Accounting Theory External Parties

Question: Describe about the Accounting Theory for External Parties. Answer: Introduction Financial reporting and accounting are meant to offer reliable and significant information on an entity or other organization to external parties. The key reporting instruments incorporate valuable data as they report on the past. This past orientation diminishes the potentiality of the stakeholders in making effective decisions for future. Thus, International Financial Reporting Standards (IFRS) is a standard that operates as a uniform code of language and is very beneficial in establishing a common reporting method for users that facilitates in proper decision-making by users. Part - A Sustainability is now a major issue for the society and business. Even among the long-standing leaders of sustainability, the relevance of debate has now moved beyond concern for future generations. The concept of IFRS has now become very popular amongst most countries because in corporate reporting, due importance is not just given to the profits but also on how contributive and beneficial the company is. Report on sustainability offers appropriate information about the social, economic, and environmental impacts caused by the everyday activities of an organization (Jordan, 2013). With the assistance of IFRS, sustainable reporting can assist organizations to understand, communicate, and measure their social, environmental, and economic performance, and then establish motives, and sustain change more efficiently. IFRS aims to combine sustainability reporting into a single integrated report that aims to communicate every viewpoint of the performance of a company. This in turn is very advantageous to the company as it obtains an opportunity to communicate with both its internal and external stakeholders in order to portray how it is operating as per their objectives. Since IFRS aims to combine both financial and non-financial aspects of a company into an integrated report, sustainable development has now become a vital aspect of functioning in the life of corporate. Furthermore, maintaining and building trust in governments and businesses is fundamental to attaining a sustainable economy (Jordan, 2013). Every day, governments and businesses make relevant decisions, which have direct influences on the stakeholders. These decisions are not based on financial information alone but are based on an evaluation of risk and opportunity utilizing information on a broad variety of future and immediate concerns (Kvaal Nobes, 2010). IFRS assists sustainability reporting by ensuring that organizations consider their influences on these sustainability concerns and allows them to be transparent about such opportunities and risks they encounter. Hence, this enhanced transparency also facilitates in maintenance of trust in governments and businesses. For example, in relation to global change in financial reporting, India has also experienced a massive change. In India, the ICAI (Institute of Chartered Accountants of India) has come into existence since 1949 to streamline the practices of accounting. This ICAI established the Accounting Standard Board in the year 1977 to harmonize the existing diversified accounting policies, procedures, and principles. Keeping in view the complexities in the Indian environment, it is a big challenge for the ICAI to introduce immediate and complete adoption of IFRS. As per EU (European Commission), the requirement of IFRS compliance in India by all the listed companies in their financial statements will assist in eliminating barriers to cross-border trading in securities by assuring that the company accounts throughout the EU are more transparent and reliable. If the Indian companies prepare their financial accounts in accordance with IFRS, they can be more simply compared with their accounts with IFRS user countries and EU companies. This will also enhance market efficiency and minimize the expense of raising capital for the companies, thereby improving competitiveness and boosting the economy (Kvaal Nobes, 2010). Besides, globalization and multinational corporations are successful in India due to the implementation of IFRS for sustainable reporting. Furthermore, Indian business firms can gain the ability to start interconnections with new financial experts, international suppliers, and other clients while IFRS plays a major role in identifying the connections of Indian commerce in the markets. All types of companies now give due prominence to the current and potential uses of IFRS for sustainable reporting. In other words, IFRS sustainability reporting is released by organizations and companies of all sizes, types, and sectors from each corner of the world. It assists in classifying economical values to the environmental effects of the operation of an organization in order to describe such effects on the environment, efficiency of cost, and business risks. Companies that produce IFRS sustainability reports have been found doing well and by releasing these reports, they indulge with the external stakeholders, integrate with global and local communities, and engage in inclusive discourse, which can result into investments that benefits both the company and environment as a whole (Larson Street, 2004). In a saturated market or competitive market, disclosure of IFRS sustainability commitments results into positive differentiation of the organization and better performance. Stu dies associated with CSR (corporate social responsibility) have if companies in highly competitive markets, if indulge in sustainability initiatives, can enhance organizational success, minimize negative social impact, and benefit the society as a whole. The interconnection between International Financial Reporting Standards (IFRS) and its current and potential uses for sustainability reporting is very effective. Besides, this interconnection is motivated by the international efforts of different countries to make their operations more effective to the environment and to save energy as a whole. Gathering of information and framing a sustainability report based on IFRS can assist a company to establish new methods of data collection and to imagine new processes about long-held strategies. Furthermore, the data collected in the process of reporting can assist companies in innovation of processes, minimize waste, and obtain insight into potential areas of growth. Validating and managing this data also requires establishing effective interconnections with the external and internal stakeholders of the company. The mere idea of an IFRS sustainability reporting bounds each company to start operating and planning to make strategies for the b etterment of environment, thereby facilitating in sustainable growth (Slaper Hall, 2011). This reporting can provide companies a better insight into potential differences in business and process. Besides, innovative companies can employ environmental and social initiatives as opportunities for significant learning. Hence, these are the current and potential uses of IFRS for sustainable reporting. Part B Accounting standards provide the base for reporting for all entities on a uniform basis. With the increased globalization, entities are having increased responsibility towards transparent and accountable disclosures. Accounting standards provides guidelines to facilitate the reporting on matters for benefit of all classes of stakeholders as the various aspects of recognition, measurement, presentation, treatment, and disclosure of accounting transactions are defined by policy documents (Pyo Lee, 2013). The meaning and coverage of the term Sustainability differs from organization to organization. Sustainability reporting is the communication from corporations that include its responsibilities and activities taken for the concern towards social and environmental impacts in addition to the financial reporting (Hajer, 2005). The country selected for report is United States of America as it has the highest implementation requirements with reference to sustainability in comparison to other countries. Apart from the routine accounting standards issued and applicable to corporate, there is a non-profit organization name Sustainability Accounting Standards Board incorporated in the year 2011 to focus on the social and environmental issues and their appropriate disclosure. The specific requirement of SASB is the reporting in Form 10-K to be filed by the public companies in USA. To facilitate comparison, SASB has focused on industry specific standards and identified 80+ industries for which the key performance indicators updated and disclosures of material information are a fundamental requirement. It would be pertinent to note that though SASB develops standards for implementation in the US market, it is widely used by organizations all around the world as it provides the guidelines in a phased manner. Through these standards, organizations have a cost effective way to implement and manage the disclosures related to sustainability issues. The prospective investors provided such information that helps them make useful decisions about the corporate performance on sustainability issues by comparison with the benchmarks. As FASB, GRI, IIRC, GISR, and SEC are all independent organizations with mission for the applicability, disclosures and risks related to sustainability management, SASB ensures that there is no duplication in the integrated reporting by collaboration with these bodies. Thus, it is complementary with these bodies. Briefly, GRI provides applicable sustainability indicators, each GRI report is unique in its way, and companies should adopt SASB standards for the disclosure of the minimum information about material issues related to integrate reporting. The GRI report should then be prepared if a broader communication to the stakeholder is intended. The significance of this GRI Report understood by the fact that companies preparing this report have more chances of being selected as a supplier (Global Reporting Initiative, 2011). Thus, there is recognition for both the company and the Standards. The IIRC only provides the principles for integrated reporting but does not prescribe any matrices. Companies have to anyhow adopt SASB standards for the disclosure requirements. The SEC requires companies to make disclosures in Form 10-K and Form 20-F about the material risks and the SASB helps by providing guidelines as to what constitutes material risks for the purpose of this disclosure (Jorgensen Sodestorm, 2012). The GISR has the mission of developing sustainability-rating standard. SASB assists GISR in developing and defining the term materiality for the development of the rating system. These frameworks have the combined effect of creating awareness about environmental impacts and the related risks and opportunities. Thus, the Sustainability Reporting Standards adhere to various principles that are listed below: The standards aim at long-term value creation and mitigation of risk. It is based on robust and extensive research carried out over various sectors of the economy. The standards make the various sustainability factors measurable, quantifiable, comparable, and auditable. The standards ensure highest quality reporting and thus serve the objective of decision-making. It fulfills the criteria of relevance, usefulness, completeness, cost-effectiveness, and applicability and direction ability. It supports the convergence with the international standards and is reflective of the shift to the modern integrated reporting (Potter Soderstrom, 2012). Thus, it can be seen that these standards are to be used complementary to the FASB standards. With the increased usage of internet and social media, investors have become more active in seeking information, lodging complaints, and tracking company performance. The stakeholder perception of which company is accountable and which matters are accountable has significantly changed. With these changes, emerges the newer and wider definition of materiality, financial reporting, sustainability, and integrated reporting (Hegarty et. la, 2004). IAS 8 defines materiality as, the omission of items which have the impact of either individually or collectively influencing the economic decisions of the users to the financial statements. The International Auditing Standard 320 states that the possible effect of the misstatements on the individual users or corporations could vary depending upon the needs (Norman MacDonald, 2004). Thus, materiality in the sustainability-reporting standard AA1000 is inter-linked with the accounting and auditing standards. The financial reporting community is concerned with the broader range of stakeholder groups and this led to the publication of AA1000 Framework in 1999. This Framework does not limit the scope of materiality but extends it to link materiality with strategy formulation and implementation, performance management and value creation. The Framework requires reporting of such issues under materiality that can make a change in the organization performance (Apergis et. al, 2013). These requirements help in heading towards integrated materiality in financial and sustainability reporting. AA1000APS further stands to extend materiality to include such matter that will affect the actions, decisions, and performance of the stakeholders and the organization. To meet these requirements, organizations have to follow a materiality determination process integrated with the issues of the shareholders, financial considerations, peer-comparisons, and industry norms in the broader sustainability-reporting context. As there are different set of expectations from different groups, the standards are designed at addressing the conflicts (Global Reporting Initiative, 2011). The IIRC also released a paper that defines materiality as, such issues that could change the assessment of the financial capital providers with reference to the ability of the organization to create value (Apergis et. al, 2013). Thus, this extends the significance of materiality for a specific category of stakeholder namely financial capital providers. The Materiality Background Paper lays emphasis on the role of the senior management and key managerial personnel in the process of determining materiality as in many cases the lack of attention or the ignorance of the management is observed (Pietersz, 2011). This clearly calls for a shift in the thinking of the Board of Directors from the routine reporting requirements in the standards to what can create long term value for the stakeholders though it might not be measurable or quantifiable (Barbu et. al, 2014). Thus at various points of times, different set of organizations and bodies have extended the definition and reporting under materiality and the combined impact of all these have made compliance all the more challenging for entities (Barbu et. al, 2014). Though there is no specific penalty or disallowance defined in any of these standards for the non-compliance, the adherence to these creates a positive impact and lifts the value of the company in the eyes of public. The climatic changes all over the world mandate the measurement of the emissions from the various manufacturing companies and the effective waste disposal management systems for all companies. These are seen as significant challenges in the corporate governance and sustainability reporting. The risks of the climatic changes have to be first identified and the possible impact of the same has to be disclosed as a part of the integrated financial reporting framework (KPMG, 2008). In a similar manner, the measurement of natural resources like water and natural capital forms a part of the Global Sustainability Reporting Standards. Thus, the concept is developed with the goal of measuring items that matter. There is a positive push for the transparency not just for financial reporting but also the strategy formulation and the suitable measurement of the actions of the companies. The areas that are meaningful for the stakeholders are targeted and translated in the form of Standards prescribed by various bodies. The mixture of these tools achieves market recognition. A classic example of the integrated reporting can be found in the Annual Report of a company named Novo Nordisk. The features that are unique from the routine annual reports are: Key financial figures with metrics for social and environmental performances. Share information and stock dividend information to include comparisons with the long term targets, Graphical representation of the performance, comparison, and discussion with the long-term targets and changes in targets, if any. Integration of the environmental and social performance of the company with the management decision making, Consolidated financial statements and separate set of social and environmental statements that are mostly non-financial in nature. Audit and assurance reports not just for the financial part but also for the social and environmental reporting. This is one of the significant acts that stresses on the responsibility part of the company. It ensures that no part left unattended and hence, the policy of company is appreciated (Nikhil et. al, 2009). Thus, this company serves as a great example for all those companies that are willing to follow the sustainability reporting standards. Reporting mechanism In the rise of corporate scandals and crimes, it is observed that the mindset of the management and the reporting entities is corrupted with the need and greed for fast money. This keeps them away from the transparent reporting under the various standards. This has also led to the increased regulations which actually at to supervise the functioning and reporting as per the disclosure requirements under the various acts (Albuquerque et. al, 2013). Thus, there is a need to create awareness and make corporate realize the importance for doing a legitimate and fair business. The history of any successful organization depicts the true and fair reporting in various aspects to have created long-term value for the organization. Therefore, the organizations should not only be concerned for creating wealth but also look for providing sustainable development (Deegan Rankin, 1997). There is a strong urge to do so because if it is left unattended it might devoid future generation of the ample benefits. Hence, creating awareness is strong desirable so that every country is alert in this regard. This will be a strong step towards the future development. However, the costs of compliance have increased under the integrated reporting framework, but the benefits from the same certainly outweigh its costs. It is predicted that increased number of countries stress on the need for sustainability reporting on serious levels and ensure that companies provide the relevant information over various periods of time (Horngren, 2013). The cost might be high at the initial point of time but in the end, it will provide additional to the companies and will bring a balance in operations. Conclusion Many companies due to the increased competitiveness and practical problems of implementation see the desired levels of transparency as a liability. Due to this, there is a requirement for non-financial information to be more standardized and to be included under different and specific sections. It should be complementary to the financial information, which is definitely a challenging task. These standards have been clearly developed over time due to the stakeholder requirements and the response of the companies to the increasing reporting is an interesting phenomenon to analyze. 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