Acct1077 : Financial Accounting Theory Assessment Answers

Financial Accounting Theory is designed to enable you to apply financial accounting theories to a contemporary workplace situation. It includes a Work Integrated Learning (WIL) experience in which your knowledge and skills are applied and assessed in a simulated workplace context and where feedback from industry and/or community is integral to your experience.

Introduction:

The evolution of IFRS (International Financial Reporting Standards) developed by the IASB (International Accounting Standard Board) has caused significant changes in financial reporting requirements. The development of international accounting standards has caused the changes in the term financial reporting to become general purpose financial reporting as its primary purpose is to provide information to the stakeholders for making decisions. International accounting standards helps reporting entities to produce financial report that can be useful in making the economic decisions and allows investors to allocate the capital after analyzing the entity performance in right manner (Ismail, 2017). The International Accounting Standard Board (IASB) has issued conceptual framework of accounting that has mandated all countries around the world to apply IFRS in form of their national accounting standards. Following this all countries in South Asia have make use of IFRS to replace their original GAAP (Generally Accepted Accounting Principles) (Kuzina, 2013).

The financial reporting requirement was initially governed by Country own GAAP and after the implementation of IFRS by the IASB, the local GAAP has been replaced by current IFRS. Some of South Asian countries have fully adopted the IFRS while some of them have adopted convergence approach to implement the IFRS. IFRS has started gaining its importance as generally accepted financial reporting accounting standards because of worldwide economic standardization (Felski, 2015). The purpose of this report is to judge the impact of IFRS on the South Asian Countries particularly in context to factors that influence the choice of accounting policies. Accounting policies are chosen on the basis method applied for the recognition of the various elements of financial statements. After the implementation of the IFRS in South Asian Countries has drastic impact on the choice of accounting policies as there is no specific rules on how to choose the accounting policies. This report will provide detailed discussion in form of critical review regarding the implementation of IFRS has impacted the choice of accounting policies in South Asian countries

Research Methodology

Research aim

The main aim of this research report is to discuss the various factors that have impacted the choice of accounting policies in South Asian Countries after the implementation of IFRS.

Research Method Applied

In this research study the purpose is evaluate the previous literature on the selected research topic, so it has been decided to perform the critical review of the relevant literature that will help to satisfy the research aim. The main sources of literatures are journal articles, books, information on renowned websites of international accounting body and published report (Greuning, Scott and Terblanche, 2011).

Financial Reporting and accounting policy

Day (2008) stated that the major objective of the financial reporting as stated by the conceptual framework of accounting is to provide relevant and true financial information to the present and potential investors, lenders and creditors for facilitating them in their decision-making process. The business corporations disclose useful information to their external stakeholders by developing general purpose financial statements such as income and balance sheet. This is referred to as valuation role of financial reporting. In addition to this, there is also a stewardship role of financial reporting as stated by the agency theory of accounting. The theory has stated that there exists an agent-principal relation between the business managers to its owners and other stakeholders (Bouckova, 2015).As such, financial reporting can be regarded as a medium by which managers depicts their accountability to the business owners and stakeholders by disclosing relevant facts and information related to the business performance (Day, 2008).

The fact can be supported by the stakeholder theory of accounting. The theory has stated that business managers need to act in the interest of stakeholders and adopts the policies and methods leading to creating of maximum value for them. The presence of regulation on financial reporting is essential to protect the investors from fraudulent practices that can lead to presenting manipulated financial information to them (Unegbu, 2014). Thus, the adoption of a uniform set of accounting rules and policies is necessary for homogenization of accounting standards and thus removing any discrepancies in the financial reporting process. The conceptual framework of accounting has been established by the IASB for developing a consistent set of accounting principles so that end-users can easily compare the financial information of entities across the world. (Zehri, 2013).

 Shima and Yang (2012 stated that the IASB has developed IFRS standards to be adopted by the business entities worldwide for improving the quality of financial information. In this context, the emerging economies such as South Asian countries are also emphasizing to adopt either wholly or partly the IFRS. This will help in promoting integrity and transparency in the business operations of these countries and thus protecting the interests of the stakeholders. The compliance with IFRS will help the business entities operating within these countries to improve the quality of financial information by presenting it as per the conceptual framework of accounting principles and guidelines (Borhade, 2018). The conceptual accounting framework has stated the fundamental and enhancing qualitative characteristics such as relevance, faithful presentation, understandability, comparability, verifiability and timeliness to be present in the financial reporting so that it meets the interest of end-users (Kashyap, 2016). As such, the implementation of IFRS by the developing countries will facilitate IASB in meeting its goal for developing a globally-set of accounting standards to improve the comparability among the business performances at a global level. This will in turn lead to improving the market efficiency as investors can easily compare the financial performance of business entities worldwide and can take better investment decisions. This in turn will lead to improving the flow of capital in the international markets and promote corporate growths and development (Schultz and Lopez, 2001). South Asian countries such as India, Pakistan and Bangladesh IFRS adoption is influenced by the number of factors that impacts their accounting policy changes (Limijaya, 2017). In this context, the significant factors that are impacting the adoption of accounting policies in South Asian countries complying with IFRS are discussed in the followings section.

Factors that impact the choice of accounting policies in South Asian Countries

There are many factors that govern the choice of accounting policies in South Asian Countries. The countries in South Asia are unique due to their different background, level of development, financial reporting requirements, government regulations and agency relationships that have a significant impact on their accounting policy choices (Weygandt, Kieso and Kimmel, 2010). The major authority responsible for development of accounting standards within South Asian country is the Institute of Chartered Accountants. The institute in support of regulatory bodies based on IFRS is responsible for governing the financial reporting process within South Asian countries (Limijaya, 2017). Some of important factors that lead in difference in choice in selection of accounting policies are discussed below:

Size of Firm

There has been great influence of the size of firms operating within South Asian countries in context of selection of accounting policies (Yao, 2009). In South Asian countries there are both medium size companies to large and multinational companies. The choice of accounting policies is dependent upon the size of entity and accounting method applied by them. The large firms tend to adopt the use of accounting policies that tends to depict their higher income as they are in the scrutiny of general public. On the other hand, smaller firms are less politically visible and are less risky (Limijaya, 2017). This causes the mangers to adopt the accounting policies that increase the income as it does not seek public attention largely. The fact can be argued on te basis of positive accounting theory as per which business mangers select the accounting policies on the basis of prediction of real world events. Therefore, the impact of accounting policy on the income realization of the companies is predicted before selection of an accounting choice as per the theory (Kabir, 2017). Thus, it can be said that the extent of economic growth and development in South Asian countries can be possible reason for the difference in selection of accounting policies. Due to non-presence of uniformity in the selection of accounting policies under IFRS, the developing countries are selecting the accounting policies that best suit to their economic condition (Hla, 2015).

Profitability

The selection of accounting method is also largely impacted by the incentive compensation plan present within a business entity in South Asian countries. The firms in which managers remuneration is linked with accounting earnings tend to select the accounting methods that reporting higher earnings for deriving higher incentives (Bouckova, 2015). This can be stated on the basis of agency theory which has stated that principal that are, business owners and the agents, that are, shareholders tend to reduce agency costs by aligning their goals (Lin, 2017). As such, business owners tend to adopt the use of incentive plans to reduce the agency costs and attaining a consensus between their goals with that of managers of improved business profitability. South Asian companies do not provide any information about their bonus plans in the annual reports prepared and disclosed to the general users. As such, it can be said that the member countries of South Asia are using the accounting policies that helps them to link the accounting policy choices with the bonus provided to the managers (Epstein and Jermakowicz, 2008).

Nature of ownership of business and finance system

There are mainly three types of financing system that impacts choice of accounting policies. These financial systems are capital market based system where prices are impacted by the market condition, credit based system where resources are applied by the government and credit based system where banks and financial institution governs the policies (Uddin and Tsamenyi 2010), The companies choose only that finance system that considerably helps them in choice of accounting policies. An entity that depends on external sources of finance has to choose credit based financial market as they need funds to finance the business. So it becomes necessary for the companies to select the accounting policies that govern their accounting profit and help to report the maximum profit (Hla, 2015).

Cultural Factors

The adoption of accounting policies among South Asia countries is also influenced by the cultural factors. There is a huge cultural difference between the developed nations and developing countries of South Asia that influences the accounting system within these countries. There is cultural difference based on the size or underdeveloped status among the South Asian countries and in the developed nations (Shima and Yang, 2012). These countries often tend to adopt the use of an accounting system that is based on another country in the context of influence of cultural factors. These cross-cultural-differences have a huge impact on the skills and capabilities of the accounting professionals and thus leading to differences in the judgments adopted during application of accounting standards (Tanaka, 2014). This is also proving to causemajor differences among the financial reporting system adopted by the South Asian countries and that followed by the developed nations (Limijaya, 2017).

Financial Leverage

The selection of accounting policies among the South Asian countries is also largely dependent on the level of debt possessed by the business entities within these countries It has been demonstrated that leveraged firms have higher incentives to adopt the use of accounting methods that leads to reporting higher income. This is mainly done to avoid the debt constraints that can restrict a manager to take develop future growth opportunities (Kashyap, 2016).

Research Findings

The overall analysis carried out in the research has identified and examined the factors that are responsible for causing problems towards the adoption of IFRS among the South Asian countries. The factors such as size of a firm, financial leverage, profitability, nature of ownership and others discussed in the above section are responsible for creating issues among the South Asian countries to comply with IFRS. IASB is emphasizing on the development of a globally universally accepted accounting system by the adoption of IFRS worldwide to promote comparability among the business performance worldwide. However, the identified factors discussed in the research are causing major restrictions towards the development of a holistic approach towards financial reporting on a global level. Therefore, it is required that IASB need to be examining the issues and provides adequate support and guidance to such countries for promoting the implementation of IFRS.

Conclusion:

Adoption of IFRS has great impact on South Asian countries as they have to make a lot of changes in the locally accepted accounting principles and to develop their own set of accounting standards. The accounting standards developed by the South Asian countries have given choice of accounting policies as there is no uniformity in accounting policies in IFRS. So there are many factors that govern the choice of accounting policies by the companies in South Asian countries.

Recommendations:

It has been recommended to the researchers to make further investigation on this topic so that possible causes of difference in accounting policies can be studied in detail and measures can be taken to avoid issues faced while adopting the accounting policies. The accounting experts need to make a detailed analysis into the challenges that South Asian countries are facing with the implementation of IFRS. This will help in developing effective solutions by the international accounting bodies to successfully implement IFRS and promote homogenization of accounting standards.

References:

Ali, M. and Ahmed, K. 2015. Determinants of accounting policy choices under international accounting standards. Accounting Research Journal 30 (4), pp. 430-446.

Borhade, S. 2018. Convergence of IFRS in Global Accounting System: Where do SAARC Countries stand for? Journal of Accounting, Finance and Auditing Studies 4 (3), pp. 45-66.

Bouckova, M. 2015. Management Accounting and Agency Theory. Procedia Economics and Finance 25, pp. 5-13.

Day, R. 2008. Factors causing difference in the financial reporting practices. Asian Academy of Management Journal 13 (2), pp. 111-129.

Epstein,B.J. and Jermakowicz, E.K. 2008. Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008. John Wiley & Sons.

Felski, E. 2015. Do common features exist among countries that locally adopt IFRS? International Journal of Accounting and Financial Reporting 5(2), pp. 144-174.

Greuning, H.V., Scott, D. and Terblanche, S. 2011. International Financial Reporting Standards: A Practical Guide World Bank Training Series. World Bank Publications.

Hla, D. 2015. Globalisation of financial reporting standard of listed companies in ASEAN two: malaysia and singapore. International Journal of Business and Society 16 (1), pp.95 – 106.

Ismail, R. 2017. An Overview of International Financial Reporting Standards (IFRS). International Journal of Engineering Science Invention 6(5), pp. 15-24.

Kabir, M. 2017. Positive Accounting Theory and Science. Journal of Centrum 8(13), pp. 137-145.

Kashyap, A.K. 2016. Financial Market Regulations and Legal Challenges in South Asia. IGI Global.

Kuzina, R. 2013. Conceptual framework for financial reporting: current state, development and application outlook. Socio-economic Research Bulletin 3 (50), p. 85-89.

Limijaya, A. 2017. IFRS Application in Southeast Asian Countries: Where Does Indonesia Stand? Finance and Social Sciences, pp. 1-15.

Lin, Z. 2017. The Routledge Handbook of Accounting in Asia. Routledge.

Tanaka, G. 2014. The Influence of the Cultural, Legal, Economic and Financial, Historical and Political Factors on the Accounting System. Journal Studies 7, pp. 25-45.

Uddin, S. and Tsamenyi, M. 2010. Research in Accounting in Emerging Economies. Emerald Group Publishing.

Unegbu, A. 2014. Theories of Accounting: Evolution & Developments, Income Determination and Diversities in Use. Research Journal of Finance and Accounting 5(19), pp. 1-15.

Weygandt, J., Kieso, D.E. and Kimmel, P.D. 2010. Financial Accounting: IFRS. John Wiley & Sons.

Yao, W. 2009. Implementing International Financial Reporting Standards in Asia. Asia Focus.

Zehri, C. 2013. Does adoption of international accounting standards promote economic growth in developing countries? International Open Journal of Economics 1(1), pp. 1-13.