Most companies in today's world have to prepare some form of detailed record of its activities during the year. There are several users who require such detailed information, and therefore companies produce yearly accounts, showing items such as incomes, cash flows, and asset measurement. These users usually have a vested interest in that company; the most in need are probably investors, who have a monetary interest in the company, and directors who seek to maintain the financial well-being and future growth of a company, but there are also others who may take an interest. Creditors may be interested to know the likelihood that a company can honour its debts. In addition financial statements are required when a company produces its yearly tax return. A useful set of financial accounts provides shareholders with precise information about the value of their shares, levels of dividend receivable, and future value of their investments. In addition the actions of directors are made clear and any actions adverse to the business' performance can be avoided. In the interest of fairness and comparability several rules and regulations known as standards apply to the writing of financial reports. These are enforced independent accounting bodies. In the UK the main body involved with the setting up of accountancy standards is the Accountancy Standards Board.
IASB and FASB developing Enhanced Conceptual Framework
The accounting standards operated under by each country can vary, in something as basic as inventory evaluation, practices in major countries include:
* Cost (FIFO) (e.g. some Japanese companies)
* The lower of FIFO and net realisable value (e.g. general UK practice);
* The lower of LIFO and current replacement cost (e.g. common US practice).
Therefore existence of difference standards can lead to a lack of comparability between companies of different countries. Items shown in financial statements may differ due to recording practices and crucially useful figures such as profit and shareholder wealth. This is quite a problem in capital markets where rational investors seek to compare companies with which to invest in. The scale of these differences can be shown by the following attached table (annex A). Here the value of shareholder's funds has been reconciled to US accounting rules. The biggest difference being with the US's accounting treatment of Glaxo Wellcome's shareholder value, had these accounts been prepared under US accounting rules value would be £8,168m higher. There is clearly a problem in what figure to use. It would be difficult for an investor to make a comparison between Glaxo Wellcome and an American pharmaceutical company; they may not have as big a difference as shareholder values suggest. The problems extend to other users, particularly those auditing and consolidating groups of accounts such as an English company with American subsidiaries.
To seek to resolve these problems a method of harmonising reporting standards was sought. In 1973 a body called the International Accounting Standards Board (formally known as the IASC) was formed. A section taken from its current mission statement reads; "The board is ...