8 pages/≈2200 words
Accounting, Finance, SPSS
International Accounting Standards (IFRS) Verses National Accounting Standards (GAAP) (Research Paper Sample)
This paper analyses and compares two key accounting standards: International Accounting Standards (IFRS) Verses National Accounting Standards (GAAP).source..
International Accounting Standards (IFRS) Verses National Accounting Standards (GAAP)
The debate regarding the effectiveness of applying international accounting standards such as International Financial Reporting Standards (IFRS) over Generally Accepted Accounting Principles (GAAP) has been of an a great magnitude of over the years, fuelled by the effects of globalization. The IFRS, initially known as International Accounting Standards (IAS), was first issued in 2003 by the International Accounting Standards Board (IASB) (Ramanna and Sletten 2009). The main aim of IFRS was to unite accounting across the EU, which consisted of approximately 19 countries that time. The applicability of the IFRS got recognition globally, with about 70 countries by the end of 2009 evidenced to have adopted the IFRS (Ramanna and Sletten 2009). However, despite of their associated benefits, some large economies such as Japan, USA, Brazil, Canada, India, China and Japan continue to use domestically developed accounting standards in place of IFRS. This paper provides a comprehensive analysis of the relevance of adopting international accounting standards (IFRS) and its associated criticisms. However, before the actual analysis, the author presents a brief summary of the nature, scope, features, assumptions and requirement of IFRS for clarity purposes.
2.0 The Nature, Scope, Characteristics, Assumptions and Requirements of IFRS
Fundamentally, IFRS are designed to act as a common worldwide language for business affairs in order to facilitate the understandability and comparability of company accounts across international boundaries. The IFRS are built on three key assumptions. The first assumption-going concern- is based on the postulation that a business entity will continue to be in operation for an infinite future (Epstein and Jermakowicz 2010). The second assumption states that the accounting figures (reported) will be based on a stable measuring unit. Moreover, the IFRS assumes that the preparation and reporting of company accounts is based on the assumption of constant purchasing power units.
Under the context of IFRS, the quality of a companyâ€™s financial statement is weighted against two primary features: materiality and faithful representation, and four secondarily (enhancing) characteristics, which include timeliness, comparability, verifiability and understandability. According to article 10 of the IAS 1 (IFRS), a company is obligated to provide five elements in its financial statements. The first element is the Statement of Financial Position consisting of details on the companyâ€™s assets, liability and equity. The second element (Statement of Comprehensive Income) should detail the companyâ€™s revenues and expenses, which should be measured in monetary (nominal) terms under the historical cost concept. Other elements include the Statement of Cash Flows, statement of Changes in Equity, and Notes to Financial Statements.
3.0 Argument for and against the use of International Financial Accounting Standards
The application of global accounting standards has received a number of both supports and criticisms over the past years.
3.1 Argument in Support
The adoption of the international accounting standards (IFRS) has been supported in many countries for a number of valuable reasons. Generally, the benefits associated with the adoption of IFRS ranges from economic value, political value to synchronization (network) value benefits. However, due to the presence of other support arguments that do not fall in any of these segments, the author has found it convenient not to base any of the inherent benefits into any of the underlying segments. First, the proponents of IFRS argue that its application can help a company to minimize the costs associated with information processing and auditing, particularly to the participants of capital markets (Barth 2007; 2008). Financial analysts argue that if informational costs are reduced with the adoption of IFRS, foreign investors will be encouraged to invest in the country thus boosting an economyâ€™s level of foreign capital and trade. This argument is based on the factor that in the absence of IFRS, foreign investors will incur information costs in familiarizing themselves with domestic accounting practices. Such costs are said to greatly influence their investment destination country (Ramanna and Sletten 2009). In the absence of IFRS, financial analysts argue that investors may be faced with the information symmetry, which may result to investment risks attributable to adverse selection (unobservable private information) and moral hazard.
In addition, it has been argued that the adoption of IFRSs increases the understandability of a companyâ€™s financial statements to different users over to the use of local accounting standards such GAAP. With the effects of globalization, particularly the removal (relaxation) of trade liberalization, individuals do conduct businesses globally. This can be evidenced in UAE when the adoption of IFRS led to the establishment of â€˜free tradeâ€™ zones, later the â€˜free tradeâ€™ agreements, which enabled foreign firms to have access to tax-free reports coupled with considerably lower employment costs and significantly fewer regulatory requirements. Ideally, if you invest in different companies globally with distinct domestic accounting practices, it will harsh for you to comprehend each companyâ€™s accounting practices without the application of a common accounting standard (IFRS). Analysts, further, argue that with the international acceptance and understanding of IFRS, companies will be at a position to stay competitive and suppress global challenges arising from globalization of markets.
Another argument in support of IFRS is based on their underlying relative ease of comparability. Albrecht (2008) asserts that the adoption of IFRS helps companies, the public and investors to internationally compare financial easier. Comparability enhances consistency of the financial statements. Consider a multinational company having its operations in different countries with different national accounting. Will there be consistence in the financial reports from each subsidiary? In this case, it will be difficult to assess how the company is performing in different geographical (national) locations whose accounting practices are diverse. It has been argued that the requirements for companies to adopt a globalized set of accounting standards have an effect of ensuring trustworthy, reliable financial information regarding various corporate.
Moreover, since at the end of each financial year multinational companies are required to consolidate their financial statement across all nations, it will be difficult if each of its branches (in different countries) ado...
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