Chapter Two Worldwide Accounting Diversity

The purpose of this paper is to define accounting, and identify the four basic financial statements. The paper also explains how the different financial statements are interrelated to each other and why they are useful to managers, investors, creditors, and employees.

The field of accounting is constantly evolving. This is true not only for the theory of accounting itself but also the entities that govern its theory and practice. Presently, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are faced with some of the biggest challenges to date. To understand the significance of these two boards, it is necessary to understand their histories, relations between the boards, and the standards that they set. Also how the knowledge of these boards and the field they lead, gained through the masters of science in accountancy

During the PRE-IFRS accounting system and where worldwide accounting diversity was widespread, a number of PRE-IFRS developmental factors were found to be the cause behind international differences in ownership and financing of companies and led to differences in the financial reporting practices of multi-national corporations (MNCs). This type of environment created extensive opportunities for corruption and poor performance and made it hard to compare global companies. The following four main PRE-IFRS development factors have the biggest impact on international business accounting practices: source of finance, legal system, taxation system and political and economic ties (Meek & Saudagaran, 1990). Even though the International Financial

As the complexity of our financial economy develops it is important that our accounting standards progress in accordance. Accounting is very important to the development of the global and local economies. Accounting is basically the gathering, summarizing and presenting of financial information of an entity to interested internal, external and possible investors. This information should be presented in a non-bias way so that other people are able understand.

Why do we study comparative accounting? Countries around the world have different aspects such as taxation, legal systems, culture and colonial influence that differ the way accounting is reported. Ultimately the need for fair presentation is the final objective to comparative accounting. Thousands of years ago when accounting was first practiced, each country practiced financial reporting according to the power and strengths in their country, regardless of how accounting was reported in neighboring countries. Nowadays, because the world is becoming more globalized and harmonized, standard-setters feel the need to report their accounting in a uniform way. The International Accounting Standards Board [IASB] was formed as a non-for-profit

A set of internationally recognized accounting standards facilitates capital flows across borders. Globally accepted standards make financial information readily comparable for its users. Foreign investors are more inclined to put money into a U.S. company if they are familiar with the company’s financial reporting. Conversely, U.S. investors will find it easier and less risky to invest in foreign companies when they know the local accounting standards (Epstein 2009). This will make U.S. companies and capital markets more competitive, since it saves costly reconcilition of different standards. Preparers, investors, auditors, and others will benefit from these cost effieciencies, since a Results of an IFAC Survey among accounting leaders around the world with respect to the importance of convergence to International Financial Reporting Standards for economic growth in their countries:

An aging of a company's accounts receivable indicates that $4,500 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a

Endenich, Hoffjan, Schlichting and Trapp (2016) found that international companies tend to have harmonious accounting policies when it comes to subsidiaries. There is a growing awareness about the need for a global accounting system, and this has had an effect of making

Political and economic forces shape accounting. The increased worldwide integration of politics and markets raises the necessity for integration of financial reporting standards. The integration is driven by the reductions in the costs of information processing and communication. International Financial Reporting Standards are a common business affair language in the globe for easier comprehension and comparison of company accounts across international boundaries (AICPA). The standards are issued by the International Accounting Standards Board. The IASB is a United Kingdom body that was established in 2001 and is based in London. The historical cost paradigm authorizes the IFRS except IAS 29 and AFRIC 7, which

Divergent accounting practices can cause complications for investors who rely heavily on financial statements being prepared under different methods. The lack of comparability between companies from different countries can significantly affect the analysis of financial statements when making important investment decisions. The differences in accounting principles can cause problems for multinational corporations. Companies trying to gain access to foreign capital markets might have to present a set of financial statements in accordance with the accounting standards applied in that

it provides a better indication of ability to generate cash flows than the cash basis.

Accounting is the language of business. It is a profession that is being guided by principles, concepts, conventions, laws, etc. All these fundamental building blocks serve as common and general compasses to all practitioners of the profession. In some cases, they are nation-wide tailored, while in other cases, they are universally tailored. Accounting as a living, practical, dynamic and realistic profession covers so many areas of social, economic (business), and governmental activities. Surely, any endeavour that involves monetary and material activities create a room for the services of Accounting. Many of the human endeavours for which the accounting profession plays significant (some times inevitable) roles include; Banking, Insurance, Manufacturing, Farming Contracting, Oil and Gas, Mining, Transportation (Air, Land and Sea), Educational Institutions, Churches, Ministries, ICT, Hire Purchase, Local Government Authorities, Estate Businesses, Export and Import Businesses, Bill of Exchange Transactions, Royalties Transactions, Consignment Transactions, Stock Market Transactions, Sports, Entertainment, Hospitals and Hospitality Industry, etc.

“Accounting is said to be as old as any organized human activity. Dating back to Babylon and Humaraby’s book of law, over Greece and Rome and further on through history, there has always been a need to record events referring to purchase and sale, payment and collection. Such recording originally generated bookkeeping, which at the level of development of production forces was primarily in function of trade and banking. Its further development was according to changes in organization of business activity (Andrijasevic, n.d.).” According to Novicevic and Antic (1999), “until the 70s enterprises in West countries carried out their business in protected competitive conditions.” However, in today’s global economy, markets have become universal, with organizations viewing the world as a platform for carrying out their diverse trades’. To compete successfully in the global market, organizations/ businesses need to prioritize customer satisfaction parameters during business operations. To achieve this, they must concentrate on key success factors such as; costs efficiency, quality, cycle time, and innovativeness. “Quality has become one of the key competitive variables generating the need for evaluation of spending resources needed for the given level of quality by which the company can expect and achieve competitive advantage on the market (Gajic, 2005).”

In the era of globalization, differences in national accounting standards are a big obstacle for multinational corporations to prepare consolidated financial statements. Hence, it is clear that accounting standards harmonization is essential. However, in the progress of accounting harmonization, there have been many debates on whether the implementation of principles-based accounting is more efficient than rules-based accounting. Although many countries dispute the rules-based accounting and have tendency to reform their accounting system into the principles-based accounting, in my opinion, the rules-based accounting has many undeniable advantages and until now its application is reasonable.

Accounting Standards are used as one of the main compulsory regulatory mechanisms for preparation of general-purpose financial reports and subsequent audit of the same, in almost all countries of the world. Accounting standards are concerned with the system of measurement and disclosure rules for preparation and presentation of financials statements. They appear with a set of authoritative statements of how particular types of transactions, events and other costs should be recognized and reported in the financial statements. Accounting standards are devised to furnish useful information to different users of the financial statements, to such as shareholders,