Explain why listed companies produce financial statements for external users and how these are regulated in the UK. - `The International Convergence Project is considered to be absolutely necessary in this age of globalisation. Discuss.

        Regarding to the differences in financial reports, the main causes are “the country´s legal system, the model of obtaining funds (stock market or financial institutions) and the influence of status in professional accounting”.

In order to end up with the differences mentioned above, the International Accounting Standards Board IASB is an independent organization based in London, UK which aim is to set up rules that ideally would apply equally to financial reporting by public companies worldwide. This aim is trying to be achieved throughout the International Financial Reporting Standards (IFRSs).

Moreover, it is important to analyse the factors that might create a demand for international institutions like the IASB for identifying relevant incentives and disincentives for countries (particularly U.S) to participate in (or even be dominated by) co-operative international institutions and arrangements such as the current trend towards the international harmonisation of accounting standards.

        Nowadays our world is dominated by globalization and as a result there is higher emphasize on convergence. The number of multinationals is sharply going up and companies increasingly have for instance franchises in different parts of the world. Today financial markets and foreign companies are more accessible for investors so that is why it is extremely important to carry on improving the markets efficiency allowing investors to make right decisions. Having a different sort of regulation rules between countries implies they will be spending time and money due to the translation financial statements necessity. In addition, awareness is needed by investors so as to evaluate foreign companies. If it is not possible to compare two financial statements they loose relevance.

As a result investors decide not to invest in foreign companies in order not to take risks in making wrong investment decisions because of the lack of understanding of financial statements.

However, it is not appreciable in short term but in the pipeline, allocation of capital might not be done properly as well as the integration impediment of capital markets. Consequently, this will lead to a weak world economy.

        There are two possible perspectives in order to accept these international accounting standard-setting. Paul De Lange and Bryan Howieson (2006) support that the first perspective is that there are few countries that have well-developed and sophisticated accounting standard-setting arrangements of which the U.S is typically acknowledge as the most dominant. The great majority of other countries have much to gain with little cost by simply adopting standards effectively developed by this small group within the boundaries of the IASB. As David Damant corroborates(2006) the markets where accounting is already oriented in the capital markets the improvement may not be large (as for example in the UK) whereas for those countries which started with very little accounting expertise the change is to a framework which embodies economic reality and the impact will be enormous. “Countries that are enthusiastic about cooperation are likely to be those that expect to gain more, proportionately, than they contribute...”.

On the other hand, the IASB could effectively be perceived as oppressive by those countries that do not have well-developed standards-setting regimes.

        There are several reasons that determine whether or not countries are willing to accept convergence so as to achieve the sought international harmony that the project would lead to.

Uniform rules need only be invented once and they promise more accurate and comprehensive financial statement information than the national standards. Improving financial reporting quality allows small investors to compete better with professionals reducing their risks when taking investment decisions. IFRS adoption could reduce the cost to investors of processing financial information because they would be more comparable internationally. Furthermore, reducing the processing information cost most likely increases the efficiency with which the stock market incorporates in its prices.

Another advantage of uniform standards is the protection they give auditors against managers playing an “opinion shopping” game. According to Ray Ball (2006) if all auditors are required to enforce the same rules, managers cannot threaten to shop for an auditor who will give an unqualified opinion on a more favourable rule. Furthermore, eliminating informational externalities arising from lack of comparability is also advantageous. “If firms and/or countries use different accounting techniques they can impose costs on others due to lack of comparability”, to the extent that firms internalise these effects, it will be an advantage for them to use the same regulations as others. By and large, bringing convergence would mean to some degree reducing barriers among countries.

        Controversially, there are also reasons to be reluctant to accept the financial standardization. It is unclear that uniform financial reporting quality requires uniform accounting rules. Moreover, it is costly to develop detailed set of accounting standards to cover every part, so standards are not the only way of solving accounting method choices. “Some type of functional completion is required”. Furthermore, within the IASB aims they are not covering the production of stewardships accounts which fulfil the understandability by private investors and the public generally.

        The E.U has moved from a multi-GAAP world to one where a handful of financial reporting languages are morphing to a single language due to the acceptance of the IFRSs in 2005 . In this year more than 8000 listed companies in 25 countries simultaneously switched to IFRSs. Nevertheless, uncertainty remains over whether, how and when SEC (U.S Securities exchange commission) will make the decision for U.S companies to incorporate or converge with IFRS, leaving U.S GAAP behind. Thus, nowadays the project in the U.S is still an ongoing one. Meantime there are different factors to be considered such as the magnitude of the proposed changes and the differences with the actual U.S regulation.

        According to Oscar J. Holzmann and Tom Robinson (2005) the Financial Accounting Standards Board (FASB) and the IASB have been both involve since 2002 in an effort to improve the international comparability of financial reporting by developing a single set of high-quality accounting standards. These organizations started a joint project in 2010 concerning the highly aggregated and inconsistently information presented on the financial statements with the non-standard regulations. This made it difficult to completely understand the relationship between entity´s financial statement and its financial results. As a result, according to Neil Alderman and Chris Ivory (2011) the project has as prior goal, the establishment of a global standard for the presentation of financial statements information, providing financial statement users with information that is particular and useful in their decision making .

In order to enhance the understandability of the financial statement information, some changes were proposed. The main thrust of the proposed changes is the necessity of cohesiveness and disaggregation. “Cohesiveness means that the relationship between items in the financial statements is clear and that an entity´s financial statement complement each other as much as possible while disaggregation means separating resources by the activity in which they are used and by their economic characteristic”. Another proposed change is a common structure of financial position, comprehensive income and cash flows. The latter will lead to have related information more easily associated.

        Afterwards mentioning some of the proposed changes, the differences between the U.S GAAP and the convergence project are remarkable. GAAP allowed financial statement preparers to choose between the use of direct and indirect methods of preparing the cash flows as Paul Munter argues(2011) . Moreover, GAAP encourages to use the direct method but preparers are also allowed to use the indirect method. Meanwhile the convergence project just allows the use of direct method without exceptions arguing that is a more friendly method to present cash flows from operating activities. In addition, the statement of cash flows should be disaggregated “by nature” which refers to such distinctions as raw materials purchases and employee benefit costs. Still, this method change has some drawbacks such as users feeling inundated because of information overload. Another inconvenience is the necessity to redesign the information systems along with the likely loss of working capital information.

        Overall, the proposed improvements would come along with an appreciable inconvenience: costs. Neil Alderman and Chris Ivory(2011) state that “it is intuitive that most of the cost would fall upon preparers but the financial statement users, auditors and regulatory bodies would also experience costs”. Anticipated costs to take into account are for instance the coding changes that financial reporting software would need which requires high expenditures. Besides auditors would be forced to change their audit programs and during the transition period increase their working hours. Nonetheless, there are also advantages such as anticipated benefits.

Neil Alderman and Chris Ivory(2011) also support that users would be better able to analyse an entity´s performance independent of its capital structure because every reporting entity would segregate the effects of its financing decisions and related activities from all other activities. These authors carry on saying that users analysis of an entity´s financial position and performance would be greatly improved by additional disaggregated information presented in the three primary statements and the notes to financial statements.

        Additionally, the proposed common structure for the three primary financial statements would allow users to spend less time trying to understand the relationship between numbers in different financial statements. Likewise another remarkable benefit is the facility given to users to understand the sources and uses of an entity´s operating cash flows that by and large should help them to predict cash flows as well as to understand how judgements affect reported information. Moreover, based on responses received to date by FASB it seems that some observers believe that the proposed reporting format would help users build new and better models for predicting cash flows. Still, users might differ with the benefits mentioned supporting that it is arguably these changes which allow them to predict cash flows. Specifically, it is still unclear the manner which disaggregated information would be helpful in assessing potential cash flow. According to the proposed changes, the assessment of future cash flows would be relegated to the notes but critics perceive the note disclosure as information overload.

        In conclusion, any sort of changes characterize the world we live in now. Moreover, our society is also shaped by the nowadays transformations including the accounting ones. Industries in order to be updated with the constant economic changes have also evolved and developed.

International harmonisation throughout accounting standards seems to be a huge and evolutionary step in the accounting era. The national GAAP has already been replaced with the IFRSs in many countries, for instance a significant number of countries within the European Union, others are in process or even contemplating doing so -as it is mentioned above U.S is a country within this group.

It has been seen throughout time that the health of our economy directly depends on the accounting industry. The reason for this is that accounting is the frame of capital markets. Nowadays globalization has interlace nations´ economies and main changes in the accounting industry.

Healthy accounting industry means having comprehensive, consistent and comparable financial statements and convergence would be a great way so as to guarantee it. That is why, in my opinion it would be helpful if the U.S joins the international accounting standards because of the financial influence that this country has worldwide. As a consequence financial markets would be highly improved.

BIBLIOGRAPHY :

• Joel G. Siegel Ph.D. CPA,Jae K. Shim (2010). Barron's Dictionary of Accounting Terms. 4th ed. US: Barron´s snippet.
• Ilse Maria Beuren, Nelson Hein, Roberto Carlos Klann. (2008). Impact of the IFRS and US-GAAP on economic-financial indicators. Managerial Auditing Journal . 23 (7), 632-649. 
• Ray Ball. (2006). International Financial Reporting Standards:pros and cons for investors. Accounting & Business Research. 36 (2), 5-27. 

• Paul De Lange. Bryan Howieson. (2006). International accounting standards setting and U.S exceptionalism. Critical Perspectives on Accounting. 17 (4), 1007.-1032.

• Oscar J. Holzmann. Tom Robinson . (2005). Short term convergenge is bearing fruit. Journal of Corporate Accounting & Finance (Wiley). 71-75.

• Neil Alderman. Chris Ivory . (2011). The convergence project. Project Management Journal. 42 (5), 14-21.

• Munter, Paul. (2011). Convergence drives more change. Financial Executive. 27 (1), 22-25.

• http://www.ifrs.org/Features/Europe+and+IFRSs.htm. Last accessed 15th December 2011.

• http://. Last access 14th December 2011.

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