Numerous accounting standards can lead to confusion and argue complications for preparers and users of financial statements. Financial statements prepared under different countries' financial accounting rules are often not comparable. For example, If one company were to report under UK GAP and another were to report under French GAP, an investor would not be able to make apples-to-apples comparisons without making a number of adjusting accounting entries.
With so many different national accounting standards, It would not be unusual for the same company to show a profit if its financial were prepared under en nation's accounting standards, but to show a loss if using another country's GAP. The International Financial Reporting Standard was introduced in order to combat this problem. What will I discuss in the main body of the Essay? I will discuss the effectiveness of the FIRS in creating comparable Financial statements for Investors and other users of financial Information What Is your personal opinion?
I think is does/ does not because Agree: Disagree: A country can take FIRS as a starting point but then make various changes. China has done this. For 2007 onwards, the Financial statements of Chinese listed companies just use a set of standards based on 'FRR. Nonetheless, there are several clear differences. For example, unlike the rule under SIS 36, impairments must never be reversed As explained in section 4. 2, Ell-endorsed FIRS contains more flexibility on hedge accounting than does the Saab's SIS 39.
As another example noted earlier, the Venezuelan version of FIRS does not contain the dozens of amendments to FIRS of the last six years. So, there are deferent versions of FIRS In different countries, and therefore different practices can result. Different translations of FIRS It Is essential for FIRS to be translated into several languages. There are, for example, two official SAAB translations into French (one ELI and one Canadian). Often, meanings can be lost in translation.
On page 22, Nobles gives three examples of where there are clear errors in translation, which could lead to variations in accounting practices. Imperfect enforcement. As noted briefly In section 5. 2, monitoring and enforcement of FIRS remains a national matter. In some countries, there are powerful governmental Financiers in France. In other countries, there is a private-sector body, such as the Auk's Financial Reporting Review Panel (FRR), which can take companies to court for defective accounting.
In countries that have no effective regulator, audited financial statements that assert compliance with FIRS might not in fact comply Gaps in FIRS We now turn to four more opportunities for companies to adopt different FIRS practice. These are not intrinsically national like those above but they could lead to national biases in the choices made by companies. The first of these is gaps in FIRS. The most obvious gaps relate to accounting for insurance contracts and for mineral extraction (including oil and gas).
Although these topics are addressed by FIRS 4 and FIRS 6, respectively, those standards place few constraints on companies. The result is that, generally, pre-FIRS practice continues. So, Australian insurance companies continue with Australian practices, and Spanish companies with Spanish practices. Therefore, some factors (such as legal systems, financial systems, role of the accounting profession, tax alignment and extent of private versus public ownership of companies), which in the past led to differences between accounting systems, may still influence accounting in European countries.
Furthermore, the enforcement of financial reporting standards is considered to be an important factor in the promotion of comparable information (CESAR 2003). Without an effective worldwide enforcement mechanism, local political and economic factors will continue to exert a superintendence's on local financial reporting practice (Ball 2006). SIS 39 has caused the most controversy because it requires the adoption of fair value measurement for selected financial instruments. In practice, there are potential problems with the determination of fair value.
In some cases, if active liquid markets re not available, companies must estimate the fair value. This increases opportunities for manipulation and may introduce some 'noise' due to imperfect estimation of variables or imperfect or inadequate use of valuation models. Moreover, the fair value measurement approach adopted by SIS 39 differs from the accounting treatments used in Europe under previous local accounting standards The level of compliance with SIS 39 differs between the countries. From Table 3, panel A it is evident that I-J companies present the highest index (0. 87), followed by Italian companies (0. 871), Portuguese companies (0. 56), French companies (0. 839) and German companies (0. 680). These results suggest that German companies comply less with the measurement practices of SIS 39 than the other European-listed companies. ( Study conducted by A. L. Morass & A. Filial for the Australian Accounting review) LEGAL SYSTEM: The Accounting world can be divided into "those countries which have a 'legalistic' orientation toward accounting and those with a 'nonlinguistic' orientation" (Nobles et al. , 1997:8).
The non-legalistic approach can be found in countries, which use common law. In common law countries, Accounting does not upend upon law. Accountants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choc et al. , 2002). The task of the legal system is to give an answer to a specific case rather than to formulate general rules for the future (Choc et al. , 2002). The legalistic approach can be found in countries, which use the so called code (or codified) law. In for the Accounting and financial reporting (Nobles, 1994).
This means that "Accounting rules are incorporated into national law and tend to be highly prescriptive and reoccurred" (Choc et al. , 2002:43). In these countries the role of law is to describe behavior, which is considered to be acceptable in the society (Choc et al. , 2002). The I-J has common law, other EX. nations like Germany, France, Spain and Portugal have codified law The three main sources for external capital are shareholders, banks and government (Hill, 1999). It varies from country to country, which of these three provides most of the financial capital to companies.
In countries like Germany and Italy banks provide companies with capital. In countries like England and the United States shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden. (Hill, 1999) This diversity of capital providers means that Accounting Practices differ in order to satisfy needs of capital providers. In the case of shareholder ownership, (e. G. In the U. K. And the U. S. ), information disclosure will be more important than in countries, where capital is raised from banks or governments.
This is explained by the fact that in the latter countries information will be transmitted more directly. Redheaded and Gray, 1997) It is impossible for a company to inform each shareholder with its specific information needs, because they are a big and unordered group. Therefore financial statements in the US and I-J are "oriented toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds" (Hill, 1999:593). The Accounting Practices in countries with banks as main capital providers have an interest to protect banks investment.
This led to more conservative methods, which are characterized by overvaluation of liabilities and underestimation of assets (Hill, 1999). In countries where capital is provided by the government, Accounting Practices are oriented towards needs of governmental planners (Hill, 1999). Ball: A major feature of FIRS qua standards is the extent to which they are imbued with fair value accounting [a. K. A. 'mark to market' accounting]. Ball: Substantial international differences in financial reporting practice and financial reporting quality are inevitable, international standards or no international standards.