Gale (2010) reported that today people around the globe are more connected to each other than ever before. Information and money flow more quickly than ever. Companies can now sell standardized products efficiently and effectively all over the world and this has widened the global marketplace at a faster rate. This is in essence that goods and services produced in one part of the world are increasingly available in all parts of the world as nations converge more every year. While the affinity for global trade has increased in the recent past, researchers have often questioned whether companies switch to IFRS will affect way in which corporate accounts are managed. The objective of this research is to explore the incentives for companies in the United Arab Emirates to the International Financial Reporting or retain the locally used method of financial reporting.
Importance of Research Problem
IFRS were designed to meet the needs of equity investors in companies in public capital markets. For this reason, IFRS contain a wide range of issues and full amount of implementation guidance. Some private companies do not need meet those needs hence finding it hard to comply. When assessing short term cash flows, liquidity, and solvency, IFRS regulations become hard and expensive to monitor. On the other hand, GAPP offers quite detailed and industry specific rules for revenue recognition which IFRS do not. For the short term, GAPP provides the best alternative for companies that are just starting (Cohn, 2010). In the 21st century, financial reporting by large companies has gone through a transformation. Before the year 2000, there was an array of global diversity with which multinational corporations reported their finances. In the UAE, most firms reported their finances from the head office using local standards. However, by the end of 2010, almost all large companies had started or changed their reporting mechanism to the IFRS. This research is underscored by the desire to understand the impetus for the switch.
Literature Review on the Switch to IFRS
American Institute of Public Accounts (2012) report that in the year 2010, IASB and FASB released a document known as the Exposure Draft Revenue from Contracts with Customers. This document affected how companies would do financial statements. IFRS requires that companies undertake their inventory at the lower cost of their value. However, GAAP calculates inventories at the lower cost of current earnings. This cost is subject to a ceiling of realizable value subtracting a floor of the net realizable value minus the nominal profit margin. Still, a change from FASB could lead to a realistic positive income effect due to the accumulation of the previous year’s costs in the beginning of the inventory. This only happens in the assumption that there is a turns over. Similarly, the transition from FASB to IASB will have an effect on the balance sheet as the income state in the year of effect. The FASB reserve is a contra-asset or asset reduction account companies can use to adjust downward the cost of inventory under the new system.
Watson (2012) argued that for international economies, especially from emerging economies such as UAE, convergence is perhaps the greatest reason why companies would consider changing to IFRS. Convergence refers to a move towards using a single, globally accepted set of financial reporting standards in preference of standards developed nationally. Some of the reasons why a company would switch to IFRS include the need communicate with a wide range of external stakeholders mostly in the capital markets. Similarly, IFRS is widely accepted and understood across the world making it easy to do business on a larger scale. Some of the demerits of using IFRS include its excessive cost on the switching company in term of training and changing records.
Proposed Research Methodology
I intend for this research to be different. I will use a priori of discussion of literature that formulates the hypothesis, details of research situations, details of sampling techniques, statistics. I will also use detailed discussion of transcripts of recordings of verbal interactions and the devices used by the participants. I intend to develop a research design that is highly interactive. The stakeholders involved in this discussion include the customers as well as the corporation’s owners. My sample size would be an estimate of 10 corporations CEO and accountants from Dubai and Abu Dhabi.
How the Research will be Used and disseminated
Most companies are currently striving to operate beyond their original borders. Often these companies strive to have a better acclimatization to the business environment overseas with the ultimate goal of gaining dominance in their original countries as well as in the overseas markets. While struggling to acquire more territories in the marketing field to ensure better performances, external and internal forces affects companies’ growth. Due to the challenges, most companies attempt to mitigate the internal influences while disregarding the external effects. The research on IFRS will be disseminated through publications, oral presentations and analysis that will be helpful for the general success of the companies.
American Institute of Certified Public Accountants. (2012, June 12). INTERNATIONAL FINANCIAL REPORTING STANDARDS. Retrieved June 22, 2012, from http://www.ifrs.com/ifrs_faqs.html#q1
COHN, M. (2010, October 29). Controversy Continues over IFRS Costs. Retrieved June 8, 2012, from http://www.accountingtoday.com/debits_credits/Controversy-Continues-IFRS-Costs-56128-1.html
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Walton. P.( 2012). An Executive Guide to IFRS. Chicago: John Wiley & Sons.