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Accounting Essay

1166 words - 5 pages

C) Discuss the extent to which IAS 21 is likely to enhance the comparability of financial statements of listed companies in Europe and Australia.

Accounting standards around the world were immensely diverse. Each country had different accounting standards and methods of calculation within their country. Over time many listed companies and corporations have become international and have spread globally. Individual standards caused a large number of rework and comparison issues in order to prepare financial reports to be in accordance with that of their own country. Many countries have adopted and converged their own standards to the international Financial Reporting Standards. The United ...view middle of the document...

IAS 21 enhances the progression and converts transactions into the functional currency of the entity at a closing or historical rate. This fairly distinguishes the difference in foreign exchange rate used and aids the subsidiaries to have their transactions converted into the functional currency as that of the entity.

The IAS enhances the comparability of financial statements in Europe and Australia on some fronts. It reduces the risk of foreign activities being incorrectly accounted for as well as the functional currency (currency of the primary economic environment in which the entity operates) being determined inadequately, which could have a major impact on the financial statements. It improves efficiency when dealing with foreign activities and makes it easier for auditors to understand and spend less time on looking at a country’s specific standards.

According to Nobes, the EU and Australia has major implications for accounting research. In the EU, countries such as the UK and Germany still have their differences and Nobes suggested that, “unless a country is culturally dominated by another, its financial system is the main driver of its financial reporting system.”

In Australia, IAS 21 is not required, however the IFRS has been formed closely to that of Australian standards and therefore may be compared more easily. If an Australian company is to compare its financial transactions with that of European countries, the easiness is dependant on whether the current or the temporal method is used. If different methods are used this will complicate rather than enhance any comparison.

Moreover companies in Australia and the UK, but not Germany have accounting periods that do not begin on the 1st of January therefore suggesting that another complication may arise. International differences exist among companies since French banks for example show less earnings volatility than British or Australian banks since there are less restrictive hedge accounting criteria.

When adopting the IAS 21, the functional currencies of its subsidiaries must be identified. Logically speaking an entity’s functional currency should be that of its country of operations and therefore should give the same results as using the current rate method. However another flaw of the IAS 21 is that subsidiaries may come up with different results. An example used by Nobes, where a German company, Bayer, had the understanding that operations of a company outside the euro zone are integral to that of the company, the functional currency is the Euro. Here the current method is used which is seldom. However a similar German company, BASF, stated that “the functional currency throughout Europe...

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