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Over the last few decades, globalization has been influencing world economics. Consequently, the needs of the world’s capital markets have continually increased. With this, the accounting practice has become increasingly important so that these needs can be effectively met. This is successfully achieved through the implementation of the International Accounting Standards. In June 1973, professional accounting organizations in nine nations, the United States included, joined to form the International Accounting Standards Committee. The constituent bodies agreed to conjointly get the newly launched International Accounting Standards and employ them in their accounting practice. These standards promote a worldwide acceptance and observance of the accounting practice. These organizations looked forward to convincing outcomes after adopting the standards. In other words, when a company uses one set of highly credible standards, the financial information presented is likely to be highly transparent and comparable (Alfredson, Leo, Picker, Pacter, Radford & Wise, 2012). This significantly helps to reduce the costs incurred in preparation of financial statements. When the accounting standards are used in a consistent way, the prime beneficiaries are participants of the capital markets because they are exposed to more reliable and better quality accounting and thus promotes a better decision-making. These positive outcomes justify and support the adoption of the International Financial Reporting Standards in the financial reporting by companies in the United States and the European Union.
Today, no set of Generally Accepted Accounting Principles has been declared universal. For this reasons, the GAAP requirements are not uniformly used globally. Their use differs from one industry or region to another. In the United States, the Securities and Exchange Commission requires that all companies comply with the Generally Accepted Accounting Principles requirements. The general GAAP requirements are stipulated and administered by the Financial Accounting Standards Board. Also, the use of GAAP by the local and state governments is stipulated by the Governmental Accounting Standards Board. In the United States, all public companies are supposed to comply with the Securities Exchange and GAAP requirements (International Accounting Standards Committee & International Accounting Standards Board, 2000).
Generally Accepted Accounting Principles rely on a set of four basic principles, constraints, and assumptions so as to effectively meet its objectives and implement policies stipulated.
Firstly is the business entity assumption. The GAAP views a business entity as a distinct legal person independent from its proprietors and other businesses. All revenues and expenses of the business are to be separated from the expenses and revenues of personal accounts. Secondly is the going concern assumption. The US GAAP assumes that the business will be in operations long enough to meet its objectives. Thirdly are the time-period assumptions, which imply that the economic activities of a business are divided into equal artificial time periods. These periods are created by dividing the financial year into different segments. Finally is the monetary unit consideration. This assumption implies that a fairly stable currency will be used as the unit of record. For example, the unit of record in the USA is the US dollar (Alfredson, Leo, Picker, Pacter, Radford & Wise, 2012).
Generally Accepted Accounting Principles in the United States use four basic principles that must be observed in all financial reporting. These are historical cost, revenue recognition, matching, and full disclosure principles. Historical cost principle requires all companies to account for their operations and make reports based on the acquisition costs contrary to the fair market prices (Hall, 2014). Revenue recognition principle holds that all revenues to be recorded when they are realized or earned contrary to when they are received. Additionally, expenses should be incurred when they are incurred not when paid. Thirdly matching principle requires that all expenses be matched to the revenues they help earn and to the accounting period in which they are earned. This principle allows for a better evaluation of the actual profitability and performance of the company (Chambers, 2014). Finally the full disclosure principle obliges that all information deemed necessary to influence the decision making of the investors must be disclosed. The information is availed in the main body, on disclosure notes, or as additional information.
In addition to the basic principles and assumptions, US GAAP also stipulates basic constraints that need to be observed in financial reporting. The basic constraints are objectivity, materiality, consistency, and conservatism (Gray, 2014). The objectivity constraint requires that all financial statements presented are based on objective evidence. Secondly is the materiality constrain, which implies that the significance of all items reported be considered during financial reporting. An item is said to be significant when it is likely to influence the decision making of the users of such information (Barth, Landsman & Lang, 2008). Thirdly the consistency constraint requires that all accounting firms use the same accounting methods from one period to another. As such, the procedures used in one accounting period should be used in the next and other subsequent accounting periods. Finally is the conservatism constraint. This is used when comparing solutions and requires that least satisfactory outcomes are not chosen over the others.
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In the United States, the use of International Accounting Standards (IAS) is highly promoted. The reason behind this is that interests and deeds of all stakeholders are gradually becoming global. As such, the Securities Exchange Commission has continuous struggles to establish standards with a global acceptance. Also, the commission seeks to develop a global structure to allow quality financial reporting. The only way through which liquid, fair, and efficient capital markets can be achieved is when information presented depicts the qualities of comparability, transparency, and reliability (Barth, Landsman & Lang, 2008).
The International Accounting Standards are used in various fields particularly the capital markets and the banking sector. These capital markets encompass the primary and secondary markets. Primary markets are where securities are first issues, and secondary markets are markets for the purchase and sale of already issued securities. The banking sector entails banks and other financial institutions such as microfinances and Saccos (Weygandt, Kimmel & Kieso, 2015).
The International Financial Reporting Standards (IFRS), is an international accounting language that ensures that all company accounts are comparable and understandable in different countries. The standards are particularly important to companies that conduct their operations internationally. The IFRS in the modern day replace many national accounting standards, which require that the accounting rules are comparable, relevant, reliable, and understandable so that they suit the needs of internal and external users (Chambers, 2014).
The International Financial Reporting Standards are significantly important in the global markets. To start with are the implications on the reporting companies. The International Financial Reporting Standards facilitates comparability, which is in turn critical in allowing effective allocation of scarce resources. For international comparability to be achieved, all the nations of the world need to adopt one global set of accounting standards, the IFRS, because it facilitates the understanding of the differences between various national accounting frameworks. Secondly are the implications to investors. Investors benefit positively as international financial reporting standards help to avail information that is necessary to allow for a better decision making (Gray, 2014). In addition investors are exposed to better investment opportunities. Thirdly and finally is implication on the national regulatory bodies. The International Financial Reporting Standards help to avail better information to be presented to the market participants through a disclosure based system.
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The International Financial Reporting Standards have implication on various countries. This is because various facets of their economy are affected depending on the way accounting for a resource is conducted. The state and local taxes including income taxes, net worth taxes, and tax accounting among other areas are affected positively when International Financial Reporting standards are used. Also, the revenue recognition rules used affect the way countries recognize their income (International Accounting Standards Committee & International Accounting Standards Board, 2000).
As the importance of the accounting practice increases day by day, there is a need for the nations of the world to develop a common financial reporting platform, which will facilitate the understanding of accounting differences in different countries. This will allow better comparability and better allocation of scarce resources. Adoption of International Financial Reporting Standards is paramount because it positively impacts companies, decision makers, and national regulatory bodies.