ACCOUNTING AND DECISION MAKING

Accounting and Decision Making



Accounting and Decision Making

Identify and critically discuss at least FOUR areas of subjective judgement in DITW's financial statements for 2012.

Ans1- International Financial Reporting Standards are rapidly becoming the global standards intended to increase comparability of financial statement data across geographic boundaries and better serve investors in their search for more efficient capital allocation. In 2002, the Financial Accounting Standards Board (FASB) and the IASB signed the Norwalk Agreement committing to convergence of U.S. GAAP and their international counterpart, IFRS. In 2007, the SEC reiterated its desire for harmonization of the standards and eliminated the requirement that foreign entities listed on U.S. exchanges prepare a 20-F reconciliation to reconcile its non-U.S. GAAP statements to U.S. GAAP as long as the financials were prepared in accordance with IFRS. This regulatory change reaffirmed the U.S. desire to transition towards IFRS. Eight months after lifting the requirement to prepare 20-F reconciliations, in August of 2008, the SEC issued a proposed roadmap that called for an early adoption option allowing certain companies to use IFRS as early as 2014. After carefully considering responses to the roadmap, the SEC unanimously approved a new policy statement and staff work plan early in 2010. The new plan called for further review of IFRS and a 2011 vote on whether to move forward with a mandate to use IFRS by 2015. While the SEC affirmed its desire to keep moving toward IFRS adoption, the new timeline offers issuers some breathing room from the 2014 deadline originally spelled out in the proposed roadmap the SEC unveiled in 2008. This affirmed desire towards adoption indicates that the U.S. is well on its way to a transition to IFRS. However, as noted above, companies, investors, and analysts are not prepared for such a shift (Kotlyar, 2008, 248).

A shift to IFRS from U.S. GAAP would significantly change the financial reporting guidelines that currently guide publicly traded companies on the preparation and presentation of their financial statements. These changes will affect all of the financial statements currently required by U.S. GAAP, and therefore will affect the analysis of those statements as well. Of particular interest in this study is the effect of a transition on financial analysts' analyses of financial statements prepared in accordance with a different set of standards, since analysts have been identified as one of the primary users of the financial statements and their investment recommendations have been linked to investor behaviour. According to the fundamental analysis approach to equity valuation, financial analysts typically examine key financial indicators when evaluating a company's financial strength and stability. The problem that arises as a result of conversion is that changing to a different set of standards directly effects the preparation of financial statements, and a change in the financial statements directly affects those financial indicators calculated by analysts when evaluating a company. A transition to IFRS would have significant effects on those accounting information sources, specifically the financial ...