Role of international accounting standard board (IASB) Essay

Custom Student Mr. Teacher ENG 1001-04 26 September 2016

Role of international accounting standard board (IASB)

International accounting standard board is an independent accounting standard setting body. It was founded in 2001 to succeed international accounting standard committee with it location in London and consist of 14 members. It main role is development of accounting standards that guide the preparation and reporting of financial statement. It is also responsible for reviewing the existing standard to meet the changing need in accounting environment for instance IASB and FASB are working jointly to produce a new conceptual framework for financial reporting.

This conceptual framework deals with objective of financial reporting, qualitative characteristics and constraints of decision-useful financial reporting information. IASB is also responsible in creating accounting rules that are relevant and consistent in all countries (Jon $ Bill, 2008). Role of the U. S. Financial Accounting Standards Board (FASB) One of the major goals of financial accounting standard board is establishment of financial accounting and reporting standards. These standards govern the preparation and reporting of financial reports.

FASB also develop broad accounting concept which guide the board in creating new standard and reviewing the existing one. FASB also develop and review the conceptual framework that establish reasonable bounds for judgment 2 during the preparation of financial reports and also increases understanding of, and confidence in financial information by users of financial statements. The conceptual framework also help the user to understand the nature and limitation of information contained in financial reports (Pelham, 2004).

Benefits of having one world-wide standard for financial reporting To investors and other users a common standard of financial reporting will facilitate comparison of financial reports. Investors will be able to make meaningful and useful comparison of investment portfolio in different countries. Multinational companies will also benefit since consolidation of financial statement will be easier. In the event of merger and take-over, appraisal of foreign enterprise will be more straightforward. In addition common financial reporting would make it easier for multinationals to comply with reporting requirement of foreign stock exchanges.

It would also be possible for multinationals to reduce audit cost and facilitate transfer of accounting staff across national borders (George, 2006). The national government would save money and time as they adopt international accounting standards in full. The government would also be able to counter transfer pricing which is usually practiced by multinationals through the use of foreign accounting practices which are sometimes difficult to understand. The calculation of tax liability would now be easier particularly for multinational companies who receive a sizeable portion of their income from abroad.

Countries which could not be able to issue standards will be guaranteed of well researched and quality standards. It will also ensure transparency and accountability of company’s operations in different countries. 3 Adoption of common standard would make it easier for international investors to monitor their oversea investment thus assisting the government in attracting international investors. Finally common standards would promote trade within regional treading block through the use of the same accounting practice. Concerns to a manager if IFRS replace U. S. GAAP

One of the concerns to a manager is how the adoption of IFRS affects the financial position of the firm and those of other competitors in the industry. Change in accounting policies as a result of new standard may improve the financial appearance of some companies for instance a company which has been using LIFO method for valuing inventory but changes to LIFO may generate some gain in the process and thus gaining competitive advantage over it rival. The other concern of a manager would be the cost to be incurred for implementation of new standard. Need for training may increase both accounting and auditing cost.

The next concern to the manger is how the conversion to IFRS from GAAP affects the firm’s operations such as IT systems, tax reporting and tracking of stock-based compensation. If FASB accepts IFRS for all entities, do you believe accounting information become more useful? Accounting information is considered useful if it posses two fundamental qualitative characteristics i. e. relevance and faithful representation. Besides this two fundamental characteristic there are other enhancing qualitative characteristics which distinguish more useful information with less useful information.

The enhancing qualitative characteristics include comparability, verifiability, timeliness and understandability. 4 In comparing the FASB and IASB framework both recognizes relevance and faithful representation as the two fundamental qualitative characteristic. In addition both recognizes comparability, verifiability, timeliness and understandability as enhancing qualitative characteristic, the only difference between the two is the way they define this terms (Pelham, 2004).

Therefore adoption of IFRS will not make a major significance to the usefulness of financial information. However adoption of IFRS will enhance comparability of accounting information. Information about a company is considered more useful if it can be compared with similar information about other company and adoption of IFRS for all entities will enhance comparability and thus make accounting information more useful. How are the FASB and IASB standards enforced?

The standards developed by FASB are enforced by security and exchange commission (SEC) and AICPA. While filing the annual report to SEC all public limited companies are expected to have prepared their report in accordance with general acceptable accounting standards (GAAP) which are developed by FASB. The IASB standard are enforced by the government, stock exchange commission and accounting bodies in the country where they applicable for instance all companies incorporated in UK are expected to prepare their annual report in accordance with IFRS. How might the US and IFRS may converge on the issue of LIFO accounting for inventory Though IFRS does not recognize LIFO as a method of valuing inventory it is possible for the two to agree that either method can be used to value inventory just like the use of either reducing balance or straight line method in calculating depreciation but any method chosen has to be consistently followed and a change from one method to the other has to be explained by a good reason and disclosed in annual statement.

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