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ACC204 Advanced Financial Accounting Assignment Sample
This ACC204 advanced financial accounting assignment sample discuss the financial standard reporting according IFRC standards and more finance and accounting concepts.
IFRS standards are the international financial reporting standards that are now being suggested to every company all across the globe. According to the studies that have already been carried out, such global convergence of IFRS can lead to better comparability of accounting standard in addition to reduce costs for investors. While enhancing the quality of the financial reports, the global acceptance of IFRS is also expected to make capital markets more liquid. The comparison of the financial statements of Verizon Communications, based in the US and Broad investments Limited, based in Australia is carried out. The study demonstrates the higher clarity and understanding provided by the financial statements of Broad Investments Limited that has already adopted changes in its accounting standards. The rigid nature of US accounting standards is shown to make the statements slightly complex and non-understandable. Hence, it has been recommended that the global convergence of IFRS across countries is a smart move and must be adopted as soon as possible.
IFRS (Internal Financial Reporting Standards) are the standards that are now being globally used for the preparation and reporting of the financial statements of the companies. Prior to the year 2003, every country used to follow different set of guidelines and rules for the financial statement reporting (Ball, 2012). Companies used to earlier follow the U.S. GAAP guidelines for ensuring international quality of their financial statements. But with the convergence of IFRS globally, companies all over the world can make use of the same standards for better and clearer financial reporting. The assignment is divided into three main parts. Part A presents an overview of the benefits and disadvantages of IFRS global convergence while taking the views of different academicians. The next part, part B takes the example of two companies, one from the United States and one from Australia to highlight the differences made by different reporting standards, which is followed by part C that takes part B into account to vote for or against the global convergence of IFRS.
Bushee & Leuz(2005) take the example of the United States and demonstrate the existence of highly diversified firms, the financial statements of which differ from the statements of large multinationals. Hence, it is shown that the adoption and global convergence of the IFRS help companies in adopting similar guidelines so that the financial statements can be easily compared and there exists a similarity in the statements of different firms, whether operating in the same economy or different economies (Hail, et. al 2009).
Joss & Leung (2013) demonstrates the benefits of the convergence from an investor’s point of view, highlighting its ability to provide investors with timely information. The information that the investors receive can then be used for gaining a better understanding of the financial situation of a company or institution. Studying and comparing the financial statements of different companies that have been prepared according to different set of accounting standards is a complex and complicated task and hence the global convergence helps investors all around the globe to make investment decisions accordingly (Ball, 2006).
While some experts believe that the adoption of the global accounting standards makes it easier for the investors to study the financial statements and make investment decisions, there are experts who are of the opinion that the adoption of the same standards would not allow investors to look at other factors while investing (Ikpefan & Ailemen, 2012). It is highly likely that the investors will only take the financial statements into account while making decision, which can again conflict with their interest and benefits. But Carmona, et. al (2008) bring the attention towards the other side and argue that the convergence exposes investors to an understanding of similarities and differences in financial statements in different economies that make them dig deeper into it and understand the same.
There are lots of conflicting ideas regarding the convergence of the IFRS globally, as the benefits and issues are clearly visible and need to be accounted for. As Barth (2013) has clearly pointed out, the benefits and achievement of comparability totally depends on the firms themselves. Unless and until the firms are ready to accept changes, the convergence can never happen. He also focuses on another benefit for the investors and that is the reduction in the costs generally incurred for comparing investment opportunities. Thus, keeping the negative impacts demonstrated by Ikpefan & Ailemen (2012), it becomes clear that the investors are actually benefitting from the suggested convergence of IFRS.
It is not only the investors, but the markets themselves can also benefit a lot from the phenomenon. Hail et. al (2008) assessed the benefits of the global convergence of the IFRS on the market itself. He/she demonstrated that the global convergence of these financial reporting standards help in enhancing the liquidity of the capital markets, thus making them more profitable. The capital markets tend to become more liquid with the global adoption of these standards, giving better returns to the investors. Even the quality of reporting becomes better with the adoption of similar standards and guidelines. Companies in certain economies often face several dilemmas and problems related to the reporting of certain transactions in the statements. But the adoption of global standards helps accountants in follow the same rules and regulations, thereby improving the overall quality making it easier for accountants to prepare the financial statements (Thomas, 2009).
Authors like Peng (2010) have challenged the ability of IFRS convergence to make capital markets liquid and very aptly points out the presence of other legal and economic rules and regulations that affect the market. It makes sense to take into account the different rules and guidelines that different countries follow. Hence there is no set rule or study that proves that the convergence would lead to better liquidity in the market for sure. Maybe the adoption of IFRS can lead to better quality of financial statement but the enhancement of capital market liquidity is something that needs more study and research.
Another problem that lies with the convergence of IFRS is the transition from the old standards to the new globally accepted standards. The companies need to modify and change their entire system and processes in order to accommodate the new set of standards. It is very time consuming and also could be complex. The reporting systems, software everything needs to be changed and that could lead to some problems during the transition phase(Kvaal, et. al 2011).The companies also need to make sure that they train their employees. All these activities during the transition phase tend to be time consuming, challenging and Inherently costly. While on one hand, it is said that the global convergence of the accounting standards help in improving the overall quality of the financial statements and reports, on the other hand, there are other views that suggest otherwise.. For example, while people are shifting from the conventional standards to new standards, the accountants are bound to make mistakes while preparing the statements(Hellmann, et. al 2010).That means financial statement so prepared are likely to suffer from a number errors making it unreliable.
However, this problem is expected to reduce over the priod as the accountants get familiar with the new standatds. Transition from the already applied accounting standards to a whole new set of standards is also very costly. There are several costs that are involved with the adoption of these standards. From the training of employees to changing the reports and the previously prepared reports, everything would take up some cost and the entire process becomes quite costly in the beginning. It is true that the initial step of converging with the International Financial Reporting Standards (IFRS) is costly but the long term benefits of the same are much higher. The companies can get significant savings when they do not have to change their reports according to some other standards for better comparability (Tokar, 2011).
One thing that becomes clear from the analysis is the dual nature of the global convergence of IFRS. While it is beneficial for investors and for making financial statements globally acceptable and comparable; the use of the same standards globally can also be very time consuming and can create confusions and complications in the initial stages. The trade-off between costs and benefits however speak in the favor of convergence and companies all across the globe are trying to accept his changes in a better manner.
Two companies have been selected for analysis. One if an Australian company listed on the Australian Stock Exchange, subjected to the Australian Accounting Standards and the other is an US company listed on the listed on one of the US stock exchanges which comes under US accounting jurisdiction. The purpose of taking two companies from different countries is to determine whether there are significant differences in the use of accounting policies and particularly measurement bases in two different jurisdiction. Given two countries have different accounting standards (rule based and principle based), comparing their use of accounting policies may give some lights as to whether global convergence actually can be beneficial.
Verizon Communications Inc. is a telecommunications company that is listed on the New York Stock Exchange and is known for its developments in the fields of mobile, broadband and cloud communications. With the continuously changing global environment it has become important for the communication companies to also change the technologies used by them. The company is shown to make use of the U.S. Generally Accepted Accounting Principles (GAAP) for preparing its financial statements. The balance sheet of the company shows that the accountants first make estimates with respect to different financial inputs and numbers and the real values are based on these estimates and assumptions, which then help in reaching to appropriate conclusions (Annual Report of Verizon, 2012).
One thing worth noticing in the case of Verizon Communications is the use of the specific rules in the preparation of the financial statements. The US accounting policies are shown to be completely based on the rules defined by GAAP. Verizon has accepted some changes that differ from GAAP policies but it has not been able to completely move out of the traditional standards. The revenue recognition system makes use of different basis for recognizing revenues for its different product and services offerings. Based on the product or service it is making a record for, the basis changes and so does the revenue recognition methodology.
But at the same time, the Australian company, Broad Investments Ltd. recognizes revenue on the basis of fair value. Verizon has adopted some changes but still stick to the best estimate of selling price methodology for determining its revenues. This clearly demonstrates a barrier to accepting changes and makes things complicated. While understanding revenue generation and sources of Broad Investments Ltd. is extremely simple because of the application of global standards, it is difficult to understand revenue generation and basis of calculation for different products in Verizon.
The differences in the accounting of goodwill also bring out the rigidity of the accounting standards in the United States. Broad Investments accounts for goodwill as the costs that are reduced from the accumulated impairment losses. The excess of the sum of the transferred consideration and non-controlling interest is what is regarded as the total goodwill for the firm. If goodwill accounting is compared for Broad Investments and for Verizon Communications, it is found that both the companies treat goodwill as the excess of the acquisition costs. But the adoption of global standards helps Broad Investments to segregate its goodwill and account for it accordingly. While Broad Investments logically report goodwill from different sources in different ways, Verizon does not believe in such segregation. Under the purview of the old and traditional GAAP standards, Verizon sticks to the old methods that do not make goodwill accounting very clear to the investors.
Following the 2012 update on the impairment of intangible goods, another change in the reporting standard was adopted in 2013 and that was with regards to the classification of accumulated income. There are certain specifications that have been provided by U.S. GAAP regarding the reclassification of the comprehensive income but the adoption of new standard includes income other than the comprehensive income. However, the adoption of this standard has shown to not lead to significant differences in the financial statements of the company. And hence cannot be taken as a strong point for analysis.
While studying the financial statements of these two companies, one thing that becomes clearer is the changes that have been adopted in both these companies. While the entire world is talking about the global adoption of IFRS, companies across the globe have been trying to incorporate changes in their financial statements. The financial report of Broad Investments presents a list of changes that are being made to their accounting standards, demonstrating their impacts and benefits. The changes have clearly brought an enhancement in the quality of these financial reports, making them much easier to understand and comprehend. Whereas, the financial report of Verizon looks like the same old reports that didn’t provide complete information to the investors. The changing nature of Australian financial reporting standards according to situation has proven to be fruitful, while the adoption of rigid old GAAP rules in the US has led to difficulties in understanding true sources of revenue, goodwill etc.
We discussed the benefits and some of the drawbacks of globally accepting and converging the International Financial Reporting Standards (IFRS). It is shown that the adoption of common reporting and accounting standards all across the globe leads to easy comparability and higher quality of the financial statements when seem from a long term perspective. However, despite of all the positive outcomes, it has also been analyzed that the process of transition from the already being used standards to the new global standards is a difficult time period and can lead to several issues and problems.
But the comparative analysis done for the two companies has highlighted the changes that can be made to financial reporting standards and quality of a firm by adopting the new and globally accepted accounting principles and standards. One similarity that was observed was in the use of estimates for accounting purposes. Despite of changes in the accounting period, the companies made use of estimates of different values for accounting purposes, which brings in a similar type of results for their financial statements. It may be surprising in the beginning to think that despite of having completely different set of financial reporting standards, the financial reports of the companies are so similar.
But the financial statements of Broad Investments are much clearer than those of Verizon. Broad Investments has adopted a plethora of changes in its financial statements reporting, which all seem to work in the favor of the company and even the investors making use of the reports. The reports clearly explain and break down different factors to present a better correlation between different situations and the results, which is definitely not the case with Verizon. Hence, it is clearly logical to adopt and accept the global convergence of IFRS, as it makes things simpler, clearer and easy to understand.
The analysis demonstrates the advantages and disadvantages of the global convergence of the same financial standards. It is shown that the adoption of IFRS by companies all across the globe not only helps in providing comparable reports to the investors, thus making it easier for them to study the reports and also analyze the same. The comparison of the accounting policies of two companies belonging to different economies and different countries demonstrates the significance of the global convergence and proves that the adoption of similar accounting standards across the globe helps in easier and better understanding of the financial reports.
- Annual Report of Broad Investments Ltd. (2012), Broad Investments’ Website [Online] Available at http://www.broadinvestments.com.au/pdf_press/BRO%20Annual%20Report%202012.pdf, last accessed on 09/13/13
- Annual Report of Verizon Communications (2012), Verizon’s Website website [Online] Available at http://www22.verizon.com/investor/app_resources/interactiveannual/2012/downloads/12_vz_ar.pdf, last accessed on 09/13/13
- Ball, R. (2012). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, 36(1)
- Barth, M.E.(2008). Global Financial Reporting: Implications for U.S. Academics. The Accounting Review, 83(5), 1159-1179
- Barth, M.E.(2013). Global Comparability in Financial Reporting: What, Why, How, and When?. China Journal of Accounting Studies, 1(1), 2-12.
- Bushee, B.J., &Leuz, C.(2005). Economic consequences of SEC disclosure regulation: evidence from the OTC bulletin board, Journal of Accounting and Economics, 39(2), 233-264.
- Carmona, S., &Trombetta, M.(2008). On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system. Journal of Accounting and Public Policy, 27(6), pp.455-461.
- Hail, L., Leuz, C., &Wysocki, P.(2009). Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors. [Online]Available at http://www.lse.ac.uk/accounting/news/MAFG/Leuzpaper.pdf, last accessed on 09/14/13.
- Hellmann, A., Perera, H., & Patel, C.(2010). Contextual issues of the convergence of International Financial Reporting Standards: The case of Germany. Advances in Accounting, 26(1), pp.108-116.
- Ikpefan, O., & Ailemen, A.(2012). International Financial Reporting Standard (IFRS): Benefits, Obstacles And Intrigues For Implementation In Nigeria. Research Journal of Finance and Accounting, 3(2), 2222-2847.
- Joos, P.P.M., & Leung, E.(2013). Investor Perceptions of Potential IFRS Adoption in the United States. The Accounting Review. 88(2), pp. 577-609.