International Accounting Standards: UK Financial Reporting

multinational method of method of accounting Standards UK Financial ReportingAPC311 INTERNATIONAL fiscal REPORTING ASSIGNMENT(Word count 3, 080)IntroductionThe growth of international activities has been rapid oer time. These activities include atomic phone number 18as of international trade, international investment, international bond and equity offerings, chapiter movements between countries and the number of multinational firms. Countries, entities and bodies who carry out these activities continuously seek to achieve growth and higher fall backs at lower cost of financing. This implies that there is a good deal the need to consider international rather than national or internal alternatives of raising pay. The differences in accounting systems and principles that exist in antithetical countries argon a barrier to towards the comparability of financial information that is published by companies using different sets of accounting measuring rods (Alexander, 2007).This l ed to the pressure for international harmonisation to regulate, prepare and procedure financial statements which are reliable, comparable and transparent (Nobes and Parker, 2000). This puke only be achieved if countries employ the same accounting standards through the harmonization of accounting principles. International harmonization may be defined as a political process aimed at reducing the differences in accounting practices across the world in influence to achieve comparability and compatibility (Hoarau, 1996). To achieve this feat, accounting regulators such as the IASB have attempted to advance harmonization projects in an attempt to minimize differences between different national accounting standards (ORegan, 2006).As argued by Choi et al (2002), harmonization will trifle it more likely for users of financial statements to interpret the information correctly and make better decisions based on that information. It will similarly inhibit drastically the information asym metry between stakeholders and companies and hence save manpower, money and resources.The International account statement Standards Board (IASB), issuers of International Accounting Standards (IASs) was established in 2001 and is the independent standard-setting body of the International Financial Reporting Standards (IFRSs) Foundation, an independent, private sector whose principal objectives are to ascend in the public interest, a set of high quality, understandable, enforceable and globally accepted international financial reportage standards (IFRSs) based on clearly provide accounting principles. IFRSs are a set of high quality, understandable, enforceable and globally accepted Standards based on clearly articulated accounting principles.The need for International Accounting StandardsThe international investorThe information age and the advent of high-tech computers makes possible the availability of massive amounts of international financial information. Institutional and i ndividuals who are interested in making international investments can therefore benefit from the global harmonization of accounting standards.International Accounting firmsThe role of international accounting firms include providing auditing and consulting serve in many countries. The absence of international accounting principles implies that they have to gain expertise in areas of domestic financial accounting principles and related laws. Gaining this expertise can substantially increase their operational costs.International intergovernmental organisationsInternational intergovernmental organizations including the United Nation (UN), the European Union (EU) and the Organization for Economic Cooperation and Development (OECD) extend credits for projects to new(prenominal) countries. They are therefore interested in obtaining comparable financial information in order to evaluate the projects they carry out in the various countries.as the organization. This can be achieved only if there is harmonization of international accounting principles.Developing countriesDeveloping countries often seek international financing sources for their development. It is of import for their governments and accounting regulating bodies to adopt international accounting standards in order to make it easier for them to access international financing sources.Stock exchangesThe use of international accounting principles can modify the internationalization of Stock exchanges which can in turn increase international financing activity.This essay will make particular reference to the UK equivalent of accounting standards i.e., theFinancial Reporting Standards (FRSs) to examine the different accounting give-and-takes in the individual accounting standards of interest in this assignment.IAS 38 Accounting for intangible summations Definition An intangible summation is an identifiable monetary addition without physical substance. An addition is a resource that that is controlled by t he enterprise as a result of past events and from which succeeding(a) economic benefits are expected IAS 38.8.The objective of IAS 38 is to prescribe the accounting treatment for intangible additions that are non dealt with specifically in an separate IAS. The standard deals withthe criteria to be met before an enterprise can recognise an intangible assethow to measure the carrying amount of intangible assets and the disclosures that needs to be do.Examples of assets that may qualify as intangible assets under IAS 38 arecomputer software, copyrights, customer and supplier relationships, franchises, licenses, rights patents.The three critical attributes of intangible assets areIdentifiability In order for an intangible asset to be identifiable, it must be separable and it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and pacts. (IAS 38.12)Control (power to obtain benefits from t he asset)An intangible asset must be under the control of the enterprise in order for it to have the power to obtain coming(prenominal) economic benefits from the asset. Control will usually but not necessarily emanate from legally enforceable rights, in the absence of which it is more difficult to see the existence of an asset. For example, control over technical know-how is deemed to exist only if it is protected by legal right such as a copyright or patent.Recognition and measurement IAS 38 stipulates that an intangible asset should be recognized only if both(prenominal) of the following occurIt is possible that the future economic benefits that are attributable to the asset will flow to the entity, andThe cost can be reliably measured.The cost of an asset must be reliably measured if the asset is acquired in a normal transaction. Also, the fact that a price has been paid for the asset, is a reflection of the expectation that future economic benefits will flow to the entity. blessing and brand imageIn order for goodwill and brand image to be classified as intangible assets and included as assets of the enterprise, they need to be identified separately. If goodwill and brands have been acquired externally, then their cost and existence can be identified and capitalised. As regards internally generated goodwill, it cannot be recognised as an asset becauseit is not separable from the businessit has not arisen form contractual or other legal rights, andits cost cannot be reliably measured (IAS 38).A expiation of the carrying amount at the beginning and the end of the period.FRS10, accounting for goodwill and intangible assets is the equivalent UK Financial Accounting standard to the IAS 38.The standard views goodwill arising on eruditeness as not constituting an asset or an immediate loss in value. But it relates to the cost of an investment in the financial statements of the acquirer, hence the values are attributed to the acquired asset and liabilities in the consolidated financial statements. The standard is of the view that even though purchased goodwill is not in itself an asset, including it in the assets of the reporting entity rather than deducting it from stockholders equity recognises that goodwill is part of a larger asset whose investment the entitys management re importants accountable. Thus, the objective of the FRS10 is that it ensures that purchased goodwill and intangible assets are charged to the income statement in the periods they are depleted.A comparison of the different accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 1.DiscussionThe IAS definition for intangible assets has its limitations as many intangibles such as patents and related drawings do have a physical substance (Tiffin, 2005 p.67). even the real issue with intangible assets is that intangibles are difficult to value and as such, attempting to measure their impairment is plagued with problems Godfrey Koh, 2001). The uncertainty about asset values and their impairment renders them susceptible to creative accounting.Intangible assets can be generated internally by firms. But it is difficult to accurately identify and cost such assets. IAS38 states that internally generated goodwill shall not be recognised as an asset. Research and development are therefore considered to be different parts of creating an internally generated intangible asset. The enquiry material body is defined by IAS 38 as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. This implies that research costs incurred are expensed when they occur. There is consistency in classifying what constitutes an intangible asset by the standard. Of course, this treatment of research is appealing as there is a opportunity that an initial research may not actually lead to any economic benefit.Accounting for chooses (IAS 17)Definition A lease is an agr eement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.A lease falls under two main categories a finance lease and an operating lease.A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. altogether other leases are classified as operating leases. Classification is made at the inception of the lease. IAS 17.Thus, in order to accurately classify the type of lease, it is important to determine whether the risks and rewards associated with owing the asset are with the lessee or the lessor. An asset will be classified as a as a finance lease if the if the risks and rewards lie with the lessee. However, it will be classified as an operating lease if the risk and rewards lie with the lessor.As regards a finance lease, the concept of substance over form is applied. The substance is that even though the legal owner of the asset is n ot the lessee, the commercial reality is that the lessee has acquired an asset by obtaining finance from the lessor, this implies the recognition of an asset and liability.Other distinguishing factors of a finance lease includeThe present value (PV) of the minimum lease payments at the beginning of the lease amounts to substantially all of the unobjectionable value of the asset.By the end of the lease, the lease agreement transfers ownership of the asset to the lessee.The option rests with the lessee to purchase the asset at a price expected to be substantially lower than the fair value when the option becomes exercisable.The leases asset must be of a specialised nature.A comparison of the different accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 2.DiscussionOperating leases appear to be more popular as both the contract asset and liabilities can be effectively kept off the balance sheet with future lease obligations findd as footnotes. H owever, a finance lease, often treated as an in substance purchase by the lessee and a sale by the lessor, is less popular as it requires both leased assets and liabilities to be recognized on the balance sheet. But the finance lease does produce a tax benefit because of a larger expense, interest summing up derogation, compared to an operating lease which only reports the lease payments as an expense. IAS 17 (IASB, 2008) allows managers to structure a lease in such a centering as to avert the reporting of lease assets and liabilities.In order to ensure a complete and transparent recognition of assets and liabilities arising from lease contracts on financial statements, the IASB decided to make no distinction between finance leases and operating leases and employ the right-to-use assets and its lease obligations that is based on the present values of future lease payments using the incremental acceptation rate of the lessee at the inception of a lease.Capitalization of lease ca n impact negatively on cabbage because of the increased cost due to the depreciation of the asset and interest expense. This will in turn affect expected profit margin, return on earnings (ROE) and return on assets (ROA) (Bradbury, 2003).IAS 37 Accounting for provisions, dependant on(p) on(p) liabilities, and contingent assetsDefinition A provision is a liability of uncertain timing or amount.IAS 37 ensures that a provision should be recognised only when there is a liability i.e. a present obligation resulting from past events.Contingent liabilitiesDefinition A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of events not wholly within the control of the entity orA present obligation that arises from past events but is not recognised because it is not probable that an outflow of economic benefits will be required to settle the obligation orA present obligation that arises from past events bu t is not recognised because the amount of the obligation cannot be measured with sufficient reliability.DisclosureAn entity should disclose a contingent liability in a note, unless the possibility of an outflow of economic benefits is remote.Contingent assetsA contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.An entity shall not recognise a contingent asset. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition as revenue is appropriate.A comparison of the different accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 3.DiscussionIAS 137 aims at ensuring that only genuine obligations are dealt with in the financial statements i.e. planned future expenditure even when authorised by the gameboard of direct ors or equivalent governing body, is excluded from recognition. Appropriate recognition criteria andmeasurement bases are applied to provision, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to alter users to understand their nature, timing and amount.The standard seeks to ensure that for example assets are not overvalued. Accounts receivables may be overvalued if reasonable provision for bad debts is not made. This has the tendency to wallow earnings and in such instances the provision for bad debts will prove to be inadequate in future, whilst in the short term account receivables and earnings receive a temporary boost.Also, contingent liabilities which are obligations that are dependent on future events for the confirmation of the existence of an obligation. If companies fail to record a contingent liability that is likely to be incurred and subjected to reasonable estimation, it has the effect of understating their liabil ities and overstating their net income or shareholders equity.The above examples are indications of how companies use creative accounting to manipulate their financial statements in particular their balance sheets.ConclusionAccounting for intangible assets, accounting for leases and accounting for provisions, contingent liabilities, and contingent assets are all complex areas which are prone to manipulation in the form of creative accounting which is defined as the transformation of financial accounting figures from what they actually are to what preparer desires by taking advantage of the existing rules and/or ignoring some or all of them (Kamal Naser, 1992).Creative accounting in whatever form it takes is usually meant to overstate assets or understate liabilities.The collapse of a number of corporate giants such as Enron Corporation, Tyco International, World Com, Global Crossing, Arthur Anderson, Parlmalat etc. have not only destroyed investor confidence and shareholder values but it has also damaged the accounting profession. The situation is even made worse when there are different accounting standards that are used in preparing financial statements.This is made even worse when there are different accounting standards used in preparing financial statements.The adoption of one set of global financial reporting standard such as the international financial reporting standard (IFRS) that confers with investors, stock markets, accounting professionals and accounting standards setters will go a long way to reduce the practice.Arguably, accounting standards whether in the US, UK, Australia or the IAS will not have all the answers to accounting and financial reporting problems but it is hoped that it will largely reduce its occurrence.APPENDICESAPPENDIX 1 similarity of IFRSs with UK GAAP treatment of intangible assetsAppendix 2 Comparison of IFRSs with UK GAAP treatment of LeaseAPPENDIX 3 Comparison of IFRSs with UK GAAP treatment of provisions, contingent l iabilities, and contingent assets