Fair Representation of Financial Statements

Fair Representation of m iodintary Statements1. INTRODUCTIONThe Financial account Standards Board was formed to resolve the problems faced by the external pecuniary reporting regiment. In particular, it hopes to promote the archetypeization of international bill tireds through its International Accounting Standards (IASs) to facilitate transactions and improve pecuniary markets. Underscoring the FRSBs philosophy is to enable the whiteish presentation of pecuniary literary arguments. This report discusses this innovation and evaluates whether the application of a standardized invoice reporting regiment would reach its accusatorys with a critical examination of virtu every(prenominal)y score standards.2. FAIR demonstration DEFINEDWhenever we mention the fair presentation of financial contestations, we ar referring to the history concept of authoritative and fair piece of taildidate. The phrase dead on target and fair in an report context does not have the aforesaid(prenominal) meaning as true and fair in a general context. Thus, true in an account statement context does not mean in accordance with the facts or not false and fair in an report context does not mean just or unbiased.The close to generally true version of true and fair in an be context is that accounts be true and fair if they atomic number 18 prep ard and presented in accordance with generally accepted business relationship principles. Thus courts have held that accounts base on historical salute present a true and fair view. Riley has pointed out that the various Companies Acts assume the presentation of a true and fair view and not the true and fair view. The implication is that in a particular circumstance no single view is true and fair besides that there atomic number 18 several views each of which is true and fair. Presumably, any generally accepted accounting system provides a true and fair view. on that point be some who argue that different ac counting standards does not inhibit the adoption of fair presentation while some others believe that a uniform international standard like IAS is the outdo means of achieving fair presentation of financial statements.3. THE pillow slip FOR DIFFERENT ACCOUNTING STANDARDS3.1 Diversity is DesirableIt has been argued by some that a range of accounting methods is desirable because of the diverse circumstances of different businesses. In some circumstances one method would be desirable and in other circumstances some other method would be some appropriate. Diverse accounting methods are necessary because of diverse circumstances. For example, it could be argued that when a non-controlling interest in another(prenominal) company is acquired and where there is a veritable influence over its policies, the equity method would reflect the circumstances more(prenominal) accurately than simply showing the investment at cost.Given a variety of accounting methods, it is argued that managemen t should choose the one which best reflects the comical circumstances of the situation. The ability to choose the most appropriate method should lapse to comparability of accounting reports. More meaningful comparisons would be possible because accounting reports reflect the circumstances in each case. The independent auditor should crack that management selects the most appropriate method for the presentation of a true and fair view. If management does not choose the best method, the auditor impart not confirm the presentation of a true and fair view and a qualified audit report should result.3.2 Arguments Against International Financial Reporting StandardsJust as there are many compelling arguments in favour of IAS, there are to a fault every bit compelling arguments against it. sensation of the major criticisms against IFRS is that poorly developed and developing countries view it as a form of imposition of rules or neo-colonization by economically superior countries (Mednic k, 1991). Secondly, normalization goes against the inherently flexible nature of accounting. One of the key principles of accounting is content over form, so providing international standards would be contrary to this. When accounting rules are standardized or harmonized, they cannot possibly be flexible enough to tally into the enormous scope of different national situations, legal systems, stages of economic ingathering and cultural differences. Instead of aiding progress, such rigid and inflexible standards whitethorn actually hinder it.Next, some experts argue that it will be very demanding for international accounting standards bodies like the IASB to reach a universal consensus on some issues. As a result, concessions and compromises will have to be make so that it becomes satisfying to the international community (Berton, 2000). When this happens, the standards become inadequate and permissive. other argument against international accounting standards is that it could be dangerous as the standards may erode scratch and cause volatility in the balance sheets of the companies (Parker, 2002). As a result, companies need to educate their investors about the effects of international accounting standards on the account profits and liabilities.Finally, some have expressed commercial enterprise that international standardization or harmonization may cause standard overload. Companies that have to deal with social, political, national and economic pressure will be overextended to comply with the more complex and expensive international collectments. This may add to operating costs.4. THE CASE FOR INTERNATIONAL FINANCIAL REPORTING STANDARDS4.1 Problems with DiversityThere is the availableness of a wide choice of accounting methods. For many transactions, accountants are able to choose from a selection of accounting methods each of which is equally acceptable and which often give widely different results. However, there are two main types of criticism leveled against this kind of regeneration.One, it is suggested that the availability of several acceptable alternative accounting methods for a single transaction could make the accounting reports of different companies non-corresponding. Differences in reported results could reflect different accounting procedures sort of than different doings. For example, suppose that Company A expensed all research and learning expenditure, use FIFO for inventory and depreciated its assets on a straight-line basis. Any differences in the reported profits and balance sheets of the two companies would be due, at least in part, to differences in accounting procedures and any assessment of relative performance and financial position would be difficult to make. The critics argue that diversity in accounting methods reduce the utility of accounting reports by measuring incarnate performance in different ports.Two, it is also suggested that the availability of different accounting methods allows management to choose those methods which give the desired result. In other words, profits could be manipulated by the choice of accounting method. If management wants lower profits, conservative accounting procedures could be use. Choosing accounting procedures to satisfy management objectives is sometimes set forth as creative accounting. In America, researchers have found substantial endorse of creative accounting. The critics regard creative accounting as particularly naughtily and finish that financial statements cannot be used with any confidence to sum of money or equation managerial performance.The common element of these two criticisms is that the availability of a choice of accounting methods places to a lack of comparability in accounting reports.4.2 profit DisclosureThe second argument for IAS is to seek increase revealing. Two types of increase revealing are suggested. One, it is argued that the problems of diversity could be at least partially overcome by deta iled disclosure of accounting method. Under this proposal, accounting reports would include a statement of the methods used to work depreciation, unearned income, inventory and so on. It is suggested that this additional selective data would enable statement users to recast the accounting reports into a form suitable for comparison with the reports of other years or other companies.Two, it is suggested that where an accounting method is different from that used in the previous report, the fact of the trade of method and the effect of the change on reported profits or balance sheet items should twain be disclosed. With this additional information statement users would be able to echo the accounting reports of a company to make them comparable on an image basis. The effect of creative accounting would be disclosed.It should be noted that the increased disclosure response leaves companies and their auditors with a choice from a range of accounting methods. Diversity in accountin g method is not reduced. The increased disclosure allows statement users to make accounting reports comparable by recasting them in the form they need.Increased disclosure is a solution to the problem of diversity can be criticized on the grounds that the benefits may not be shared equally by all statement users. It requires a statement user with accounting skills to recast financial reports on a comparable basis. Statement users without access to these skills would receive no benefits from these additional disclosures. Indeed, they may be worse off as sophisticated statement users recast the financial reports and to make better decisions. Any solution to the diversity problem which places the one on statement users and which could therefore discriminates against a group of users is clearly unsatisfactory.4.3 Increased UniformityIt is also widely believed that a universal adoption of IAS would conduct to uniformity of financial statements internationally. When different standards a re used, it is sometimes difficult to compare the financial performance of two companies. Comparability would eliminate misunderstandings about the dependability of foreign financial statements and would remove one of the most in-chief(postnominal) impediments to the guide of international investment. Narrowing the range of choice of accounting methods is usually exposit as increasing uniformity. In most cases, increased uniformity is achieved by issuing statements of accounting principles or standards which specify the accounting method for a particular transaction or event.Increased uniformity means that the uniform accounting methods are likely to be used in the same circumstances by different companies and at different times. The onus is on management and accountants rather than statement users. There are several arguments used to support the case for greater uniformity of accounting method. Firstly, the most primary(prenominal) argument is that uniformity of accounting pr ocedures will allow comparisons of accounting reports. like situations will be reported in a similar way and results will be directly comparable. Any difference in reported results will be due to differences in the circumstances and not in the accounting method.Secondly, many accountants believe that increased uniformity would make their jobs very much easier. Choosing an accounting procedure is for many accountants time consuming and difficult. It may lead to conflict between management which wants creative accounting and accountants who believe that another method is more appropriate. With uniformity, the chance of conflict over accounting method would be reduced.Thirdly, with uniformity, accountants would be better able to defend their procedures in court. Because their choices would be limited, they could not be accused or choosing an accounting method to equate the needs of any particular group. This in an all important(predicate) consideration for accountants.4.4 toll Ben efitsThere are numerous financial benefits of having IAS. The initial is that it decreases the cost of data collection (Choi et al, 1999). Time and money will be saved on consolidating divergent financial information when more than one set of reports is necessitate to comply with the different national laws or practice. Secondly, it is believed that the ease of comparison of information and the reduced cost of collecting data will help spur the knowledge of capital markets through the inflow of foreign capital (Don and Thomas, 1995). Investors, financial analysts and foreign leaders will be able to understand the financial statements of foreign companies and they would be able to compare the investment opportunities that will encourage them to make the correct investment decision. This in turn will also facilitate the movement of funds. As taxes are levied on the total income of a business, it would be of great help to national tax authorities around the world if net income was calculated on similar accounting principles and practices. In addition, this will provide firms with a competitive advantage. International accounting and disclosure standards would make it easier to conduct the competitive and operational analyses needed to run a business. It will also become easier for top management to manage important relationship with stakeholders such as guests and suppliers. Multinational corporations will benefit the most and it will also become easier for them to fulfil the disclosure requirements for international stock-taking exchanges. Finally, harmonization of accounting standards will decrease audit costs and increase the efficiency of the audit (Choi et al, 1999).5. DIFFERENCES IN ACCOUNTING TREATMENTTo better understand how universal adoption of IAS would eliminate differences in accounting treatment, let us consider some examples of divergent accounting treatment. For this purpose, a comparison is do between IASs and the United States Generally Accepted Accounting Principles (US-GAAP).5.1 Changes in wear and tear or Amortization MethodAccording to IAS 16 and IAS 38, there is an intelligible stipulation that changes in depreciation or amortization method must(prenominal) be accounted for as a change in estimate. However, US-GAAP treats these changes as changes in policy by demonstrating the cumulative effect of the change in the income statement. These require retrospective changes, which are not required by IAS.5.2 Impairment of AssetsIAS 36 uses a discounted impairment bring out, because the value in use is by commentary a discounted value. Reversal of impairment losses recognized in front years is allowed. On the other hand, in the US-GAAP, if the sum of the expected funds flows is less than the carrying measure of the asset, the entity shall recognize an impairment loss. This means that the impairment trigger is an undiscounted amount. Reversal of previously recognized impairment losses is prohibited for assets to be held and used.5.3 Impairment of GoodwillAccording to IAS, the recoverable amount of a bills generating unit should be compared with the carrying value of its net assets. Resulting impairment losses should first be deducted from goodwill and then from other assets on a pro-rata basis. However, US-GAAP requires end of the implied fair value of the goodwill. If the implied fair value is less than its carrying value, this carrying amount should be reduced. Such a goodwill impairment test cannot affect the carrying set of other assets.5.4 Business Combinations in-process Research and DevelopmentFor IAS, purchased in-process research and development that meets the light criteria for an intangible asset should be valued at fair value. make up if it is not a separate identifiable intangible asset, the IAS method results in capitalization of those costs as part of goodwill. Under US-GAAP, purchased in-process research and development assets both tangible and intangible should be c harged to expense at acquisition date if no alternative future use for the assets can be determined.6. INCONSISTENCIES IN IASAlthough IASs are deemed to improve fair reporting, there are occasional inconsistencies that often hamper their effectiveness. Indeed, the IASB has tried to correct some of these inconsistencies, but there are sleek over flaws in the overall framework. The following are some of the inconsistencies that have been corrected in recent years.6.1 Classification of tonnage duty Taxes in IAS 112In some countries, shipping companies are allowed to choose to be taxed on the basis of tonnage transported, tonnage capacity or a notional profit sort of of the standard corporate income tax regulations. In the past, tonnage capacity was regarded as a basis for dutiable income. This is based on a flawed assumption. Income taxes are calculated on taxable profit which implies net, rather than gross amount. Taxes either on tonnage transported or tonnage capacity are based o n gross instead of net amount. Therefore, such taxes would not be considered income taxes and would not be presented as part of tax expenses in the statement of comprehensive income.6.2 Accounting for gross revenue Cost in IAS 38Some problems arise among real the three estates developers. IAS 2 does not permit selling costs to be capitalized as inventory if the real estate units are considered to be inventory. However, other standards conclude that some direct and incremental costs recoverable as a result of securing a specifically identifiable contract with a customer may be capitalized in narrow circumstances, for example in IAS 11 (Paragraph 21) and IAS 18 (Appendix 14(b)(iii)). Hence, it is not possible to reach a conclusion on the appropriate accounting for board categories of selling and marketing costs in all circumstances.6.3 Disclosure of Idle Assets and Construction in Progress in IAS 16In accordance with paragraph 74(b) of IAS 16, an entity is required to disclose the am ount of expenditures recognized in the carrying amount of an item of property, plant and equipment in the charge of its construction. Paragraph 79(a) encourages an entity to disclose the amount of property, plant and equipment that is temporarily idle. Paragraph 112(c) of IAS 1 requires an entity to provide in the notes information that is not presented elsewhere in the financial statements that is applicable to their understanding. The disclosure regarding idle assets might be particularly relevant in the current economic environment. Therefore, IASB should review all disclosures encouraged with the objective of either confirming that they are required or eliminating them.7. CONCLUSIONTo end, all accountants agree that the fair presentation of accounting and financial statements is important. However, what exactly constitutes fair presentation is a contentious and debatable matter. Some insist that adopting IFRS is the best way of achieving this objective while others assert that substance is more important than form and that it is perfectly acceptable to use different accounting standards so long as it shows some form of fair presentation. While I personally believe that it would be ultimately benefit the international financial community to have one standard to prevent confusion, its implementation is still some years away.