Question

Are the international differences in the formats of financial statements a major obstacle to comparing the statements?

Answer 1

Yes. The international differences in the formats of financial statements a major obstacle in comparing the statements.

The following are a few examples of complications during the comparison of the financial statements of different formats:

1. In some countries, assets are displayed in order of decreasing liquidity (cash first), whereas in other countries there is an increasing order of liquidity (intangible fixed assets come first)
2. The balance sheet, in some countries, is made two sided having assets and liabilities on each of the sides; whereas, other follow straight format where assets and debits are combined and then liabilities and credits are combined.
3. Valuation of assets - different countries follow different methods of depreciation of assets as per their respsective accounting standards and hence the figures become uncomparable.
4. Concervatism - Certain countries follow the rule of conservatisim and hence understate the profits and asset value; while others follow the opposite which leads to increase in profits and misguide the investor.

Need for the international formats:

The companies raise capital , perform transactions, and run entities across the globe; on the other hand investors seek diversification and opportunities of investment. Earlier the differences in the formats of the financial statements used to create a lot of complications in such cross border transactions. To simplify this, patchwork was required to be done for every set of investor which incurred cost and time. At the same time, the investor had to verse himself to understand the international methids of accounting before making investment and comparing the same with other companies. To solve this challange, there was a major need of a uniform, transaparent, efficient and accountable method of accounting. This led to the introduction of IFRS. IFRS statements are transparent (as they bring uniformity in comparison and quality of financial statements and helping the investor take informed decision); effecient (as they help investors to better allocate the capital after assessing the risk and oppotunity at global level); and most importantly they are accountable (as they remove the gap of lack of global information between the providers of the capital and the utlisers of the capital).