Financial reporting
Financial reporting reveals to the educated eye how managers think about the prospects of their companies and industries and how they perceive opportunities and risks. And it is the slate on which corporate managers mark their own grades and strive for personal advantages, including various forms of compensation. The need for rules of conduct for accountants and for standards of financial reporting has been recognized, at least by some, for more than three-quarters of a century (Riper 1994). Rules of conduct generally are regarded as belonging within the self-disciplinary purview of professional associations, but talk of rules or standards for financial reporting often gives rise to concern that because such rules affect something loosely called the public interest, their formulation should not be entrusted to the private sector. Partisans of the private sector, however, fear the rigidity of governmental agencies and their susceptibility to political influence and manipulation. The cost of applying standards for financial reporting has long been a concern of the corporate preparers of financial information, a concern that traditionally has been expressed in demands that those who promulgate standards pay closer attention to the cost-benefit ratio (Riper 1994). Financial reports show the short and long term condition of a business. To be effective financial reports need to be reliable, understandable and relevant. The need for better financial reporting systems paved the way for the International Financial Reporting Standards. Not all people in private institutions believe that the International Financial Reporting Standards will help them provide better financial reports.
International Financial Reporting Standards
Accompanying the development of accounting rules within national jurisdictions has been the emergence, growth and influence of ‘international’ accounting standards. These have been issued by the International Accounting Standards Board (IASB) which was established in 1973 with a membership comprising national accounting bodies. The IASB has issued over 40 International Financial Reporting Standards which have exerted influence on accounting practice in a variety of ways: being adopted as national requirements without modification, providing the basis for development of national standards, as an international benchmark in countries that develop their own accounting standards, through the endorsement of regulatory authorities and stock exchanges, and by application by individual companies. The internationalization of accounting rules has drawn its rationale from a claimed need for accounting practices to be consistent across national boundaries (West 2003).
Accounting practices carrying only the imprimatur of convention have been enshrined in formally sanctioned documents, obligations to comply with the provisions of those documents have been imposed, and the bodies responsible for issuing accounting rules have been periodically changed in name, structure and status (West 2003). Accounting rules can only function to protect the users of accounting information when their development proceeds as a technical task overseen by those with relevant expertise. An intention to rely on professional authority as the primary means of disciplining the quality of accounting information is evident in the law relating to companies. Traditionally such legislation has specified the general nature of financial reports that must be prepared but not the detailed technical accounting procedures to be applied in their preparation (Luciano & Mayes 2005).However, with its authority derived principally from social rather than epistemic factors and armed with technical practices carrying only the imprimatur of convention, the accounting profession has struggled to discharge its mandate. Financial reporting failures were the inevitable result and precipitated calls for formally stated accounting rules. Present accounting rules do not, as has often been represented, have their genesis in failures in the market for accounting information. The accounting profession’s continued failure to enforce effectively that general qualitative standard and instead persist with its conventional technical practices lies behind the present proliferation of accounting rules. These conventional practices defy the requirements of a serviceable system of financial instrumentation (Luciano & Mayes 2005). IFRS are known to be the set of standards that are principles based because they establish broad rules. IFRS dictate certain treatments to procedures. IFRS was known by its older name of International Accounting Standards (IAS). The board of the International Accounting Standards Committee (IASC) issued IAS between 1973 and 2001. In April 2001 the IASB developed IAS and continued its development then called it IFRS. The financial statements of IFRS contains a balance sheet, the income statement, either a statement of changes in equity (SOCE) or a statement of recognized income or expense (SORIE), a cash flow statement and notes.
The Pros and Cons of IFRS
Financial reporting aims to provide information to actual and potential contracting partners of an enterprise and to the public. The information shows the results of management’s stewardship and should be seen as supporting well-founded decisions. Very often, the concept of decision usefulness is explicitly mentioned in the framework for financial reporting standards. Such a framework typically exists in countries with non codified law on financial reporting and sets out the concepts that underlie the preparation and presentation of financial statements. It provides important guidelines for the standard-setter who sets financial reporting standards. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions (Hopwood, Leuz & Pfaff 2004). To avoid the problems of informing investors about an ambitious wealth or income figure, other objectives of financial reporting have been formulated. The economic decisions that are taken by users of financial statements require an evaluation of the ability of an enterprise to generate cash and cash equivalents and of the timing and certainty of their generation (Hopwood, Leuz & Pfaff 2004).
The problem inherent in a prediction of cash flows using financial statements is that there is no discussion of how people can learn about the timing and uncertainty characteristics of the cash generation. Assets and liabilities contain no explicit information about the time structure of future cash flows. Of course, if the user of financial statements looks at inventories, he or she expects cash inflows that are near to the period of the current financial statements (Hopwood, Leuz & Pfaff 2004). Financial statements are expected to represent a true and fair view of the company’s financial position and the results of its operations. Although assets may be valued upward, historical cost is the basis generally used for asset valuation. Should assets be revalued upward the corresponding credit is made to an appraisal increase account. The straight-line basis is the usual method for depreciation of assets Inventory values are set at cost with the common methods being first-in first-out, actual, average and retail. A loss is booked when the net realizable value of an asset falls below cost on a permanent basis. Leases are normally accounted for in consonance with IFRS. That is, finance leases, those where ownership risks and rewards are owned by the lessee, are accounted for as though purchased with subsequent depreciation taken into profit and loss accounts. Payments for operating leases are recognized in the accounting period when the cash is paid or received (Garner, Mckee, DL & Mckee, Y 2000). Financial statements and reports would not gain truthful information without the IFRS. The IFRS sets the rules and regulations on how a financial report would be constructed; it provides guidance on how computation should be done on a given situation. The problem with IFRS is its limited guidance on interpretation. The difference in interpretation creates varying actions that affect the result of a financial report. Another problem on IFRS is the different interpretation of its rules and procedures this creates confusion and financial statements that have varying result.
References
Garner, DE & Mckee, DL & Mckee, Y 2000, Offshore financial
centers, accounting services and the global economy, Quorum
Books, Westport, CT.
Hopwood, A, Leuz, C & Pfaff, D (eds.) 2004, The economics
and politics of accounting: International perspectives on
research trends, policy, and practice, Oxford University
Press, Oxford.
Luciano, B & Mayes, DG (eds.) 2005, New Zealand and Europe:
Connections and comparisons, Rodopi, Amsterdam.
Riper, R 1994, Setting standards for financial reporting:
FASB and the struggle for control of a critical process,
Quorum Books, Westport, CT.
West, BP 2003, Professionalism and accounting rules,
Routledge, New York.
Credit:ivythesis.typepad.com
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