The advantages of international standardization of accounting standards
Scores of the national standards-setting and financial regulatory bodies have come to an agreement that various tangible advantages or benefits accrue from the implementation of the standardized international accounting principles. In fact, in fiscal 1988, the SEC clearly acknowledged this fact in one of its policy statements (Godfrey et al., 2006). The statement stated that each of the security regulators ought to work jointly and attentively in order to develop viable international regulatory frameworks, which may boost the capital markets’ vitality.
Thus, capital markets are amongst the key segments greatly benefiting from the uniform international accounting standards. At present, corporations that want to issue or subscribe their stocks through capital markets (CM) in various nations are obliged to adhere to the dissimilar regulations presented by every state (Deegan, 2010). This implies that lack of uniform international accounting standards creates entry barriers given that fulfilling the diverse monetary reporting conditions result in substantial costs increments. In the financial year 1993, for instance, Daimler Benz had to spend approximately sixty million US dollars when preparing financial statements that adhered to the United States Generally Accepted Accounting Principles (GAAP). This company also had to pay amounts of money ranging from $15 to $20 million every financial year to fulfill the GAAP set by the US. Corporations with foreign reporting requirements and universal operations may be able to reduce the associated costs and streamline the reporting standards via creating a consistent global statutory and uniform accounting reporting system (Deegan, 2009).
On the other hand, divergent or non-uniform international accounting standards tend to generate wastefulness or cross-border capital inflow inefficiencies. Therefore, the standardization of the international accounting reporting standards will ensure that the cost of capital is reduced since standards that are globally acknowledged will enlarge the universal funding base without imposing further reporting cost penalties. In fact, costs that cause or produce the market entry barriers will be eliminated while the perceptive investors will be encouraged to pursue the right of entry into the overseas markets (Godfrey et al., 2006). This will in turn cause an increment in the level of cross-border resource flow efficiency.
Besides eliminating the excess costs incurred in reporting the financial performances, the international standardization of accounting standards eliminates the efforts geared towards duplicating the formulated accounting principles (Saudagaran, 2009). That is, uniform global accounting standards normally facilitate the commitment and concentration of the accounting experts towards formulating the reporting standards that meet the desires of all the information consumers or users. Rather than offering a contracted national focus, the standardization of accounting standards provides a global approach to reporting financial information.
Finally, the standardization of global accounting standards may generate enhanced conformity amid the economic and accounting measures. The standardized financial reports enable both the economic and fiscal conditions of corporations to be more comparable and transparent amongst unlike states. More often, uniform accounting standards favor the interests of smaller investors since it is hard for them to assess and contrast the financial statements as well as economic data of different nations (Saudagaran, 2009). Hence, through standardized accounting reports, the cost incurred to acquire the financial info will be low while comparability and transparency will boost the global division of labor process at an ordinary international marketplace.
Disadvantages of international standardization of accounting standards
The IFRS (international financial reporting standards) has been acknowledged in financial statements preparation. In fact, the standardized international accounting standards were meant to replace all the GAAP that different countries had put in place so that every monetary statement could be assessed founded on similar sets of accounting tenets (Henderson, Peirson & Herbohn, 2010). Despite the fact that global accounting principles have been standardized to benefit the universal businesses, they present various impediments especially for states with entrenched Generally Accepted Accounting Principles.
The first disadvantage of the international standardization of accounting principles is that it offers fewer details compared to what most states currently enjoy using. However, the public, workers, regulators, and investors depend on viable accounting reporting systems, which necessitate that all companies should divulge their annual financial position details. Most of such info ought to be offered in a standardized way to allow the assessors to compare the industrial standards to the accounting information. As a result, every accounting industry in the state had to implement the GAAP, which governed the accountants in the presentation of proper accounting info for the corporations. Thus, the national GAAP is deemed suitable in guiding the financial reporting of companies that just operate within a single state (Godfrey et al., 2006). Nevertheless, when a corporation globalizes its market operations, it becomes complicated to offer standardized info conforming to a particular state’s GAAP devoid of breaching the other country’s GAAP.
The other disadvantage of standardization of the international accounting principles relates to the implementation cost incurred by corporations. In every nation that intends to adopt the newfangled global accounting standards, it is anticipated that the accounting professionals will have to incur additional costs of training and re-edification. In fact, companies that intend to go global are obliged to invest their resources and time heavily in re-educating the employees or accounting personnel so that they can comply with the standardized financial principles. In addition, it will possibly be expensive for companies to operate internationally while the costs of changing from GAAP to IFRS significantly surpass the derived benefits (Raihi-Belkaoui & Jones, 2002). Hence, there will be few incentives for corporations to adopt standardized accounting principles just to be globally consistent.
The six blocks for crafting the theoretical accounting outline and their significance
Deegan (2010) claims that in the economic year 1976, accounting bodies instigated designing a theoretical accounting outline to serve as the foundation for determining disagreements in monetary coverage as well as for situating the bookkeeping principles. The six building blocks of the conceptual accounting framework are related to the business enterprises’ financial reporting and they are as discussed below (Deegan, 2010).
The objectives of financial reporting
This first building block of the conceptual accounting framework identifies the accounting rationale as well as goals. The block is important in that when the accounting principles are generated based on the conceptual framework; it makes the accounting reports to be rather functional. However, this block is intended to offer financial info concerning fiscal changes, claims to monetary resources, and information on these resources (Henderson, Peirson & Herbohn, 2010). Besides, the basic objectives assist the creditors, perceptive investors, and other consumers to evaluate the level of uncertainty, timing, and amount of cash to be generated in the future.
Finally, the objectives help individuals and groups that make both the credit and venture decisions to have rational economic and business activities understanding. Thus, this building block instigates a wide range of concerns regarding info, which is important to the decisions made by creditors and investors (Godfrey et al., 2006). The objectives tend to concentrate on accounting statements offering essential info for the prospective evaluation of the business enterprises’ future cash flows.
The qualitative attributes of financial accounting info
This block examines all the attributes, which make the financial and accounting info valuable. The attributes are as discussed below:
Understandability and decisions of the consumers or makers: Those who make decisions tend to vary based on their capacities to process accounting info, the information that can be acquired, the manner in which decisions are made, and the kind of decisions made. Hence, the value of info permitting rational consumers in perceiving the desired accounting significance is called understandability (Deegan, 2009).
Dependability and significance constitute the other fundamental traits making the monetary reports supportive when generating bookkeeping conclusions. For instance, accounting info should assist in creating variations in the decisions being made for it to be relevant. Accounting info lacking decision bearing is deemed irrelevant in making such decisions. Prediction about the results of the future, present and past actions can be made using relevant information (Henderson, Peirson & Herbohn, 2010). Conversely, reliability is important for people lacking knowledge or time for assessing the factual info contents. Thus, lack of biasness, errors, and when accounting info is faithfully represented would imply that such info is reliable. This will in turn assist the financial information to be consistent and comparable.
The financial statements elements of a business enterprise
According to Deegan (2009) assertions, this conceptual accounting framework block offers the meaning of each of the financial statements’ items including expenses, revenues, liabilities, and assets. The elements are classified into two categories whereby equity, liabilities, and assets comprise the first group describing the resources claimed and quantity in a particular period. The investments, losses, gains, expenses, and revenues generated by the stakeholders describe the situation, events, and transactions affecting the business enterprise at a particular time.
The measurements and recognition of business enterprise financial statement
Deegan (2010) claims that this conceptual accounting framework building block lays down the guidance, measurement criteria, and the fundamental recognition on what accounting and financial info ought to be officially included in the fiscal statements along with the period when this should be done. Besides, the notions of dimension and acknowledgment exemplify how the bookkeeping procedures and fiscal fundamentals ought to be stated, calculated, and documented by the methods of bookkeeping. This building block assists in the identification of the primary financial constraints, principles, as well as basic assumptions. Under the basic assumptions are the periodicities, financial units, going concerned, and economic entity. However, the basic accounting principles include full disclosure, matching, revenue recognition, and historical costs. When measuring and recognizing the business enterprise financial statement, the constraints taken into consideration include conservatism, industrial practices, materiality, and costs benefit.
The financial statements elements
This conceptual accounting framework building block replaced the financial accounting concept statement No.3 by expanding its scale to incorporate nonprofit making associations (Raihi-Belkaoui & Jones, 2002). The financial statement elements are important to accountants and stakeholders as they help to identify all the elements that should be incorporated in the financial statement at a particular period.
The use of present value and cash flow information in accounting measurements
Henderson, Peirson and Herbohn (2010) state that this conceptual accounting framework building block offers the framework that could be used to channel the present values as well as the prospective cash flows as a measurement basis. When resources are initially acquired, they have identical fair value and historical costs. However, in the next financial stages, reasonable value, the chronological overheads, as well as the monetary and marketplace states normally deviate. Thus, this block usually assists in measuring both the present value and the future cash information.
Deegan, C 2009, Financial accounting theory, McGraw Hill, New York, NY.
Deegan, C 2010, Australian financial accounting, McGraw-Hill Australia, North Ryde, NSW.
Godfrey, J, Hodgson, A, Holmes, S & Tarca, A 2006, Accounting theory, Wiley &Sons, Hoboken, New Jersey.
Henderson, S, Peirson, G & Herbohn, K 2010, Issues in financial accounting, Pearson Education Australia, Frenchs Forest, NSW.
Raihi-Belkaoui, AR, & Jones, S 2002, Accounting theory, Thomson Learning Australia, South Melbourne.
Saudagaran, SM 2009, International accounting: A user perspective, CCH Publishers, Illinois, United States.