Critically discuss the importance of international accounting harmonization

FINANCIAL REPOTING BSB00133-6

Question 1:

In the global economy today, users of financial statements outside the enterprise have to demand for comparability of accounting reports, especially when firms want to borrow capital from credit institutions or some foreign investment. The globalization trend of the world economy requires countries to use common accounting language to help ensure that information can be compared on an international scale. That was the process of international accounting harmonization is happening now, as many countries are moving towards International Financial Reporting Standards (IFRS). With IFRS, it is an attempt to norms among countries closer to each other than in accordance with a frequent practice. Over time, various countries have adopted IFRS and it proved to be the advantage of international accounting standards to improve the transparency, accountability and create the set of high quality of the accounting standard. However, professionals are continuing debate about the needs to adopt IFRS when it may create some criticisms for the businesses using IFRS. This essay will attempt to point out the importance of global accounting standards and its positive influence on the global market, as well as its problems.

According to Deegan, “The aim of the international harmonisation process of Accounting Standards is to reduce or overcome differences worldwide” (Deegan 2005). We can see that all the companies should establish strategies to work together so that can be applied and better harmonize the rules of IFRS in order to provide a clear result and utilities for the collection of financial and accounting information.

It can be obviously seen that there are various benefits of using IFRS that cannot be denied in order to support corporate prepare financial reporting worldwide such as savings drafting standards cost. Besides that, the integration of accounting help for companies raising capital on international markets; helping enhance the comparability and transparency of financial reporting activities. The financial statements prepared in accordance with IFRS are widely accepted in many countries around the world. The financial statements are concerned, can be comparable and give a true financial situation of the organization is what investors are looking for in formulating their investment decision. In addition to that, IFRS helps to ensure global consistency of financial reporting standards applicable to organizations in the different jurisdictions, in terms of measurement, disclosure and transparency. Through the application of IFRS, companies will be able benefited from economic integration, such as access to capital, maintaining competitiveness and develop in a sustainable way. This reinforces the stability of the country’s economy. Going into the issues of interest, one of the biggest benefits that IFRS brings to businesses is saving costs. Investors do not need to use a large amount of money to ensure the accuracy and effectiveness of the declaration of monetary activities. The next is “With a similar internal reporting system within the company, which gives the chance of better comparisons, less confusion and mistakes between the parts of the company”(Neil 2002). The transport information across many parts will not suffer unnecessary mistakes and help homogenous information, avoiding complicating procedures when reviewing the errors if it is possible. Besides that, financial data information being disclosed to the media will not be misleading. More on that, “By using one set of Accounting Standards in diverse jurisdictions and capital markets. Further cost savings can be achieved, because the preparation of consolidated financial statements will be easier for companies. Since there are no longer costly changes from several different accounting systems for each subsidiary, when the parts of the company are consolidated for one. With one set of Accounting Standards, the credibility of the externally reporting could be raised”. (Neil 2002). Neil also stated that “International companies can realise significant cost savings if they do not have to change their financial statements to conform to each country's rules, when listing on security exchanges” (Neil 2002). In other words, the access to the main financial market will become easier for companies acting globally and access to capital is much simpler for them. We can see clearly through an example from Spullber. “For example, a company, which has a subsidiary in Cuba, the parent company is located in Germany and the shares are listed on the NYSE. This company would have to prepare financial statements in Cuba, in Germany and in order to be listed on an U.S. stock exchange it would have to prepare also financial statements in accordance with U.S. GAAP. Thus, its is easy to understand the strength that a world-wide accepted set of Accounting Standards would have”. (Spulber 2001). “From the standpoint of the users of financial statements. Investors, banks or owners are interested in obtaining information, which enables them to make buy/sell/hold investment decisions” (Neil 2002). Performance comparable financial reporting among countries and between companies with similar financial statements will not encounter any problems during implementation. This can be explained with the circumstances that similar transactions are accounted for and reported in the same manner everywhere in the world. Standard international financial reporting (IFRS) today is applied by a lot of countries around the world , as of the end of 2008 (08.27.2008) had more than 100 countries including Australia, Singapore Turkey, ... and all of the countries in the European bloc. Besides, there are many countries in the preparation process through the IFRS transition has not yet been completely through. That, underlining the harmonization that IFRS can bring to satisfy the needs of businesses and investors.

Although there are many benefits globalization standards are recognized but there are also limitations in the transformation and application.First of all, “The risk that a new accounting system brings along in terms of possibilities for tax avoidance or fraud, that authorities composing the standard might have overlooked” (Deegan 2005). Having the same point of view, Spullber argued that “The possibility of this happening is imaginable especially when the global standard will consist of a mixture of rules from around the globe” (Spullber 2001). Companies cannot instantly be familiar and apply proficiently IFRS. The occurrence of fraud and error is inevitable to happen. Next is “The necessary reform at tax authorities will be costly and possibly time consuming” (Spulber 2001). The government will have to take the necessary action to support and help create the conditions for businesses in the first step to become familiar with the new accounting standard. It also costs a lot of time and money on training. In addition to that, “Another disadvantage is the differences between Accounting Standards. Apart from international financial reporting standards, there are two other major accounting models the Anglo-American Model and the Continental-European Model” (Spencer 1998). Furthermore, environmental factors such as culture, language, and legal system can restrict the feasibility of IFRS. The further challenge is to build a qualified financial accountant staff team. This is no easy job because IFRS is considered to be very complex, even in the developed economies. Financial experts will face many new concepts and different accounting methods applied are new. Hail stated that: “Although comparability in general is a difficult goal in an international setting, the nature of IFRS itself also seems to hinder the process of becoming a global standard. The foremost difference between IFRS and U.S.-GAAP is that IFRS requires more discretion and that U.S.-GAAP is more principles-based and detailed” (Hail, 7). So, GAAP is not a great method to follow especially the small companies with limited capital.

Accordingly, the method of accounting transactions under IFRS based on the nature of the transaction and based on numerous judging and evaluation analyzes of the managers, who will advise accountants financial statements. Moreover, to apply IFRS unit must spend substantial initial costs, rebuild the system to collect, process and present the financial information. With pressure and the increasing scrutiny of investors and the authorities, while the transition to IFRS takes time, enterprises cannot ignore this problem if you wish to succeed in the environment competition. Route planning to apply IFRS, including awareness raising, training and building the system is urgent and imperative.

In conclusion, we can say that the application of IFRS has opened a new era that changed the way recorded, measurement and presentation of indicators and items on the financial statements. The adoption of IFRS will bring numerous benefits to investors. However, to adopt the IFRS, business needs to focus on many aspects to maximize the gadgets of international financial reporting standard.

Question 2:

Legally, Board of Directors are defined as "the management company", has the right to perform the company on behalf of all the rights and obligations of the company, except for those within the authority of the General Assembly shareholders. The Board of Directors also launch the strategic development, manages funds and decides the survival of the company. Therefore, important virtues and necessity of the board chairman are fairness, transparency and full responsibility.

For the reasons mentioned above, the selection of board members is an extremely important act, must be identified and assessed on various objective factors, spread over every aspect. The Financial Reporting Council stated that: “The search for candidates should be conducted and appointments made on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender.” (Financial Reporting Council (FRC), 2010: 13). We can see in the above appointment. No important qualities are used as the basis for recruitment of candidates. And the shareholders must appear in the appointment to ensure transparency and openness in the assessment of the actual abilities of the candidates because all things are in favour of bring the most profit for shareholders. Obviously, we cannot find the fairness and transparency in the selection.

In addition to that, lack of impartiality is one positive thing expressed on the appointment. According to O’Neal and Thomas (1996): “ the appointment process may have the tendency in choosing the narrow pool of candidates according to the preference of the members of Board of directors personal, social, professional and business networks”. The prejudice is no longer a stranger in the election, when the selection of candidates was carried out based on the tendency of each individual preferred in evaluation board, which leads to unequal between candidates and difficult to make accurate judgments about the capacity of each person. When organizing an election board member, everything must take place under the supervision of the president. However, in an election above, there is no public election commission was formed to evaluate the candidates that the Board was self assessment alone. It shows a lack of seriousness and lack of professional as well as affecting the chances of the candidates. That showed that power was not equitably distributed among members.

In conclusion, this appointment did not satisfy three essential virtues as fairness, transparency and accountability. That causes significant impact to the erroneous decision of the board chairman as well as offering a comprehensive insight lack of genuine capacity of the candidates.

Question 3:

A, According to the definition of operating segments in Financial Reporting Standard 8, an operating segment is defined if it satisfies these conditions:

• That engages in business activities from which it may earn revenues and incur expenses.

• Whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) to make decisions about resources to be assigned to the segment and assess its performance.

• For which discrete financial information is expected to be available.

(IFRS8).

We can see from above that, in this case, the chief operating decision maker needs to be identified that can be a person or a group of directors.

Head office function is in the operating segment if it controls business activities and can bring the revenue when the revenues of the head office are bigger than the related to the activities of an entity. In this case, since the head office does not give rise to revenue so this is not the operating segment to report.

B. According to IFRS8, Information is required to be disclosed separately about an operating segment that meets any of the following quantitative thresholds:

− Its reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments

− The absolute amount of its reported profit or loss is 10 % or more of the greater, in absolute amount, of:

• The combined reported profit of all operating segments that did not report a loss; and

• The combined reported loss of all operating segments that reported a loss.

− Its assets are ten per cent or more of the combined assets of all operating segment.

(IFRS8).

From these above informations:

Total revenue =73500

=> 10% = 7350

Operating profit of segment that does not report a loss:

4500 + 3000 + 225 + 675 = 8400

=> 10% = 840

Operating segments are reporting a loss: (4500).

Total assets = 29850

=> 10% = 2985

QPR1 segment exceeds requirement in term of the revenue threshold (34500>7350),

The profit (4500> 840) and the assets (12000>2985)

QPR2 segment exceeds in term of the revenue (27000>7350), profit (3000> 840) and

The assets (9000>2985)

QPR3 segment does not exceeds the revenue threshold (6000<7350), but

Exceed the result threshold (4500> 840) and the assets threshold (7500>2985)

QPR4 segment not exceeds any of the requirements

QPR5 segment not exceeds the requirements

Therefore, the OPR1, OPR2, OPR3 should be reported separately.

C. IFRS attracted critical comments because IFRS is a new method and the use of the information is still very much limited, caused much controversy.

REFERENCES:

Financial Reporting Council (2010). The UK Corporate Governance Code. London: Financial Reporting Council Ltd.

IASB, (2009), IFRS 8-Operating segments, iasplus, [online]:

http://www.iasplus.com/en/standards/ifrs/ifrs8 [Accessed on June 22nd]

Baxter, p 2005, ACCT19062 issues in financial reporting, Study Guide, Central Queensland University, Rockhampton.

Deegan, C 2005, Australian financial accounting, 4th edn, McGraw-Hill, North Ryde. Neil, G 2002, Accounting for the Global Economy, Oxford university press, Oxford. Spulber, D 2001, A Second Opinion on International Accounting Standards, MITPress,Cambridge,Massachusetts. Spencer, K 1998, The View from the AASB: Take it Easy, Get it Right, AustralianCPA,SU.

Hail, Luzi, Leuz, Christian and Wysocki, Peter D., Global Accounting Convergence and the

Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy

Factors (February 25, 2009). Available at SSRN: http://ssrn.com/abstract=1357331