According to ACCA, the objectives of financial reporting standards are defined as follows” The overall objective of the FRS is to require all entities falling within its scope to highlight a range of important components of financial performance to aid users in understanding the performance achieved by an entity in a period and to assist them in forming a basis for their assessment of future results and cash flows.”
And moreover, the American Financial Accounting Standards Board defines Financial Reporting as follows” activities which are intended to serve the informational needs of external users who lack the authority to prescribe the financial information they want from an enterprise and therefore must use the information that management communicates to them”.
Based on above mentioned definitions, it is understood that a company’s financial information should be communicated to its relevant stakeholders such as shareholders, investors, government, lenders and others who are making business, financial and credit decisions.
However, as globalisation is intensifying and creating multinational companies and organizations, accounting practices and regulations became different across different countries and the consistency became a very important and critical issue. It became difficult to measure income and expenditure in the income statement, as well as measuring and recognising assets and liabilities in the balance sheet.
Therefore, it is often really hard for anyone making business and financial decisions, to decide when comparing two companies’ financial statements especially if they are located in two different locations.
Nobes and Parker (2008) also state that if a number of accountants from different countries, or even one country, are given a set of transactions from which to prepare financial statements, they will not produce identical statements.
Even if they all follow a set of rules and regulations, whether implicit or explicit, there is no format or set of rules that completely covers every eventuality to the minutest detail, which makes financial reporting inconsistent.
One of the clearest examples for inconsistencies in international reporting systems was in the case of GlaxoSmithKline and Diamler Chrysler.
Before its merger with Chrysler Daimler, Benz obtained in 1993 a listing of their shares in the US and in so doing needed to report under both US Generally Accepted Accounting Principles (GAAP) and German GAAP.
It is usually expected that the profit reported under the same principles would be the same but the company reported a loss of $1 billion under the US GAAP and a profit of $370 million under German GAAP (Greenwood & Eyles 2005).
And International Accounting Standards Board as the international regulator has been trying to ensure that companies meet the standard requirements in the preparation of their financial statements and their presentations. However, this does not entirely solve the problems of financial reporting as different countries have different factors such as their cultural environment that shape up financial reporting in each country.
There has been an impressive attempt to reduce them particularly by the IAS who is the issuer of International Financial Reporting Standards (IFRS). The aim of this body is to achieve harmonisation in accounting practices so as to enhance globalisation in capital markets.
- C. Nobes and R. Parker, 2008, “Comparative International Accounting”, Third edition, Prentice Hall, London