Topic: Is transition to and adoption of international accounting standards in New Zealand and around the world a good or bad occurrence?
Introduction
The current financial economics and the financial industry trend in the world can be considered as stable but at the same time, the slowdown of the US economy. However, businesses in New Zealand and around the globe have asserted to offset any deflationary impacts from other countries. For instance, the appreciation of the pound and the lowering of oil prices have curbed the inflation in UK. Accordingly, the world economy appears to be strong despite the cyclical peaks slowdown felt by the financial industry. In any business organisations, progress that the company is making is recorded as basis of assessing the stewardship of management and for making economic decisions. An assessment of financial standing is important to ensure security and create substantial decisions. Actually, a financial statement analysis is one such yardstick that takes into consideration current and future financial situation in an attempt to determine a financial strategy to help achieve organisational goals.
Epstein (2005) claims that executives and managers use the information that they glean from financial statements analysis to know how well the company is doing financially as well as information about problem areas so they can make changes to improve the company’s performance. In accordance to financial reporting, international businesses are subject to submit financial reports based on the standard set by global business organisations. International Financial Reporting Standards (IFRS) and the so-called Generally Accepted Accounting Principles (GAAP) must be considered by organisations in giving their financial reports (Murray, A 2008). But the question is: Is transition to and adoption of international accounting standards in New Zealand and around the world a good or bad occurrence?
Objectives of Financial Reporting
As stated, Financial statements (FS) provides an overview on how managerial decision-making drives an entity to attainment of each stakeholders’ goals. With such information, stakeholders will be able to execute economic decisions in accordance to what FS indicate and its implications to stakeholders’ future relationship with the entity. Aside from being a decision-making and managerial-monitoring tool, FS are also used to interpret contracts or agreements in which the performance or position of an entity is of utmost concern (WSU 2009). Perhaps, a credit agency or a certain regulatory body closely examines the entity and appraise it based on an authentic FS. As observed, the presence of FS implicates indefinite number of advantages not only for a firm but also for the whole business community and public at large. Generally, the main objective of financial reporting is to meet the end user’s need for adequate information. According to the International Accounting Standards committee (IASC) Framework for the Preparation and Presentation of Financial Statements, “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” (IASC 1989, paragraph 12).
Financial reporting should demonstrate the accountability of the government or unit for the financial affairs and resources entrusted to it, and provide information useful for decision making by providing and indicating the following (IFAC PSC Study 1, 1991, paragraph 63):
Financial Reporting Essentials
The basic financial statements are: the balance sheet, the income statement and the cash flows statement. The balance sheet shows how a company stands at a given moment and attempts to show how much a corporation has and how much it owes (Graham & Meredith 1998). What it has is shown on the asset side, what it owes is shown on the liability side. Graham and Meredith (1998) relate that the assets consist of the physical properties of the company, the money it holds or has invested, and the money that is owed to the company. Intangible assets, if there are any, are also found in the balance sheet on the asset side. On the liability side are shown not only the debts of the firm, but also reserves of various kinds and the equity or ownership of interest of the stockholders. Debts incurred in the ordinary course of the business appear as accounts payable, while more formal borrowings are listed as bonds or notes outstanding. The stockholders’ interest is shown on the liability side as Capital and Surplus, as they are generally considered the debt of the company that they owe to the stockholders.
The income statement shows how profitable the company was over a specific period of time. Information enclosed in the said statement are usually most or all, and sometimes more, of the following: sales, cost of goods sold, beginning inventory, purchases, ending inventory, expenses including advertising, depreciation, insurance, payroll taxes, rent, repairs and maintenance, wage and salary and utilities (Bandler 1994). The statement of cash flows, on the other hand, tells how much cash the company generated over the period of the income statement and where it went. Items in the cash flows include cash received from customers, cash paid to suppliers and employees, interest and dividends received, interest paid, and income taxes paid (Graham & Meredith 1998). These cash flows are computed by converting the income statement amounts for revenue, cost of goods sold, and expenses from the accrual basis to the cash basis. This is done by adjusting the income statement amounts for changes occurring over the period in related balance sheet accounts. In conducting the analysis, regard will need to be paid to the accounting policies of the organisation and the extent to which any creative accounting may have taken place. As Fridson & Alvarez (2002) asserted, ‘financial statement analysis is an essential skill in a variety of occupations’ that need to be possessed and understood.
International Financial Reporting Issues
In the context of New Zealand, financial reporting is one of the factors that need consideration not only by the business organization in the said region but also by the global community especially to those who are responsible in setting up the international financial reporting standard (IFRS) and GAAP. Currently, the Unites States are still using the old GAAP and the rest of the world uses the IFRS, but there is a convergence project (Murray, A 2008; p. 25). The objective of this project is to eliminate a variety of differences between the two.[1] Basically, there is an agreement between US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to make a high quality, common accounting standards for use in the world’s capital markets. From this convergence issues, the rise of an argument that both IFRS and GAAP has their weaknesses shows significant impact to business. Meaning, the convergence project of both IFRS and GAAP justified the fact that these standards are not the standard of all business. Thus, the cons and pros of IFRS and GAAP argued that whether or not one global standard is best for the investing community. Basically, some groups contest the convergence, saying that conflicting auditing and imposition of international rules make it hard to guarantee credible financial statements (Murray, A 2008; p. 25). Significant barriers still need to be conquered in accordance to the convergence to one international set of accounting rules. Those barriers include: expected corporate tax impacts, time necessary to convert existing accounts by CFO’s and tax directors, outcome on the U.S. Uniform CPA Exam and sufficiency of training for U.S. investors as well as U.S. audit firms. Unless those obstacles are addressed soon, the convergence project will go on to run into resistance in the U.S. markets (Fried, D, Sondhi A & White, G 2003).
In the context of New Zealand and in accordance to the interview with Tom Jones, it is shown there are still many countries tend to oppose International Financial Reporting Standards. As emphasized in the interview (Murray, A 2008), countries like New Zealand opposed this because of its credibility for the public sector. The interview highlighted that if appropriate and sensible changes are not made to IFRS in the future, there might be an increasing risk in which the resulting set of standards will not be of high quality or ultimately “fit for purpose” for the public sector (Murray, A 2008).
As indicated in the interview of Murray, A (2008), Accounting Standards Review Board (ASRB) continuing approach is not in the best interests of the public sector since it was trying only to address the causes of the underlying problems within the current standard-setting environment. However, Jones in the interview of Murray, A (2008), argued that the transition to IFRS has been a significant challenge for the local government sector. Many local authorities like in New Zealand may cope extremely well with these challenges, while other local authorities have struggled because of the variety of assets, liabilities, revenues, and expenses of local authorities and their controlled organisations, there were many different adjustments made in the transition to IFRS.
On the other hand, the idea of having one sole set of standards globally is appealing to others. This standard will finally lead to investment assessments on a global foundation as well as enable cross border business to be more reliable and transparent. But the continuing problem in convergence is that the International Accounting Standard Board lacks the resources and the legal authority for effective implementation actions. However, the SEC approved this convergence since they believed in the importance of effective oversight, not only in the development of high quality accounting and auditing standards, but also in reinforcing the application of accounting standards by registrants and their auditors in a rigorous and consistent manner and in ensuring a high quality audit function..
Enforcement seems to be a significant area of concern for the SEC in considering the global financial reporting framework. Through its review and comment process, the SEC is currently able to review and comment on US firms’ application of GAAP and related SEC disclosure requirements and the same significant interpretive and enforcement role would occur if international standards were used to prepare financial statements included in SEC filings.
Conclusion
For the question, “Is transition to and adoption of international accounting standards in New Zealand and around the world a good or bad occurrence?”, the answer is yes, the transition to and adoption of international accounting standards in New Zealand and around the world a good occurrence, even though accounting models, country culture, business cases are varied from one another, the need of a global accounting standards is essential because it offers distinction of progress to any global business. The suggestion of converting to IFRS/GAAP and creation of one global accounting standard justifies having many future benefits as well as many short-term obstacles. The expectations of the investing public, however, will eventually benefit. The global standardization will generate many chances for business as well as accounting firms. To have the entire globe on a level playing field is not a bad idea. Because many business problems in global context result from reporting choices, it is important that those with concerns in this area are able to use to best advantage the information that organisations provide. Views of accounting that go beyond the prevalent perception and at least have begun to indicate accounting’s standards deliberation over it have not only manifested in academia but have gained some purchase in society more generally. In short, these views equate to the construal of accounting in negative terms, even though the practice is scarcely explicitly challenged. Accounting standards is not uncommonly associated with the like of fiddling the books, fraud and a general lack of humanity.
Whilst accounting information has many shortcomings, it can be used as a tool in achieving and supporting improved business outcomes. The central issue is whether financial accounting and reporting standards should be a scrupulously neutral exercise, self-disciplined to measure and report business activities as objectively as possible in order to provide information that can be used with confidence as a basis for making business decisions. Or should it be directed instead by concern for the society at large? In other words, should the primary concerns of accountants and accounting standard setters be the reliability and objectivity of reported information, or should they focus first on the possible environmental and social consequences of the information? That question, of course, raises others regarding the nature and uses of information in general.
References:
Bandler, J 1994, How to use Financial Statements: A Guide to Understanding the Numbers, McGraw-Hill, New York.
Epstein, L 2005, Reading Financial Reports for Dummies, Wiley Publishing Inc., New Jersey.
Fridson, M & Alvarez F 2002, Financial Statement Analysis: A Practitioner’s Guide, John Wiley & Sons Inc., New Jersey.
Fried, D, Sondhi A & White, G 2003, The Analysis and Use of Financial Statements, 3rd edn, John Wiley & Sons Inc., New Jersey.
Graham, E & Meredith, S 1998, The Interpretation of Financial Statements, HarperCollins, New York.
IASC 1989, Framework for the Preparation and Presentation of Financial Statements, July (1989).
IFAC Public Sector Committee 1991, Study 1, Financial Reporting by National Governments, IFAC Public Sector Committee
Murray, A 2008, Global Integration of Accounting Standards: An Interview with Tom Jones, The CPA Journal. Accessed: March 2009, Available at: <http://www.allbusiness.com/economy-economic-indicators/economic-news/11672196-1.html>
Washington State University (WSU) 2009, Accessed March 2009, <www.cbdd.wsu.edu>
[1] From http://www.iasplus.com/agenda/converge.htm
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