International Financial Reporting Standards
In conducting business activities, various evaluation tools such the financial statements have been put in place
Evaluation of business performance is very important both to the business owners and other stakeholders since it assists in making further investment decisions. Therefore, to come up with very effective and uniform financial statements which can be used to compare the performances of the various similar global firms, efforts have been put by different accounting bodies in order to have internationally recognized accounting standards. This write up will therefore discuss the different ways through which the International Accounting Standard Board (IASB) and the Financial Accounting Standards Board (FASB) can work together to come up with the international accounting standards known as International Financial Reporting Standards (IFRS). It will also address the benefits of the IFRS to the global economy.
According to Walton & Aerts (2006), accounting standards are the general rules and guidelines which are used by the accountants for reference when making and interpreting the financial statements. They are very important since they provide the companies with the most efficient way of reporting their business performance to the shareholders and all the other stakeholders who need them for decision making. Therefore, in order to have worldwide financial accounting standards in place, both the IASB and FASB have been in charge of developing the International Financial Reporting Standards (IFRS). In this relationship, the International accounting standards board (IASB) is the accounting standards setting a body which works independently and has the responsibility of developing the international financial reporting standards (IFRS).
Financial Accounting Standards Board (FASB) is the non profit making organization in America which is in charge of developing the Generally Accepted Accounting Principles (GAAP) for the non governmental entities in America. These general principles are therefore used by the non governmental companies in preparing their financial reports. They are also used by the Securities and Exchange Commission (SEC). On the other hand, International Financial Reporting Standards (IFRS) are the accounting standards which are developed by the IASB and are meant to be the reporting standards which should be adopted worldwide. This brings uniformity in the accounting standards across the world (Walton & Aerts 2006).
Walton & Aerts (2006) note that, in order to develop the IFRS, both the IASB and FASB have converged to work together since the year 2002. This is in order to assist in coming up with the financial reporting standards which are comprehensive enough to be used throughout the globe. Therefore, for the bodies to work together there is need to formulate some standard setting approaches which can assist in the development of the IFRS. These approaches may include the proposals for amendments by either of the two boards. This is whereby both the boards are rendered free to point on any issue which they may think need some changes or adjustments. Thereafter a discussion is held by the two boards which then come to the best reporting standard resolution.
Another possible approach which can be adopted by these two boards is the public opinion consultation
This approach can be very applicable if done by the FASB in America since most of the American investors and companies are well conversant with the standards. This will make it easy to point how they want the standards integrated with the ones for the IASB in order to form comprehensive IFRS. Additionally, it is important to also consult with the rest of the world’s accounting bodies since the IFRS are meant to be used worldwide. This can be done by making proposals over some changes and having a forum where the world’s accounting stakeholders can post their comments and feelings (Walton & Aerts 2006).
Both the boards should also recruit some accounting personnel from the well established bodies such as the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants (AICPA) in order to assist in the development of the IFRS. This is because they are well conversant with the existing accounting standards and therefore know the specific areas where the adjustments should be made. To further enhance the development of the IFRS, the boards should also try and eliminate the differences between IFRS and GAAP as was already declared in the Norwalk Agreement in the year 2002. This is because the IFRS will prevail over the GAAP once accepted internationally. It is equally important to integrate the two since the IFRS can only be developed from the already existing accounting standards such as the American GAAP (Walton & Aerts 2006).
Both the two boards should also come up with a programmed time on how to approach their discussion processes. This would be very important since the boards will have a consistency in there work and hence coming up with the required standards within the stipulated time. Once any similar aspects of the GAAPs and IFRS are integrated, their level of compatibility should be maintained so that there are no further confusions which may arise from their independent application. Finally, these developing boards should try and put the newly developed standards into test so as to be sure that they are comprehensive enough to be relied on by the whole corporate businesses worldwide (United Nations Conference on Trade and Development Secretariat, 2007).
According to the United Nations Conference on Trade and Development Secretariat (2007) IFRS development is very important to the economy since it enhances the setting of the best accounting standards and principles; which can be used by the business entities all over the world to evaluate and to know the true performance of the business activities. IFRS is also needed in the economy since it enhances comparability of the financial statements from different companies either within the same country or in different countries. This therefore helps in ranking the similar companies according to their performances. It further notes that IFRS is an important decision making tool for the investors and lenders. This is because the investors normally consider the performance of any particular firm before they invest into it. Therefore by having the IFRS developed, the level of trust of the financial statements of the various companies will increase.
Since the development of the IFRS improves the quality of the financial reporting, the risks of making wrong investment decisions are also lowered. This is because all the facts needed in coming up with the decisions. The IFRS is also important in the economy since they are written accounting guidelines which can always be used for guidance and reference by the accountants in order to produce quality and reliable accounting work (United Nations Conference on Trade and Development Secretariat, 2007).
Walton & Aerts (2006) also note that IFRS is important in the economy since it gives the results of the companies’ performances which are in turn used by the economic policy makers. For instance, the policy makers may inform the government of the new economic trends in the companies and further propose the favorable courses of action to be taken by the government in order to stabilize the economy. These economic courses of action by the government may include the regulating policies such as cutting down of taxes, giving of subsidies or even coming up with price floors and ceilings for particular products. They further note that IFRS is important to the economy since it lays emphasis on the economic accounting and the accounting for the other non monetary transactions and events which are very crucial to the financial information users such as the shareholders.
Walton & Aerts (2006) further notes that adoption of the IFRS will ensure that there is no arbitrage between the accounting standards and it will further lessen the political interference or involvement in the standard setting process by the government. This will therefore help create time for the government to concentrate in the other economic activities within their specific territories. The less developed countries which are incapable of making their own standards of accounting will also have an economic measure and a ranking tool for their companies. This is because of the fact that the IFRS made financial statements are uniform hence assisting them in coming up with internal economic policies for improvement.
IFRS is also important to the economy since it will enable for mobility of the professional accountants; when seeking employment. This is because the accountants from all over the world will be having the same guiding principles towards doing their work and hence making it possible for them to get employed from any part of the world. The adoption of the IFRS will also be very important in cutting down some of the investment costs such as the cost of interpreting the accounting results from different countries or regions. For instance the foreign direct investments performance will be easier to understand without any further local interpretation (Nandakumar, 2010).
According Nandakumar, (2010), IFRS also assists in the maintenance of an orderly and efficient capital markets since they will all be uniformly guided in there operations using the same accounting tools. Finally, it also helps in boosting the economically healthy competitions among the different firms since they will all be relying on the similar capital markets. Formation of business partnerships and the acquisition of foreign entities will be in the increase; this is important since it enhances the exchange of business ideas.
In conclusion, the development of the International Financial Reporting Standards is a great step towards the economic integration of the world’s business entities. This is because; it will place them in the same platform when it comes to the accounting interpretation of their business activities. Therefore, both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) should pull up all there necessary resources and seek professional assistance whenever necessary so as to ensure that the IFRS are developed up to the standard.