BUSM4154 – FINANCIAL ANALYTICS FOR

MANAGERIAL DECISIONS (2110)

Assessment Task 1:
Reflective Exercise 1

Student Name: Rajasimhan Yuvaraj Class Time: Wednesday – 6:30 - 8:30

pm

Student Number: S3868608 Learning facilitator – Dr. Vineet

Tawani
 Reflective Exercise 1

Question:

'Of course, using accounting standards for financial accounting in necessary and appropriate
for companies listed on a stock exchange, but there is very little benefit, if any benefit at all,
for small companies and not-for-profit organisations to use such standards. '   
Do you agree with this statement? Why?

Solution:

The statement mentions that accounting standards for financial reporting are essential and
beneficial for entities listed in the stock exchange, but when such standards are applied to small
entities and NPOs (Non-Profits Organizations), they carry almost no benefit to those entities. Though
the above statement cannot be outright agreed or disagreed, the reflective exercise writer would
partially agree with the above statement. There do lie merits and demerits on both sides of the
argument. Accounting standards for financial accountings helps stakeholders such as consumers,
shareholders, banking organizations, and regulatory bodies make informed decisions (Birt et al.,
2016). While Banks use this information for lending decisions, shareholders decide on investment
decisions, and other organizations use financial accounting information to make better choices.

Is Accounting standard perfect around the Globe for all entities to follow? Definitely not. Most CAs
and CPAs would press on the tremendous scope for improvement in this space. While many
countries follow the IFRS (International Financial Reporting System), the USA tends to lean towards
GAAP (Globally Accepted Accounting Principles). The presence of two accounting standards would
complicate decision-making for shareholders, as two companies in the same field (Eg: Pfizer and
GlaxoSmithKline) would prepare different financial reports (Sherman and Young, 2016). The issue
further extends as both accounting standards differ in operation as well. GAAP is rule-based,
whereas IFRS is principles-based, and IFRS does not allow LIFO (Last in, First out) inventory methods.
For Small and medium companies in many countries, the IFRS's implementation is associated with
high implementation costs and requires large quantities of information while reporting (Sever,
2008).

Although the current accounting system is not the perfect one, the absence of such standards would
potentially harm all stakeholders involved. Unlike Big Corporation, small companies do not have a
specialized house finance or accounting team due to cost factors. The heavy dependence of small
entities on external accountants whose decisions are the final say in most cases has a direct impact
on business regulation (Kitching, 2016). Accountants at times advise small clients to file abbreviated
accounts as the default position during financial reporting (Kitching, 2016).
Big companies approach Non-Governmental Organizations (NGOs) for the large entity's Corporate
Social Responsibility (CSR) needs. In most cases, NGOs are NPOs with minor exceptions. NPOs are on
the rise in many countries and are in dire need of accountability in financial reporting. Based on a
Chartered Accountant's information, big companies tend to muscle out NPOs with funding prowess.
There arises a significant hurdle in transparent reporting practices as NPOs lose out their autonomy
in decision-making.

While a research paper by Liu (2014) suggests that accounting regulations for small and medium
companies need to be improved considerably as accounting standards do not equal accounting
quality, the success rate of practical implementation of these standards needs to be considered.
Although adopting a global standard helps compare financial statements among entities with ease
(Sava et al., 2013), the presence of a specialized standard for separate groups such as SMEs or NPOs
would improve the overall quality of the reporting system by tailoring financial information to user
needs (Rashid et al., 2018). The presence of specialized standards would bring out the maximum
benefits in financial accounting concerning stakeholders' needs.
Reference List

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J. and Bond, D., 2020. Accounting: Business
reporting for decision making. John Wiley & Sons

Kitching, J., 2016. The ubiquitous influence of regulation on entrepreneurial action. International

Journal of Entrepreneurial Behavior & Research.

Liu, S., 2014. Accounting quality across different groups of firms under differential reporting
framework: UK evidence (Doctoral dissertation, School of Social Sciences Theses).

Rashid, N., Daud, W.N.W., Zainol, F.A., Salleh, F., Yazid, A.S., Endut, W.A., Yaakub, N., Ghazali,
P.L., Afthanorhan, A. and Abdullah, B., 2018. The Uses of Financial Reporting Standard for Small
Medium Enterprise Companies. Journal of Academic Research in Business and Social
Sciences, 8(11), pp.1331-1338.

Sava, R., Mârza, B. and Eşanu, N., 2013. Financial reporting for SMEs–past and
perspectives. Procedia Economics and Finance, 6, pp.713-718.

Sever, S., 2008, June. Specific aspects of financial reporting for SMEs. In An Enterprise Odyssey.
International Conference Proceedings (p. 729). University of Zagreb, Faculty of Economics and
Business.

Sherman, H.D. and Young, S.D., 2016. Where financial reporting still falls short. Harvard business
review, 94(7), p.17.