FINANCIAL REPORTING

Financial Reporting and Analysis

Financial Reporting and Analysis

Question 1

Accounting Quality or the Degree of Earnings Management after Mandatory IFRS Adoption

European commission in 2002, made it mandatory to all Europe union companies to follow IFRS through the regulation number 1606/2002. The aim of made IFRS mandatory was that these standards contribute to cost effective functioning of capital market, help EU firms to compete on equal footing for financial reporting and reinforce the freedom of capital movement in internal market. IFRS adaption was basically intended to ensure greater transparency and comparability of financial reporting and to improve quality of accounting information. The answer will examine the economic consequences of IFRS adaption. From many years, there was a substantial emphasis on the debate to make unified global accounting standards. The aims of standardization were to enhance the capital market performance and reduce information irregularity (Gray, Linthicum & Street, 2009, pp.431-447). Those who were in opposition of making unified global standards for accounting was debating that there would be interpretation and communication barriers in conveying information of accounting globally. IFRS mandatory adaption results in less smoothed earnings, greater losses and greater value relevance. There are many holdouts with the adaption of IFRS. Many countries found disadvantages that overweigh the benefits of IFRS. The significant example of such country is US where IFRS has delayed and impacted the transition of global accounting standards for financial reporting. Another disadvantage of adapting IFRS is the implementation cost (Ioannis, Lisa & Mike, 2010, pp.213-228). The training cost of accounting professionals and re education those for new system cost too much to the adaptor.

The adaption of IFRS can make a company paid greater taxes as the net income posting under IFRS is higher than the GAPP that leads to the higher taxation (Zhao, 2010, pp.58-59). The accounting information and earning management of a company are usually affected after adaption of IFRS. The IFRS provides the more accurate figures to the accountant for computing net income. The earning management is hurt by IFRS because under this method of reporting the net income shows higher values that leads the higher taxation. However, the IFRS is the globalized system of financial reporting and is being used by more than 100 countries worldwide (Hamilton, 2007). IFRS as an accounting global language, allows all the company to report and foot their ledger with the same rules that resulted in unified taxation rules. IFRS is detailed financial reporting system and should be adapted to comply with globalization strategy (De George, Ferguson & Spear, 2013, pp.429-462).

Question 2

Relevant International Accounting Standards and Treatments

Transaction (a)

“IAS-17 Sale and Leases summerizes the accounting regulations and disclosures related to leases, both for lessors and lessees. Leases are of two types that can either finance leases (in which ownership in the asset is transferred with substantially all the risks and rewards, and give rise to asset and liability recognition by the lessee and a receivable by the lessor) and operating leases (which result in expense recognition by the lessee, with the asset remaining ...