Contemporary Accounting Theory Commercial Transactions

Question: Discuss about the Contemporary Accounting Theory for Commercial Transactions. Answer: Brief history of the IFRS The concept of convergence of international standards was born somewhere way back in 1950s after the World War II. As a part of increasing harmony between nations, cross border trade and exchange was encouraged. This also led to free capital inflows and outflows and as a part of economic and financial integration, for the purpose of commercial transactions, the need for having a common accounting policy and related preparation of financial statements was felt (Gordon et. al, 2012). With the initial efforts targeted towards harmonization, interest in international accounting developed in 1960s. In 1962, the 8th International Congress Meeting for Accountants was hosted by AICPA. Discussions centered around the action to be taken for the development of accounting, auditing and reporting standards on an international basis. In 1966, United Kingdom Canada formed a study group that was active for almost ten years to study the differences between their accounting practices and arrive at co nclusions based on the best practices. In 1967, the first book on International Accounting authored by Prof. Gerhard G. Mueller was published (Wagenhofer, 2014). Since 1970s, the establishment of independent standard setting bodies began and FASB, IASC was formed. The IASC functioned under AICPA which had its presence in 8 countries with a mission of spreading awareness about the basic accounting standards to be followed in the preparation and presentation of financial statements and to achieve worldwide acceptance of the same. As there was initial reluctance, not all countries agreed to follow the international standards but this was just a welcome initiative (Gordon et. al, 2012). The FASB was also working towards the same mission and decided to revise the accounting standard on foreign currency. In this process, the representatives from UK, Canada and a few other countries actively participated and this was seen as FASBs first such successful initiative towards harmonization of accounting standards (Bae et. al, 2008). In 1987, the IASC issued 25 accounting standards. Most of these already existed in different countries but they had alternative treatment options with reference to the specific accounting item under discussion. So IASC wanted to narrow down these alternatives and make the standards more precise rather than allowing options and giving descriptions about the same. As the FASB and IASC were working independently but towards the same objective, the need for their merger was felt and FASB became a member of IASC in 1987. In late 1980s, FASB stressed on the importance of setting up superior international standards that would have the impact of replacement of the national standards. In 1993, FASB and the representative from Canada undertook a joint venture for issuing a standard on segment reporting and ultimately landed up agreeing on the standards that were substantially the same. After this in 1993, FASB and its related counterparts from United Kingdom, Canada and Australia undertook a group research which was popularly known as G4 and published research reports on 11 such issues relating to financial reporting and accounting for leases. This group later on became G4 +1 as New Zealand also became its member (Walker Chua, 2008). In 1994, concurrent projects on Accounting Standards for Earnings per Share were undertaken by FASB and IASC with the objective of eliminating the differences between the same. In 1995, the FASB commenced the activity of comparison between the GAAP (Generally Accepted Accounting Principles) of USA and the IASC Standards. In 1995, the IASC undertook the task of compilation of what would constitute the core accounting standards across various countries keeping in view the listing requirements in capital markets across nations. The SEC (Securities Exchange Commission) extended their support for the same. In 1996, the enactment of the National Securities Markets Improvement Act required the establishment of a comprehensive set of generally accepted accounting standards of high quality that would facilitate the financing activities among countries and also enhance the ability of the foreign corporations to gain access to listing in USA. SEC also stated that the financial statements of foreign private users would be accepted if it is of high quality, sufficiently comprehensive and rigorously interpreted and applied (Melville, 2013). In 1998, the crisis of Asian markets triggered the World Bank, IMF and G7 countries to quicken up the process of completion and global adoption of high quality international standards. From the beginning of 2000, IFRS saw a wave of acceptance and slowly and steadily lot of countries became a part of the same. By 2013, the European Union and almost 100 other countries accepted to follow IFRS or standards that were locally variant to the same. In the same year, China Japan have also commenced working on convergence of their standards with IFRS. Despite all these efforts over so many years, the worldwide adoption of IFRS still looks like a mystery as there is a lot of criticism against the same. The US GAAP is currently considered to be good and based on the true and fair view of the financial statements. On the other hand, IFRS focuses on Fair Market Value and has financials prepared based on the same. So the very idea is not much acceptable to USA which thinks that the existing GAAP provisions are good to go with (Brown, 2011). Apart from this, the bitterness among countries of the West is burnt out through IFRS. It is reported that the European Union agreed for the adoption of IFRS simply so that it could end the supremacy and legacy of US GAAP all over the world. The political forces in EU were also feared by the changes in German Law which allowed companies to either adopt US GAAP or IFRS or German GAAP and a lot of companies also adopted hybrid models. So to end this, entire EU decided the flat adoption of IFRS without any second choice (Landsman et. al, 2011). IFRS is also considered to be responsible for the bankruptcy of Germany and the EU crisis in the recent years. Hence countries like USA and India still believe that IFRS might not be compatible given the set up and structure of businesses in these countries. It is also believed that there are better ways of improving the quality of financial reporting without converging with IFRS (Meeks Swann, 2009). Thus there are a lot of criticisms against the adoption of IFRS from different parts of the world. Introduction In India, the forms of business organizations are sole trader, partnership business, joint stock companies, trusts, so on and so forth. The accounting for each of these is regulated by independent bodies. In India, the Accounting Standards are formulated by the Institute of Chartered Accountants of India which is considered for review by the NACAS (National Advisory Committee on Accounting Standards) of the Ministry of Corporate Affairs and upon approval, these standards are notified to the Central Government for publishing in the Official Gazette of the Country which marks the establishment of standards that are both operative and enforceable under law (Northington, 2011). Accounting Standards and Auditing Standards The applicability of the Accounting Standards and Auditing Standards is common to all. Apart from this, since joint stock companies are publicly or privately owned and operated and also involve higher capital than a sole trader or partnership form of business, so the Companies Act, 2013 governs the functioning of the same. This Act also contains sections that require the maintenance of books of accounts in such a way that it gives a true and fair representation of the business transactions. The Companies Act also states that the Accounting Standards should be complied in full in the preparation of the accounts combined with the disclosure and specific reporting requirements laid down in the Schedules of the Companies Act, 2013. The Accounting Policies, assumptions or estimates used in the preparation of financial statements have to form a part of the Notes to Accounts (Maria, 2016). Apart from this the Income Tax Act, 1961 also contains a few provisions such as books of accounts can be maintained by assessee under the cash system or mercantile system, but a hybrid system is not allowed (Spiceland et. al, 2011). There is another section which requires that for the purpose of calculation of profit and gains of business or profession, the valuation of inventory should be done as per the regular method of accounting followed and adopted by the assessee. This amount can be further adjusted to include any duty, tax, and cess or fees actually incurred and paid by the assessee. Thus these are the requirements with reference to the Companies Act and Income Tax Act. But irrespective of this fact, Accounting Standards are equally applicable to all entities (Choi Meek, 2012). The Institute of Chartered Accountants of India has also issued Guidance Notes on Accounting Standards in which there are specific case studies and examples showing how to deal with the gray areas or such other complexities. The Guidance Notes also have to be followed wherever applicable (Hegarty et. al, 2014). There are listed companies which have to follow the requirements of the Listing Agreements signed with Securities and Exchange Board of India. A few areas like Related Party Disclosures are given specific importance by the Listing Agreement which states that the disclosure should be completely in compliance with the Accounting Standards on the specific areas (Needles Powers, 2013). Same is the case with Segment Reporting and Accounting for Taxes on Income where the Accounting Standards have to be followed from time to time even with reference to the reporting of unaudited financial results. Corporate Governance Report is also a requirement of the Listing Agreement (Davies Crawford, 2012). There are a few companies like Infosys and Reliance, which can be named among the Top 10 Indian companies. These companies anticipate the adoption of IFRS in India and have already commenced implementation of a few of the IFRS provisions as disclosed in detail in their annual reports (Brown, 2012). Thus the conceptual framework of accounting is India is guided by all the above discussed bodies and standards set by them. S for small businesses like sole traders and partnerships, accounting is fairly simple whereas for bigger corporate and listed entities, compliance with every specific Act and law becomes a mandate (Horngren, 2012). Indias Progress towards IFRS Indian jurisdiction has made a public commitment towards moving to a global platform and following high quality international accounting standards. A few studies have also shown that in emerging economies the cost of capital generally falls due to the adoption of IFRS which could be possibly the case with India. The Preface of the Indian Accounting Standards also acknowledges the urgent requirement of the convergence between IFRS and Indian Accounting Standards (Brown, 2012). Despite this, India has not completely adopted IFRS. Instead India has issued Ind-AS which is a new version of the Accounting Standards but most of the requirements are in consonance with the IFRS. At the end of each Ind-AS, the significant points of differences between Ind-AS and IFRS are also mentioned (William, 2010). Prior to 2013, SEBI had the authority for prescribing the Accounting Standards that listed companies have to follow. SEBI primarily required that the accounts are prepared according to the Accounting Standards issued by the Institute of Chartered Accountants of India, but it also afforded an option for large corporate houses with operations in India and abroad to choose reporting as per IFRS if they wished and around 11 companies chose the IFRS option. It needs to be noted that IFRS has provided utmost advantage to the analyst of the countries who have followed it. This has enhanced the information quality (IFRS, 2016) In 2013, the Companies Act was revised which made it mandatory for the companies to follow the Ind AS which is the new set of Accounting Standards issued by the ICAI. The Companies Act, 2013 did not give the option to SEBI to continue IFRS option. Still, companies which were previously following IFRS continued doing the same. In addition to the financial statements prepared as per IFRS, for the purpose of compliance with the Companies Act, 2013 these companies have to prepare separate financial statements in compliance with Ind-AS. Thus as per the current Indian regulations, Ind-AS is to be mandatorily followed, whereas IFRS is not mandatory (IFRS, 2016). It can be concluded that India is one such Asian giant that has come forward voluntarily to adopt IFRS and currently some 7 big corporate houses are preparing Financial Statements according to IFRS as these companies constitute 23% of the total Indian capital market and also these companies can get an appeal from international investors (Brealey et. al, 2011). IFRS adoption provides the passport for almost every capital market in Europe or USA. Ind-AS is not the same as IFRS and a lot of time and effort is required to understand, interpret and implement the same. Though this is a voluminous task, there is unlimited scope for growth and expansion (Brigham Daves, 2012). Conclusion Apart from these factors, the focus of IFRS on Fair Value over historical cost also makes it difficult for companies to adopt the same since the fair values of all the assets and liabilities might not be readily available (Bushman Piotroski, 2006). For these reasons, entities might intend to continue their existing accounting policies and might not shift to IFRS until the Government mandates the same. If the IFRS is made mandatory then it will lead to uniformity and better projection of result. On a closing note, it would be pertinent to say that there are a few carve out from the IFRS which need to be framed according to the Indian context to gain applicability (Parrino et. al, 2012). If this is done then a full transition to IFRS could become a reality. In short, it can be said that IFRS is endowed with immense benefits and helps to improve the capital market. 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