RELEVANCY OF INCOME STATEMENT/BALANCE SHEET IN FINANCIAL

REPORTING

1.0 Introduction

A company's net worth is reported as a statement of shareholders' equity which is very

important to equity investors and a host of other interested parties because it reflects
the financial performance and the financial position of a firm for a particular accounting
period. Of late there has been number of debates on the relevance of the above
financial reporting. Globally, both industry practitioners and academicians have shown
some worrying concern over this trend. They argue that there is a shift in the global
trend in the way the financial perspectives of the reporting is prepared and presented. In
addition, it is also noted that the outside stakeholders, besides financial perspectives,
are keen to know more about non-financial information to consolidate their
understanding on the firm’s financial performance and position. This shift in stakeholder
behaviour is a significant contrast to traditional way of establishing a firm’s value before
making further decision to venture into the capital market. If inaccurate picture of the
firm is projected, this may confuse the stakeholders and result in making wrong decision
and such wrong decisions could cause them to suffer great losses.
2.0 Reported Trends in the Accounting World

Reportedly there had been number of global developments that have significant impact
on the business environment. Events such as globalization and market integration,
diversities affecting accounting harmonization, recurrence of financial crises and
emerging perspectives of financial reporting are some of the key trends evolving in
recent times.

2.1 Globalization and market integration

Beck (2000) by contrast defines globalization as the intensification process of cross-

border social exchanges as it reduces the cost of associating far-flung places through
communication and transfer of capital, goods, and people in a fast way. As a result,
strategic opportunity knocked on the doors of larger firms prompting acquisition of small
competitors to form a global operating network which delivers number of opportunities
(refer table1) for market integration.

1. Economies of scale
2. Outsourcing manufacturing process
3. Global distribution
4. Technology pooling including managerial talent
5. Global sourcing
6. Flex, not fixed, manufacturing
7. Joint ventures to utilize excess idle capacity
8. Co-marketing

Source: Globalization and Emerging Markets, Chhabra (2013).

Table 1: Opportunities arising out of Globalization and Market Integration

Thus market integration characteristically will be responsible for predicted challenges;
there will be a collision of cultures and social behavioral patterns. Firms may be fronting
different perceptions in trade legislations and business policies resulting in unfamiliar
legal requirements. Compliance to legal provisions may seem difficult and take long
time to adjust. Beyond that, financial reporting perspectives will have to face a
tremendous amount of readjustment and alignment in applying the accounting
standards and practices in mixed economies.

2.2 Diversities in Accounting

Naaim, (2018) argues that diversities in accounting practices can significantly affect
financial reporting. He further identified; cultural behaviours, legal systems, taxation
system, inflation, providers of financing and political and economic ties as the common
attributes of diversities that are contributing to the changing trends in financial reporting.

As a result of these diverse attributes, the accounting process inevitably had to face
various challenges in an integrated global market. Invariably the countries involved had
to prepare consolidated financial statements to see the mixed financial performances
through a single lens when involved in foreign operations. Next, access to foreign
capital markets has to be resolved through fulfilling local accounting standards in the
country in which the capital is being obtained. A third challenge relates the lack of
comparability of financial statements between companies from different countries which
can significantly affect the effective analysis of financial statements. This is followed by
lack of high-quality accounting information as a result of differing standards and
practices.

In addition taxation rules also differ from country to country in the sense that published
financial statement forms the basis for taxation in some countries whereas in other
countries financial statement is adjusted for tax purposes. Adjusting accounting records
for high rates of inflation became a necessity in countries that experienced chronic
inflation patterns. Then, providers of financing in a country also play a significant role in
the determination of the level of financial disclosures to various segments that need this
information. Lastly, political and economic ties did play an influential role in the
determination of a particular accounting framework in a country, thus countries
observing code law system obviously differ from countries that observe common law
system. The above dilemma in the accounting world foreshadows the degree of
hindrance to efforts taken to harmonize the standards and practices currently instituted
by both the divides of governing bodies such as Federal Accounting Standards Board
(FASB) U.S. and International Accounting Standards Board (IASB).

Most of the world’s economies are embracing the international financial reporting
standards (IFRS) issued by IASB. However the U.S. corporations chose to observe the
Generally Accepted Accounting Principles (GAAP) established by FASB, while firms
from other countries embrace IFRS established by IASB or by accounting standards set
by their national accounting standards board. These differences in accounting
standards have led to controversial differences in financial statements. Such differences
made it difficult for investors and creditors to make valid comparisons which can guide
them to perform accurate firm valuation in buy-sell-hold decision-making in global
capital markets.

2.3 Recurrence of Global financial Crises

The financial crises have happened decades since the seventeenth century (The
Economist, Jan., 2009). According Mohan, (2009) why recurrence of financial crises is
a real concern for the accounting world; because the intensification of global financial
crisis will render great risk to the economic and the financial environment of the
business fraternity. It is a disorder in finance regimes which will create global instability
in economic, political, social and international environments. Thus, there are number of
factors that cause the occurrence of market bubbles and financial scandals leading to
financial crises. As a result of all these scandals, the accounting world and financial
reporting will be caught up with revisiting the effectiveness of regulations, standards,
practices and frameworks. Insofar, the causes of crises indicate a high degree of
commonality in attributes such as; ineffective regulatory oversight, dodgy accounting
practices that involves massaging numbers, excessive over valuing of the market, pack
mindsets adopting certain behaviours on a largely emotional, rather than rational basis
and in many instances a sense of false confidence and infallibility. These causes of the
financial crises may be somewhat intricate and cannot be explained precisely. On the
one hand governments can be blamed for their lackadaisical oversight actions and
conversely having said all, it is a problem caused by humans’ unethical behaviours
which ultimately grinds to halt the global financial system.

2.4 Emerging Perspectives of Financial Reporting

Of late there has been visible trend shift in the perspectives of financial reporting.
Studies indicate that, besides revisiting financial domains such as historical costing and
fair market value adjustment on the balance sheets, at the behest of external users of
financial information significant research into non-financial domain has evolved.
Stakeholders particularly investors are looking beyond the financial information delving
into non-traditional areas to ascertain firms’ value. Reports indicate that today less than
15% of a company’s market value can be accounted for by its financial and physical
assets. On the contrary, it is also observed that other elements, especially relationships,
and intellectual and human capital, make up a greater percentage of a company’s value
(Ramanan, 2018).

These days, with the changing trend, the measure of success is no more restricted to
financial regime but extended to non-financial regimes such as customer satisfaction,
loyalty and brand awareness, the priority and importance given to corporate governance
and corporate social responsibility also have significant impact upon external
stakeholders, (Ramanan, 2018). Hence this shift is focused more toward a company's
social accountability and is aimed at a broader group of stakeholders than the
owners/investors themselves. In the light of these developments, the challenges for
corporations would be to place critical importance on corporate governance and
corporate social responsibility initiatives in order to be inclusive and more relevant in
financial reporting as mandated by the undercurrents of waves of change.
3.0 Critical Analysis

The main theme observed in the emergence of globalization and market integration of
various economies heralds both opportunities and threats for all the global market
players. Besides the opportunities, the threats posing challenges are more pervasive
and inevitable due to the interplay of systemic factors within the business fraternity. As a
result financial reporting initiatives will have to face a tremendous amount of
readjustment and alignment in applying the accounting standards and practices in
integrated market economies.

Next, the traditionally observed diversities in the accounting world such as legal
systems through political and economic ties inevitably raise various challenges to the
accounting process as a whole. Preparation of consolidated financial statements
through fulfilling local accounting standards and gearing towards harmonization for
compatible reporting standards and regulations in view of facilitating decision making in
integrated market were reportedly a grave concern that had to be addressed in order to
move forward. The stalemate in the harmonization process of regulations, standards
and practices between FASB and IASB is certainly a strategic concern for the global
economy. The delay in breakthrough will certainly stall innovative solutions for future
woes in the accounting world.

The trend of financial crises recognizes that market bubbles and financial scandals are
inherently a human doing arising from the lack of accountability and transparency. It is
not the weakness of conceptual framework and structure of financial reporting as
claimed, this platform has been existing since the middle of 14th century. Lastly,
besides the traditional financial domain, the importance of non-financial domain as a
greater influencing factor in firm valuation had been given more emphasis in the
accounting industry. Hence there is a distinct shift in the perspectives of traditional
financial reporting beckoning for a review of the accounting process for an innovative
solution. That said, industry opines that the overall relevance of income
statement/balance sheet remains good and is not lost as highlighted by some quarters
from the industry and academics.
4.0 Recommendations

In the light of the prevailing trends in the accounting world the following
recommendations are made in the hope to address the current woes:

4.1 The standards governing bodies; FASB and IASB shall resolve the stalemate
differences in the nearest possible future and bring about harmonization in the
accounting world.

4.2 Global corporations shall expand their focus from traditional financial regime to non-
traditional financial regime in order to augment an innovative conceptual framework and
consolidate the relevance of income statement/balance sheet in financial reporting to
facilitate the operating environment in the globally integrated economy.

5.0 Conclusion

Judging from the reported global trends in the accounting world, certainly there is a
considerable shift of a recognizable scale with new dimensions to explore and innovate
the financial reporting perspective. Irrespective of all the developments affecting the
accounting world, the writer feels that the relevance of income statement/balance sheet
can never be replaced from the conceptual framework of accounting process and it has
to remain as bedrock in the financial reporting domain may be with relevant modification
in its structure to accommodate changes. Lastly, with augmentation in respect to shift in
users’ perspectives, the income statement/balance sheet may strongly remain relevant
and portray a greater degree of reliability for years to come in a dynamic operating
environment.
References

Ibrahim Naaim (2018). worldwide accounting diversity

1. 1. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc.
2. Published on Jul 14, 2018
3. International Accounting

https://www.slideshare.net/IbrahimNaaim?utm_campaign=profiletracking&utm_medium=sssite&utm
_source=ssslideview

Stanford Centre for Intl Devt, Working Paper No. 407, GLOBAL FINANCIAL CRISIS: CAUSES,
IMPACT, POLICY RESPONSES AND LESSONS* Rakesh Mohan December 2009

https://globalpoverty.stanford.edu/sites/default/files/publications/407wp.pdf