Transparency in Financial Reporting: A concise comparison of IFRS and US GAAP

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Interim accruals for various selling expenses, general and administrative expenses, allowances for doubtful accounts and deferences and contingencies are illustrations of items that normally require companies to rely heavily on estimates. There is a problem of deciding the quantity of disclosures ininterim financial reports. In general, disclosure requirements applicable to annual reporting are not applicable to interim reporting.

There is a problem in determining materiality criteria foreseeing the information to be disclosed in interim reports. The primary conceptual issue is whether the interim period ispart of a longer period or is a period in itself. The first position is known as the integral view, the latter as the discrete view. In the integral view, interim revenues and expenses are based on estimates of total annual revenues and expenses.

The discrete view holds that earnings for each period are notaffected by projections of the annual results; the methods used tomeasure earnings are the same for any period, whether a quarter ora year. In practice, some elements of both positions are recognized in current reporting practices.

Those who favor the second, integral approach regard each interim period primarily as an integral part of the annual period. According to this view, delays, accruals and estimates at the end of each interim period are affected by judgments made at the interim date on the results of operations for the balance of the annual period.

Transparency in Financial Reporting - A Concise Comparison of IFRS and | Fruugo

Investors and lenders analyze information related to business abuse in order to evaluate the risk and return associated with an investment or lending alternative. A major argument in support of segmental reporting is that ifinvestors are provided with information about the profitability,risk and growth of the different segments of a company'soperations, they will be better able to assess the earningspotential and the risk of the company as a whole.

They will be able to predict a company's future earnings more accurately and cash flow can be achieved by using consolidated data alone. Investor uncertainty about company prospects will thus be reduced, share prices will be more accurately determined and a more efficient allocation of resources promoted. Besides the investors, it has been suggested that segmentalreports are likely to be useful to employees and trade unions,consumers, the general public, government and also for the purposeof promoting managerial efficiency.

Employees and trade unions are interested in the company's performance and prospects from the standpoint of wage negotiations and job security and therefore segment reports may be just as relevant to them as investors.

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Information on segmental performance is also needed so that policy decisions by management to develop orcurtail specific activities can be verified and understood. Lack of information, on the other hand, may lead to distrust and labor problems. Basic problem which arises in segment reporting is division of adiversified company for segment reporting purposes.

Every segmentation base can create segments differently. Segmentation identification is also problematic. Segmentation can be done on thebasis of organisational division, Industry, Market, Product etc. Each base has its own limitation and its own problem. In business organisation where more than one product are dealt.

There are likely to be costs common to two or more products. Joint costs may be general administrative expenses and legal expenses. The allocation of these joint costs becomes a complex problem during segment reporting. However there can be somecommon costs which can be apportioned on some reasonable basis forexample electricity charges which can be apportioned on the basisof light Points in a particular segment on the other hand there canbe some common costs like salary of a director which can only beapportioned on some arbitrary basis.

Segment reporting also involves costs of disclosures. The provision of additional information along with routine information increases the operating costs of the company in terms of collection costs and management control systems costs. Cost arguments also relate to increased competition that may result from segment reporting. In the absence of some regulatory provisions to disclose segmentreports; voluntary disclosures are likely to be perceived bymanager to be beneficial only in certain situations.

For example, management will report on the segment when they believe that the attractiveness of the company can be enhanced. In a diversified business entity which may have someinter-segment transactions. There are number of methods for intersegment transfers i. All these methods lead to different operating results for the reporting segment.

Measurement problems have created problem of difficulty inproviding at while doing segment reporting. Since the measurement problem affects the feasibility of disclosure of certain information, one should look at the problem of determining segment information. If we look at the profit and loss account statement, the sales figure in particular in the segment sales immediately gets into trouble.

Under Generally Accepted Accounting Principles GAAP , anoperating segment engages in business activities from which it mayearn revenue and incur expenses, has discrete financial informationavailable, and whose results are regularly reviewed by the entity'schief operating decision maker for performance assessment andresource allocation decisions. Follow these rules to determinewhich segments need to be reported:.

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IFRS 8 defines an operating segment as follows. An operating segment is an entity component: [IFRS 8. IFRS 8 requires an entity to report financial and descriptiveinformation about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet the criteria specified: [IFRS 8. Two or more operating segments may be aggregated into a singleoperating segment if aggregation is consistent with the coreprinciples of the the standard, the segments have similar economiccharacteristics and are similar in various prescribed respects.

If the total external revenue reported by operating segmentsconstitutes less than 75 per cent of the entity's revenue,additional operating segments must be identified as reportablesegments even if they do not meet the quantitative thresholds setout above until at least 75 per cent of the entity's revenue isincluded in reportable segments.

Transparency in Financial Reporting

Header search input. In the new Mission Statement, a new concept, 'trust,' as well as a new characteristic, 'trusted accounting language,' have been introduced. Second, the IFRS have to evolve into a single i. Let us reflect on the concept of trust and how trust is gained. Academic evidence from the management and economics literature shows that people's trust in other individuals and institutions highly depends on the national influence.

So, what people trust largely depends on their national culture, their past history, and the local formal and informal institutions. In these countries, accounting numbers are a formal expression of the financial situation of a company and they may serve as a basis for contracting and decision-making. To make sure that accounting numbers are reliable, formal institutions in these market economies support their reliability by requiring external audit, the use of corporate governance mechanisms, strong enforcement of standards, and well-established laws designed to protect investors and property rights.

In these market economies, where transactions take place based on formal contracts, investors, creditors, employees, suppliers, and other stakeholders rely on accounting numbers and they are trusted for contracting and business transactions, because there are strong formal institutions that make sure that accounting numbers may, most of the time, be relied upon for decision-making and assessment.

However, these formal institutions are not under the IASB's control. Worldwide, we can distinguish between market-based economies, where formal contracting is the standard, and relationship-based economies, where transactions are embedded in long-term networks or informal relationships. Formal contracting and strong formal institutions are often absent in these relationship-based economies, which are characterized by weak protection to property rights and little transparency in the government and legal procedures.

According to North , informal institutions are the 'actual rules that have been followed. Helmke and Levitsky identify two types of interaction between formal and informal institutions. In the first type of interaction, informal institutions play a problem-solving role to assist social interaction, as well as coordinate and improve the performance of complex formal institutions.

In this case, informal institutions reinforce failing formal institutions. In the second type of interaction, informal institutions play a problem-creating role, e. In this case, informal institutions undermine formal institutions.

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Often, economists also distinguish between extractive or inclusive institutions when analyzing country differences. Inclusive institutions are the opposite. In a country with extractive institutions or informal institutions that are conflicting with weak formal institutions, the environment is less munificent so that the IFRS becomes the trusted accounting language.

In a country where informal institutions are conflicting with weak formal institutions, perhaps property rights are not observed, and regulation enforcement are lacking, thus there are low trust levels. When extractive institutions are operating, trust levels are not high as well. In these circumstances, it is hard to generate trust through accounting numbers. Therefore, it is extremely probable that national circumstances in a given country determine whether the IFRS accounting language will become a trusted language in its business environment.

These days, the IFRS have been adopted by an increasing number of countries. The reasons for their adoption may differ. IFRS adoption can take place as a part of a donor-aid package along with a global financial institution, such as the World Bank or the International Monetary Fund IMF , or such adoption may be an initiative of a national government that wishes to increase the legitimacy of companies, since local formal institutions are weak and they do not provide companies with the legitimacy required to engage in international transactions.

In both situations, the IFRS are quite often introduced in an institutional environment that is totally different from the environment the IASB's board members usually envisage when they set standards. Listed companies that have international trade relations or those intended to attract international investors have firm-level incentives to comply with the IFRS, a trusted language for this kind of listed companies may be easier to achieve.

However, firm-level incentives to comply with the IFRS are weaker for listed firms that are mainly focused on the local economy or those pursuing business transactions with other economies also characterized by weak formal institutions and conflicting informal institutions.

The challenge is even bigger for the IFRS concerning private firms. Private firms often have no or little international ambition. Full compliance with the IFRS among firms operating in their local economy or similar economies concerning institutional characteristics is not needed to increase legitimacy and engage in business transactions, since these firms manage along with informal institutions to make their businesses thrive. Nevertheless, this mission faces the same kind of obstacle that the objective of devising a single set of high quality accounting standards aimed to contribute to high quality information.