Introduction
International accounting standards refer to the principles that are considered worldwide while balancing financial records. The goal of international accounting has been to create a comparison of different businesses in the world, fostering global trade and increasing transparency in financial reporting. Investors can make well-versed economic decisions about investment openings and the risks involved due to the accountability, efficiency, and openness developed by comparable accounting standards universally. Additionally, international financial reporting standards are conventional common guidelines that aid in the transparency and consistency of financial statements globally.
These standards state that companies must report their accounts, their significant transactions, and other actions with economic impact. International Financial Reporting Standards (IFRS) were introduced to limit fiscal inconsistency in corporations. IRFS enables organizations to create a conjoint accounting language and ensure that businesses and their financial statements can be constant and unswerving from one company to another and from a country to a different nation. Therefore, one can analyze various aspects of international accounting that are related to IRFS.
The Consistency Aspect of International Accounting
The consistency aspect of international accounting depicts that once a company adopts a particular accounting strategy, it should follow the principle dependably to ensure that results reported from future accounting can be comparable. However, when new methods emerge that improve the documented financial report’s efficacy, a company can change and adapt to the transformation (Kieso et al., 2020). The adjustment should be clearly stated to enable the financial statements’ examiners to scrutinize them with ease. For instance, if a company uses the First In, First Out (FIFO) assumption in evaluating its cost flow for the inventory and formulating the cost of goods sold, there will be a conclusion that Last in, First Out (LIFO) should indicate the business’s profit. Before auditing, many companies try to conceal the gap in reliability in the period of change from FIFO to LIFO. However, when this information is not disclosed, auditors proclaim that no transparency during a particular period.
Moreover, if consistency is not followed, it creates doubts for the board. Typically, auditing helps organizations to maintain a consistent track of every transaction. Thus, dependability can help attract potential stakeholders and improve general business competence, strengthening trust among the shareholders. Steadiness is highly advised, but people cannot outweigh the fact that different economic, cultural, institutional, and legal measures that support financial reporting can cause variances in accounting patterns. Although consistency is hugely recommended, there are some potential causes of inconsistency on the rise (Morales-Díaz et al., 2018).
First, different interpretations of IFRS standards can lead to inconsistencies due to their ambiguity. These standards require interpretive guidance as various constituents might arrive at different variations that might be risky when maintaining consistency in the results.
Secondly, experience and culture might significantly influence consistency since it might become difficult to apply these standards without being influenced by past experiences. The solution to these problems would be educating organizations on maintaining consistent financial accounting. Additionally, during such training, any arising queries should be addressed to ensure that officials do not have any reason to question the firm’s economic accounting.
The Transparency Aspect of International Accounting
The transparency aspect of international accounting refers to clarity, user-friendliness, and easier understandability of financial statements. In transparency, financial terms and hidden entries should not be used, and everything that is written must be elaborated. The importance of auditing is to make every assessment understandable to every reader with detailed elaborations ensuring each figure and entry is accounted for (Kieso et al., 2020).
Consequently, IRFS focuses on the aspect of transparency since it aids in inspecting any cases of fraud that may arise between one audit and another. With the assistance of a third party, the auditor, the inspection opinions are crucial in determining an organization’s sincerity. It improves the credibility of the financial statements with users like investors, lenders, and creditors. Depending on the validity of a particular organization, business statements can be compiled to provide funding or credit the business (Ebaid, 2016). Hence, transparency in fiscal reports should always positively impact its readers with entries clearly and justly recorded.
Transparency also helps in attracting investors globally as everyone would like to capitalize on an authentic organization. With transparency received from auditing, the organizations can track the ever-changing business environment and the competition that rises in different sectors. In rare cases where transparency is not adhered to, some officials might try to tamper with the financial statements. IRFS has also ensured that board members use auditors to verify their monetary accounts and ensure transparency is observed. The assessment exercise is also vital since it prevents problems of understatement, misinterpretations, and scams.
Auditing is encouraged since it is a factor of corporate transparency governance. Some of the documents that show an organization’s authenticity include balance sheets, which show the company’s liabilities, assets, and stockholders’ equity (Kieso et al., 2020). Income statements show the profits and losses of the organization. Cash flow statements indicate all the credits cash in and cash out and any debits the corporation experienced during a particular period. Lastly, the stockholder’s equity information shows all the shareholders’ equity records and any changes that may have happened at any specific time.
Globally, transparency is essential to every firm as it reduces the uncertainty since all participants are receiving the same data, helping them make their conclusion. Correspondingly, the growth of any business is predetermined by how it manages the few resources it has. Furthermore, no new investors would invest in firms with illegitimate financial statements and low track of resources. Lack of clarity leads to hidden information, such as debt levels, and investors may fail to determine when the business is struggling (Kieso et al., 2020). Another essential aspect of factual financial statements is that investors can compare their portfolios with related enterprises.
Benchmarking is crucial as it helps shareholders design innovative measures to grow the business. International financial accounting standards also get amendments annually through the IFRS and International Accounting Standards Board (IASB) interpretation committee projects (Ebaid, 2016). In this case, individuals can learn that correctness allows investors to make the right adjustments to improve corporations. Therefore, transparency is vital in accounting since it determines the procedures that an organization can practice.
Conclusion
The aspects of international financial accounting play a significant role in improving the performance of organizations. Investors can focus on these factors before capitalizing on a particular firm. Moreover, transparency is encouraged by IRFS since it enables organizations to develop ways of limiting losses and enhancing profits. Consistency is another factor that people can address when focusing on IRFS. Typically, every organization aims at increasing its output and minimizing expenditure.
Hence, the aspect of consistency can be utilized by enterprises to develop plans that can increase production and limit losses. Furthermore, without these aspects of international accounting, investors would incur losses due to insufficient accounting of resources. In essence, consistency and transparency have enabled IFRS to limit the gap between global markets, allowing investors to diversify their investment opportunities in different areas of the world.
References
Ebaid, I. (2016). International accounting standards and accounting quality in code-law countries. Journal of Financial Regulation and Compliance, 24(1), 41-59.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting IFRS. John Wiley & Sons. Web.
Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial ratios: a new methodological approach. Accounting in Europe, 15(1), 105-133.