business could not function that will surely create chaos. There will insufficiency of disclosure and no guarantee that the information is correct and reliable, thus, fraud will take place. The IASB is hoping that all organization all over the world will use a uniform set of accounting standards. Conclusion In deciding on what accounting method is best for the business, it should make sure that the supplied information in the financial statement is relevant and reliable. Financial statements are important to the stakeholders in making decisions whether the presentation is using the proposed or the traditional way. Regulations are modified to make it more effective and efficient in producing a high-quality standard. Understanding should be done first before complying with these new accounting changes. Many countries are now using IFRS because they acknowledge the benefits they can get from it. While there are countries that abide by IFRS, there are still hesitant to abide the change. The process is much complicated than before, but it is much reliable. Standards are really necessary because they are the driving rules on the road. Whether to use GAAP or IFRS is not the real issue, it is up to the company on what to consider. These standards whether governed by too much or too less regulation are beneficial if and only if financial providers faithfully follow the presentation. Although disadvantages are present, the goal of these new regulatory requirements is to set global high-quality standards applicable to all. Reference Lists American Institute of Certified Public Accountants, n.d. International financial reporting standards. IFRS Resources, [internet] Available at: http://www.ifrs.com/updates/aicpa/ifrs_faq.html [Accessed 2 July 2010]. Association of Chartered Certified Accountants, 2009. Policy Paper: The future of financial regulation. [pdf] pp. 1-36. UK: ACCA. Available at: http://www.accaglobal.com/ pubs/general/activities/library/governance/cg_pubs/tech-tp-ffr.pdf [Accessed 2 July 2010]. Australian Accounting Standards Board, (2004). Framework for the preparation and presentation of financial statements. [pdf] pp. 1-36. Australia: AASB. 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