Question

Assess the view that accidents of history are primarily responsible for international differences in corporate financial reporting.

Answer 1

Financial reporting includes forming of financial statements such as statement of cash flows, income statements, balance sheet, etc. To bring out a common base for reporting the financial statements, a set of international reporting standards were developed known as IFRS (International Financial Reporting Standards) and it guided on how certain transactions should be reported. These are flexible to use.

IFRS is being used by many countries now but there are some which use them in modified form and hence there are differences in International Reporting.

US

US still uses its own GAAP - Generally Accepted Accounting Principles. There are differences in Revenue Recognition under various heads and does not consider contingent revenue. Companies can follow LIFO or FIFO method for inventory valuation but in IFRS only FIFO is followed. Assets are valued at their purchase cost - depreciation. GAAp does not allow capitalisation of costs on assets.

Accidents un history that led to differences in financial reporting :

1. Enron shuffled much of its debt obligations into offshore partnerships and became the biggest scandal in the history. It prompted the passage of the Sarbanes-Oxley Act

2. Six years after Enron scandal, financial world collapsed & led to the adoption of the Dodd-Frank rules.

3. Certain legal cases such as Pfizer versus GlaxoSmithKline, Walmart versus Carrefour show the use of GAAP and IFRS by two different companies.

4. Cadbury before being acquired by Kraft in 2009, reported profits of $690 million under IFRS and under GAAP they were $594 million only and return on equity was 9% under GAAP and 14% under IFRS.

5. In fastest-growing emerging nations, compliance and enforcement are weak.

* Many countries like India & China have created their own versions of IFRS.

* The shortcomings have caused companies to use unofficial measures to report financial performance. Facebook, Twitter, Amazon, eBay, and Alibaba showed that traditional guidelines prevented them from truly reflecting their businesses’ value in reported accounts & began to adopt alternative ways to report on earnings but now SEC says that management should be able to support the reason behind including an alternative measures for disclosure.

* Accounting is affected by political and economic forces and there might be differences in reporting.

The shortcomings of IFRS and other reporting standards, allowed nations to have their own set of rules. These rules were formed when they faced a number of scandals by the misuse and flaws in existing standards. Some of the scandals were :

* Enron scandal in US

* Worldcom Scandal in US

* Lehman Brothers Scandal in US

* Satyam Scandal 2009 in India.

* Sahara Scandal In India.

* Nordbanken, Sweden

* Northern Rock, UK