Global Accounting Standards

How changing world environment is leading to an increased focus on international accounting Saudagaran (2009) says, â€Å"The purpose of accounting is to provide information that is useful for making business and other economical decisions.†Advertising We will write a custom research paper sample on Global Accounting Standards specifically for you for only $16.05 $11/page Learn More The growth for businesses from small companies to multinationals has raised the need for international accounting since the accounting information is needed by the stakeholders for making business and economical decisions. (Saudagaran). In the capital markets where capital is graded, listed companies need to apply international accounting standards especially if the market is experiencing a steady growth. This will make it easy for foreign investors to make timely and well informed decisions on investing in the market without undergoing the consultation cost or learnin g the new accounting standards. (Saudagaran, 2009). In 2008, during the sub-prime loan crisis in America, financial institutions and investors worldwide experienced massive losses from the meltdown. The crisis provided evidence that in a global financial system, national borders are porous. (Saudagaran) Difference in accounting method as they are applied internationally There are two types of accounting methods the cash and the accrual method. According to Rich et al 2009, cash method mainly deals with incomes. Under cash basis accounting, revenue has to be recorded when the cash is received regardless of when it is actually earned. Similarly, an expense is recorded when cash is paid.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More In addition, by recording only the cash effects of transactions, cash-basis financial statements may not reflect all the assets and liabilities of the c ompany at a particular date. For this reason, most companies do not use cash method. (Rich et al, 2009). Accrual method is an alternative of cash method and transactions are recorded when they occur. (Rich et al 2009) He further says that â€Å"the reason why accrual accounting is superior to cash method is because it ties income measurements to selling which is the principle activity of the company.† So this means that all revenues are recognized as they are earned and all expenses are recognized when incurred. Accrual method also has a more complex system that records both cash and non cash transactions. (Rich et al). Time period assumption Most stakeholders usually demand timely information from companies so companies have to frequently produce financial report like the quarter year report, half year report and end year report to satisfy information users (Rich et al, 2009). Since companies are involved in different activities every time, there is great need to record ever y transaction on time for proper accountability. Revenue recognition period This principle is used to determine when revenue is recorded and reported. Under this principle, revenue is to be recognized or reported in the period in which these two conditions are met; the revenue is earned and collection of cash is reasonably assured. According to Rich et al (2009), the requirements are met when goods or services have been delivered or performed to the customer since at this point the risk of ownership has been transferred from the seller to the buyer regardless of when the cash is received. Matching principle In matching principle expenses are incurred regardless of when the cash is paid. (Riahi, 1985) Expenses of an accounting period should include only those costs used to earn revenue that was recognized in an accounting period and exclude cost used to earn revenue in early or later periods thus the key to expense recognition is matching the expense with revenues. (Rich et al, 2009) .Advertising We will write a custom research paper sample on Global Accounting Standards specifically for you for only $16.05 $11/page Learn More Classification of accounting models used in different geographical regions Bhattacharyya 2005 states that, â€Å"accounting model is a key that unlocks the mystery of double entry accounting†. Accounting models are based on two major parts; the T model, the five ledger accounts model which are also the accounting models. Accounting models include asset account, revenue account, liability account, equity account and the expense account. The accounting model used in a particular geographical region basically falls under either of the above mentioned depending on the preferred model and business. Role of International Accounting Standards Committee and International Accounting Standards Board The role of International Accounting Standards Committee through committees and consultations with the Internationa l Accounting Standards Board in establishing International Accounting Standards is issuing interpretation of standards since was replaced by the International Accounting Standards Board. (Mattessich, 2007). The International Accounting Standards Board’s role is to regulate and amend International Accounting Standards and International Financial Reporting Standards and also to create new standards if possible. They essentially oversee the application of the standards to ensure uniformity. Examination of different accounting standards and determinants of national accounting standards Political and economical ties Countries which are geographically close usually create trade unions for free movement of goods, services and capital between them. Political and economical ties play a major role in the formation of these trade unions which relatively affect the accounting standards used by the union nations. (Riahi, 1985). Nations like Germany have adopted the cash method since itâ⠂¬â„¢s a communist government and its main focus is the welfare of every individual. Britain, a capitalist government has adopted accrual method since in a capitalist government the main focus is about competition which will in turn influence growth. Therefore, all the nations allied to the two countries tend to have similar accounting practices. (Riahi, 1985).Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Level of inflation During inflation firms tend to choose a different accounting policy for stock keeping, either LIFO or FIFO, to ensure maximum profitability. (Mattessich, 2007). The governments usually try to cub the level of inflation by employing both scholars and professionals to try and regulate inflation. In Zimbabwe, a country that has the highest level of inflation, very minimal growth can be achieved so the government tries so much to fight inflation. In developed countries like America, inflation has very minimal effect so the two countries are forced to adopt different accounting standard for the welfare of the people. Level of economic development Germany is a major producer of goods and low producer of services since most of its population comprises of the elderly. This means the government receives more taxes from exports. The government has adopted the cash accounting model since this model ensures that the welfare of the people is well catered for. In Britain, the g overnment has adopted both the accrual and the cash model. This is because Britain is a major producer of goods and services. They have adopted a capitalist kind of government which encourages people to work hard. National culture The national culture is usually carried down from one generation to another. Germany colonized most of the African and European countries. Germany has adopted a communist kind of government. Such countries adopted a similar kind of government and accounting practices that were carried down to the subsequent generations. Relationships between business and capital providers This is especially important if the capital providers are foreigners. This is because the capital providers will need accounting standards that they best understand. This is mostly experienced in the capital market especially when a steady growth is noted and most investors are foreigners (Bhattacharyya, 2005). Both Brazil and India have been forced to change their accounting standards to influence capital inflow from foreign investors which is healthy for growth. This is because the two countries have had a steady growth. Therefore, in conclusion, these various determinants impact significantly in the determination of a country’s accounting standards. Thus such factors should be put into consideration in understanding the reasons of adopting one accounting model over another. References Bhattacharyya, U. (2005). Municipal accounting: concepts and practical issues. Mittal Publications: India. Mattessich, R. (2007). Two Hundred Years of Accounting Research. Routledge: Britain. Riahi, B. (1985). International Accounting: issues and solutions. Quorum Books: California. Rich, J., Mowen, M., Hansen, D. Jones, J. (2009). Cornerstone of Financial Accounting. Cengage Learning: Florence. Saudagaran, S. (2009). International accounting: A User Perspective. (3rd ed.) CCH: Chicago. This research paper on Global Accounting Standards was written and submitted by user Jonah A. to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.