Use of accounting standards by organizations in financial statement preparation

Discuss About The Accounting Standards International Portfolio.

Over the previous decades, the global economy and capital markets have turned out to be highly globalised and integrated. In such consideration, the advantages of having a set of superior quality internationally recognized financial reporting standards are important. There is convergence and harmonization of international financial reporting standards along with generally accepted accounting principles (Ball, Li & Shivakumar, 2015). This ensures that that the financial reporting of the companies is comparable, transparent and is consistent. From evaluation of the current business environment it is observed that there is increased use of accounting standards by the organizations in preparation of their financial statements. This is resulting in diversity within the accounting practices of the organizations in New Zealand. However, despite of abiding by the reporting standards, most of the organizations are dealing with economic consequences related to such standards (Cascino & Gassen, 2015). One of such concern is present regarding the understanding and financial statement interpretation relied on the domestic standard. This is adversely affected because of the differences in accounting practices all through the nation and in international industry.

In addition, the application of domestic accounting standards makes comparability of the accounting information greatly complex (Christensen, Lee, Walker & Zeng, 2015). This can be considered as a concern that declares the differences in accounting standards across nations which further decreases quality and relevance of accounting information. The limitations that exist in the domestic accounting standards of New Zealand offers an impetus for the call of harmonizing the accounting principles and rules among the nations. It is also gathered that there is very limited research that ascertains the impact of IFRS implementation in New Zealand (DeFond, Hung, Li & Li, 2014). Moreover, there is also limited research available in analyzing the impact of IFRS on value relevance of accounting information for its users or investors.

Individuals and the companies consider employing accounting information for various purposes and investors are deemed to the most important users of accounting information. These investors are observed to rely on such information gathered from financial statements in order to analyze the financial strengths and performance of the organizations (Ledford & Gast, 2018). This can facilitate the investors in taking vital decisions whether to invest in the organization or not. Moreover, in order for the accounting information to be useful for the investors, it needs to be relevant along with being reliable. The users of the accounting information those make better investment decisions based on financial statements of the organizations are highly interested in analyzing the financial reporting quality (Lewis, 2015). The financial reporting quality determines the importance of the accounting information. Accounting standards is deemed to provide important guidelines for the financial transactions treatment along with proper disclosure of information within the financial statement.

Diversity in accounting practices within New Zealand

The accounting standards issued in a nation by national accounting body or government as this as in this case to regulate the accounting practices within the nation (Li, 2015). These are known to be the domestic standards and along wit that the standards published by a international body is deemed as international accounting standards that is important to be maintained by the organizations in maintaining effective and reliable financial reporting. Considering the scenario, this research will have a significance of contributing to the knowledge in several ways. The research will focus on offering evidence that suggests implementation of IFRS did not bring any considerable improvement in the accounting information value relevance of the non-financial companies in New Zealand (Martínez?Ferrero, Garcia?Sanchez & Cuadrado?Ballesteros, 2015). Moreover, the research will also investigate that accounting information content of the earning per share is highly value relevant in consideration to IFRS. The research has great significance in contributing the existing literature on earnings per share, book value of equity, stock return and share price. It will also explain the literature on IFRS implementation in New Zealand along with value relevance of accounting information (Müller, Riedl & Sellhorn, 2015).

Neuman and Robson, (2014) revealed that there are three vital regulatory authorizes in New Zealand business sector, the minister of planning and economy, the central bank along with authority of raw materials. In addition, the accountants along with the auditors association are one of the official bodies that represent the accounting profession within the nation. Ledford and Gast, (2018) further stated that the necessary disclosure requirements of the state indicates that all the organizations within the nation must develop financial statements, cash flow statements, balance sheets, statement of changes within the company’s capital and notes related with the accounts. It must also be gathered that in New Zealand, the non-financial companies must prepare their annual report within the two to three months towards the end of the financial year.

Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros, (2015) indicated that as per the Central Bank circular No 20/99, the financial institutions, banks along with the investment organizations in New Zealand are needed to develop their financial statements. Such statements must be in adherence to the International Financial Reporting Standards that in effect from annually 1, 1999. In the year 2004, the New Zealand established International Financial Centre that is an offshore capital market established within the financial free zone. Müller, Riedl and Sellhorn, (2015) evidenced that the legal framework needs the banks and the companies listed within New Zealand International Foreign Affairs to implement the IFRS standards. These researchers also ensured that the companies listed within the New Zealand market are needed to publish IFRS financial statements from the year 2003.

Impact of domestic accounting standards on comparability of accounting information

Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros, (2015) stated that New Zealand and the related colonized nations gathered its accounting practice from its previous colonial country. Te initial attempt to regulate the accounting practice within New Zealand took place at the time when group of the nation’s accountants came with an idea of IFRS accounting framework implementation in company’s financial statements. Before that there was lack of domestic accounting standards in New Zeeland that guided preparation of financial statements and resulted in development of New Zealand accounting standards board. Müller, Riedl and Sellhorn, (2015) added that several benefits have been derived by the organizations that implemented IFRS including New Zealand. Research conducted by these researchers also evidenced that IFRS implementation can increase inflow of foreign direct investment. Value relevance existence within the companies of New Zealand is categorized into three parts. One of them includes relative association research that investigates whether there is statistical relationship between accounting numbers and stock prices.

In contrast, Neuman and Robson, (2014) stated that the value relevance concept is measured by employing regression analysis and the anticipated coefficient value is recognized to be statistically significant. This is further different from the variable of zero accounting that is considered being more relevant. IFRS implementation in New Zealand increased earnings value relevance but had less improvement in the value relevance of book value in post IFRS time (Taylor, Bogdan & DeVault, 2015).

According to Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros, (2015) for the accounting information to be reliable to its stakeholders and investors it must be relevant. Within IFRS conceptual framework, relevance is considered as among the two major qualitative characteristics of the companies accounting information. As per IFRS, accounting information that resulted in persuading the investors to take a distinct decision from one intended is deemed as relevant information. Müller, Riedl and Sellhorn, (2015) stated that such information might have both among the predictive and the confirmative value. Evidence within the accounting literature also indicated that the research within the relevance of accounting information has significant implications. It is also argued that the new and useful accounting information impacts the capital market efficiency.

Based on such argument, Martínez?Ferrero, Garcia?Sanchez and Cuadrado?Ballesteros, (2015) stated that correlation between the share return and earning indicated increased correlation among two variables. This further signifies that accounting information is of superior quality. These researchers also suggested that the term `”value relevance” is in great connection with the accounting information presented by the companies in their work. Considerably, several definitions are present in the accounting literature regarding the financial information’s value relevance. Müller, Riedl and Sellhorn, (2015) presented the view that one of these definitions considers accounting information to be value relevant in case information has presented relationship with the value of equity market. Value relevance of accounting information is also desired as the capability of such information to impact the share price of organizations.

Significance of accounting information for investors

The research intends to carry out an investigation on “Value Relevance of Accounting Information within the Nation after Adoption of International Financial Reporting Standards (IFRS)”. Considering the same, the research will employ both the primary and secondary data collection technique (Neuman & Robson, 2014). Primary data will be collected from the selected respondents of New Zealand through conducting a questionnaire survey. In addition, positivism research philosophy and deductive research approach will be employed in this research as it facilitates in analyzing previous trends and proven facts regarding IFRS adoption in New Zealand Companies. Moreover, secondary data associated with IFRS implementation and value relevance of financial information will be gathered from the reliable online journals, websites, books and government sources (Oulasvirta, 2014). In selecting the survey participants for the research simple random sampling process will be employed. This is because of the reason that it is highly suitable in offering equal chances to the respondents of the selected in the process of survey. For this reason, quantities data has been gathered through the process of this sampling method from a large sample (Ramanna & Sletten, 2014). Considering this sampling technique, 31 shareholders or investors of the selected non-financial companies in New Zealand will be selected for gathering their constructive viewpoint on their adoption of IFRS principles and their accounting information based value relevance.

The collected data will be analyzed with employing several analytical techniques. In consideration to same it is indicated that effective analytical techniques selection is important for attaining reliable and suitable conclusion (Silverman, 2016). MS Excel data analysis tool will be employed in maintaining transparency along with interpreting the composed information. Gathered quantitative data will be represented in the graphical and table form for its efficient interpretation. Using the MS excel application will facilitate in correlation and regression analysis of the gathered responses in order to test the validity of the selected shareholders or investors responses on the value relevance of their companies information (Taylor, Bogdan & DeVault, 2015). In accomplishing the research the researcher has focused on maintaining suitable code of conduct in maintaining research validity. It is also ensured that the researcher maintained confidentiality of its respondents and avoided asking delicate questions to them (Martínez?Ferrero, Garcia?Sanchez & Cuadrado?Ballesteros, 2015).

Task	Week 1	Week 2	Week 3	Week 4	Week 5	Week 6
Selection of topic and search for justification
Constructing literature
Selecting appropriate methods
Data collection
Data analysis and representation
Reviewing the outcomes
Conclusions and recommendations
Submitting draft of the project
Printing and final submission

Table 1: Research Timeline

(Source: Authors Creation)

Despite of having several useful implications in understanding the value relevance of accounting information presented by the organizations in New Zealand, this research is observed to have certain limitations. Focusing on one location serves as one of the limitation related with the research (Wang, 2014). Moreover, primary data has been gathered from the shareholders of the selected non-financial companies in New Zealand. In this the reliability of gathered information acts as major restraint that generates a barrier between the research results along with the research accomplishments. The investors or shareholders might have the intention to indicate positive image of the organizations through not revealing major concerns during the survey (Yu & Wahid, 2014). For this reason, the researcher might face difficulty in recognizing major concerns and making relevant information to deal with them. Data collection can also present the risk of being less reliable as the participants might or express their genuine opinions.

References

Ball, R., Li, X., & Shivakumar, L. (2015). Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), 915-963.

Cascino, S., & Gassen, J. (2015). What drives the comparability effect of mandatory IFRS adoption?. Review of Accounting Studies, 20(1), 242-282.

Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), 31-61.

DeFond, M. L., Hung, M., Li, S., & Li, Y. (2014). Does mandatory IFRS adoption affect crash risk?. The Accounting Review, 90(1), 265-299.

Ledford, J. R., & Gast, D. L. (2018). Single case research methodology: Applications in special education and behavioral sciences. Routledge.

Lewis, S. (2015). Qualitative inquiry and research design: Choosing among five approaches. Health promotion practice, 16(4), 473-475.

Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), 555-582.

Martínez?Ferrero, J., Garcia?Sanchez, I. M., & Cuadrado?Ballesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), 45-64.

Müller, M. A., Riedl, E. J., & Sellhorn, T. (2015). Recognition versus disclosure of fair values. The Accounting Review, 90(6), 2411-2447.

Neuman, W. L., & Robson, K. (2014). Basics of social research. Pearson Canada.

Oulasvirta, L. (2014). The reluctance of a developed country to choose International Public Sector Accounting Standards of the IFAC. A critical case study. Critical Perspectives on Accounting, 25(3), 272-285.

Ramanna, K., & Sletten, E. (2014). Network effects in countries’ adoption of IFRS. The Accounting Review, 89(4), 1517-1543.

Silverman, D. (Ed.). (2016). Qualitative research. Sage.

Taylor, S. J., Bogdan, R., & DeVault, M. (2015). Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons.

Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.

Yu, G., & Wahid, A. S. (2014). Accounting standards and international portfolio holdings. The Accounting Review, 89(5), 1895-1930.