External Reporting Incentives or Standards

Question: Discuss about the External Reporting for Incentives or Standards. Answer: Effects of Changes in the Financial Reporting Environment Financial reporting environment refers to the rules, policies and standards of financial reporting. In the recent past, many changes have taken place in the financial reporting environment and the effects of the changes in financial reporting environment can be clearly identified in the business world. Christensen et al. (2015) believe that the changes in financial reporting have made several improvements in the reporting standards like, more transparency, more accuracy in the measurements of the value of assets and liabilities. However, on the contrary, Leuz and Wysocki (2016) noted that due to the changes in financial reporting, several technical issues have taken place. The major technical issue that has taken place is the new accounting standards. For example, as per the new standards provided by Financial Accounting Standards Boards (FASB) and Australian Accounting Standards Board (AASB), using the fair value method is essential while measuring the values of assets. However, using the fair value method does not provide any extra monetary benefit at the time of selling the assets because the assets are already measured at their current market price. On the other side, the changes in the exposure draft have created some confusion in the accountants of the companies. Many accountants cannot properly understand the actual requirements of new exposure draft provided by International Accounting Standard Board (Christensen et al. 2015). Financial reporting becomes more challenging for the companies. For example, in the new exposure draft, it has been mentioned that financial reports of the companies must include only the material information and immaterial information can decrease the usefulness of financial reports. Now, including all the material information is very difficult for the companies because sometimes for the future security companies need to keep some material information in secret. The changed environment of financial reporting in Australia is regulated by the International Accounting Standard Board (IASB), AASB and IFRS. As per the new guidelines and amendments provided by IFRS and FASB, it is mandatory for the companies to maintain the full disclosure principle during financial reporting. At the same time, the IFRS also mandated that while measuring the values of assets and liabilities, the companies need to follow the fair value method (IFRS.com, 2016). As per the AASB 101, the companies are divided into two tiers. The companies under tier 1, need to disclose all the material information in their financial reporting. However, the companies under tire 2 get some reduction in the disclosure requirements. As per AASB 132, the entities, which do not have equity capital, may have to adapt the presentation of the financial statements for the interests of the unit holders or members. As per AASB 116 and AASB 138, the changes in the values of plant and equipments and intangible assets are needed to be considered while ascertaining the comprehensive income (Aasb.gov.au, 2016). At the same time, the AASB 119 and AASB 121 have suggested to consider the employee benefits and changes in the foreign exchange rates at the time of determining the comprehensive income. The AASB and IASB have mentioned that the purpose of financial reporting is to represent the actual financial position and performance of the companies to their stakeholders and the other users in order to help them in taking economic decisions. Therefore, to comply with the new financial reporting environment, the companies need to adopt many changes in the financial reporting standards (Aasb.gov.au, 2016). However, the success or failure of the new accounting standards is influenced by the political activities. Here, the political activities do not refer to the activities done by the political parties, but it indicates the corporate governance of the companies. In order to get success in the business, it is essential to have strong corporate governance within the companies. However, the new accounting standards or financial reporting environment sometimes fails to identify the loopholes in the corporate governance in the companies and the case of Parmalat or Enron is the perfect example of that (Cblr.columbia.edu, 2016). The accounting regulations in Europe are considered as the strictest regulations in the world. However, the accounting regulations in Europe also failed to identify the corporate frauds the by the company. The company did the financial reporting in such a way so that nobody can understand the fraud. This type of political or corporate governance issue indicates that the accounting standards or financial reporting environment must provide some stricter guidelines to control the political influences and improve the financial reporting environment (Leuz Wysocki, 2016). Reference list: Christensen, H. B., Lee, E., Walker, M., Zeng, C. (2015). Incentives or standards: What determines accounting quality changes around IFRS adoption?.European Accounting Review,24(1), 31-61. Leuz, C., Wysocki, P. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research.Journal of Accounting Research,54(2), 525-622. IFRS.com. (2016). Ifrs.com. Retrieved 7 August 2016, from https://www.ifrs.com/ Aasb.gov.au. (2016). Aasb.gov.au. Retrieved 7 August 2016, from https://www.aasb.gov.au/ Cblr.columbia.edu. (2016). Cblr.columbia.edu. Retrieved 17 August 2016, from https://cblr.columbia.edu/