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How International Differences In The Ownership And Financing Of Companies Could Lead To Differences In Financial Reporting

1888 words - 8 pages

How International Differences in the Ownership and Financing of Companies Could Lead to Differences in Financial Reporting

The major objective behind the development of International Financial Reporting Standards (IFRSs) has been to achieve financial reporting across different countries, which could be easily compared. In order to achieve this kind of comparability, it is very crucial that the IFRS be used by all the countries involved in the same way, and that these standards be interpreted as well as applied in a manner that is quite consistent in these countries thus leading to consistency in terms of rules or form of application and consistency in the actual manner ...view middle of the document...

A general belief by the international community has always been that the accounting practices that give vital information regarding businesses should be in a position to transcend countries and converge notwithstanding the kind of industry or company in question. However, this is not usually the case, especially in areas where the companies involved have different ownership and financing structures.

Factors that could be related to the environment in which a business operates in have been identified as major contributors to differences in financial reporting by different companies in countries across the world. These environmental factors include the kind of business ownership as well as financial system in place, taxation procedures and the colonial inheritance. Other factors include the level at which economic development is taking place, the legal system within the country and cultural practices. These factors have a major impact on how accounting information is reported (Abacus, 2004).

The stakeholder governance approach means that shareholders, managers as well as employees, and banks have an interest in the financial reports provided by the company. In this model, there is less demand for publicly disclosing financial information as is opposed to the corporate governance model because of the simple fact that these stakeholders are directly involved in the operation and governance and thus have full information regarding the company and its financial status. The issue of information asymmetry is thus solved based on the superior knowledge possessed by these stakeholders (Schultz & Lopez, 2001). This state of affairs thus means that companies with a different ownership structure will show differing preferences in terms of agents for capital, government, and labour and thus, greater smoothing of earnings and their management is expected. Issues of ownership and separation of this ownership aspect from management control become very important. Thus, companies that have different ownership structure will also differ on the way financial information is reported (Ampofo & Sellani, 2005).

As has been seen in many instances, companies normally get inclined to adopting IFRS system that is in line with the current financial environment within a given country. There are three types of financing options that could be chosen by a company (Psaros & Trotman, 2004). These financing systems include credit-based system in which case commercial banks and a number of monetary institutions are very prominent; credit-based systems in which the government is the sole administrator of resources; and the capital market-based systems where the determination of prices is done through the free market practices. In the three systems, companies still find themselves relying heavily on their profits based on the capital acquired, although; the sources of funds that are external to the companies do differ from one company to the other (Harrison...

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