International Financial Systems Sample

Introduction:

The increasing scope of accounting systems in business organizations has led to industry-wide demands for introducing suitable frameworks to verify the comparability and reliability of corporate reports. The institution of International Accounting Standards (IAS) and International Financial Reporting Standards has provided ample assistance in developing the accounting information framework as well as provided opportunities for accounting personnel for realizing efficiency (Buehlmaier & Whited, 2016). However, the occurrence of large-scale disasters on the global economic front such as the financial crisis of 2008 has resulted in the demand for the credible financial report. Therefore a critical evaluation of prominent issues in international business reporting alongside an evaluation of the role of International Accounting Standards and International Financial Reporting Standards (IFRS) is necessary to determine the trends in financial reporting on an international scale.

The origins of IFRS can be perceived in the authority of IASB or the International Accounting Standards Board which is independent and operates in the private sector for the development and moderation of IFRS. The IASB was formed as a replacement for the IASC or International Accounting Standards Committee in 2001. The IASB was associated with the proliferation of International Accounting Standards which were circulated in the period from 1973 to 2000. The IASB is responsible for supervising the technological aspects of the IFRS foundation.

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Topic 1

Lease accounting:

The discussion paper provided by IASB and the Financial Accounting Standards Board by the name of ‘Leases: Preliminary Views’ indicated issues with financial reporting related to leases. The document was intended as a long-term initiative to bridge the gaps between US GAAP and IFRS. As per Blut et al, the Leases project is intended to formulate a single approach for lease accounting which can ensure that the statement of financial position such as the balance sheet would include references to liabilities and assets involved in the lease arrangements (Blut et al., 2015). Babalola & Abiola said that Lease accounting has been a considerably debated topic for quite a long time and major criticisms have been drawn by practitioners and users of the financial statement referring to the implications of off-balance sheet finance that can be a probable result of subjective nature of the leases project upon treatment by IAS 17. The discussion paper allowed insights into the fundamental approaches that could modify the perception of accountability of leases (Babalola & Abiola, 2013). The references to the right-of-use model are indicative of privileges for accounting all liabilities and assets and referring to them in the context of other leases. Therefore it can be concluded that the formulation of IFRS about lease accounting would be reflective of a single method that can account for resolving lease accounting issues.

Income tax:

Income tax issues were identified in the Exposure draft issued by IASB in 2009 related to Income Tax. The project was intended as a long-term convergence project with the potential to replace the IAS 12 related to income taxes. As per Cucchiella, D’Adamo & Gastaldi, the primary concern which was observed in the case of income tax accounting and reporting were based on the future consequences of tax which could be caused by the transactions and events of the past (Cucchiella, D’Adamo & Gastaldi, 2015). The major modifications which were required to resolve the specified issues of income tax reporting indicated retention of the traditional framework especially in terms of the temporary difference approach. According to Dewachter et al, the preferred changes include modification of methodology intended for the calculation of deferred tax, elimination of exceptions in recognition of income tax, the inclusion of guidance for tackling uncertainties, and changing definitions (Dewachter et al., 2015). The modifications have to consider deferred tax with references to liabilities and assets in jurisdictions where the company can acquire settlement or recovery of the carrying amount to estimate taxable profit (Dewachter et al., 2015).

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Other issues:

IFRS regulations have also extended further to financial instruments and the year 2018 would be witnessing the proliferation of a novel standard. The standard is intended to determine the basis of measurement of financial assets and receivables. The financial assets are subject to evaluation to find whether they should be evaluated at amortized cost or fair value as per the new standard. As per Ehiedu, the standard also implies the impairment of loans and indicates the recognition of receivables based on expected losses (Ehiedu, 2014). Potential criticism has been drawn against the standard for resolving the measurement insufficiencies such as dependence on business model factors, and the complexity of loans, investments, and equities. The implications of issues of complexity and disclosure overload have to be addressed through encouraging initiatives for companies to restrict the irrelevancies and conflicts in their financial statements. The standards implemented as per the IFRS are potentially indicative of the identification of primary users of financial statements, aggregation, and disaggregation of information, development of recognition and measurements as well as compliance with IFRS standards. According to Gozen, the formulation of standards related to materiality is subject to friction between the FASB and the IASB (Gozen, 2014). The responses of financial accounting frameworks of different organizations would also depend on consideration of IFRS standards under development which could be implemented for catering the issues such as insurance, disclosure initiatives, and rate regulation. As per Johnson et al, the outcomes of developing proficient financial reporting standards could be a major opportunity for addressing the methodology followed by public companies for the preparation and disclosure of financial statements (Johnson et al., 2015). Business organizations have the privilege of capitalizing on the guidance provided by IFRS to frame their financial statements and thereby comply with the requirements of international financial reporting rather than settling for industry-specific reporting requirements.

International Financial Reporting Standards:

Almost all organizations across the globe are imbibing the International Financial Reporting Standards (IFRS) which in general, are the accounting rules that determine the way transactions are required to be reported. As per Kallala et al, these rules also decide which all information should be presented in the statements associated with finance. Many issues have been resolved while many crops up by the entire standards set (Kallala et al., 2015).

Better accuracy is achieved in the comparison of the financial statements among companies that make use of the same financial reporting standards. This is crucial during the comparison of various companies that are located in various countries as these companies might happen to use varying methodologies and rules in their statements preparation. Efficient and increased comparability has assisted the investors to have a better determination of whether investments of dollars should be directed (Morano & Tajani, 2013).

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According to Nesticò & Pipolo, the United States of America along with other countries is yet to adopt the International Financial Reporting Standards. Operating business in America as these companies often requires preparing statements related to their finances in terms of IFRS and a different set using the American Generally Accepted Accounting Principles (Nesticò & Pipolo, 2015).

The IFRS makes use of philosophy that is more based on principles than rules. A philosophy based on principles denotes that each standard’s goal is to reach out at a reasonable valuation and that various ways are there to arrive there. This provides the organizations with the liberty to adaption of IFRS to the specific circumstances that lead to easier and more useful statements.

With all the advantages that IFRS provides, there are disadvantages to the flexibility and liberty that IFRS extends. As per Rudolf & Papastergiou, organizations can only make use of the methods that they opt for by allowing the statements associated with finances to project the desired results only. In this case, there is a possibility of profit or revenue manipulation that can be utilized to mask out the financial issues in the organization and also has the chance of encouraging fraud. For instance, altering the inventory valuation method can include increased income in the statements of profit and loss of the current year (Rudolf & Papastergiou, 2013). This results in making and presenting the organization appear more profitable than it is. Though IFRS needs those alterations in the application of the rule to be more justifiable, it is possible for organizations for inventing reasons to make changes. Stricter rules would ensure the valuation of the statements of the companies in the same way.

A small organization will get affected by the adoption of IFRS by a country in the same way that a larger company would be influenced. However, small-scale organizations do not obtain many resources to implement the alterations and train the staff. As per Sher et al, this gives rise to smaller companies that bring in accountants or consultants from outside to assist in having the changeover. Certainly, these small-scale companies will face more of a financial burden than the large scaled ones in the particular area (Sher et al., 2015).

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Topic Two:

Analysis of the statement of financial position

As it is known that this report is aiming towards the description of the concepts of the international financial statement as discussed in the above section. This part is supposed to analyze the statement of the financial position as per the concept of international financial standards and reporting (Stone, 2016). In that case, it is necessary to have a clear understanding of the role and value of the financial statements which will further provide the knowledge regarding the evaluation of the international dimension of financial reports.

Therefore, starting from the initial condition, finance is the part that deals with the provision of money as per the requirement. According to Słyś & Kordana, the organization must have a strong financial backup. And when the point comes to the financial statement, it is considered to be the part that is needed while making a decision. And further, its analysis is the basic vital process needed by every organization (Słyś & Kordana, 2014). It is because the analysis of the financial statement is the process that determines the strength and weaknesses of the organization from the financial point of view. Vogel said that it shows a clear understanding of the financial condition of the organization by establishing a strategic relationship showing the relations between the balance sheet items and the profit loss accounts. Therefore the major role of the financial statements of the organization is that it maintains all the financial records of the organization. It calculates the profit and loss of the organization which is further used to measure the strength and growth of the organization (Vogel, 2014).

On the other hand, this analysis of the financial statement helps the business owners with proper decision-making and the successful survival of the business. That is the reason the role of financial statements is to bring success to the organization (Stolowy & Lebas, 2006).

The financial statement analysis is done mostly by two methods, one is Trend analysis and another common-size analysis.

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In trend analysis, a particular asset or liability item is compared over time of evolution. It is done through a percentage change approach which is used as an index with a base value of 100. On the other hand, common-sized financial statements are analyzed by one entity or two or more entities. One entity analysis is done over a period which is generally three years. But two or more entities analysis is done by comparing entities over one year or multi-year period (Stolowy & Lebas, 2006).

At the same time, another purpose for the analysis of the financial statement is to carry out a comparative analysis in terms of finances. These comparative analyses are based on three types. As per the research of Nesticò & Pipolo, the first analysis that is done is the analysis of the financial condition of the organization known as to be the intra-company basis. The second one is the financial analysis in between the organizations competing within the market known as the intercompany basis. And the third one is the industry averages which state the analysis that is to be done against the industry averages in the market (Nesticò & Pipolo, 2015). The financial analysis, therefore, provides a clear overview of the finances of the organization just because it includes analysis and interpretation through which it brings out major significances for the organization.

On the whole, while going through a critical understanding of the financial analysis of the organization brings out various objectives behind the origin of the financial statement. Due to this reason, the financial statement is much valued in the organization as it shows the picture of capacity as well as the profitability of the organization within it. Along with that, the financial statement brings out the ease in assessing the operational efficiency and managerial effectiveness of the organization which works for the long-term growth of it (Morano & Tajani, 2013). The financial statement, therefore, plays a vital role in decision making which controls the financial position of the firm in the market. Apart from that, it acts towards forecasting the prospects of the organization by determining its dividend action and further assesses the progress of the organization in the market.

Till now it is quite clear that the financial statement analysis brings out the collective analysis of the past performance of the organization along with its present condition and future condition. Along with that, this analysis will bring out the proper assessment of the organization through which the earnings of the organization will get clear. And its power, quality, growth, and persistence of the organization will come into knowledge. Therefore the parameters through which this analysis is done must be checked which are also said as the international dimension of the financial reports. So the reports regarding the financial status of the firms are rated based on these parameters in the international market (Kallala et al., 2015). These parameters are the income statement, balance sheet, statement of retained earnings, and statement of changes in the financial position of the organization. Depending upon these dimensions parameters the organizations in the international market carry out the formation of the international dimensions. This further helped in evaluating different aspects of the organization is done. The formation of the international financial reporting standards majorly focused upon the strict principles comprising transparent, high-quality, and comparable information regarding the financial statements of the organization. It will further help in providing a clear report to the investors along with other bodies involved in the formation of economic decisions in the international market. The bodies who get benefitted from the analysis of the financial statement are the investors, creditors, management, bankers, analysts, and investment advisers. The basic dimensions that they use for the analysis of the financial statement making a report in the international financial reporting standard are the part business enterprise in the international market. Those dimensions are liquidity analysis, growth, and stability analysis, market strength analysis, profitability analysis, and capital structure analysis (Johnson et al., 2015). With the implementation of all these structural analyses, the organization can successfully be able to carry out the proper formation of the report as per the standards of international financial reporting standards. This will further help the organization in promoting and facilitating the proper corporate decisions in the international market. These dimensions will further help the organization in accounting for the losses and gains of the organization in the international market as per the international financial reporting standards (El Kasmioui & Ceulemans, 2013).

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Part-3:

Ratio analysis:

Ratio analysis is the analysis based on the quantitative approach to the information that is contained in the financial statements of organizations. As per Dewachter et al, the analysis of the ratio is based on the items associated with the financial statements such as the income statements, balance sheets, and statements related to the cash flow. Thus, the ratio of one or more items to another single item or combination of other items is then calculated (Dewachter et al., 2015). This analysis finds application in the determination of different aspects of the operations in a company along with the financial performance which includes its liquidity, solvency, profitability, and efficiency. The ratio trends are analyzed and observed over some time to check if they improve. The ratios of different companies are compared associated with a specific sector so that a clear idea is obtained regarding comparative valuations and how stacking up is done. It can be said that the analysis of ratios is the basis of fundamental analysis.

Ratio analysis includes two steps. In the first step, ratio calculation is to be done. The second step involves the ratio to be compared with the standards that are predetermined. The predetermined standards can include the average ratio of the same firm or industry past ratio. There are various types of ratio analysis methods, for example, Current ratio, quick ratio, cash ratio, Inventory turnover ratio, Debt ratio, Asset turnover ratio, etc. (Stolowy & Lebas, 2006).

According to Morano & Tajani, Ratio analysis is a very important tool for the decision-making process of the management of an organization. The management can evaluate the performance of the organization which includes profitability, operation efficiency, and financial health over some time with the help of ratio analysis (Morano & Tajani, 2013).

Financial Analysis:

The process of evaluation of projects, budgets, businesses, and other entities associated with finances to determine suitability and performance is denoted as financial analysis. Conventional analysis of finance finds application for the analysis if an entity is solvent, liquid, stable, or enough profitable to permit monetary investments. Considering a company, a financial analyst will have to conduct calculations and analysis by concentrating on the statement of income, statement of cash flow, and balance sheet (Johnson et al., 2015).

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This analysis helps in determining the trends in the economy, setting up policies related to finances, planning associated with long-term business activities, and identification of companies or projects worth investments. It is achieved through the process of financial synthesis of data and numbers. As per Gozen, among the conventional ways for analysis of financial data is the calculation of the ratios obtained from the data to compare against the data of that particular company’s past performances or any other companies (Gozen, 2014). The prime objective of financial analysis is the provision of required information that is useful for the individuals working in an organization i.e. management, owners, employees as well as individuals outside the company such as creditors, government, investors, consumers, etc. Financial analysis includes the determination of the ability of the company to mobilize the funds that are required along with the utility of those funds in an operating business (Stolowy & Lebas, 2006). The objective of financial analysis is the determination of the feasibility of conducting business rationally.

Conclusion:

The IASB is endowed with the task of directing the technical agenda of the IFRS foundation through deriving consultation approaches with the public and trustees. The IASB prepares the IFRSs by the predefined process in the IASB constitution followed by their approval in unison with the interpretations specifically provided by the IFRC Interpretations Committee for evaluating the credibility of the standards. Thereby the IASB has the authority to issue the International Financial Reporting Standards. However, the recent issues which have emerged in the context of the financial report have led to the requirement of immediate concerns for evaluating each issue in the context of the IAS and IFRS implication. The prominent issues which could be observed in the domain of financial reporting can be derived from documents issued by IASB. The issues include references to leasing, management commentary, and income tax.

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