Accounting management help on: Accounting standards
Introduction
In general, standardization considered as the movement towards the implementation of the single accounting standards and the implementation of the similar rules of the accounting whereas harmonization referred as the effort for decreasing the distinctions among systems of the accounting and motivates the implementation of same methods. The implementation of the same methods by the companies in distinct countries assists in enhancing the comparability of the financial reporting (Chanchani & Willett 2004). Various factors are responsible for enhancing need for the harmonization of accounting standards. The enhancement of the FDI, the growth of the MNCs, the development of the financial markets and the persuasion of organizations like the IASB, The IFM and the World Bank all help in supporting of harmonization and an idea of having the single system of the accounting. It has been examined that the debate has been taken place on the application of the IFRS to the developing countries. In general, IFRS is applicable to both type of countries such as developed and developing country (Adams, 2002). Some people argue that the implementation of the international standards of the accounting could generate to economic growth and development in developing countries. It has been examined that the suitable IFRSs for the developing economies distinct from nation to nation relying on various changing elements. These elements comprise the political, legal, cultural, economic environments and the historical background of the countries. Throughout the previous few years, various developing countries have started to implement IFRS as mentioned by the IASB because of the constant increase in global companies viewing overseas investment (Al-Baluchi, 2006). Few researchers have revealed that it could be advantageous for the developing countries, if they adopt IFRS standards. Nevertheless, the debate is going on between practitioners and academics regarding the limit, to which IFRS standards may be adopted by the developing countries, as environment changes from nation to nation and the truth that the acceptance of these kinds of standards might be detrimental as they have formed for the capital market in the developed countries. It is analyzed that Saudi Arabia referred as the country for that these standards might be either detrimental or beneficial.
Existing Accounting Standards of Saudi Arabia
It has been evaluated that before year 1992, only one group of the accounting standards was issued by the SSA. These standards were based upon the three countries standards like the Germany, USA and Tunisia (Al-Mehmadi, 2004). These countries were taken and categorized as per the following reasons a) the limit to which the profession of the accounting was formed in country b) how much the environment of country similar in comparison to Saudi Arabia and the potential benefits Saudi Arabia would receive from current bodies in country. In May2008, there were 17 SAS, out of which 16 were published by the SOCPA and with exception of Zakat and standard of the income tax were related on USA GAAP, UK standards and IASs. The SAMA needs all financial institutions and banks in region of Saudi Arabia to make their statements of finance in relation with IFRSs. Other registered companies are needed to make their reporting based upon the SASs.
It is very clear that Saudi Arabia is having world’s greatest oil reserves and considered as the nation that can perform a crucial part in the economy of the world. Attempts made for taking the benefit of oil reserves for developing the country and create it as prosperous. Saudi Arabia currently joined the WTO and activities of the stock market of the Saudi Arabia have increased. As per World Bank, 2007 the Saudi Arabia country ranks 1st among all Eastern countries and 20th in world as the favorable atmosphere for the FDI (Abuhmaira, 2006). It shall also try for addressing the factors, why there is no entire adoption of the IFRS by the Saudi Arabia, though other countries standards of accounting are implemented as the initiating point for the SAS. Banks in the Saudi Arabia have started adopting IFRSs. In summation, SOCPA has chosen to implement these standards in the situations when there is no SASs. The study shows that the consequence of the IFRS on the excellence of the financial reporting of the banks and their possible consequences on the financial reporting of the companies after the adoption. In general, countries of the Arab are same in their culture, legal systems and religion. Normally, countries of the Arab are classified in the homogenous group comprising Egypt, Libya, Kuwait, Iraq, Lebanon and Saudi Arabia. These countries normally have great power distance, high masculinity, low individualism and great uncertainty avoidance. However, few differences in the systems of the accounting survive among them. For e.g. The Saudi Arabia Country have policies and regulations which might be distinct from other countries of Gulf. In general, English language might be the factor for marking the distinction among developing countries with concern to the IFRS adoption, as English language facilitates the IFRS adoption through developing countries where language English is spoken more as compared to other countries which don’t use English.
Few Arab countries like Saudi Arabia has Sharia Law as the guide in which all features of the life, and search that it’s not simply compatible with IFRS and certain matters should be referred. For example: Islamic law abandons interest, but no any provision is created in IFRSs. The religion factor is considered as environmental factor which shall impact the IFRS relevance to the Saudi Arabia (Abd-Elsalam & Weetman, 2003). The accounting users of the Saudi Arabia might be distinct as compared to the Western countries. Decision –usefulness and accountability show the major goals of the financial reporting. It might be recommended that the excellent practice of the Islamic accountability shall enhance the disclosure level that might offer users of the accounting with extra information for facilitating decision-making.
Comparison between SASs and IFRSs
The major differences among IFRS and SAS prevail in their different measurements of the accounting. For example: IASs provides higher flexibility for allocating the inventories cost by implementing the LIFO but SAS allows only the usage of WACC formulas for allocating the inventories cost. It is very clear that SAS uses historical cost whereas IFRSs uses only fair value. In few cases, SASs needs more disclosures in comparison to IFRSs, but IFRSs normally need more detail and disclosures in comparison to SASs. The representation of the IFRS is easily understandable in comparison to the SAS because IFRS reflect all essential details throughout the standards. At last, it can be said that the relevance and understandability of the financial reporting could be increased by the implementation of the IFRS in Saudi Arabia. It has been observed that adoption of the IFRS in the Saudi Arabia shall enhance the excellence of the financial reporting. In, fact individuals live in Saudi Arabia thinks that the IFRS adoption could enhance the financial reporting comparability between countries.
Numerous countries of the Arab have been grouped by World Bank as least income like Egypt and high income like Gulf countries comprising Saudi Arabia. In fact majority of the countries comprising Saudi Arabia has non-efficient markets of the stock. This might recommend that the systems of the accounting were designed to help the governments (Chand, 2005). Few countries of the Arab are recently initiating to rethink their system of the accounting to help in enhancing the stock market efficiency and increasing the confidence of the investors as many countries have implemented IFRSs. The lawful system of the developing countries might cause variations in the systems of the accounting; some countries out of these have been persuaded by the lawful system of the developed countries and might be distinct from countries that have not been persuaded. In another developing country like Arab country comprising Saudi Arabia country, the lawful system might be persuaded by the religion. The system of the accounting shall then be distinct from those countries in that religion has no any influence.
It is also examined that structure of the standards of the accounting accepted in the developing countries is persuaded by the MNCs because of economic authority showed by these MNCs, the power and authority which prevails from their structure, size and from international and diverse characteristic of their actions. The researcher revealed that the MNCs impact the formulation and structure of the standards of the accounting in the developing countries. It has been examined that MNCs because of their economic power might collaborate to cease governments from setting standards of the accounting which might be counter to the interests of the MNCs and might show their influence on global organizations like the World Bank and the IMF to create them and put emphasis on the developing nations not to form such type of standards. In summation, because of their financial power, MNCs are capable to use pressure groups for opposing the governments which wish to form inflexible regulations of the accounting. In, fact developing countries of the Islamic require the system of the accounting which fulfills their religious requirements and keep in mind the economic components of the Sharia law like preparation of accurate figures for the purpose of the Zakat, the exclusion of the interest and the implementation of the accounting as the path for achieving the Islamic Accountability.
Conclusion
At last, it can be concluded that the implementation of the single system of the accounting shall assist capital and sources to move easily throughout borders and minimize the accounting cost while making the financial statements. In regards to developing countries, the harmonization of the IFRS shall minimize the time and expense indulged in issuance of the new standards, enhance the stock market efficiency and prepare statements of finance more understandable. The representation of the IFRS is easily understandable in comparison to the SAS because IFRS reflect all essential details throughout the standards.
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