Accounting Policies And Reliability

Question: Discuss about the Accounting Policies And Reliability? Answer: Introduction The report starts with a discussion on harmonisation of accounting standards. How and why the harmonisation process is useful has been explained. Harmonisation is then compared and contrasted against the process of convergence. The convergence of IFRS into GAAP has been briefed a little in the report. The impacts of such convergence on various economies in EU have been briefly discussed. The aim of the report is to explain the importance of uniform accounting practices for the companies that are operating in global economy. The report then goes on to discuss the qualitative and fundamental aspects of financial reporting and why is it useful to have reporting that are fundamentally strong and sound. International accounting standards Harmonisation basically means bridging the differences in financial reporting. The purpose of harmonisation is to make the accounting standard uniform so that all the disclosures are done in the same way by all the companies. If financial reports are prepared in different ways by all the companies, it becomes difficult for the reader to understand each and every aspect of the financial reporting. So, there are some standard rules and procedures that are to be followed by all the companies which is known as harmonisation of accounting standards. According to Combs, Samy and Myachina (2013), Harmonisation of accounting may vary from country to country. Thus for international investors, it becomes difficult to understand the accounting standards of other countries. Here the term convergence comes into picture which means creating a harmony between accounting standards that are followed by different regulatory bodies. An example of this would be international Accounting standards (IAS) and US Accounting standards (GAAP). This would enhance the confidence of international investors while making investment decisions. Harmonisation takes into account the comparability of the reports and to ensure that the chances of occurrence of any reporting as well as reading errors are minimum (Nobes, 2014). With the help of harmonisation reading complexity of all the financial statements is reduced. Harmonisation also tries to ensure that the process of auditing is smoothened out and the audit reports are prepared uniformly across a country (Jannelli and Tesone, 2013). On the other hand, convergence takes into account, harmonisation of international accounting standards. Harmonisation does not deal with the quality of reporting but convergence deals with the quality of reporting. Convergence also aims to ensure that the international financial reporting that all the companies could use for national and international reporting. Harmonisation aims at increasing agreements in the accounting standards and rules between parties. But it does not involve standardisation of accounting practices (Beke, 2010). Convergence leads to standardisation of accounting process across countries. In harmonisation, as long as there is no logical conflict in the financial representation, or a conflict between the set accounting rules, it would be accepted and followed. But in convergence, the accounting processes and rules are standardised and are to be followed globally. There cannot be any difference because of different boundaries. Convergence can also be defined as an effort of IASB to promulgate the different national accounting standards and use the expertise of these standards to promulgate the best possible international accounting standards. It ensures compatibility in all the international reporting. Convergence tries to remove the barriers for financial reporting when they try to move across boundaries. However harmonisation aims at producing synergistic results within the boundaries of a single economy. It aims at making the reporting uniform so that readers can compare the performance by using similar performance indicators. Advantages and Disadvantages of Harmonisation The advantages and disadvantages of harmonisation is discussed in the table below. Advantages Disadvantages Harmonisation aids comparability of the financial reports irrespective of the industry and thus acts as an important tool in the hands of the investors. Harmonisation does not take into account international scenario and thus is subjected to condemnation. The quality of reporting by the companies operating in under developed economies may not be explicit enough. Financial reporting appears to be more consistent because of harmonisation. Harmonisation ignores the fact that the conditions for accounting may be different and thus uniform reporting on uniform features makes it difficult for the companies a lot of times. Harmonisation aids the process of investment and various analysis can be performed by the experts. So all the investments that are made are informed investments. Harmonisation cannot provide a fool proof answer to the questions posed by the operators in a global economy (Bradshaw and Miller, 2008). The Adoption of IFRS in the EU Any business enterprise that is operating in EU is supposed to use IFRS accounting standards for the purpose of reporting. From the year 2015, endorsement has been made compulsory by regulatory authorities in EU(Shim, Siegel and Shim 2012). Since then EU has been one of the major contributors to IFRS in terms of market capitalisation. No account consolidation is possible without following principles of IFRS in EU. As per a research conducted by Biondi (2014) still there are a few companies who are following the principles of GAAP. Adoption of IFRS made financial reporting process more transparent, comparable and encouraged liquidity, more capital inflows. The markets in the European Union became more investment friendly as international investors were able to make informed investments. (Source: European commission, 2015) The endorsement process of IFRS was made public so that every change that is incorporated in the system is transparent. The monitoring board made direct interaction with IFRS foundation which in turn put the issues of IASB and IFRICs. It was made sure at each levels that the responsible authorities are providing unbiased opinions and there are no vested interests as such. IASB also proposed to develop a conceptual framework wherein they agreed to respond to the demands of stakeholders of these policies as well as respond to the concerns of the regulatory bodies. The role that was to be played by each committee member was made clear by IASB but at the same time the concerns related to standards were to be addressed by EFRAG(European Financial Reporting Advisory Group). The committee would also prepare a report on the expected economic effects of the changes and on the other financial indicators of the economy. Then it would go ahead and propose the draft to the other team members of the board. If any of the team members want to oppose to any changes that are made in the reporting standards then they need to do so within the three months. Else it would be assumed that the proposed draft has been accepted. The regulatory bodies basically had two main concerns. They wanted to address the concerns of investors as well as the concerns raised by taxation authorities. The standards should be Anglo-Saxon and also should be able to address the queries of creditors. In a study conducted by Terzungwe (2012) on Nigerian firms it was noticed that by converging into IFRS, the firms could get better opportunities at international level. They gained on cross border listing, had better competitiveness and they could eliminate the need for reconciliation of information that was reported by their financial accounts. In another study conducted on Italian firms by Cordazzo (2013), it was found out that there existed huge discrepancy between the GAAP and the IFRS. The impact of different accounting rules in the financial accounts created big differences in net income as the treatment of intangible assets and taxes. Another implication for Convergence of IFRS in EU was cost that was to be incurred in training the professionals for the new accounting standards. The diversities that existed in EU in the accounting standards made the convergence a tedious and complex process however it came out with a lot of advantages (Harper, Leatherbury, Machuca and Phillips, 2012). The Conceptual Framework for Financial Reporting The conceptual framework for financial reporting explains the rules and procedures that are to be followed while making financial disclosures. It helps in providing help to the regulatory authorities to develop standards that would assure consistency in the disclosures as well as interpretation ways. This has to ensure that the reporting is clear and concise and there does not exist any scope for any loopholes for fraud and misrepresentation (Teixeira, 2015). Qualitative Characteristics Qualitative characteristics that are to be described are comparability, transparency, integrity, verifiability and timeliness. Fundamental Qualitative Characteristics All the financial disclosures that are made by the companies must be done keeping into mind the users requirements. So apart from addressing the fundamental needs of the financial reporting, it should be able to provide suitable explanations to the varieties of concerns that are raised by various stakeholders. The fundamental qualitative characteristics are materiality, relevance and faithful representation. Apart from this other factors that are to be kept into mind are verifiability, comparability, timeliness and understandability. The fundamental aspects can be explained as follows. Relevance: The financial reporting should contain only those data that could be used as information for at least one set of stakeholders. The reporting should add value to the decision making process of the reader. Faithful Representation: People who have invested money and have some kind of interests attached with any business organisation would certainly like to have a clear picture about the firm. So the financial data that are represented should be free from error, complete and unbiased. Materiality: This characteristic ensures that the data that are represented are entity specific and pertain to a specific time period. The reader should be able to clearly understand the purpose and time period of the disclosure. Enhancing Qualitative Characteristics Since the quality of accounting does not have any fixed definition that all are supposed to follow, the quality of reporting would generally be understood by looking at some fundamental principles. The others are value additions which act lie cherry on the pie and supports stakeholders requirements. The determinants of the financial reporting would be the analysts who are using the information provided by the companies to lure the investors, the legal system who would want to have fair tax revenues, the debtors and the capital providers. The regulatory authorities want this reporting to be uniform so that financial audits and financial performance can be judged uniformly (Abbas and Al-abdullah, 2012). The enhanced qualitative characteristics can be explained as follows. Reliability: The reader of the data should be sure that whatever is being disclosed is reliable and being prepared by someone who has required knowledge about the same. A completely reliable accounting reporting would be one where all the depictions that are being made have required information and the user is being able to understand the phenomenon that is being depicted. Comparability: From investors perspective it is very important to be able to choose between options. They should also be able to compare the past performance with the current performance so that they can decide on the growth path of their investments. The feature comparability also enables users to compare between different companies in the same industry and also between two firms in completely different industry. Consistency: The accounting procedures that are used should be consistent over the years. Same items should be treated in the same way over the years. The ways of treating each and every item should be uniform. Verifiability: The reader of the information should be sure that all the information that has been depicted in the accounts are free of errors are completely unbiased. At any point of time, if anyone wishes can verify the data using appropriate channels. The reader should be sure that the information depicts only reality and nothing else (Ball, Li and Shivakumar,2015). Timeliness: The availability of data at the correct time is of utmost importance. There is no point of having an information when is significance has been lost. So, timeliness is one important aspect of financial reporting. Understandability: The conceptual framework of reporting affirms that if the data is presented in a clear and concise manner following all the guidelines would be understood in the correct way. Conclusion The above discussion puts a light on the importance and usage of harmonisation of accounts. The importance of harmonisation over convergence has also been explained. The convergence of IFRS in the EU economies has significant effects in terms of net income and equity of the users of accounting standards. Finally the paper has put light on the fundamental and other qualitative characteristics of financial reporting. The aspects like relevance, comparability, faithfulness, understandability, verifiability are emphasised in the paper. The paper explains the purpose of accounting from various stakeholders point of view. 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