International Accounting Standards: UK Financial Reporting

world-wide write up Standards UK Financial ReportingAPC311 worldwide FINANCIAL REPORTING ASSIGNMENT(Word count 3, 080)IntroductionThe growth of world(prenominal) activities has been rapid over time. These activities accept atomic egress 18as of outside(a)istic trade, international investment, international flummox and equity offerings, capital movements in the midst of countries and the number of multinational firms. Countries, entities and bodies who pack fall(a) out these activities continuously want to achieve growth and higher re inverts at dispirit toll of pay. This implies that on that point is often the need to consider international kinda than national or internal alternatives of raising finance. The differences in business relationship systems and principles that follow in distinct countries ar a barrier to towards the comparability of pecuniary randomness that is published by companies using different throttles of account standards (Alexander, 2007 ).This lead to the pressure for international harmonisation to regulate, prep ar and use fiscal educational activitys which are reliable, comparable and lucid (Nobes and Parker, 2000). This target simply be achieved if countries employ the very(prenominal) accounting standards through the harmonisation of accounting principles. International harmonization may be defined as a political process aimed at reducing the differences in accounting practices across the world in order to achieve comparability and compatibility (Hoarau, 1996). To achieve this feat, accounting regulators such as the IASB pack attempted to advance harmonization projects in an attempt to minimize differences between different national accounting standards (ORegan, 2006).As argued by Choi et al (2002), harmonization pass on make it much likely for users of pecuniary statements to interpret the in weeation correctly and make better decisions establish on that information. It forget overly reduce dra stically the information asymmetry between stakeholders and companies and hence cede manpower, money and resources.The International story Standards Board (IASB), issuers of International accountancy Standards (IASs) was establish in 2001 and is the independent standard-setting body of the International Financial Reporting Standards (IFRSs) Foundation, an independent, head-to-head sector whose principal objectives are to develop in the public interest, a set of high quality, understandable, enforceable and globally accepted international financial reportage standards (IFRSs) establish on clearly articulated accounting principles. IFRSs are a set of high quality, understandable, enforceable and globally accepted Standards based on clearly articulated accounting principles.The need for International Accounting StandardsThe international investorThe information age and the advent of high-tech computers makes practicable the availableness of massive amounts of international financ ial information. Institutional and separates who are interested in making international investments can therefore benefit from the global harmonization of accounting standards.International Accounting firmsThe role of international accounting firms include providing auditing and consulting services in many countries. The absence of international accounting principles implies that they attain to gain expertise in areas of domestic financial accounting principles and relate laws. Gaining this expertise can substantially increase their operational costs.International intergovernmental organisationsInternational intergovernmental organizations including the United Nation (UN), the European Union (EU) and the Organization for Economic Cooperation and culture (OECD) extend credits for projects to other countries. They are therefore interested in obtaining comparable financial information in order to evaluate the projects they carry out in the various countries.as the organization. Thi s can be achieved only if there is harmonization of international accounting principles.Developing countriesDeveloping countries often seek international backing sources for their development. It is important for their governments and accounting regulating bodies to adopt international accounting standards in order to make it easier for them to access international financing sources.Stock exchangesThe use of international accounting principles can modify the internationalization of Stock exchanges which can in turn increase international financing activity.This essay will make particular reference to the UK equivalent of accounting standards i.e., theFinancial Reporting Standards (FRSs) to examine the different accounting interferences in the individual accounting standards of interest in this assignment.IAS 38 Accounting for impalpable pluss exposition An intangible plus is an identifiable monetary asset without physical substance. An asset is a resource that that is ente rtainled by the enterprise as a issuing of historic stillts and from which emerging economic benefits are expected IAS 38.8.The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in another IAS. The standard deals withthe criteria to be met before an enterprise can recognise an intangible assethow to measure the carrying amount of intangible assets and the disclosures that ask to be made.Examples of assets that may qualify as intangible assets under IAS 38 arecomputer software, copyrights, customer and supplier relationships, franchises, licenses, rights patents.The three critical attri stilles of intangible assets areIdentifiability In order for an intangible asset to be identifiable, it moldiness(prenominal)iness be separable and it arises from contractual or other legal rights, disregard slight of whether those rights are transferable or separable from the entity or from other rights and certificate of indebtednesss. (IAS 38.12) rule (power to obtain benefits from the asset)An intangible asset must be under the control of the enterprise in order for it to subscribe the power to obtain future economic benefits from the asset. Control will usually but not necessarily emanate from legally enforceable rights, in the absence of which it is more strong to prove the existence of an asset. For example, control over technical know-how is deemed to exist only if it is protected by legal right such as a copyright or patent.Recognition and measurement IAS 38 stipulates that an intangible asset should be recognised only if both of the following occurIt is possible that the future economic benefits that are attributable to the asset will give to the entity, andThe cost can be reliably measured.The cost of an asset must be reliably measured if the asset is acquired in a modal(prenominal) transaction. Also, the fact that a price has been paid for the asset, is a reflection of the mentality that future economic benefits will flow to the entity.Goodwill and brand planIn order for seemliness and brand image to be class ad advertisement as intangible assets and included as assets of the enterprise, they need to be de boundaryine separately. If saving grace and brands have been acquired externally, then their cost and existence can be identified and capitalised. As regards internally generated goodwill, it cannot be recognised as an asset becauseit is not separable from the businessit has not arisen form contractual or other legal rights, andits cost cannot be reliably measured (IAS 38).A reconciliation of the carrying amount at the beginning and the end of the period.FRS10, accounting for goodwill and intangible assets is the equivalent UK Financial Accounting standard to the IAS 38.The standard views goodwill arising on acquisition as not constituting an asset or an conterminous loss in prize. But it relates to the cost of an investment in the financial statemen ts of the acquirer, hence the values are attributed to the acquired asset and liabilities in the consolidated financial statements. The standard is of the view that even though purchased goodwill is not in itself an asset, including it in the assets of the reporting entity rather than deducting it from shareholders equity recognises that goodwill is part of a larger asset whose investment the entitys circumspection re chief(prenominal)s accountable. Thus, the objective of the FRS10 is that it ensures that purchased goodwill and intangible assets are charged to the income statement in the periods they are depleted.A comparison of the different accounting treatment of intangible assets by the IFRS and UK generally accepted accounting principles can be seen in addition 1. preachingThe IAS definition for intangible assets has its limitations as many intangibles such as patents and relate drawings do have a physical substance (Tiffin, 2005 p.67). all the same the real issue with inta ngible assets is that intangibles are difficult to value and as such, attempting to measure their disability is plagued with problems Godfrey Koh, 2001). The uncertainty about asset values and their impairment renders them susceptible to notional accounting.Intangible assets can be generated internally by firms. But it is difficult to accurately identify and cost such assets. IAS38 states that internally generated goodwill shall not be recognised as an asset. investigate and development are therefore considered to be different parts of creating an internally generated intangible asset. The look phase is defined by IAS 38 as original and intend investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. This implies that enquiry costs incurred are expensed when they occur. there is consistency in divideing what constitutes an intangible asset by the standard. Of course, this treatment of research is appealing as there is a pr obability that an initial research may not very lead to any economic benefit.Accounting for fills (IAS 17) commentary A affiance is an agreement whereby the lessor conveys to the lessee in accrue for a payment or series of payments the right to use an asset for an concord period of time.A absorb falls under two main categories a finance contain and an operating lease.A lease is classified as a finance lease if it transfers substantially all the risks and rewards fortuity to ownership. All other leases are classified as operating leases. motley is made at the inception of the lease. IAS 17.Thus, in order to accurately classify the type of lease, it is important to determine whether the risks and rewards associated with owing the asset are with the lessee or the lessor. An asset will be classified as a as a finance lease if the if the risks and rewards lie with the lessee. However, it will be classified as an operating lease if the risk and rewards lie with the lessor.As rega rds a finance lease, the concept of substance over form is utilise. The substance is that even though the legal owner of the asset is not the lessee, the commercial realism is that the lessee has acquired an asset by obtaining finance from the lessor, this implies the recognition of an asset and liability.Other distinguishing factors of a finance lease includeThe stupefy value (PV) of the minimum lease payments at the beginning of the lease amounts to substantially all of the fair value of the asset.By the end of the lease, the lease agreement transfers ownership of the asset to the lessee.The election rests with the lessee to purchase the asset at a price expected to be substantially lower than the fair value when the option becomes exercisable.The leases asset must be of a specialised nature.A comparison of the different accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 2.DiscussionOperating leases appear to be more touristy as both the leased asset and liabilities can be effectively kept off the balance sheet with future lease obligations reveal as footnotes. However, a finance lease, often treated as an in substance purchase by the lessee and a sale by the lessor, is less popular as it requires both leased assets and liabilities to be recognized on the balance sheet. But the finance lease does produce a task benefit because of a larger expense, interest plus depreciation, compared to an operating lease which only reports the lease payments as an expense. IAS 17 (IASB, 2008) allows managers to structure a lease in such a way as to avoid the reporting of lease assets and liabilities.In order to ensure a complete and transparent recognition of assets and liabilities arising from lease contracts on financial statements, the IASB decided to make no distinction between finance leases and operating leases and employ the right-to-use assets and its lease obligations that is based on the present values of future lease payments using the incremental borrowing rate of the lessee at the inception of a lease.Capitalization of lease can impact negatively on earnings because of the increased cost due to the depreciation of the asset and interest expense. This will in turn affect expected profit margin, return on earnings (ROE) and return on assets (ROA) (Bradbury, 2003).IAS 37 Accounting for provisions, contingent liabilities, and contingent assetsDefinition A provision is a liability of uncertain timing or amount.IAS 37 ensures that a provision should be recognised only when there is a liability i.e. a present obligation resulting from past events.Contingent liabilitiesDefinition A contingent liability is a possible obligation that arises from past events and whose existence will be support only by the circumstance of events not wholly within the control of the entity orA present obligation that arises from past events but is not recognised because it is not apparent that an outflow of economic benefits will be required to settle the obligation orA present obligation that arises from past events but is not recognised because the amount of the obligation cannot be measured with sufficient reliability. apocalypseAn entity should disclose a contingent liability in a note, unless the hatchway of an outflow of economic benefits is remote.Contingent assetsA contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.An entity shall not recognise a contingent asset. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition as revenue is appropriate.A comparison of the different accounting treatment of intangible assets by the IFRS and UK GAAP can be seen in Appendix 3.DiscussionIAS 137 aims at ensuring that only genuine obligations are dealt with in t he financial statements i.e. planned future expenditure even when authorised by the board of directors or equivalent governing body, is excluded from recognition. Appropriate recognition criteria andmeasurement bases are applied to provision, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount.The standard seeks to ensure that for example assets are not overvalued. Accounts receivables may be overvalued if tenable provision for bad debts is not made. This has the dip to inflate earnings and in such instances the provision for bad debts will prove to be inadequate in future, whilst in the short term account receivables and earnings receive a temporary boost.Also, contingent liabilities which are obligations that are dependent on future events for the confirmation of the existence of an obligation. If companies break away to record a contingent liability that is likely t o be incurred and subjected to reasonable estimation, it has the effect of understating their liabilities and overstating their net income or shareholders equity.The above examples are indications of how companies use notional accounting to manipulate their financial statements especially their balance sheets.ConclusionAccounting for intangible assets, accounting for leases and accounting for provisions, contingent liabilities, and contingent assets are all complex areas which are prone to manipulation in the form of creative accounting which is defined as the transformation of financial accounting figures from what they actually are to what preparer desires by taking advantage of the existing rules and/or ignoring around or all of them (Kamal Naser, 1992).Creative accounting in whatever form it takes is usually meant to overstate assets or understate liabilities.The collapse of a number of corporate giants such as Enron Corporation, Tyco International, World Com, Global Crossing, Arthur Anderson, Parlmalat etc. have not only destroyed investor confidence and shareholder values but it has also damaged the accounting profession. The situation is even made worsened when there are different accounting standards that are used in preparing financial statements.This is made even worse when there are different accounting standards used in preparing financial statements.The adoption of one set of global financial reporting standard such as the international financial reporting standard (IFRS) that confers with investors, stock markets, accounting professionals and accounting standards setters will go a long way to reduce the practice.Arguably, accounting standards whether in the US, UK, Australia or the IAS will not have all the answers to accounting and financial reporting problems but it is hoped that it will largely reduce its occurrence.APPENDICESAPPENDIX 1 comparability of IFRSs with UK GAAP treatment of intangible assetsAppendix 2 Comparison of IFRSs with UK GAAP treatment of LeaseAPPENDIX 3 Comparison of IFRSs with UK GAAP treatment of provisions, contingent liabilities, and contingent assets