The World Needs International Accounting Standards Essay -- Accounting

Financial reporting has a responsibility to communicate the economic condition and functioning of an enterprise. This has to be accurate, reliable and comply by the accounting standards. Effective financial reporting is essential in maintaining confidence in an economy and encouraging investors to invest. Towards the end of 2008, the financial sector across the world was becoming increasingly unstable. Lehman Brothers had been declared bankrupt, Various allegations towards accounting standards have been made in relation to the financial crisis. A lot of banks worldwide valued most of their financial assets at historic cost, the cost at which the assets were initially bought at. These figures were not adjusted to the current market values, and therefore were over estimated on the financial accounts. The ‘incurred loss model,’ was also heavily criticised. This model required only those losses to be recorded which would have a damaging result on future cash flows. The damaging result would have to be reliably estimated. This model did not permit the effects of future losses to be acknowledged, which was one of the reasons why losses were being severely understated. Had these banks valued their financial assets at fair-value cost, then the accounts of the companies would have been giving a more realistic Picture of profits & losses, and maybe the crisis would have been Recognised earlier in time. Off-balance sheet standards have also been blamed for covering company losses. Off-balance sheet asset/liabilities are those which are exempt from appearing on the balance sheet. It has been put forward by the Financial Crisis Advisory Group that the off-balance sheet standards may have hidden losses, therefore... ... risk factors. In response to the financial crisis, the Boards have been advised to emphasise to business entities how crucial it is that the quality of the data recorded for financial reporting should be to a high standard. A global convergence of accounting standards is more imperative than ever, as financial markets are now global markets. A uniform set of accounting standards around the world would enhance transparency, encourage efficient allocation of resources and would allow risks to be recognised. At the moment, over 100 countries have adopted to the IFRS (International Financial Reporting Standards). The Boards have advised that economies that have not adopted the IFRS, should set a practical timetable for adopting these standards. It is not only vital to converge, but also to maintain common solutions and interpretations between economies.