The flow of standards can be slowed if producers focus less on quarterly earnings per share and tax benefits and more on quality products. Furthermore, accountants and lawyers should rely less on rules and laws through the adoption of judgment and conduct. This means that the reliability of companies’ reports disclosed to the public is discretionary. The international rules that govern the disclosure of company reports may not give strict guidelines, and for this reason, business executives can maneuver earnings in order to give a better company image.
The managers may inflate costs to obtain a higher volume of benefits, such as tax benefits, which enables them to report higher earnings per share. The focus on the high-end earnings per share generates additional investment irrespective of the quality of output of the firm. In the long term, this may lead to the production of low-quality products reducing the company’s competitiveness, which subtracts the market share commanded. The managers may conform to the rules governing reporting but may not stick to just principles. Although it is legal, the absence of clear-cut principles makes the manipulation unethical.
The Generally Accepted Accounting Principles (GAAPs), like the International Financial Reporting Standards (IFRS), give direction on what the company should disclose within the financial statements. They provide the technique to be used in calculating the figures disclosed in the statements and the procedure used to annotate them. GAAPs outline the conventions used in the preparation of the financial statements that are useful in the communication of the company’s performance to the stakeholders. The information disclosed within the statements is subject to the interpretation of the recipients. This is because the GAAPs do not give discretion on assumptions made in the statements. The application of the IFRS is more conservative than the use of GAAPs. Unlike within the IFRS, matters such as the depreciation of assets inventory valuation methods can be manipulated to influence the company’s income by a considerable margin within the GAAPs. Consequently, the IFRS is regarded as a set of principles.
The Last in First out stock costing technique (LIFO) as used within the GAAPs may not correspond to the variation in prices set by the firms. A rising cost of manufacturing may cut down on the company’s profits, despite the fact that the technique attracts tax benefit to the producer. Contrary to this, the IFRS does not allow the use of the LIFO method of stock valuation because of the conformity rule. This rule ensures that the same technique used in tax accounting is strictly applied in financial statement accounting. Unless exceptions are sought for the application of the conformity rule, the utilization of the LIFO method will be harsh on the financial statements. The technique reports an inflated net income that attracts a higher volume of corporate taxes. This is detrimental to the shareholders and impedes the adoption of the IFRS rules in financial reporting.
The asset valuation within the GAAPs is more precise than the IFRS. The IFRS gives room for the inclusion of development expenditure only within the company’s assets, which are allocated within the company’s income. On the other hand, the GAAPs expenses, both research and development costs, go against the income unless the company is within a restricted industry-explicit state of affairs. The flexibility of the IFRS reflects the outline of its application as a set of principles, while the stringent application of the GAAPs presents them as a set of rules. This means that the outcome of the IFRS is based on managerial judgment while the GAAPs give an intrinsic form of reporting.