Ways in which the IASB acts to ensure as much objectivity as possible in global financial reporting
Table of Contents
The International Accounting Standards Board (IASB) has developed a conceptual framework that governs the manner in which organisations present financial statements. The board has established accounting standards that organizations must comply with during financial reporting. Notably, financial reporting is of critical importance, especially to investors. The investors rely on the information provided in financial statements to determine whether an organization is profitable. With the increasing level of global business, there has been an evident need for globally acceptable accounting standards. The IASB established a framework that determines organisations’ preparation and presentation of financial statements. The framework gives attention to the critical importance of financial statements, the qualitative characteristics of information in the financial statements as well as the definition and measurements of different elements used in the development of financial statements. Critics have argued that the International Accounting Standards established by the board do not register the expected outcomes. Some scholars have given attention to some of the outstanding disadvantages of the accounting standards established by the board. Currently, many countries have embraced the International Financial Reporting Standards. However, scholars believe that there is an unnecessary fascination with the standards established by the boards and that maintaining uniformity across different countries may be challenging. This paper will explore some of the outstanding benefits of the International Financial Reporting Standards and highlight some of its disadvantages.
Overview of the International Financial Reporting Standards
The framework established by IASB gives attention to both general purpose and consolidated financial statements. Each organisation has an obligation to develop financial statements as an important part of financial reporting. In the financial statements, each organization must present a statement of the company’s financial position, the comprehensive income for a specific period, cash flows in a certain period, as well as the changes in equity. Notably, the IASB framework gives attention to the objectives of financial statements. According to Ball (2006), an organisation provides financial statements to present and potential investors, suppliers, lenders, employees, trade creditors, government and public agencies, as well as customers. Investors require detailed financial information to determine whether an organisation is ready to take more risks in the future. Investors need to understand the potential risk that an organisation faces. Lenders need to determine whether an organisation is in a position to handle financial obligations and pay interests as expected. Suppliers need the conviction that an organisation can pay for goods supplied. Government agencies need to analyse the financial information of a company to determine whether it meets its tax obligations. Customers also exhibit interest in financial statements to determine whether they establish long-term relationships with organisations.
Employees consider financial information as a way of determining whether the organization can provide remarkable remuneration and retirement benefits. In the past, there were on international standards of financial reporting and companies did not need to comply with specific requirements. IASB came in to demonstrate that there was a need for globally acceptable standards of financial reporting that can help different stakeholders compare the financial performance of organisations. With the international standards, organisations that comply can easily access opportunities in the global market. Barth (2015) makes it clear that the most significant aspect of the International Financial Reporting Standards is to promote uniformity in financial reporting. The lack of uniform accounting standards made it extremely difficult to compare the performance of organisations. Each organisation relied on different concepts in reporting, making it difficult to carry out successful comparisons. IASB has highlighted mandatory uniform standards that should govern financial reporting. The board expects different countries to demonstrate compliance with the International Financial Reporting Standards. Public companies from different parts of the globe should embrace the standards that promote the application of specific rules in financial reporting.
The International Financial Reporting Standards mandate organisations to present certain elements in their financial statements. The balance sheet elements include assets, liabilities, and equity that demonstrate an organisation’s financial position. On the other hand, the financial statements must also contain an income statement with elements such as income and expenses. IASB seeks to ensure that public companies provide financial information with certain qualitative characteristics. These characteristics include relevance, faithful representation, comparability, verifiability, and timeliness. All public companies must ensure that their financial reporting exhibits these important qualitative characteristics. As highlighted by Giner et al. (2016), since 2001, IASB has persuaded different countries to embrace the International Financial Reporting Standards. Many scholars sought to determine why the twenty-first century brought about increased emphasis on the international convergence in accounting standards. Undoubtedly, the significance of global business has become evident in the twenty-first century. Many companies seek to explore international markets. For this reason, the international standards promote comparability, allowing investors and stakeholders from different parts of the world to analyse the financial information of different companies.
Without the uniform standards, it would be extremely difficult to compare the financial performance of different entities in the global market. In the view of the IASB and its supporters, there was an urgent need for an international convergence in accounting standards. With such standards, experts can review financial information presented by companies from different parts of the world using a similar scale. Since the international standards highlight the most significant elements, it becomes easier for different stakeholders to analyse the future of public companies. There have been various arguments in support of the need for global standards in financial reporting. Alzeban (2016) asserts that capital markets have become global, and there is a need for applying uniform accounting standards in the capital markets. For example, public companies can become part of the New York or London capital markets. The global approach of these capital markets necessitates the need for universally accepted financial reporting standards. With the increase of globalisation, wild economies have proven to be interdependent. Particularly, the interdependence of world economies became explicit during the financial crises that the world has experienced in the past. There is also an observed integration of small and medium enterprises in the global economy. Scholars believe that global standards in financial reporting serve to strengthen accounting and auditing.
It is easier to allocate global capital when using the international standards to ensure that companies provide high-quality information. Some benefits are evident in countries that have embraced the International Financial Reporting Standards. In the view of Eng, Sun, and Vichitsarawong (2014), it is possible to allocate capital globally through the increased number of investments brought about by transparency. For the first time in history, there is a remarkable level of worldwide investment. In the past, the lack of uniformity in financial reporting led to increased costs of reconciling financial statements. With the uniform global standards, there is no need for such reconciliation. Audit systems have become effective with the implementation of the global standards. Moreover, the global standards have facilitated a remarkable level of standardisation of information systems. Major economies around the globe have either adopted the International Financial Reporting Standards or set timelines. IASB seeks to establish a unified financial reporting system that relies on global quality standards that govern the capital markets. Based on the conceptual framework that IASB has established, it is possible to promote consistency in financial reporting.
The Role of Theory in Financial Reporting
The use of theory in financial reporting has become an issue of interest for many scholars. These theories explain the need for faithful representation by public companies. Particularly, faithful representation comprises a complex set of processes. According to Wagner (1965), using theories can help in forming a general framework of reference used in financial reporting. Some theories can be normative, inductive, deductive, or positive. Different scholars have placed emphasis on the need for theories in developing a reliable framework for financial reporting. IASB plays an important role in developing the global normative accounting theory. For a long time, the IASB has set a framework that public companies use to determine the accounting information they should publish. The relevance of theory explains why the world needs financial statements. Barker et al. (2014) make it clear that the agency theory gives attention to the existing relationship between shareholders and investors, as well as the management team of an organisation. There is an existing information asymmetry between shareholders and the agencies. Shareholders need adequate financial information to determine whether there is an acceptable return on investment. The agency theory places emphasis on the different interests exhibited by the principals who are shareholders and company directors who represent the agents.
Financial statements are of critical importance based on this theory because they establish a mediating platform between principals and agents regarding the risk of investment. In some instances, company directors and managers may be willing to take risks that prove to be unbearable for the shareholders. The principals use financial information provided in the financial statements to determine the kind of risks that the organisation can take. For this reason, there is a need for transparency and faithfulness in financial reporting because shareholders require a true reflection of the company’s financial position. According to Marra (2016), IASB comes in as an important board that establishes the “rules of the game” in financial reporting. Particularly, it would be difficult for shareholders to have access to realistic financial statements if regulation by IASB did not exist. The agency theory also helps in appreciating the need for regulation in financial reporting. In accounting, regulation denotes the rules and principles that govern financial reporting.
These principles ensure that there is a consensus on the kind of information that public companies must produce. IASB serves as the standard-setter that determines the kind of principles that govern accounting. Without regulation, a free market would exist that would make it difficult to access reliable accounting information. Supporters of regulation believe that there is a need for rules to reduce any market failure effects. A free market would present numerous challenges for investors and other stakeholders because companies would not provide the relevant information concerning their financial position. In respect to Tarca (2012), the level of regulation established by IASB has led to increased disclosure from different companies and established a measure of discipline in financial reporting. The agency theory emphasises the need to reduce moral hazards between shareholders and agents. Accounting standards have the capacity to reduce such moral hazards by making quality financial information available.
National Differences in Financial Reporting
Despite the emphasis on embracing uniform financial reporting standards, there are certain factors that contribute to national differences in accounting. Each country has unique laws that govern business, and that determines their level of disclosure expected from companies. Political systems have a remarkable impact on accounting standards as well. Tax systems vary from one country to the other. For this reason, the accounting standards in different countries are less likely to be uniform based on the tax systems. Economic development levels vary significantly. In the view of Hines (1988), the developed world has registered a remarkable level of economic growth, a factor that affects financial reporting standards. For example, countries belonging to the European Union represent the most economically developed countries in the globe with stringent accounting systems. On the contrary, the situation in the developing world is extremely difficult because there is limited economic development. As a result, it may be difficult to establish uniform accounting standards applicable to both worlds. Scholars have also established that the nature of business ownership and financial system has a remarkable effect on accounting standards. Each country has laws that govern business ownership and varied financial policies.
It may be difficult to create a consensus that reconciles the various financial policies from different countries. Some countries pronounce the strength of the accounting profession than others. For example, the developed world has empowered the accounting profession to a point where professionals can comply with international standards. However, in the developing world, the accounting profession is yet to grow to the expected levels. An additional factor that creates a discrepancy in international accounting standards is the culture and history of a country. According to IFRS Foundation (2015a), each country has a unique culture and history that affects the manner in which people conduct businesses. History is also important because it determines how companies have been disclosing financial information in the past. Language and religion are other factors that make it difficult to attain international accounting standards. In the Arab world, religion plays an important role in the manner in which people carry out business transactions. For this reason, it is important to consider these factors as having a potential effect on the regulation of the accounting profession.
Critical Evaluation of IASB International Standards
IASB has made remarkable progress in achieving its objectives of establishing International Financial Reporting Standards. As highlighted above, one of the objectives of the IASB was to develop high-quality standards that could govern financial reporting. As highlighted by IFRS Foundation (2015b), the board has registered exemplary performance in establishing a set of standards that promote high-quality information in financial statements. There is an increased level of comparability of the financial information provided by the companies. Specifically, IASB has succeeded in setting up basic requirements of the kind of information that different stakeholders require from public companies. The second objective was to reinforce the application of the established standards. Over time, the IASB has urged more than 120 companies have embraced the International Financial Reporting Standards. In the European Union, listed companies must comply with the standards. In the Arab world, some countries have embraced the international standards. Other countries from different regions have expressed interest in adopting the international standards.
The third objective of the IASB was to establish convergence by creating an acceptable system between the international standards and the unique accounting standards in each country. Some countries have succeeded in registering convergence by merging local standards and the international standards. Despite the criticism that IASB faces, there is evidence that it has registered remarkable success in its efforts to establish uniformity in financial reporting. Critics have given attention to the factors contributing to increasing differences in accounting standards. These critics do not believe that it is possible to set up universally accepted financial reporting standards. However, based on the progress made by the IASB, it is explicit that there is a possibility of establishing uniform global standards (IASB Foundation 2015c). Some countries have faced challenges in embracing the international standards. However, other countries have had an easy time in embracing the standards.
The IASB places emphasis on the long-term benefits of the international financial reporting standards. IASB is aware of the difficulties involved in establishing a uniform system. For this reason, it has been supportive in promoting the adoption of the international standards. It may be difficult to handle all the differences in accounting systems that various countries register. However, it is possible to enforce the existing set of standards and promote a measure of consensus. As globalisation continues, these international standards will prove necessary. Undoubtedly, IASB has succeeded in ensuring that there is a measure of objectivity in global financial reporting. Unlike in the past, the regulation provided by the IASB ensures that investors can make wise decisions based on the quality financial information. There is a lower level of uncertainty experienced by different stakeholders because they can access a higher level of financial information due to the mandatory disclosure rules. It is explicit that the globe has registered a remarkable consensus in accounting standards. The level of comparability of financial information has increased significantly. It is apparent that enforcing the standards may pose some challenges. However, the IASB has made good progress in the past.
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