ACCT 301 Accounting Standards.pdf

Running Head: Accounting Standards 1

Accounting Standards

ACCT 301

Liberty University

Kalie Waldeck

Though all countries practice some form of accounting standards, not all accounting

standards are practiced the same. In fact, accounting standards can vastly vary amongst different

countries. This research paper will define the varying international and national accounting

standards and identify the similarities and differences in each accounting standard and why each

country has adopted its own applicable accounting standards. This research paper will also

businesses that want to be listed must use the U.S. Generally Accepted Accounting Principles,

otherwise known as GAAP, or file a Form 20-F that reconciled their net income and equity

(Manzana et.al. 2007). Financial statements are crucial for a company’s financial health, and but

are also required so that investors can make informed choices on whether or not the company is

worth investing their money into. Without financial statements, current and future investors are

not able to safely invest in a company. Accounting standards have been set in place in order to

discourage fraud amongst corporations and to ensure that proper financial statements are released

using the proper channels. A country-specific law code is going to determine if a country has its

own accounting standards set into place. International accounting standards that are followed by

all countries worldwide can be beneficial for companies that do business in multiple countries.

accounting records. The International Accounting Standards Committee and the International

Accounting Standards Board aims to create a universal financial reporting standard that can be

easily accessible for all nations (Barth, Landsman, and Lang, 2008).

which in turn reduces their time and expenses. Informed decision making is important for

everyone but can be especially crucial for investors that are considering which companies would

be the best investment. If businesses all used the same standard of accounting practices, it would

same methods. Some accounting standards might make it appear that one company has better

financial history versus another company when it all boils down to the type of accounting

method that is used. There are many potential benefits to using international accounting

standards for both corporations and investors. According to a book, titled Introduction of

International Accounting Standards, Disclosure Quality and Accuracy of Analysts’ Earnings

Forecasts, the accounting method requires a considerable amount of information and data versus

other accounting methods, thus it “provides a more quality disclosure and accurate reports”

(Glaum, Baetge, Grothe, & Oberdörster, 2013). The data that is provided through this method

can be used as a forecasting tool for investors and businesses to more accurately make necessary

decisions. Using international accounting standards can also create lower capital costs, increased

With business comes risk, and different accounting measures across different countries

can increase that risk. Differing accounting methods can often produce different results. Politics,

current economic state, the legal system, and the countries culture all play a part when creating

laws that back accounting measures. According to an article in the Journal of Economics,

Finance and Administrative Services, titled Adoption Determinants of the International

new rules and regulations, accounting standards are near impossible to fully implement.

Adopting these international accounting standards is often complicated and expensive, and if a

large number of companies are not capable of changing, it can affect a nation’s economic impact.

If companies are not able to produce at a level that is reported in these standards, the country

could potentially face lessor market liquidity and changes must be made to stabilize the market.

If a company were to potentially use an accounting standard from the country their headquarters

resides in as well as international accounting standards, it might be the answer many companies

the standard method and the international method together in order to provide the most accurate

information. (Ebaid, 2016). Combining these two methods would encourage companies to

identify discrepancies within their accounting department and also allow the company to have a

better view of how their accounting practices compare to the country standards.

most countries have developed these rules to govern their accounting practices, it does not

automatically qualify each company to be listed with the Securities Exchange Commission. For a

company to become listed with the SEC, they need to follow the rules outlined by the U.S.

that these global accounting standards have become, and the more that our world economy

continues to grow, the more pressure companies begin to feel to comply. There is consistent

pressure for advanced accounting standards around the globe, which will only continue to benefit

all economies (Angeloni, 2016). The SEC requires companies to follow U.S. GAAP guidelines,

but many argue that it puts countries outside of the U.S. at a disadvantage. “The NYSE argues

that SEC reporting requirements for non-US firms leave them at a competitive disadvantage in

terms of the number of foreign listings relative to foreign stock exchanges. However, the SEC

contends that it must protect US investors from inadequate disclosures by foreign firms”

(Manzano, Conesa, and Hernandez, 2007). The main goal of the SEC is to discourage fraud

amongst corporations and to protect investors, not to encourage companies to use accounting

to hide information. Financial statements under the U.S. GAAP are similar to the International

accounting standards as both are prepped using the accrual method of accounting. Another

similarity is the requirements of financial statements that include balance sheets, income

statements, statement of cash flows, statements of stockholder’s equity and noted to the financial

statements. These rules are in place to make sure that companies are reporting all pertinent

The International Financial Reporting Standards also referred to as the IFRS, is in charge

of the governing of the International Accounting Standards Board, otherwise known as IASB.

the quality of accounting worldwide which has been great for all businesses. (Ebaid, 2016). This

type of accounting standards has put a real emphasis on quality and comprehensive financial

reporting that has encouraged all companies to want to keep up with the rest. “The proponents

argue that the use of IFRS enhances the cross-border comparability of financial statements,

improves corporate transparency, enables stakeholders to understand the financial results of

entities globally, increases financial reporting quality and, hence, facilitates the efficient access to

capital worldwide given that IFRS is more capital market-oriented and more comprehensive,

especially with respect to disclosures, than most local GAAP” (Ebaid, 2016). Publicly traded

companies need to be held to a high standard and need to be held accountable in order to bridge

the gap between executives of companies and potential investors. Accounting standards set into

investors to decipher company financials without having to worry that each company has their

records set up differently. Companies that prefer to use the international standards of accounting

tend to also attract investors even if they are not reported on the SEC website. The international

reporting standards definitely improve transparency and strengthen accountability, but companies

are not always reporting quality statements.

different country's accounting standards compared to the GAAP standards. It has been concluded

in multiple studies that the GAAP standards are considerably more stringent and specific then in

other countries, for good reason. For example, in the United Kingdom the accounting standards

standards in Sweden are also more relaxed compared to GAAP, however countries like Australia

tend to have more strict financial reporting when it comes to reporting profits. Mexico,

Argentina, and Chile are considerably more relaxed than GAAP and a study comparing the two

has found that these differences in accounting practices have caused an absurd amount of

variations in net income for companies that do business in both U.S. and South American

countries. “The results show that on average, net income measured under Mexican GAAP is

about 26 percent greater than the US GAAP measure, and Mexican GAAP equity is on average

74 percent greater than US GAAP equity. The largest number of adjustments is for deferred

taxes, compensation, and intangible assets” (Manazano, Conesa, and Hernandez, 2007). This

study has found that these countries would highly benefit from using their local GAAP in their

versus their local accounting standards, they would by reporting more accurately but would not

look as favorable to investors. Though these countries tend to look more profitable, they should

consider U.S. GAAP alignment so that they can attract better foreign investors.

there are many similarities to the international accounting standards, the ASBE measure revenue

differently. According to the book, Business and Politics: Enforcement of China’s Accounting

Standards “The valuation of revenues according to the amount stipulated in the sales contract is a

consideration receivable according to IAS 18.9” (Opper, 2003). This creates several loopholes in

their system that can make it hard for fair financial reporting. Many companies have been found

manipulating their data because of these loopholes, which makes it difficult for investors to truly

make an informed financial choice. China has begun to integrate some of the international

accounting standards into their own practices but has yet to fully fix their accounting standard

issues.

It is extremely important that organizations maintain proper and ethical accounting

standards. Though many countries have adopted their own set of accounting rules, they tend to

fall short in comparison to the U.S. GAAP standards that are in place. It is highly important that

companies fall in line with GAAP so that they can be listed by the SEC, which will help them

secure investors. For an investor to decide to take a chance on a company, it is important that

they understand and can decipher the financial statements that are released. If all companies are

on the same page and releasing the same information, more investors can come forward which

helps the economy and long-term growth for both businesses and investors. It is understandable

that other countries would want their own accounting standards, but it is in everyone’s best

interest to keep the records seamless and easy to read and secure proper financing.

References