GAGE UNIVERSITY COLLEGE

DEPARTMENT OF MANAGEMENT AND BUSSINES ADMINSTRATION

FINANCIAL AND MANAGERIAL ACCOUNTING GROUP ASSIGNMENT
Section ≠1

Name ID
Shiferaw Melese MMBA/0009/15
Estifanos Desalegn MMBA/0218/15
Sultan Mohammed MMBA/0002/15
Melkam Tseganew MMBA/0008/15
Meleyo Besfat MMBA/0044/15
masresha Emwey MMBA/0160/15
Almaz Simegnaw MMBA/0048/15
Birke Wubshet MMBA/0029/15

Submission to: Dr.Suheyli R

Date of submission: 20/01/23

Addis ababa, Ethiopia

Financial And Managerial Accounting Group Assignment 2023

Q1. What are International Financial Reporting Standards? Who uses these accounting
standards? What body is responsible for setting International Financial Reporting
Standards.

IFRS standards

 They are International Financial Reporting Standards (IFRS) that consist of a set of
accounting rules that determine how transactions and other accounting events are required
to be reported in financial statements.

 They are designed to maintain credibility and transparency in the financial world, which
enables investors and business operators to make informed financial decisions.

 This standards are issued and maintained by the International Accounting Standards
Board and were created to establish a common language so that financial statements can
easily be interpreted from company to company and country to country.

 International Financial Reporting Standards (IFRSs)are set by the International

Accounting Standards Board (IASB), which was established in 2001 to replace the
International Accounting Standards Committee(IASC). IASB members are accounting
organisations that are members of the International Federation of Accountants (IFAC).

The main objectives of the IASB

These are:-

 to formulate and publish accounting standards to be observed in the presentation of

financial statements
 to work generally for the improvement and harmonization of regulations, accounting
standards and procedures relating to the presentation of financial statements.

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Financial And Managerial Accounting Group Assignment 2023

 IFRSs are at present being used:

1. as a basis for national regulations on accountancy,
2. as an international benchmark for countries which are developing their own
national regulation.
3. as a uniform benchmark for multinational and international enterprises,
by companies listed on world stock exchanges.

IFRSs include:
1.an introduction and preface, a framework,
2.IFRSs and International Accounting Standards.

(IASs), interpretations by the International Financial Reporting Interpretations Committee,

previously called the Standing Interpretations Committee (SIC).International Accounting
Standards was the name used for all the standards until the end of 2002, and International
Financial Reporting Standards has been used since 2003.Both standards are applicable until the
time that the IASs have been replaced by the IFRSs.

Q2. Briefly discuss differences between U.S. GAAP and IFRS. What are examples of
specific differences between IFRS and U.S. GAAP?

Difference Between GAAP and IFRS

In the world of accounting, there are two different standards of financial reporting.
These are:-
1 .International Financial Reporting Standards (IFRS) and
2. Generally Accepted Accounting Principles (GAAP).
IFRS is the most widely used system in the world, with over 110 countries using this method of
accounting for publicly traded companies. The United States of America is the only country that
is yet to make the switch to this method of reporting.
GAAP vs IFRS is the most debatable topic in accounting where the former is defined as the
financial reporting method having universal applicability while the latter are the set of guidelines
made for financial accounting. As an account professional or business owner, it is vital to know

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Financial And Managerial Accounting Group Assignment 2023

the variations of these accounting methods, in order to successfully manage your company
globally, as well as domestically.
key differences between IFRS and GAAP accounting:

Elements IFRS GAAP

Adoption globally adopted method for exclusively used within the

accounting United States.

Methodology IFRS looks at the overall It focuses on research and is

patterns and is based on rule-based
principle.

Developed by International Accounting Financial Accounting

Standard Board (IASB) Standard Board (FASB)

Inventory Methods They not uses last in first out They not uses last in first out
(LIFO) inventory estimate (LIFO) inventory estimate

Inventory Reversal the amount of the write-down the amount of the write-down
can be reversed cannot be reversed

Income Statements Extraordinary or unusual they are separated and shown

items are included in the below the net income portion
income statement and not of the income statement.
segregated under IFRS

Intangible Assets When it comes to intangible Intangible assets measured

assets, IFRS takes into under GAAP are recognized
account whether an asset will at the fair market value and
have a future economic benefit nothing more.
as a way of assessing the
value.

Fixed Assets IFRS uses a different model In fixed assets, companies

for fixed assets called the using GAAP accounting must

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Financial And Managerial Accounting Group Assignment 2023

revaluation model. value these assets using the

cost model.

Development Costs Development costs can be With GAAP, development

capitalized under IFRS, as costs are not allowed to be
long as certain criteria are met. capitalized.

Quality Characteristics
IFRS also works with the
same characteristics, except
that decisions cannot be made
based on an individual’s
specific circumstances.
GAAP uses a hierarchy of
characteristics, such as
relevance, reliability,
comparability and understand
ability, to make informed
decisions based on user-
specific circumstances.

Q3.Briefly discuss why global accounting standards are needed in today’s business
environment
Because to ensure transparency, reliability, consistency, and comparability of the financial
statements. They do so by standardizing accounting policies and principles of a nation/economy.
So the transactions of all companies will be recorded in a similar manner if they follow these
accounting standards.
Accounting is often considered the language of business, as it communicates to others the
financial position of the company. And like every language has certain syntax and grammar rules
the same is true here. These rules in the case of accounting are the Accounting Standards (AS).
They are the framework of rules and regulations for accounting and reporting in a country. Let us
see the main objectives of forming these standards.

The main aim is to improve the reliability of financial statements. Now because the financial
statements have to be made following the standards the users can rely on them. They know that
not conforming to these standards can have serious consequences for the companies.Then there
is comparability. Following these standards will allow for inter-firm and infra-firm comparisons.
This allows us to check the progress of the firm and its position in the market.It also looks to

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provide one set of accounting policies that include the necessary disclosure requirements and the
valuation methods of various financial transactions.Accounting standards (AS).

Benefits of Accounting Standards

These are
1. Attains Uniformity in Accounting
2. Improves Reliability of Financial Statements
3. Prevents Frauds and Accounting Manipulations
4. Assists Auditors
5. Comparability
6. Determining Managerial Accountability

Accounting Standards are the ruling authority in the world of accounting. It makes sure that the
information provided to potential investors is not misleading in any way. Let us take a look at the
benefits of AS.

1] Attains Uniformity in Accounting

Accounting Standards provides rules for standard treatment and recording of transactions. They
even have a standard format for financial statements. These are steps in achieving uniformity in
accounting methods.

2] Improves Reliability of Financial Statements

There are many stakeholders of a company and they rely on the financial statements for their
information. Many of these stakeholders base their decisions on the data provided by these
financial statements. Then there are also potential investors who make their investment decisions
based on such financial statements.
So it is essential these statements present a true and fair picture of the financial situation of the
company. The Accounting Standards (AS) ensure this. They make sure the statements are
reliable and trustworthy.

3] Prevents Frauds and Accounting Manipulations

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Financial And Managerial Accounting Group Assignment 2023

Accounting Standards (AS) lay down the accounting principles and methodologies that all
entities must follow. One outcome of this is that the management of an entity cannot manipulate
with financial data. Following these standards is not optional, it is compulsory.
So these standards make it difficult for the management to misrepresent any financial
information. It even makes it harder for them to commit any frauds.

4] Assists Auditors

Now the accounting standards lay down all the accounting policies, rules, regulations, etc in a
written format. These policies have to be followed. So if an auditor checks that the policies have
been correctly followed he can be assured that the financial statements are true and fair.

5] Comparability

This is another major objective of accounting standards. Since all entities of the country follow
the same set of standards their financial accounts become comparable to some extent. The users
of the financial statements can analyze and compare the financial performances of various
companies before taking any decisions.

Also, two statements of the same company from different years can be compared. This will show
the growth curve of the company to the users.

6] Determining Managerial Accountability

The accounting standards help measure the performance of the management of an entity. It can
help measure the management’s ability to increase profitability, maintain the solvency of the
firm, and other such important financial duties of the management.
Management also must wisely choose their accounting policies. Constant changes in the
accounting policies lead to confusion for the user of these financial statements. Also, the
principle of consistency and comparability are lost.

Q4. Briefly discuss the difference between (A) a “rules based” approach to accounting
standard setting and (B) a “principles- based” approach to accounting standard setting

Principle-Based Accounting Standards

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Principle – based accounting standards has the flexibility to deal with new and different
situations. The standards are rigid under the rule - based accounting and may not be applicable to
new and different situations. Many businesses under ruled - based accounting have limited scope
on the applicability of the standards. The principle - based accounting standards has the
flexibility to be applied across the national boundaries and across diversities of culture. Under
the principle - based accounting, the standards are flexible to take into consideration the needs of
special cases which may not be possible using rule - based standards. The judgments reflect the
economic reality that is applicable to particular organization. Furthermore, Doupnik and Richter
(2003) argued that principles – based standards provide greater choices in recognition and
measurement of various accounting transactions and incorporate uncertainty expressions that
requires exercise of accountants’ professional judgments
Limitations of Principle-Based Accounting Standards The most obvious limitation of the
principle - based accounting standards is the risk of the litigation. The fundamental concept is
that judgment can be demonstrated to be reasonable in light of the facts and circumstances
presented at a particular time. The real question is to what extent the judgment made by the
prepares of financial reports represents the economic reality. This task becomes more difficult
when the business environment includes complex financial transactions. The complexity in the
underlying business transaction and lack of rule as preferred under principle - based standards
could result in inaccurate judgments to be made. This indeed, increases the risk of litigation.
Dickey and Scanlon (2006) explain that the lawsuit culture especially in America may lead to
companies facing an increased threat of legal action, in the absence of strict rules. Hence, the
litigation issue makes the rules - based system as preferable to principles based system.Principle
- based accounting standards requires the prepares, and the auditors to exercise significant
professional judgment. It raises several questions whether the principles -based accounting
standards are providing rooms for earnings management or creative accounting. The
manipulation under a principles - based system can occur in the judgment rather than through
manipulation of rules. These judgments are supported by the guidance that makes the standard
operational. Limited guidance and rules under the principle - based accounting can lead a
number of interpretations by the auditors, prepares and the management. Earley (2001) and
Vera-Munoz et al. (2001) argued that it will be onerous task to train professional accountants to
interpret and apply these standards in a consistent manner given the changes in the business

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Financial And Managerial Accounting Group Assignment 2023

environments and the issue of complex principles - based International Financial Reporting
Standards (IFRS)

 Rule-Based Accounting Standards Rule - based accounting standards are driven by

the desire for comparability. Schipper (2003) argued that one alleged benefit of detailed
implementation guidance is increased comparability. Rules - based standards provide
greater comparability than principle based - accounting standards. The argument is that
the prepares and the auditors will adhere to the set of rules and the financial outcome will
be comparable. Furthermore, rule - based accounting standards are more authoritative and
enforceable. The rule - based standards is easily enforceable by the regulators as the
outcome can be consistently measured. Mostly the prepares, auditors, and regulators
prefer rules - based standards because it provides detailed guidance and solution to
problems. They use these standards to justify their actions and it reduces the risk of
litigation. The requests for greater details in the rules-based standards arise because both
prepares and auditors want to minimize the risk of lawsuits. The litigation against audit
firms increased in scale the audit firms looked to the standard setters for bright line rules
that could support audit opinions (ICAS, 2006). The argument in favor of the rules -
based accounting standards is that it is very helpful where the translation is required. The
rule - based standards provides comprehensive information on how to deal with issues.
Rules - based standards has been supported on the basis that it will deter creative
accounting. The common view is that the preparers and auditors have to follow a detailed
set of rules to deal with financial events and there is less or no room to manipulate the
figures. Nelson et al. (2002) argued that detailed guidance reduces earnings management.
 Limitations of Rule-Based Accounting Standards Rules - based standards reduce or
eliminate the exercise of professional judgment (ICAS, 2006). This practice will
eventually down grade the expertise of the profession as more reliance is made on a set of
standards. Whenever the prepares and auditors will face any issue, they will refer to the
set of standards for solutions rather than exercisin their professional expertise to reflect
the true and fair view. The rules - based standards can never be comprehensive enough to
provide answers to each different case. These standards are generally for businesses with
similar information and it is applied across industries and countries. There will be
certainly special cases and we cannot argue with certainty that rule - based standards will

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be applicable across industries and countries. This may not lead to true and fair
presentation of financial event as more focus will be on the outcome based on a set of
rule than on the economic realty.The critics of rule - based accounting standards argue
that it encourages creative accounting. These standards foster creative accounting by
diverting judgment from economic reality to the details of application. Rules - based
accounting adds unnecessary complexity, encourages financial engineering, and does not
necessarily lead to a ‘true and fair view’ or a ‘fair presentation’ (ICAS, 2006). Rules -
based standards do not necessarily prevent dishonest practice as the continuous user of
the accounting standards are able find means and ways to get around the system. We
believe that neither rules- based standards nor principles-based standards can prevent
dishonest practice (ICAS, 2006). The United State of America (US) through Generally
Accepted Accounting Principles (GAAP) used a rule -based accounting system. The
corporate collapse such as Enron, Tyco and many of the other accounting scandals
provide an insight into how the rules - based system can facilitate problems and scandals.
Dickey and Scanlon, (2006) argued that the general concession being that US rule -
based accounting permitted public companies to structure transactions that were
essentially engineered to achieve certain accounting and financial reporting results. If we
use Enron as an example, the management was able to cover up the losses of
underperforming entities, increase the share prices and maximize their remuneration by
bending the rules and manipulating earnings to suit their specific needs.The greater detail
in the rules - based standards may cause more complexity as greater amount of rule needs
to be translated with correspondingly greater difficulties. These standards often are very
detailed and the standards are quite large documents. As a result the users of accounting
standards tend to focus on the document rather than the spirit of the standard itself. The
emphasis for both preparers and auditors under the rule - based system is not whether the
accounts gave a realistic view of entity performance, but whether they complied with list
of rules. Rules-based approach makes it difficult for preparers and auditors to
comprehend the volume of rules. Benston et al. (2006) suggested the more rules the
standards include, the more an override provision is necessary to avoid allowing or even
requiring accountants to follow rules by letter but not by intention.

Q5. What are the challenges and prospects of IFRS adoption in Ethiopian?

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Financial And Managerial Accounting Group Assignment 2023

The problem of differences in accounting standards will continue to exist for some time. From a
regulatory perspective, convergence to IFRS would require amendments to the Companies Act
and the Income Tax Act, to mention the major ones. Currently industries such as banking and
insurance companies are also regulated by specific acts that prescribe accounting norms. IFRS
does not provide industry specific standards so there would be additional transition challenges as
and when progress is made. IFRS requires valuations and future forecasts, which will involve use
of estimates, assumptions and management's judgments (Kumar, 2014). The principal impeding
factors in the adoption process of IFRS in Europe, America and the rest of the world are not
necessarily technical but cultural issues, mental models, legal impediments, educational needs
and political influences(Obazee, 2007) as cited by (Ojiedu et.al,2013). According to Rong- Ruey
Duh (2006), the implementation challenges include: timely interpretation of standards,
continuous amendment to IFRS, accounting knowledge and expertise possessed by financial
statement users, prepares, auditors and regulators, and managerial incentive (Ball, Robin & Wu
2000) as cited by (Ojiedu et.al, 2013).

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