Essay on International Accounting Standards

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FINANCIAL REPORTING AND ANALYSIS
IN PUBLIC COMPANIES

Nowadays, financial reporting and analysis is a fundamental part inside the business’ world, and more specifically inside the own companies. It is what tells external users, who are interested in them, all important information of the financial situation of the enterprise. However, to ensure the facts and figures that they issue are actually correct, there must be rules and someone who regulates it. In the United Kingdom, since 2005, the Agency responsible for this is the International Financial Reporting Standards Foundation, through the International Accounting Standards Board (IASB).

The IASB is the organization which issues and sets accounting standards. It was created in 2001, superseding the previous body ‘International Accounting Standards Committee (IASC)’, whose standards, called ‘International Accounting Standards’ adopted. Since then, all the next patterns it has set out are named ‘International Financial Reporting Standards (IFRS)’ (John Dunn, 2010). All UK public companies are required to obey these standards, while private companies can choose between either International Standards or UK Standards. According to the IFRS, The IASB’s goal is to provide the world’s integrating capital markets with a common language for financial reporting. Accounting Standards increase the credibility of financial information issued by companies and avoid frauds and scandals, like the GEC’s takeover of AEI in 1967, when AEI forecasted a profit of £10 million for the year when they actually reported a loss of £4.5 million. Unfortunately, it is not an easy task. Before being published, standards have to pass a laborious process, which is slow and expensive. One of the main reasons is because standard-setters have to try to forecast all possible economic consequences that will bring a new standard, as for example the cost of adopting it by companies. Additionally, it is the viewpoint of Dunn (2010) that they need the cooperation of the firms who they are regulating to run properly. If it does not happen, enterprises could ignore them, as happened in the 1980s, when the Statement of Standard Accounting Practice (SSAP) number 16, which adjusted the business figures to the inflation, started to be careless after companies realized it made them decrease their accounting benefits significantly. Consequently, ventures are able to write their opinions and judgments about any standard and send it to the IASB, in a try to find a solution withdrawing or modifying it. Accounting Standards are also useful to cover the loopholes that continue existing in financial reporting. For example, IAS 17, leases, issued in 1982 by the IASC, says that “If a lease transfers substantially all benefits and risks incident to ownership of an asset, the lessee should recognize an asset and a liability on the Balance Sheet (finance lease). However, if the “substantially all” test is not met, the lessee records the transaction Off Balance Sheet (operating lease) with very clear and extensive disclosure.” Nevertheless, the problem is, according to the American Accounting Association’s Financial Accounting Standards Committee, that lessees do not acknowledge all their lease obligations on their balance sheets, because of the distinction between operating and capital leases, which is now arbitrary. Standard-setters are currently looking for a solution to this issue.
In 2001, the IASB established a conceptual framework which tells the firms how to prepare their financial statements, in order to give a true and a fair view to external users and to help standard-setters in the development of new standards. UK public companies have also to draw up their financial statements in accordance with this conceptual framework. The goal of the IASB Framework is to provide corporate financial information valuable to all types of users, such as investors, lenders, customers, employees, suppliers, governments and the
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