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Discuss the use and purposes of financial reporting in an ever increasing global market place, and review the information requirements of different users of financial statements?
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Financial reporting is an essential aspect of the business world. It traps transactions and all financial relevant information of a company. Through it, the financial position and performance of a company can be analyzed and determined (Dr Sultan 2014). Nowadays, business is extending to cross borders. Companies are globally operating. In such a scenario, it is imperative to look into the process of financial reporting from a global perspective.
In further steps, the use, purposes and guidelines of financial reporting will be discussed. The global perspective of financial reporting will also be examined.
There are different users who use accounting information for various purposes. Their requirements may be different, but they all use the accounting information to take an economic-related decision. Accounting information, required by them can be the financial statements, management's discussion, financial notes, budgets and financial forecast. Suppliers of the company may be interested to know the current and next year's performance of the company so that they can decide on whether they can supply on credit or not. Similarly, creditors require financial statements to get the assurance of the creditworthiness of the company.
Accounting information is recorded following certain rules and guidelines. Until recently, the standard-setting body of each country set its own financial reporting standards, providing a wide range of standards. Due to globalization and due to the scope of accounting scandals with different standards, it has been realized the need for more uniform global financing reporting standard. The globalization of the world economy causes the accounting standards to be gradually integrated. The International Accounting Standard Body (IASB) developed the International Financial Reporting Standards (IFRS). There is a provision for convergence of different standards to IFRS all over the world. There are still many reporting standards worldwide, such as the US Financial Accounting Standards Board (FASB) have developed US Generally Accepted Accounting Principles (US GAAP) (CFA, Program Curriculum 2010). Similarly, Australian Accounting Standards is being followed by most of the Australian companies.
IFRS focuses on the asset & liability view rather than revenue and expenses view. IFRS promotes the practice of fair value accounting rather than accrual accounting. Following the convergence to IFRS, there has been a global shift from a revenue and expense view to asset and liability view.
Though the accounting standards have been globalized, still the localization of accounting rules has given impact in the reporting process to an extent in terms of disclosure practices, earnings management, investment behaviour, and dividend payout policy. Still, the accounting rules of the individual country remain influenced by its economic system and legal practice, known as enforcement (Ito 2014).