RELEVANCY OF INCOME STATEMENT/BALANCE SHEET IN FINANCIAL

REPORTING

1.0 Introduction

A company's net worth is reported as a statement of shareholders' equity which is very

important to equity investors and a host of other interested parties because it reflects the
financial performance and the financial position of a firm for a particular accounting period.
Lately, there has been number of debates on the relevance of the above financial
reporting. Globally, both industry practitioners and academicians have shown some
worrying concern over this trend. They argue that there is a shift in the global trend in the
way the financial perspectives of the reporting is prepared and presented. In addition, it
is also noted that the outside stakeholders, besides financial perspectives, are keen to
know more about non-financial information to consolidate their understanding on the
firm’s financial performance and position. This shift in stakeholder behaviour is a
significant contrast to traditional way of establishing a firm’s value before making further
decision to venture into the capital market. If inaccurate picture of the firm is projected,
this it may confuse the stakeholders and result in making wrong decision and such wrong
decisions could ultimately cause them to suffer great losses.
2.0 Reported Trends in the Accounting World

Reportedly there had been number of global developments that have significant impact
on the business environment. Events such as globalization and market integration,
diversities affecting accounting harmonization, recurrence of financial crises and
emerging perspectives of financial reporting are some of the key trends evolving in recent
times.

2.1 Globalization and market integration

Beck (2000) by contrast defines globalization as the intensification process of cross-

border social exchanges as it reduces the cost of associating far-flung places through
communication and transfer of capital, goods, and people in a fast way. As a result,
strategic opportunity knocked on the doors of assimilation of larger firms prompting
acquisition of with smaller competitors could lead to a feasible (refer table1) market
integration prospects.

1. Economies of scale
2. Outsourcing manufacturing process
3. Global distribution
4. Technology pooling including managerial talent
5. Global sourcing
6. Flex, not fixed, manufacturing
7. Joint ventures to utilize excess idle capacity
8. Co-marketing

Source: Globalization and Emerging Markets, Chhabra (2013).

Table 1: Opportunities arising out of Globalization and Market Integration

Thus, market integration characteristically will be responsible for predicted challenges;
there will be a collision of cultures and social behavioral patterns. Firms may be fronting
different perceptions in trade legislations and business policies resulting in unfamiliar
legal requirements. Compliance to legal provisions may seem difficult and take long time
to adjust. Beyond that, financial reporting perspectives will have to face a tremendous
amount of readjustment and alignment in applying the accounting standards and
practices in mixed economies.

2.2 Diversities in Accounting

Naaim, (2018) argues that diversities in accounting practices can significantly affect
financial reporting. He further identified that cultural behaviors, legal systems, taxation
system, inflation, providers of financing, and political and economic ties as the common
attributes of diversities that are contributing to the changing trends in financial reporting.

As a result of these diverse attributes, the accounting process inevitably had to face
various challenges in an integrated global market. Invariably the countries involved had
to prepare consolidated financial statements to see the mixed financial performances
through a single lens when involved in foreign operations. Next, access to foreign capital
markets has to be resolved through fulfilling local accounting standards in the country in
which the capital is being obtained. A third challenge relates the lack of comparability of
financial statements between companies from different countries which can significantly
affect the effective analysis of financial statements. This is followed by lack of high-quality
accounting information as a result of differing standards and practices.

In addition taxation rules also differ from country to country between countries in the
sense that published financial statement forms the basis for taxation in some countries
whereas in other countries financial statement is adjusted for tax purposes. Adjusting
accounting records for high rates of inflation became a necessity in countries that
experienced chronic inflation patterns. Then, financial providers in a country also play a
significant role in determining the level of financial disclosures to various segments that
need this information. Lastly, political and economic ties do play an influential role in the
determination of a particular accounting framework in a country, thus countries observing
code law system obviously differ from countries that observe common law system. The
above dilemma in the accounting world foreshadows the degree of hindrance to efforts
taken to harmonize the standards and practices are currently instituted by both the divides
of governing bodies such as Federal Accounting Standards Board (FASB) U.S. and
International Accounting Standards Board (IASB).

Most of the world’s economies are embracing the international financial reporting
standards (IFRS) issued by IASB. However the U.S. corporations chose to observe the
Generally Accepted Accounting Principles (GAAP) established by FASB, while firms from
other countries embrace IFRS established by IASB or by accounting standards set by
their national accounting standards board. These differences in accounting standards
have led to controversial differences in financial statements. Such differences made it
difficult for investors and creditors to make valid comparisons which can guide them to
perform accurate firm valuation in buy-sell-hold decision-making in global capital markets.

2.3 Recurrence of Global Financial Crises

The financial crises have happened decades since the seventeenth century (The
Economist, Jan., 2009). According Mohan (2009), why recurrence of financial crises is a
real concern for the accounting world because the intensification of global financial crisis
will render great risk to the economic and the financial environment of the business
fraternity. It is a disorder in finance regimes which will create global instability in economic,
political, social, and international environments. Thus, there are number of factors that
cause the occurrence of market bubbles and financial scandals leading to financial crises.
As a result of all these scandals, the accounting world and financial reporting will be
caught up with revisiting the effectiveness of regulations, standards, practices, and
frameworks. Insofar, the causes of crises indicate a high degree of commonality in
attributes such as; ineffective regulatory oversight, dodgy accounting practices that
involves massaging numbers, excessive over valuing of the market, pack mindsets
adopting certain behaviours on a largely emotional, rather than rational basis and in many
instances a sense of false confidence and infallibility. These causes of the financial crises
may be somewhat intricate and tedious cannot be explained precisely. On the other hand,
governments can be blamed for their lackadaisical oversight actions and conversely
having said all, it is a problem caused by humans’ unethical behaviors could also
ultimately grinds to halt the global financial system.

2.4 Emerging Perspectives of Financial Reporting

Recently, there has been visible trend shift in the perspectives of financial reporting.
Studies indicate that, besides revisiting financial domains such as historical costing and
fair market value adjustment on the balance sheets, at the behest of external users of
financial information significant research into non-financial domain has evolved.
Stakeholders particularly investors are looking beyond the financial information delving
into non-traditional areas to ascertain firms’ value. Reports indicate that today less than
15% of a company’s market value can be accounted for by its financial and physical
assets. On the contrary, it is also observed that other elements, especially relationships,
and intellectual and human capital, make up a greater percentage of a company’s value
(Ramanan, 2018).

These days, with the changing trend, the measure of success is no more restricted to
financial regime but extended to non-financial regimes such as customer satisfaction,
loyalty and brand awareness, the priority and importance given to corporate governance
and corporate social responsibility also have significant impact upon external
stakeholders, (Ramanan, 2018). Hence, this shift is focused more toward a company's
social accountability and is aimed at a broader group of stakeholders than the
owners/investors themselves. In the light of these developments, the challenges for
corporations would be to place critical importance on corporate governance and corporate
social responsibility initiatives in order to be inclusive and more relevant in financial
reporting as mandated by the undercurrents of waves of change.
3.0 Critical Analysis

The main theme observed in the emergence of globalization and market integration of
various economies heralds both opportunities and threats for all the global market
players. Besides the opportunities, the threats posing challenges are more pervasive and
inevitable due to the interplay of systemic factors within the business fraternity. As a result
financial reporting initiatives will have to face a tremendous amount of readjustment and
alignment in applying the accounting standards and practices in integrated market
economies.

Next, the traditionally observed diversities in the accounting world such as legal systems
through political and economic ties inevitably raise various challenges to the accounting
process as a whole. Preparation of consolidated financial statements through fulfilling
local accounting standards and gearing towards harmonization for compatible reporting
standards and regulations in view of facilitating decision making in integrated market were
reportedly a grave concern that had to be addressed in order to move forward. The
stalemate in the harmonization process of regulations, standards and practices between
FASB and IASB is certainly a strategic concern for the global economy. The delay in
breakthrough will certainly stall innovative solutions for future woes in the accounting
world.

The trend of financial crises recognizes that market bubbles and financial scandals are
inherently a human doing arising from the lack of accountability and transparency. It is
not the weakness of conceptual framework and structure of financial reporting as claimed,
this platform has been existing since the middle of 14th century. Lastly, besides the
traditional financial domain, the importance of non-financial domain as a greater
influencing factor in firm valuation had been given more emphasis in the accounting
industry. Hence there is a distinct shift in the perspectives of traditional financial reporting
beckoning for a review of the accounting process for an innovative solution. That said,
industry opines that the overall relevance of income statement/balance sheet remains
good and is not lost as highlighted by some quarters from the industry and academics.
4.0 Recommendations

In the light of the prevailing trends in the accounting world the following recommendations
are made in the hope to address the current woes:

4.1 The standards governing bodies; FASB and IASB shall resolve the stalemate
differences in the nearest possible future and bring about harmonization in the accounting
world.

4.2 Global corporations shall expand their focus from traditional financial regime to non-
traditional financial regime in order to augment an innovative conceptual framework and
consolidate the relevance of income statement/balance sheet in financial reporting to
facilitate effective valuation of firm.

4.3 Standards governing bodies to develop an oversight mechanism using big data
analytics technology for continuous monitoring of accounting activities in firms.

5.0 Conclusion

Judging from the reported global trends in the accounting world, certainly there is a
considerable shift of a recognizable scale with new dimensions to explore and innovate
the financial reporting perspective. Irrespective of all the developments affecting the
accounting world, the writer feels that the relevance of income statement/balance sheet
can never be replaced from the conceptual framework of accounting process and it has
to remain as bedrock in the financial reporting domain may be with relevant modification
in its structure to accommodate changes. Lastly, with augmentation in respect to shift in
users’ perspectives, the income statement/balance sheet may strongly remain relevant
and portray a greater degree of reliability for years to come in a dynamic operating
environment.