Advanced Financial Accounting 1 Essay Example

GRAPHS IN FINANCIAL REPORTING

Introduction

Companies are increasingly employing visual presentations in communicating financial information. To do so, companies are augmenting relevant notes with financial statements with additional materials such as texts, photographs and graphs (Dhaliwal et.al, 2011). Amidst an increasingly growing body with respect to such accounting narratives, use of graphs in financial accounting has been less regarded. Even so, the fact that graphs are integral players in strategic disclosure methods by many companies cannot be disregarded. There is therefore need for critical reviews and synthesis on the extant graphical literature and a subsequent identification of significant directions for future research.

Graphs are particularly used in the developed countries of the west. According to a report by Bettie and Jones in 2010 indicates that 90% of the top companies in the US, 82% UK, 90% Dutch, 84% German, 88% French and 92% Australian employ graphs in annual reporting (Dhaliwal et.al, 2012).

According to IPSAS, financial information should be presented fairly for the users. The present conceptual framework for financial reporting according to IPSAS1 states thatFair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, revenue, and expenses set out in IPSAS (Oulasvirta, 2014). Furthermore, IPSASB requires that presentation of information should focus on user needs (Laswad & Redmayne, 2015). Many companies have not adhered to this conceptual framework given that use of graphs is outside the scope of the conceptual framework for financial reporting standards.

Need for graphs in financial reporting

Graph usage is done for six main reasons. To begin with, companies use them to allow flexible presentation of such information by the management (Solomon et.al, 2013). Graphs are typically independent of the regulations remitted by accounting standards. Companies can consequently express, distil and summarize information in any way. Second, graphs are attention-grabbing. Colors are often used to enhance the visual saliency of graphs hence mere forbidding and formal statutory statements become oases of color; garnering attention from the users of such documents (Cho et.al, 2012). Third, graphs are excellent instruments in communication, distillation and summary of information. In essence, graphs can be used to highlight fundamental performance indicators of a company such as earnings per share and sales over a long time period. Fourth, based on the visual attributes, graphs employ highly developed spatial intelligence during decoding as opposed to linguistic decoding (Dingwerth a & Eichinger, 2010). Fifth, it is easier to remember graphs comparative to numbers on tables. Lastly, graphs being egalitarian, it is possible not only for sophisticated individuals to use the, but also the unsophisticated ones.

Misuse of graphs in financial reporting

Graphs are however not problem-free. The effectiveness of a graph in communication is largely dependent upon the graphical comprehension of both the user and the preparer. As a result, there exist numerous graphical design and construction aspects which are divergent and subject to user perceptions (Cho et.al, 2012). Further away from graphical comprehension, there is a growing concern that financial information, inclusive of graphs is being used with less regard for the user as to managerial interests. There is a tendency for the management to create the impression that the company is doing better than is warranted; using graphs (Cho et.al, 2012). It is therefore arguably true that graphs are being used by companies under a self-serving motivation. The result is, contrary to the requirements of accounting standards, biased and non-neutral information.

Recommendation

Extensible Business Reporting Language (XBRL)

This is an emerging concept in the financial reporting domain, electronically transmitting financial and business data via XML-based language. The software is an open standard under the maintenance of XBRL International. It has been endorsed by more than 550 companies globally, government agencies and organizations including the European Parliament and the US Securities and Exchange Commission as the future global financial reporting standard (O’Riain, 2012). Given that the aforementioned XML standards are flexible and powerful, XBRL employs W3C specifications like Xlink, Xpath, XML Schema and XML Namespaces to provide for increasing collections of taxonomies which define relationships, syntax and semantics for a given financial reporting source. This way, quality issues and data redundancy is overcome hence reliable and unbiased reporting.

Conclusion

As much as use of graphical presentation of information has numerous benefits as outlined herein, the approach is a breeding ground for financial misconduct directed towards favorably presenting a company contrary to the truth. There is therefore need for standardization of graphical presentation of financial information such that the users will not be misled. To do so, this paper proposes the use of Extensible Business Reporting Language(XBRL). This is with respect to the fact that in this new age when business is becoming increasingly competitive, it is not logical to do away with narrative representations in financial reporting such as use of graphs. This paper therefore supports the use of graphs in financial reporting on the condition that use of graphs is regulated such that it provides the user with meaningful, understandable, neutral and unbiased information.

References

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Laswad, F., & Redmayne, N. B. (2015). IPSAS or IFRS as the Framework for Public Sector

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Oulasvirta, L. O. (2014). Governmental financial accounting and European harmonisation: Case

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Solomon, J. F., Solomon, A., Joseph, N. L., & Norton, S. D. (2013). Impression management,

myth creation and fabrication in private social and environmental reporting: Insights from Erving Goffman. Accounting, organizations and society, 38(3), 195-213.