Contemporary Issues in International Financial Reporting

Introduction

accounting entails the process that deals with the recording of financial transactions relating to business. The process involves the operation of analyzing, summarizing and reporting the transactions to regulators, oversight agencies and tax collecting entities. Harmonization refers to the process of increasing the compatibility of accounting processes through establishing the limits to their degrees of variation. The harmonization process is more extensive than the standardization process. However, both of the methods deal with the reporting of standards. There are, however, cases where harmonization and standardization are interchangeably used. The primary importance of harmonization in standards reporting is to achieve comparability in financial statements. The preparation and presentation of financial statements are different due to the various existing different sets of monetary standards. The difference in the development and the introduction of the financial statements make it difficult to establish an efficient comparison. It is necessary to engage in the harmonization of financial statements. Harmonization is for the improvement of the comparability against domestic and international peers. They strive to establish the comparability is through the establishment of restrictions on alternative accounting to facilitate similar transactions. It seeks to establish comparability between financial statements through setting limits on the alternative accounting measures allowed for transactions.  Even with the implementation of IFRS, there would still be differences in financial reporting. Similarly, the financial statements would still not be identical. Among the factors that contribute to these differences in financial statements include the existing differences in economic conditions, national laws, and accounting and finance objectives.

Factors affecting international accounting

Various factors affect international accounting. These factors are responsible for creating differences in global reporting. Among the factors include the providers or sources of financing, the legal system, the influence of the domestic accounting profession and the existing relationship between the financial reporting and the tax reporting.

Accounting Standards Integration Problems

Among the main problems include the refusal of England, Canada, Japan and the United States to transition to the international accounting standards.  Among the issues related to the transitioning of GAAP to IAS include the issue of complexity.  In the united states, the security and the exchange commission insist that the publicly traded companies subscribe to GAAP.  With regards to the international revenue tax codes, compares are mandated to use the modified accelerated cost recovery system for assets that depreciate, rather than the use of straight-line depreciation method that is used in GAAP.  The change into an IAS accounting model requires the government to change the tax accounting systems

Adverse Effects on U.S. Small Business

There are significant problems caused by small business organizations in comparison to large multinational organizations. These problems result from the fact that the small business ventures spend more in regulatory compliance in comparison to large transnational cooperation. This, therefore, means that the revenues of these small business ventures are significantly affected. The lesser the number of employees that a company has, the more it pays in tax compliance. However, countries with more employees end up paying much lower per employee in tax compliance than the smaller companies. The smaller the company, the more burden is, therefore, faces with regards to the ability to expand and grow. The integration of accounting standards is likely to create higher costs for smaller businesses as a result of the underlying compliance mandates.

International Sovereignty Issues

The financial accounting standards board in the united states has the responsibility of setting standards of accounting that are mainly reliant on the federal securities laws and state CPA licensing laws.  All counties have various tax laws and banking and regulations laws that govern the principles used in accounting.  Countries like the united states, there are multiple individual state laws for different states.  As a result, the adaptation of the international accounting standards would not only have a conflict with the united states status law but also with the constitutional laws that deal with state rights. 

Licensing and Enforcement Obstacles

This present one of the main inhibitors of the harmonization of the accounting standards. The individual accountants, tax lawyers and certified public accountants internationally would be forced to comply with, and obtain licensing through the universally accepted body that makes rules. In the case that the international organization does not have the authority to enforce laws, no court would prosecute those who break the laws.  Through the adoption of the IFRS, business entities can present their financial statements with the same capabilities as their foreign competitors.  This would be essential for easy and more practical competition.  Also, in the case that companies are subsidiaries of foreign companies, they could have to convert to IFRS of foreign companies that are mandated to use IFRS, or in the fact that they have foreign investors that are mandated to use IFRS.

How widespread is the adoption of IFRS around the world?

The use of IFRS internationally has increasingly spread, with more than 13 00 companies using it abroad by the end of the year 2015.  its use had spread in approximately 115 countries globally by the same period.  The main countries that have adopted the application of IFRS include countries across Europe. Also, Canada and India have adopted its use.

The process of use of IRFS includes conduction consultations on the implementation of a new, or amended standard for the ident6ification of any problem.  In the case of issues that may arise, 5he IFRS interpretation committee has the responsibility of determining the course of action to be taken. The next process is the consultative process. It entails the development of accounting standards for the global; economy in a collaborative exercise based on transparency, fair consultation and accountability.

 Judgement inherent in accounts

Inherent risk entails the risk created through an error of an omission of a financial statement as a result of a factor different from the failure of international control. It is most likely to occur in a financial audit in the case of the complexity of transactions.  It is expected to happen in the case where their commercial degree of judgment is required to be at a high degree with regards to the financial estimates. The inherent audit risks entail the material misstatements that have the possibilities of happening in the financial statements as a result of other causes apart from the failure that the internal control has over financial reporting. Essentially, there are a varied number of risks with the possibility of increasing the inherent risks in the audit of financial statements.  The threats that include the complexity of elements are reported in financial statements. However, the risks involved in many justification and adjustments are reported from the management of the company. Increased and high levels of involvement from the administration can increase the inherent risks. It could, therefore, further lead to the misstatement of materials. This misstatement could be associated with a lack of experiences involved in dealing with the complexity of the elements being evaluated, or the intention of the management. In the course of either assessing or dealing with inherent risks, there is a wide range of issues that the auditors are required to pay serious attention to.

Inherent risks can also be viewed as risks that the financial statements could contain the material misstatements on either single accounts or group of accounts that are pervasive to financial statements.  The aspects of inhering sent risks mainly result from external factors, rather than from internal factors. Various factors work as examples of inherent risks. Among these factors include judgment. In the case that the financial risk elements entail a high level of analysis or justification from the management, the level of degree of incorrect management has the likelihood of increasing.  The incase could be associated with the inexperience of intention from the administration that is involved.  The second factor is the factor of estimates. In this sense, there are more extensive or significant accounting estimates in the financial statement have the possibility of increasing the inherent risks.  The auditor has the responsibility of ensuring compliance of the accounting estimates with the accounting principles and standards of accounting. The nature of business complexity can affect some items in the financial statement, For instance, complex contracts with a varied range of trends and conditions in addition to variability. There is the fact that some financial assets of financial liabilities could quickly become extinct as a result of rapid changes in the business.  The rapid changes can increase the inherent risks. As a result, there is a need for critical assessment.

In typical cases, the auditors have the responsibly of conducting a risk assessment on the financial statements that they audit.  The risk assessment is done at the planning stage of a financial statement auditing.  There is the identification of audit risks, identification and management of the risks.  There are significant audit risks. Among the types of inherent risks include control risk and dates risk.

The risk assessment should depend on the experiences and the expertise of the industry that the auditors possess.  In the case that the entity being edited is a complex or a fast-changing environment, it must be an experienced auditor in the team. This is necessary for reducing the audit risk through the decrease of the detection of threats. Assessment of the inherent risks should be understood as subjective, rather than an objective process. This is as each entity of the different factors in the various entities may be different.  The best way of performing the assessment is through the understanding of the external factors. The best way of performing the evaluation is to keenly assess the external environment that could affect the quality of the financial statement.

Rules-based accounting

This refers to the type of accounting that companies following the rule-based approach have the responsibility of complying with all the laws and regulations. The companies must not deviate from the rules.  GAAP (Generally Accepted Accounting Principles) entails a rule-based accounting system it is mainly used in the united states.  The goal of the principle-based approach is to set principles that provide specifications to the intention of the regulation exercise.  It, however, does not deal with the responsibility of setting rules dealing with the requirements of an individual institution.

Difference between principle-based accounting and rules-based accounting:

There are differences in principle-based accounting and rules-based accounting. The key points of difference between principle-based accounting and rules-based accounting are given below:

Decision-making

In the application of a principle-based accounting system, the accountant engages in exercises that not only follow a loosely regulated set of principles, instead, is also looked upon to apply the principles in addition to personal judgement. The decision-making process entails the implementation of the essentials of accounting.  With regards to the rule-based accounting, there is the establishment of a set of rules that should be and must be obeyed in every accounting situation. It restricts the accountant from the application of their principles and judgement in the accounting process.

Legal aspects

with regards to the legal issues, the IFRS accountants and auditors are responsible for the application of their knowledge relating to accounts to follow the best choices. In this case, the options entail whether to apply the initial IFRS in a specified situation or not.  However, in the application of GAAP, there is no opportunity for the creation of any changes. The accountants are expected to exercise strict adherence of the rules.  The result of this effect is that the accountant may fail to take up their professional duties that that suggest that they should operate by the consideration of the best interest of the general. The assumption implies that the company can survive by blaming the laws in the case that a lawsuit proceeds against them.

 Flexibility

With regards to flexibility, an accounting system based on the adherence to the principles provides more flexibility to the companies. The principle accounting system allows for the adjustment of the principle with regards to the needs of individuals at the specified time. Reasonable justifications follow the alterations.  The rule-based account ting system, on the other hand, fails to provide this privilege. Companies that subscribe to the rule-based system are forced to adhere to sets of rules under all circumstances.

 Application:

The GAAP a rules-based accounting system is mainly in use in the United States.  The IFRS is a principle-based accounting system in use in more countries. Its use has either been fully or partially adopted in approximately 130 countries throughout the international system.  Governments and states across the world prefer the use of IFRS. Its standards are not as strict as the rules of use of the GAAP.  The functioning of IFRS is accommodative to the companies and businesses across the world.  It attempts to incorporate and accommodate the needs of companies through a more progressive approach.

 Standardization

Standardization in accounting is significantly essential.  Through the standardization process, it is easier to establish a comparison of financial results among various companies.  Despite the promotion of standardization by IFRS, with the fact that all the companies have the obligation of adhering to similar principles for the recognition of assets, liabilities and capital for financial reporting, it offers a sense of flexibility. Companies that subscribe to IFRS have the liberty to vary from the set principles in the case that they would still provide a clear picture detailing the financial operations of the company. This method, however, has an underlying disadvantage that it can result in inconsistency about the results published by the various entities. The GAAP system used in the united states is, however, a strict and rigid system. It provides rigorous sets of rules that no individual company has the option of deviating from. The ultimate set of results of all the companies are therefore created through the adherence to similar regulations. The r4esult is that the results obtained are more standardized, thus providing a higher level of comparability.

 Translation issues

Translational issues in accounting reefer to foreign currency translation. In other circumstances, it is simply referred to as currency translation. It entails an accounting method through which international companies translate the results of its foreign subsidiaries in its reporting currency. In essence, it involves the conversion of the financial statements of the foreign subsidiary into the useful reports of the parent company.

National legal requirement

With regards to the federal legal requirements, countries operate through the establishment of laws meant to guide the practice of accountancy. These laws provide the guideline through which accountants and other individuals operating within the field with a related mandate operate.  Also, individuals and organizations are governed by the requirements to ensure the fulfilment of basic laws relating to accounting. Among the necessary regulations provided by the national legal requirement include the taxation aspect. Here, individuals and controls are required to fulfil their tax obligations through the payment of the required tax depending on the various nations to which they belong.  Updating and presentation of financial statements is also a substantial obligation. Through there, there is the ability to exercise efficient planning and accountability by the financial responsible bodies and organs.

Further Changes and Challenges

The aspect of further changes and challenges refer to the changes and challenges in accounting. The changes in accounting mainly refer to the changes that relate to the accounting principles, the reporting entity, or accounting estimates. Countries adopt the changes in accounting methods mainly because of their reasons. Among the reasons responsible for the changes in accounting methods include the desire to increase the organizational cash flow through the decrease of income tax. It also includes the willingness to register better profits,  the need to follow industrial practices and as a way of fulfilling the requirements of the financial accounting standards board to change accounting standards. In the case that companies register accounting errors, they could also seek to exercise accounting changes.  The change in accounting principle entails the adoption of a different accounting principle that was previously not in use by an organization the change in accounting estimates are generally the changes that a company makes regarding the accounting estimates following the closure of a financial year. The changes in reporting mainly occur in the case where companies initially combined to produce a unified report for the companies. The differences in accounting reporting follow the breaking off of the various companies to engage in individual reporting.

Conclusion

even with the harmonization of accounting, in the case that accountants from different countries, or even from the same countries are given the same set of transactions, to prepare, there is no possibility of production of similar results. This is as various other factors govern the accounting process, leading to the differences in the results generated.  Among the factors that could lead to this difference include the difference in principles used by the different companies.  While one company may use rule-based accounting, the other may use principle-based accounting, consequently leading to the realization of different results.  The accounting systems that the various countries use could also result in the generation of differences in the results obtained.  The other factors that lead to the production of different results include the sources of financing of organizations, the legal systems to which the organizations prescribe, and the relationship that exists between the financial report and the tax report of the organization.