Free Sample: Uniform accounting standards produce uniform paper example for writing essay

Uniform accounting standards produce uniform - Essay Example

Discuss and evaluate the above statement in the context of International Financial Reporting Standards (FIRS). By Infielders In the last decade, various countries around the globe have shifted towards a uniform accounting standards or the International Financial Reporting Standards (FIRS). The main motive behind this movement is to come up with a global language for accounting which will be comparable and understandable beyond the borders of a nation.

As of today about 120 countries require FIRS for domestically listed impasses, although only about 90 countries have fully conformed to FIRS . While some argue that it is necessary to have a system of accounting that is clear and transparent to global investors and companies, some others are skeptic about it being efficient. Furthermore, some feel that the costs of implementing FIRS can be too high and hence uniform accounting will not be worth the cost. Hence, critically analyzing FIRS and understanding its impact on accounting principles will help us to recognize the costs and benefits of this system.

One of the main objectives of FIRS is to increase the efficiency and transparency in accounting. However, the main tension in the model rests due to the non- uniform nature of firms as well as nations. For instance, countries differ on myriad ways such as capital and labor markets, nature of government, involvement of government in the company and so forth. Similarly, firms differ from each other in various ways including size, growth, types of products, geographical location and technological advancement . Therefore, coming up with a detailed accounting system or a set of principles to fit all of these can be challenging.

Thus, FIRS uses a principle based system, rather than a rule based system which will allow the companies to apply FIRS according to their situation and prepare their statements. However, this flexibility can itself be seen as a big down- side of this system. This will provide a way for companies to manipulate the statements which in turn can encourage fraud. Trance Eocene comparing the fraud under the system of GAP and FIRS says that, As FIRS is largely based on Judgment in applying principles, t only stands to reason that the risk of fraud in the financial statements will increase with the change .

For example, Fair Value Judgment is one of the corner stones of FIRS system of accounting. However, it is unclear as to who gets to value things and how can these figures checked for reliability. Thus, FIRS, which is created to form a uniform and transparent system of accounting can itself lead to non-uniform accounting practices with very little information about who makes the Judgment behind numbers presented in the financial statements.

Furthermore, another crucial once that rises with the implementation of FIRS is the balance between the capital allocation benefit of a uniform accounting standard against the social cost of forcing diverse firms to adhere to the same rigid standard says Koru Ray, a professor of Economics from George Washington University . Hence, for a small company the cost of shifting from its current accounting practice to FIRS might be too high whereas for a big company it might be small. Furthermore, the time in which all the companies will have to shift from their old system to FIRS can decrease the quality of the uncial statements.

Lack of experience in this new system of accounting can also increase mistakes making the system less accurate . Nevertheless, it is undeniable that in an increasingly more globalizes world, a cross-border accounting system will immensely benefit firms and investors. This system will lead to investment comparisons between various countries, making investors better off. In fact, Marc Bogart, a Certified Public Accountant says that the single set of standards will cut down the costs to which foreign companies investing in the U.

S. Markets will have to adhere. He also believes that, the U. S. GAP standards along with other strict accounting regulations have long been deterrent to foreign companies trying to raise money in the U. S. Capital markets . Small investors will be benefited from this change, as they will have an access to more financial information which can be easily understood. In short, implementing FIRS will lead to easy to understand, clear and efficient financial data which will be made available to the general public.

Just the implementation of FIRS does not mean investors are protected against fraud or segregationist of a company’s financial statement. In addition, FIRS also has numerous short term problems that can have a huge impact on its initial adoption and implementation. However, company’s and investors can protect themselves against risks by learning FIRS which will increase their understanding of the financial statement. This will not only help them to critically analyze the numbers represented on the statement but also help them to better compare and contrast one statement from the other nationally or internationally.

Free Sample: Uniform accounting standards produce uniform paper example for writing essay

Uniform accounting standards produce uniform - Essay Example

Financial reporting refers to the representation of financial information, in order to be uniform the financial reporting must be based on a fixed set of rules, involve complete objectivity ND no bias. The FIRS (International financial reporting standards) has indeed helped the uniformity of financial reporting. However, in some cases due to subjectivity involved, created by human Judgment, the financial information reported may not be uniform. Furthermore the various methods permitted by the FIRS for the valuation of assets, inventory, and other components, create non-uniform financial reports.

Uniform accounting standards are vital for uniform financial reporting as they specify the accounting methods used to interpret business transactions, this in turn creates n agreement on how commercial transactions are to be accounted for thereby creating uniform financial reporting. For example, the FIRS states that assets are to be recorded at the lower of their historical cost or net realizable value on the statement of financial position as a result all assets are reported in a uniform way.

There are many other cases that lead to uniform financial reporting, but the main point is the standard rules implemented by the FIRS lead to a uniform way of reporting certain financial information. However there are some aspects of uniform accounting standards that can lead to on-uniform financial reporting. In the case of the FIRS there are some aspects involved that rely heavily on human Judgment. This subjective element can lead to varying financial reporting. For example the calculation of fair value is a highly subjective process.

Especially for intangible assets like pension costs and share based payments, in both cases their respective fair values will be determined by hypothesizing what a market price would be if there were a market. Though these judgments are based on a large amount of quantitative data there is a large degree f human Judgment involved. Similarly when it comes to depreciating an asset a firm has many options, which as will be discussed later pose other problem, under the FIRS an entity can be depreciated by several methods examples being the straight line and the reducing balance methods.

The method chosen depends on the person’s perception of how the value of an asset depreciates over time thus creating a subjective aspect. It is worth mentioning however that this subjective component is crucial in capturing the realistic changes in value of an asset. If there were a rule dating that the only method allowed was the straight line though uniformity would be created across financial reporting a degree of realism would be removed for example a piece of agricultural land could degrade exponentially each year suggesting that an alternative method would be more accurate in capturing the value over time.

Another problem associated with the FIRS, in relation to uniform financial reporting, is that there are many methods one can use to present financial information. For example under the FIRS companies can employ one of three cost formulas when porting inventory expenses, specific identification, first in first out, or weighed average cost. Depending on what cost method is used inventory will be reported differently. Firms in many cases take advantage of this flexibility by employing the cost method that reports the cost of inventory at its lowest value thereby increasing profit.

This flexibility hampers uniform financial reporting . However the FIRS has enforced other rules that counter the flexibility of others. In the case of costing inventory though the firm has three options to choose from under the FIRS (AS . 26)”an entity must use the same cost formula for all inventories having a similar nature and use to the entity. That is, a multinational company must use a consistent inventory policy election for each class of inventory in all of its worldwide subsidiaries”.

Furthermore other accounting systems like the US GAP allow an additional method of costing inventory (last in last out), which creates even more flexibility and also do not provide any rules like AS 2. 26 to counter such flexibility. Another important point is that certain firms may employ creative accounting to take advantage of the subjective component as well as the flexibility provided by the FIRS to manipulate certain financial information. This produces non uniform financial reporting, however the use of auditors can be used to hinder this aspect as auditors will present a non bias report of the financial data.

In conclusion uniform accounting standards in the context of the FIRS do, to a certain extent, produce uniform financial reporting as they specify the accounting methods used to interpret business transactions, which lead to agreement on how commercial orientations are to be accounted. However in some cases these rules involve a subjective component, which can lead to non-uniformity because different people may have different perceptions of a certain accounting aspect like the fair value of an asset.

In my opinion however in the context of the FIRS this subjective element does not lead to a great amount of non-uniformity due to the constant revaluations of components such as the fair value of assets. Furthermore the subjective decisions are based on large amounts of relevant data, which lead to fairly uniform reporting. In the case of the FIRS firms, which use creative accounting to manipulate their accounting information thereby creating non uniform reporting can be hindered by the use of auditors.

Free Sample: Uniform accounting standards produce uniform paper example for writing essay

Uniform accounting standards produce uniform - Essay Example

Financial reporting refers to the representation of financial information, in order to be uniform the uncial reporting must be based on a fixed set of rules, involve complete objectivity and no bias. The FIRS (International financial reporting standards) has indeed helped the uniformity of financial reporting. However, in some cases due to subjectivity involved, created by human Judgment, the financial information reported may not be uniform. Furthermore the various methods permitted by the FIRS for the valuation of assets, inventory, and other components, create non;uniform fallopian reports.

Uniform accounting standards are vital for uniform financial reporting as they specify he accounting methods used to interpret business transactions, this in turn creates an agreement on how commercial transactions are to be accounted for thereby creating uniform financial reporting. For example, the FIRS states that assets are to be recorded at the lower of their historical cost or net realizable value on the statement of financial position as a result all assets are reported in a uniform way.

There are many other cases that lead to uniform financial reporting, but the main point is the standard rules implemented by the FIRS lead to a uniform way of porting certain financial information. However there are some aspects of uniform accounting standards that can lead to non-multiform financial reporting. In the case of the FIRS there are some aspects involved that rely heavily on human judgment. This subjective element can lead to varying financial reporting. For example the calculation of fair value is a highly subjective process.

Especially for intangible assets like pension costs and share based payments, in both cases their respective fair values will be determined by hypothesizing what a market price would be If there were a market. Though these Judgments are based on a large amount of quantitative data there Is a large degree of human Judgment Involved. Similarly when It comes to depreciating an asset a firm has many options, which as will be discussed later pose other problem, under the FIRS an entity can be depreciated by several methods examples being the straight perception of how the value of an asset depreciates over time thus creating a subjective aspect.

It is worth mentioning however that this subjective component is crucial in capturing the realistic changes in value of an asset. If there were a rule dating that the only method allowed was the straight line though uniformity would be created across financial reporting a degree of realism would be removed for example a piece of agricultural land could degrade exponentially each year suggesting that an alternative method would be more accurate in capturing the value over time.

Another problem associated with the FIRS, in relation to uniform financial reporting, is that there are many methods one can use to present financial information. For example under the FIRS companies can employ one of three cost formulas when porting inventory expenses, specific identification, first in first out, or weighed average cost. Depending on what cost method is used inventory will be reported differently. Firms in many cases take advantage of this flexibility by employing the cost method that reports the cost of inventory at its lowest value thereby increasing profit.

This flexibility hampers uniform financial reporting . However the FIRS has enforced other rules that counter the flexibility of others. In the case of costing inventory though the firm has three options to choose from under the FIRS (SIS . 26)”an entity must use the same cost formula for all inventories having a similar nature and use to the entity. That is, a multinational company must use a consistent inventory policy election for each class of inventory in all of its worldwide subsidiaries”.

Furthermore other accounting systems like the US GAP allow an additional method of costing inventory (last in last out), which creates even more flexibility and also do not provide any rules like SIS 2. 26 to counter such flexibility. Another important point is that certain firms may employ creative accounting to take advantage of the subjective component as well as the flexibility provided by the FIRS to manipulate certain financial information.

This produces non uniform financial reporting, however the use of auditors can be used to hinder this aspect as auditors will present a non bias report of the financial data. In conclusion uniform accounting standards in the context of the FIRS do, to a certain extent, produce uniform financial reporting as they specify the accounting methods used to interpret business transactions, which lead to agreement on how commercial orientations are to be accounted.

However in some cases these rules involve a subjective component, which can lead to non-uniformity because different people may have different perceptions of a certain accounting aspect like the fair value of an asset. In my opinion however in the context of the FIRS this subjective element does not lead to a great amount of non-uniformity due to the constant revaluations of components such as the fair value of assets. Furthermore the subjective decisions are based on large amounts of relevant data, which lead to fairly uniform reporting.