Accounting management on: Accounting standards
Introduction
This essay gives the brief overview about the politicization of accounting standards; politicization has prevailed because the financial report of the business entity effect on several economic interests in community. This essay also gives the arguments for and against the individual country adopting standards of the IASB as the foundation for its domestic accounting rules. At last, this essay indicates why each and every qualitative feature explained in conceptual framework of the IASB is significant and example for showing the conflict between the qualitative characteristics of relevance and reliability.
The Politicization of accounting standards
It has been observed that setting of the accounting standard performs the significant function in informing users about how, where and when the information of the company is revealed. It is very clear that there are several users of the financial information and it is obvious to have conflicting and diverse interests of the users and therefore hardly survives the accounting standard that is suitable to all users (Wagenhofer, 2004). That is the main reason that’s why modern researcher such as Deegan reveals that the setting of the accounting standard considered as the political process which shows that setting of the standard is not simple as it views and there is complication related in its root. There are few corporate powers that dominate the accounting process. Setters of the accounting standard have been criticized for offering undue influence to the individual. Currently, there was criticism of enhancing political interference in process of setting of accounting standard. For example Managers might use personal contacts to political decision maker for gaining the leverage over the setter of the standard. In general, accountability of the country government is to adjudicate among competing interests in selection of the standards of the accounting. For example: Government is good at imposing and collecting of taxes at the initiation of the human history. It has been examined that the economic impact of the accounting is indirect because politicization results in distorting and concealing the information. People are free for reinterpreting the numbers of the accounting while people cannot reinterpret the drug law and excise tax. Organizations have sufficient incentives for offering credible information and knowledge about their management to stakeholders. If the manager of the organization does not offer the needed information to the stakeholders then stakeholders shall perform in the path to create the company out of market and which the company cannot afford. It is very clear that in absence of minimum and regulation standards of the financial reporting, organizations might fail to reveal the sufficient information or would possible indulge in creative practices of the accounting. For example If plans of the compensation tie the salary of the manager to the rate of the return on assets and accounting income then managers would have policies of accounting and have a chance for the alteration in accounting standards to enhance or safeguard the payment of the compensation (Walker, 2007). The similar case is right with industries also and if the industry experiences that the specific standard of the accounting shall bring the negative development for business then the industry shall be lobbying against the standard. At last, it can be said that the economic effects of the accounting are indirect because politicization always results in distorting or concealing information. It has been examined that individuals are free to interpret the numbers of the accounting but they cannot interpret the drug law or excise tax.
Arguments for and against the individual country adopting IASB standards as the foundation for its local accounting rules
The real advantages of the mandatory acceptance of the new standards throughout the countries considered as the topic of debate between practitioners and academics. There are various arguments which show that IFRS brings considerable enhancement in the quality of the accounting, whereas there are arguments to contrary (Leuz, Pfaff & Hopwood, 2004). Arguments recommending that the essential acceptance of the IFRS reporting generates to considerable advantages in respect to accounting quality like reporting under IFRS increases the transparency and enhances the financial reporting comparability. Those who are in the favor of using IFRS claimed that shared group of standards could make it simpler to evaluate the performance of the companies throughout distinct countries (IAS Plus guide, 2008). This could increase the efficiency of the competition for the global funds and create global capital market more effective and generating to the lower capital cost for the firms. To evaluate the consequence of the IFRS adoption, we require 2 distinct financial statements for similar accounting year, one is based upon current local GAAP and other is based upon the IFRS. In 1st year of the adoption of the IFRS in the Australia and U.K, the financial statement reported upon the basis of local GAAP for last year is restated as per the IFRS for the purpose of the comparison. It can be said that 2004 was the year in that both financial statements in relation with IFRS and local GAAP were available. Therefore, the consequence of the adoption of the IFRS on financial statements might be analyzed by evaluating two financial statements for the year 2004. It can be possible that experience of the Australian or U.K firms from the adoption of IFRS might be repeated. In matter of the flexibility permitted in the choices of accounting method throughout IFRS, there may be variations in organizations accounting decisions because of the differences in the sociological and environment culture throughout the nations (Holmes, 2010). It has been analyzed that the discretionary accrual considerably reduced in U.K, but it did not alter in Australia under the reporting of IFRS. It can be said that the changes in discretionary accruals throughout the adoption of IFRS revealed the wide changes throughout the industries in the Australia and U.K. Therefore, it might be stated that the consequence of the adoption of the IFRS on the degree of the earning management changes throughout nations, sizes of the firm and industries.
Qualitative Characteristics
In general qualitative characteristics considered as the attribute which create the information offered in the financial report helpful to users. The 4 principal qualitative features are Understandability, reliability, relevance and comparability.
Understandability
The essential information quality offered in the financial report is that which is easily understandable by the users. For this motive, user is assumed to have relevant knowledge of economic and business actions and accounting and the willingness to examine the information with proper and reasonable diligence. The information about the difficult matters which must be comprised in financial report, due to its significance to decision making requirements of users and must not be excluded on grounds which might be complex for users to recognize and understand.
Relevance
To be helpful, information should be relevant to decision making requirement of users. Information has quality of the relevance when information persuades the economic actions of the users by assisting them and evaluating present, past and future events or correcting their previous evaluations. The confirmatory and predictive functions of the information are connected to each other. For example: information concerning the recent structure and level of the asset holdings has excellence to the users when they attempt to estimate the capability of entity to take the benefit of the chances and its capability to respond to adverse conditions. Any information about the past performance and financial position is implemented as the foundation for estimating upcoming financial performance and position and other issues in that user is interested like wage and dividend payments, movements of security price and the capability of entity for meeting its commitments as they become due. For example: predictive value of profit and loss account is increased if infrequent and unusual components of expense or income are disclosed separately.
Reliability
To be helpful and useful, information should be reliable. Information has the excellence of the reliability when information is free from any kind of material bias and error and may be relied on by users. Information might be applicable but so non reliable in nature and representation that its understanding might be misleading (Bush, 2005). For example: if the amount and validity of the claim for the damages under the lawful activity are disputed, it might be inadequate for entity to understand the entire sum of the claim in balance sheet and though it might be sufficient for disclosing the circumstances and amount of claim. For reliable, information should show faithfully the events and transactions. For example: the balance sheet show faithfully the events and must other events which result in liabilities, equity and assets of business entities at the date of reporting that fulfill the criteria of recognition. For example most of the entities create goodwill internally throughout the time but it is complex to measure or identify that amount of the goodwill reliably. It might be complex to understand items and to reveal the uncertainty of the error around their measurement and recognition.
Comparability
In general users should be capable for comparing the financial report of the business entity over the period of time for identifying the trends and changes in its financial performance and position. Users should be capable for comparing the financial report of the distinct business entities and evaluating their financial cash flows, performance and position. The display and measurement of financial consequence of events and transactions should be taken out in the reliable way within the entity (Bromwich, 2004). The significant consequence of the qualitative feature of the comparability is users must be informed about the policies of the accounting in the making of financial report and any alterations in effects and policies of such alterations. Users are required to identify the differences among the policies of accounting for events and transactions among the policies of accounting for transactions and events implemented by similar entity from year to year and by distinct entities. The requirement for comparability must not be puzzled with uniformity and must not be permitted to become as the impediment for the initiation of enhanced accounting standards. It is not significant for the entity for continuing the accounting in similar manner for the event or transaction if policy accepted is not in maintaining with qualitative features of the reliability and relevance. The purpose is to accomplish the sufficient balance between the features for meeting the purpose of the financial report. The relative significance of features in distinct cases considered as the issue of the professional judgment.
According to me, reliability and comparability features are considered as most important because information has the excellence of the reliability because it is free from any type of material error or bias and might be relied by the users. The balance sheet represents faithfully the transactions and events that result in assets, liabilities and equity of the business entity at the date of reporting which meet the criteria of recognition. The significant consequence of the qualitative feature of the comparability is users must be informed about the policies of the accounting in the making of financial report and any alterations in effects and policies of such alterations.
Example for showing the conflict between the qualitative characteristics of relevance and reliability
It is very clear that two main qualitative features of the accounting information are reliability and relevance. In general, these qualities may conflict and demanding a trade off among several degrees of reliability and relevance (Barth, 2006). The estimation of the financial variable might possess a greater degree of the relevance to the creditors and investors. The estimation necessarily comprises subjectivity in the prediction of upcoming events. Hence, due to low range of the reliability, GAAP do not need companies to offer estimations of the financial variables. It has been observed that relevance and reliability often interrupted each other. Reliability might suffer when the method of the accounting is altered to benefit relevance and the vice-versa. Sometimes, it is not clear whether there is gain or loss because of reliability or relevance. The initiation of the recent cost accounting shall examine the point. Proponent of the recent cost accounting thinks that the recent cost revenue from the continuing operation is referred as more applicable measure of the operating performance as compared to the operating profit calculated upon the foundation of the historical cost. They also think that, if holding losses and gains which might have prevailed in past period are distinctly displayed and recent cost revenue from the continuing operations depicts excellent operating performance. The uncertainty around the calculation of the recent cost is considerable and changes between estimates of its magnitude might be expected. Because of changes, representational faithfulness or verifiability, elements of the reliability might reduce. Whether, net gain to information users obviously relies on relative proportion attached to the reliability and relevance.
Conclusion
At last it can be stated that the politicization has prevailed because the financial report of the business entity effect on several economic interests in community. According to me, reliability and comparability features are considered as most important because information has the excellence of the reliability because it is free from any type of material error or bias and might be relied by the users It is very clear that two main qualitative features of the accounting information are reliability and relevance. In general, these qualities may conflict and demanding a trade off among several degrees of reliability and relevance.
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