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Financial Reporting Methods and the Challenges they pose to Accountants
Financial reporting is an important part of accounting. It is through reporting that an organization reveals how it performs in regards to certain models and the financial performance reporting of its variables. In today’s world, one major problem that affects the accountants is the method that they apply in valuation and reporting of financial statement. Different organizations in different countries embrace different concepts which affect the figures that appear on the financial statement making it hard to interpret the performance of an organization in regards to certain region. This outline will focus to outline how different organizations embrace these financial methods and how they continue to pose challenges to the field of accounting should there be no development of uniform standards to govern this challenge.
Investors majorly rely on performance of organizations through the figures that are presented to them through accounting. Similarly, whenever an investor plans to make a certain investment in a country, they have to weigh the option or methodologies that are applied in such a country. For example, if an investor comes from a country where they use IFRS and they would like to go to a GAAP country, they usually have to consider that IFRS is usually a principle based accounting method, while GAAP is a rule based method (El Razik 29). IFRS being a principle based method has the likelihood of interpreting transaction in vast figures hence allowing for the possibility of broad disclosures from financial statements. This is not the same case as with GAAP who may have fewer expectations.
The concept of management may matter to investors depending on the various methods that are applied. For example, in a method such as the IFRS, management of inventory only follows the use the FIFO method. This would matter to accountants as they have to worry on how to account for all the stocks under the different methods in a way that it makes sense. GAAP on the hand is not reserved and may allow for adoption of techniques that make it possible for an organization to release its stocks which means an accountant knows what they need to address at a certain time (Shafii and Nurazalia 44). This would mean that the figures that might be in financial statement might be different and make a significant impact to different accountants.
According to Sarea and Mustafa (68) different financial reporting methods also pose a challenge on how accountants calculate for different figures and how they will appear in financial statement. For example, under methods such as AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) how businesses calculate different figures may matter a lot depending on how different Muslim institution purports the method should achieve. Muslims follow doctrines also known as Shariah compliance. Under standards such as AAOIFI, it is considered uncouth to earn interests and profits. Shafii and Nurazalia (46) also add that this means that whenever accountants are making certain calculation, profits and interests should not reflect as gains. Such a difference may not factor in other countries that adopt other financial methods as they consider interest as an ethical way of doing business. In such a case, an accountant may be at a dilemma on how they should handle funds for a person who is a Muslim, yet they are in nations where other methods are the norms of accounting.
Different financial reporting methods also affect on some aspects that should appear on the balance sheet. Take a case of the Muslim AAOIFI, some of the products that they consider to be illegal such as the sale of alcohol may not appear on the balance sheet as they are considered to be against their culture and tenets. Other reporting methods such as IFRS monitor the movement of such good allowing only the most recent goods to be used in computation of the current sales. Assuming this is a case of a multinational company who have to report their financial performance to the various countries and their country of origin. The challenge now arises how should they make disclosures in a way that is uniform? Is there a certain way in which they can harmonize such transactions to reflect uniformity? Such challenge urges accountants also to wonder how such financial statements might reflect vertical, horizontal and regional comparison (Shafii and Nurazalia 69).
Other upcoming trends that pose challenge to accounting figures are globalization and development of new accounting guidelines in various countries such as the Sarbanes-Oxley Act in the case of the US. While the act hopes to build on trust to the investors and woo them that companies are more responsive and are more likely to be open, other methods also are prone to the previous characters that GAAP. Managers of a company may have a higher likelihood of influencing figures prompting the challenge to accountants whether they may need to do this while other methods do not allow it (Porter and Curtis 157). It also makes one wonder whether it is at all fair to give the wrong impression to the investors. In such a capacity, accountants have to query their ethical concerns and dilemmas. They also have to identify a way in which they can solve such a problem.
As El Razik (19) notes that the procedure of the method also raises concern to the accounting field. How should the accountants report values on income, how should they directly make the figures in a way that investors will understand the financial position of an organization which will allow them to make the right decision. Owing to these challenges, the international community has created a body that will hope to oversee some level of uniformity between the various reporting methods and hopefully offer some light on some of the pointers that cut across these methods (Porter and Curtis 211). In the current time, accountants have to bear the problem and hope that the body will come with the solutions that will make this quest possible.
The consequences of these accounting reporting methods have been immense and have affected a variety of fields. It is known to be the duty of the accountants to show how organizations are performing hence influencing investors to make positive consideration towards the performance of the organization, the value of stock in the stock market, the skills that are disseminated by accounting institutions to accounting students, the level of emphasis by accounting standard setters and the corporate managers in making appropriate decisions on how to run an organization. Thus, unless a clear guidelines is developed demarcating what these financial methods should address, accounting will be faced with challenges of adapting to market transformations and changes.