Introduction to Procedures of Accounting
Every organization undertakes the procedures of accounting in order to assess the financial health and performance of business. With the help of this, organization will be able to frame competent strategies and policies which gives its contribution in the achievement of organizational goals and objectives. Besides accounting, public and private limited companies have the responsibility to report the users about the financial information of its business operations and activities (Godfrey and et.al., 2010). It enables company to build trust in the mind of stakeholders. The present report will discuss the impact of accounting standards and other regulatory framework upon the business decisions of the users. Along with this, it depicts the potential challenges which a company might face.
A. Improvement in the quality of economic decisions of the user of financial statements due to the development of standards and other regulatory frameworks
International accounting standards are introduced by the International Accounting Standard Board which facilitates the comparison of the financial statement across the national boundaries. It consists of a set of accounting standards which entails the system through which various transaction of the business organization are reported in the financial statements (What is International Financial Accounting Standard?, 2015). Different countries and organizations use the different methods of accounting in order to assess its financial position and performance. It affects directly to the decisions of stakeholders as well as their faith. In order to remove discrepancies, International Accounting Reporting Standards are taken into consideration (Quick, Turley and Willekens, 2007). It encompasses the rules which accountant needs to follow for maintaining the books of accounts. Further, t facilitates better understanding, comparison and reliability at international level.
Development and adoption of accounting standards are very beneficial not only for the organization but also for the stakeholders. It plays a significant role in improving the quality of economic decision taken by the user of financial statement. IFRS builds trust and satisfaction in the mind of investors when organization follows the accounting principles and rules which are accepted at both national and international level (Hontoir and Izhar, 2001). Financial statements include income statement, cash flow statement and balance sheet. Investor’s decisions are highly based upon the financial statements of an organization. It provides deeper insight about the financial health and performance of the firm. When investor plans to make investment at national and international level then IFRS plays a vital role in the decision making of existing and potential stakeholders.
IFRS Facilitates the need of different users of financial statements. There are different type of users of financial statements. It includes both internal as well as external users. Internal users includes managers, shareholders and employees. Whereas external user includes investors and credit lenders. The users are very much affected due to the adoption of IFRS by the organization. It facilitates capital resources allocation decisions of various users. Investors and shareholders can invest their funds in high profit earning organization by comparing the financial status of the companies (Godfrey and et.al., 2010). Credit lenders also will be able to take effective grant decisions by analyze the solvency position of organization.
Moreover, it also helps the investors by reducing their data acquisition and data collection costs. IFRS reduce the level of complexities in the financial statements. It require more quantitative and qualitative disclosures than the local country's GAAP requirements. Therefore, all the useful information will be available for Various users satisfying their needs (Koen and Greuning, 2001). It helps the users by improving transparency and establish consistency in financial statements reporting. Moreover, Management can exercise more significant judgment by applying the IFRS standards.
IFRS enables multinationals to improve the efficiency and flexibility of financial reporting procedures. On contrary, many companies operating in an international market may have subsidiaries in other countries. Such companies prepare their financial statements in one accounting language accordance with IFRS. Thus, all the information will be available to the management authorities which help them to take necessary investment decisions.
According to the IFRS requirements companies also has to consider changes to their key performance indicators and report them. Therefore, it is clear that the standards helps the organization to achieve and maintain capability by providing variety of sources of information to users. The standard also affects the way that how management runs the business and assess performance. Users can easily understand the financial statement of Such organizations who prepared it according to the requirement of IFRS (Singleton and Singleton, 2010). It increase the comparability and the reliability level of the financial statements. It helps to compare the financial statement of two or more companies whether operated in same country or in other country. It provides a faithful representation of the financial statements and increase relevance also.
However, it has also some adverse impact on the organization. Companies who converts its financial statements accordance with IFRS will not have any market incentive. Moreover, the cost arises due to the adoption of IFRS may outweigh the profits of the company. Organization who convert its statements according to the IFRS may lead to increase in cost because of the requirement of providing training to the employees and implement information technology. IFRS also required that auditors have the knowledge of such standard for their verification purpose (Satava, Caldwell and Richards, 2006). Thus, it is clear that the standards effect the business organization in both ways. It helps various users so as to increase the comparability, reliability and relevance. Moreover, the conversion of financial statement prepared in accordance with local GAAP into IFRS can increase cost so the organization will be affected adversely.
B. Potential challenges which companies and regulator might face
There are various potential challenges which companies and regulators might be face in harmonizing the national financial accounting standards. As companies already follows accounting practices as per their convenience to assess the financial health and performance of an organization. Thus, company might face difficulty in follow or adopt the accounting rule and practices imposed by the international financial reporting standards (Francis, Khurana and Pereira, 2003). Besides this, companies also resists to adopt the accounting practices which are introduced by IFRS. It happens that organization not easily adopts the changes which take place in the business environment.Moreover, it creates high level of difficulty among the companies in harmonizing the accounting practices of itself and IFRS. In contrary to this, users of financial statements requires to attend the training and development session to implement the accounting practices in the appropriate manner. Besides this, shareholders or potential investors also faces difficulty in understanding the international accounting practices which is adopted by an organization (Feroz, Park and Pastena, 2008). Thus, it is also one of the main reason due to which companies resist to adopt the international accounting practices to assess their financial health and performance. In order to resolve this issue, international financial board needs to highlights the benefits of the use of international accounting standards.
In addition to this, regulatory framework also face difficulties in setting of standard accounting practices and rules. In order to develop universal accounting rules and principles regulatory bodies requires to undertake research and development activity (Griffin, 2009). For this, regulatory bodies have to spend huge amount of time and money to frame the appropriate accounting rules which provides better insight to the various stakeholders.
Besides this, international financial board might face difficult in identifying the gap between current and old accounting practices. For this, international financial board have to make in depth research to assess the loo falls which occurs in the current accounting practices. As accounting performance adopted by an organization highly impacts the financial position and performance of them (Butler, 2009). Besides this, it also affects the decision making of the users of financial statements. Thus, international accounting standard board needs to make caution in setting accounting standards and policies.
Along with it, in order to set universally acceptable and appropriate accounting rules international accounting standard board needs to assess the current practices of the organization. It provides more assistance to international accounting standard board in making appropriate change and harmonize the international accounting practices (Clikeman and Lemon, 2010). In addition to this, global financial board needs to encourage the organization to support accounting rules and practices introduced by the international financial board. Regulatory bodies also faces the problem of cultural changes and developing system of accounting and regulation. Greater accountability and wider political participation also impose challenges in front of the accounting board in setting suitable accounting practices.
Thus not only regulatory bodies but companies also face various challenges in harmonizing the national reporting framework.
From this project report it has been concluded that International financial reporting standards represents the universally accepted accounting rules. It enables users of financial statements to make economical investment decision by making comparison at international level. It can be concluded that companies resists to adopt the practices introduced by international accounting standards. Besides this, regulators also have to spend large sum of money and time in framing international accounting rules and practices.
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