Executive Summary
Following the plan of XYZ Corporation to transition from GAAP to IAS, this report will explore the major areas that the corporation should take into account and recommend areas of importance. IAS reporting standards are universal reporting principles that will ensure the uniformity of financial reporting internationally. The major findings include that there will be a dramatic change in the names of financial statements.
The corporation should engage sound audit and reporting practices in their reporting mechanisms. The transition will come with heavy investments in the costs of developing employees and changing reporting structures. However, XYZ Corporation’s transition will offset the costs borne after it starts realizing the benefits of the transition. The report concludes that investing in the transition will be a heavy investment with long term benefits thus a worthwhile development.
Introduction
The International financial reporting Standards (IFRS) were introduced in 2001 replacing international accounting standards (IAS) (Tweedie, 2004). The standards were offered by the IASB (International Accounting Standards Board). The standards are mandatory for all public companies listed on stock exchanges including the NYSE (New York Stock Exchange).
The standards are implemented for the consolidated accounts reporting of companies (Gordon, 2008). Before the transition to IAS, every country had its own standards for guiding the calculation; GAAP (Generally Accepted Accounting Principles) standards. The rationale for the shift to IAS was based on the need to eliminate the incapacity of investors to reach informed decisions from the records drawn on the basis of GAAP (Beuren, Hein and Klann, 2008).
Research Findings
Making the transition to IAS will affect the financial records of XYZ Corporation
The transition from GAAP to IAS by XYZ Corporation will cause significant changes in the financial records of the corporation (Kwok and Sharp, 2005, p. 75). The changes include the significant change in the format of the financial records prepared, as opposed to those prepared under GAAP standards (Benzacar, 2009, p. 29). The statements of the corporation will change in the different areas mentioned. Next, the title of the corporation’s balance sheet will change from ‘balance sheet’ to ‘group balance sheet’, and the name fixed assets will change to non-current assets (Benzacar, 2009, p. 29; Tsalavoutas and Evans, 2010, p. 820). Capital and reserves are renamed as equity; profit and loss accounts are renamed to retained earnings, and the total capital invested is renamed as total equity (Benzacar, 2009, p. 29).
Through the change of the names, the name titles of financial records will coincide with the information presented in other records, which will make it easier for outsiders to evaluate the financial health of the company in question (Benzacar, 2009, p. 29-30).
The rationale behind the need to change names includes increasing the comparability of different financial records:
- The new names will show a cohesive financial representation of the corporation’s activities allowing the readers to see the relationship between the items presented in different financial statements, demonstrating that the statements complement each.
- Through the change of names, information will be disaggregated so that it can help a reader foresee the future cash flows of corporations like XYZ.
- With the names showing a better association between the information presented in the different records, readers will be able to evaluate the liquidity, as well as the financial flexibility of organizations like XYZ Corporation (Benzacar, 2009, p. 29-30; Benzacar, 2009, p. 29-30).
The shift to IAS will require the development of a universal accounting language by the IASB, which may not be possible
The development of a universally accepted language should form a major component of the objectives of the IASB while enforcing the transition into the IAS, which XYZ Corporation is pursuing (Stittle, 2004, p. 139). As a result, even with the adoption of the IAS, XYZ corporations should realize that it may not receive maximum benefits from the transition as language plays one of the most critical roles in the generation of the varied accounting models for related areas (Evans, 2004, p. 235; Jacob and Madu, 2009, p. 356).
The issue that will face XYZ Corporation in its shift to IAS will include the limitation it will face due to the inaccuracy of the IASB in translating accounting statements and concepts from one language to the other (Jacob and Madu, 2004, p. 356).
This limitation is supported by Evans (2004, p. 235) who argued that an exact transfer or equivalents of meaning during translation is often almost impractical in financial reporting. Consequently, it will not be possible to realize total homogeneity or to convey the exact meaning of the IAS accounting standards from one language to the other (Stittle, 2004, p. 139; Evans, 2004, p. 235; Salamudin et al., 2010).
This limitation of the language used by the IASB is likely to cause confusion in the comprehensibility of the financial data presented by different organizations including that presented by XYZ Corporation after it is translated into other languages like German, Spanish, and Vietnamese (Evans, 2004, p. 235).
Therefore, international investors intending to invest in organizations like XYZ corporations are likely to get the wrong picture about the financial health of institutions as translations may eliminate the weighty nature of the financial concepts and the variables in the statements (Evans, 2004, p. 235; Stittle, 2004, p. 139-140).
The XYZ Corporation is likely to develop its financial records on the basis of distorted statements drawn from the records of other organizations due to the limitation (Evans, 2004, p. 235; Stittle, 2004, p. 139,140). In extreme cases, the information presented by XYZ corporations and that of other organizations is likely to be distorted through translation. This is likely to result in concerns over the reliability of IAS standards (Stittle, 2004, p. 139,140).
The cost will be a major consideration among the companies making the transition to IAS
The cost will be a far-reaching aspect when deciding whether to change from GAAP to IAS. As noted by Ballas, Skoutela, and Tzovas (2010, p. 934), the transition will entail more than special knowledge among the accountancy team of corporations. This will also lead to the alteration of the information models of the organizations.
This presents the need to invest in the training of the staffs alongside the transition (Gordon, 2008 p. 232). As a result, the transition to IAS becomes quite expensive to XYZ Corporation both in the short and long term as there will also be a need to invest in the continuous development of the company’s accounts (Pickard, 2007; Gordon, 2008, p. 232).
The major areas of investment during the transition include dedicating funds for software development. Thus, the corporations will require their software development team whether internal or external to develop new software that meets the standards of IAS accounting (Gordon, 2008, p. 232).
Apart from the development and maintenance of the financial records software, the employees of the company should be trained in the areas of using the software in formulating financial records that are in line with the new and emerging standards (Pickard, 2007, p. 36). Some of the areas that will need major investments in XYZ Corporation will include the development of an employee-base and the maintenance of the infrastructure available at the company (Ballas, Skoutela and Tzovas, 2010, p. 934).
Recommendations
While undergoing the transition from GAAP to IAS, the XYZ Corporation should note that the criteria for its endorsement should be explored in an in-depth manner. In this case, it should draw clear differences between the decisions related to standard setting and adoption, as well as the endorsement of the standards (Benzacar, 2009). Additionally, during and after the transition, the interpretations of IAS should be reserved under the directives of IFRIC (International Financial Reporting Interpretations Committee (UNCTAD, 2012).
The transition to IAS should be accompanied by the key concern of engaging sound audit consultants, practices and standards, as well as reinforcing the accounting mechanisms of the corporation. This will ensure that the corporation meets the expectations of the IAS standards in executing its audit and accounting functions (Jacob and Madu, 2009).
The transition to IAS will require a heavy investment in funds to be employed in the transition, change of present accounting mechanisms, as well as contracting consultants to help in the transition and its maintenance (Jacob and Madu, 2009). However, apart from the costs incurred by the corporation during and after the transition, the benefits of the transition will outweigh the costs of the transition, as well as improve the standing of XYZ Corporation globally.
Conclusion
IAS is an integrated set of financial reporting standards developed on the basis of internationally articulated financial principles. The transition from GAAP to IAS was intended to eliminate the difficulties experienced by international investors. The transition should be accompanied by sound audit consultations and practices so as to ensure that the new standards are observed. Despite the heavy investment during the transition, the benefits will outweigh the costs borne by XYZ Corporation in the long term.
References
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