Financial statements in the context of the accounting system of modern entities in

parallel with Jordan and Romania

Omar Alhato
University December 1, 1918 of Alba Iulia, Romania
Doctoral school, Faculty of economic sciences

Abstract

The Financial Statement of a company is one of the sources of information about a company’s
financial status that could affect the investment behavior and will be useful to its users. In
addition, accounting system in recent years has made significant impact on socio-economic and
political developments; especially on recording, preparing, interpretation, auditing and
management. The purpose of this research is to discuss practical and conceptual issues related to
accounting system of modern entities in parallel with Jordan and Romania. The method of
research adopted is exploratory review of existing accounting literature. In this context, we
drafted this paper through which we outline an overview the history of financial reporting and its
evolution and the importance of accounting theories. Moreover, this study would be hopefully
benefited for academics, researchers, companies sectors as whole; in the sense to provide
descriptive information about Middle East accounting, in case of Jordan. On the other side,
providing accounting information for European Union, in case of Romania.

Keywords: Financial Reporting, Review of Accounting Theories, Jordan, Romania, Financial

Statements, Developments in Accounting.

JEL CODES: M41.

1. Introduction

The accounting system fulfill the information function, which involves the supply of accounting
information’s, in a specific form of presentation, to all internal and external structures of the
entities. Preparation of financial statements is important for the successful conduct of the
activities of any companies.

The standards issued by the IASB are known as the International Accounting Standards (IAS)'.
IASB has issued 41 IAS as of January 1, 2003. The efforts made by the IASB have resulted in
some desirable results in both developed and developing Countries. Based on Deloitte &
Touche's recent report, 42 countries have adopted IAS as the primary reporting standards for
listed domestic companies. In addition, 28 other countries are planning to use IAS as primary
reporting standards for listed domestic companies, starting as early as 2004, but no later than
2007. Moreover, 32 countries have permitted the use of IAS for their listed domestic companies
(Deloitte & Touche, 2003). Among the countries attempting to harmonize their accounting
standards with IAS, over Eighty percent are from developing countries and this trend is growing.
International Financial Reporting Standards (IFRS) are accounting principles, methods
(‘Standards’) issued by the International Accounting Standards Board (IASB), an independent
Organization based in London .

The primary objective of financial reporting is to provide high-quality information on reporting

entities, which can be used for economic decision making (Financial Accounting Standards
Board [FASB, 2010]. International Accounting Standards Board (IASB 2010) Providing such
high-quality information is important, because it can positively influence present and potential
capital providers and other stakeholders when making investments, credit decisions, and
allocating resources that may enhance overall capital market efficiency .

In this context, this paper we try to discuss practical and conceptual issues related to accounting
system of modern entities in parallel with Jordan and Romania.
2. Research methodology

The research purpose, in alignment with the purpose of the study and in tandem with the
philosophical worldview, drives the selection of the method. Whichever broad method is
adopted, there are specific approaches and research designs relevant for the study.

The purpose of this paper is to discuss practical and conceptual issues related to accounting
system of modern entities in parallel with Jordan and Romania. To achieve this goal, this study
adopts qualitative approach, through outline an overview the history of financial reporting and its
evolution and the importance of accounting theories. The researcher traced the origin, growth
and development in accounting by using different textbooks, magazines, journals on accounting
theory. Furthermore, the paper however reviewed the achievements made in accounting theory;
and precisely in Europe.

3. Adopting the international financial reporting standard ( IFRS ) on Jordan and Romania

Middle East accounting standards were reformed to improve the quality of accounting
information. Middle East accounting bodies have experienced some major changes during the
past several years. Prior to 1990, there were no national accounting standards for countries in this
region because of the absence of accounting organizations (Zahra & Masoud, 2015) . The
Middle-East countries for example Jordan, to a large extent, have welcomed the International
Accounting Standards, Jordanian Auditors Society issued its decision No 54 of 1989 by which
obligate all the Accountants and the concerned to apply the international accounting standards in
Jordan as of 1.1.1990 in their preparation and auditing the published financial statements for the
Jordanian Joint stock Public listed Companies on Amman Stock market. (The Jordanian
Association of Certified Public Accountants, 2003), Presentation of Financial Statements is
mandatory in Jordan. IAS 1 encourages companies listed on the Amman Stock Exchange to
publish additional statements to financial statements if management believes they will assist
users in making economic decisions.

in Romania, after 1990, the transition to capitalism was made by adopting a “gradual economic
reform” approach instead of a "shock therapy" as it IFRS adoption in developing countries: the
case of Romania was the case with former communist countries (e.g. Poland and the Czech
Republic). Accordingly, the accounting reform was also gradual, as part of the reforms
performed in the Romanian post-communist economy. However, once Romania plunged into the
global economy, right after the communist regime (Mihaela Ionaşcu et al., 2014) . the IFRSs
have been implemented as a result of conditions imposed by supranational bodies that operate
globally - the World Bank and International Monetary Fund – which provided financial
assistance needed for Romania's economic and social reforms. In this context, in the late 1990s-
early 2000s, the application of IFRS in Romania was coupled with the EU policy as regards to
IFRS, due to the status of Romania as a candidate state for EU membership. This prompted the
shift from harmonization to mandatory compliance with IFRS, according to EU regulations.

4. Development of accounting within modern entities

Accounting as we find it nowadays is the result of many combined efforts of number for
different nations. Every nation’s accounting standards and practices result from a complex
interaction of economic, historical, institutional, and cultural factors. Diversity among nations is
to be expected. In countries with strong equity markets, such as the United States and the United
Kingdom, accounting profits measure how well management is running the company.
Accounting is designed to help investors assess future cash and the associated risks, and to value
the firm, (Frederick and Gary, 2011). Today, many industrial economies are becoming service
economies. Accounting issues relevant in manufacturing, such as valuing fixed assets and
recording depreciation, are becoming less important. New accounting challenges, such as valuing
intangibles and human resources.

The pioneering classification is the one proposed by Mueller in the mid-1960s. He identified four
approaches to accounting development in Western nations with market-oriented economic
systems. The first classification under the macroeconomic approach; accounting practices are
derived from and designed to enhance national macroeconomic goals. Firm goals normally
follow rather than lead national economic policies as business firms coordinate their activities
with national policies. The second classification under the microeconomic approach; accounting
develops from the principles of microeconomics. The focus is on individual firms whose main
goal is to survive. To accomplish this goal, firms must maintain their physical capital. It is also
critical that they clearly separate capital from income to evaluate and control their business
activities. Accounting measurements based on replacement cost best fit this approach.
Accounting developed from microeconomics in the Netherlands. The third classification under
the independent discipline approach; Accounting is viewed as a service function that derives its
concepts and principles from the business process it serves, not from a discipline such as
economics. Businesses cope with real-world complexities and ever-present uncertainties through
experience, practice, Accounting developed as an independent discipline in the United Kingdom
and the United States. The last classification for accounting under the uniform approach;
accounting is standardized by the central government and employed as a tool for administrative
control. Uniformity in measurement, disclosure, and presentation makes it easier for government
planners, tax authorities, the uniform approach is used in countries with strong governmental
involvement in economic planning where accounting is used to measure performance, allocate
resources, collect taxes, and control prices, among other things. France.

4.1 Origins and Development at the international Accounting Standards Committee (IASC)

According to Butynets, at the beginning of 20-th century, it became clear that traditional
accounting did not keep up with the needs of management in an increasingly competitive
environment, rapidly changing technology and growing complexity of organization of
production (Butynets, 2002). Therefore, the first stage of development of international system of
accounting was marked by creation of a legal framework for accounting in some countries,
establishment of professional accounting associations, rethinking of the role of accounting.
Interest in international system of accounting grew toward the end of 1950s due to the fact that
following the end of World War II there was increasing global economic integration which also
lead to increase in capital flows, international trade and foreign direct investment ; due to
expansion of international economic relationships, specialization and cooperation of production,
creation of transnational corporations, the problem of incompatibility of accounting and auditing
standards became of paramount importance . During the 1960s, there was period of international
mergers and acquisitions, particularly between American and European companies.

From the Following figure below, illustrates a timeline of the history and development of the
IASB.
Figure1. IASB Timeline
1966 Proposal to establish an International Study Group
comprising the Institute of Chartered Accountants
of England & Wales
1967 In February the Accountants International Study
Group (AISG) was founded
1973 In June the International Accounting Standards
Committee (IASC) was established
1973- 2000 Between these years, the IASC released a series of
standards known as the International Accounting
Standards
1997 Standing Interpretations Committee was
established to consider contentious accounting
issues
2000 International Accounting Standards were finally
recognized in the Stock Exchanges around the
world
2001 The International Accounting Standards Board
(IASB) came into effect on April 01, 2001
2003 The first IFRS was published in June
2005 Companies in the UK were required to present
their financial statements using the international
accounting standards adopted by the European
Union
Source: Knowledge guide to IAS & IFRS, 2010.

4.2 The impact of globalization on the accounting systems

Globalization is not a new phenomenon. According to Altbach 2004, globalization is the broad
economic, technological and scientific trends that directly affect higher education and are largely
inevitable. Politics and culture are also part of the new global realities. Technology has long been
an important accelerator for globalization. Another aspect of globalization in financial markets is
the disclosure of relevant financial information as to the value of the financial assets. Economies
in the world are converging globally and investors can access more timely information regarding
their investments. Altbach adds that academic systems and institutions may accommodate these
developments in different ways. The increase in international trade and investment, as a result of
globalization, has increased the need for a set of international accounting and reporting standards
that will help to harmonize company financial information, improve the transparency of
accounting, and ensure that investors receive more accurate and consistent reports.

The influences of globalization on accounting research and practice are discussed in conjunction
with the intervention and involvement of institutions, nation states, government agencies and
corporation’s .The need for global accounting education is triggered by developments of
financial markets and dismantling of barriers to trade. reporting and disclosure set of standards
will result to increase volume of cross border capital flows through a number of foreign
direct investments via mergers and acquisitions, international corporate performance,
accessibility to capital, both from local and foreign investors just to mention a few (Akinyemi,
2012).

4.3 Characteristics of financial statements under the IFRS

According to the Board’s constitution (IASB, 2010), for companies’ financial reports to be
decision-useful a single set of high quality standards at a global level have the potential to
eliminate the barriers to cross-border investing and to improve the reliability, comparability and
transparency of financial reports. Further enhancing characteristics are timeliness, verifiability
and comprehensibility. These are; in summary, the benefits typically anticipated when adopting
the IFRSs, and are in line with EU arguments (Regulation 1606/2002, Article 9b) and those used
in other jurisdictions to support the development of national capital markets and the integration
of capital markets. In the Conceptual Framework of 2010, the term ‘faithful representation’ was
replaced by the term ‘reliability’ as a qualitative characteristic of financial information. This shift
represented a move away from previously accepted ideas of substance over form, prudence
(conservatism) and verifiability. Faithful representation is achieved when to be useful, financial
information must not only be relevant, it must also represent faithfully the phenomena it purports
to represent. This fundamental characteristic seeks to maximize the underlying characteristics of
completeness, neutrality and freedom from error.

5. Theories for the implementation of the International Financial Reporting Standards (IASB)

There have been several theories that dealing with the implementation the International Financial
Reporting Standards (IASB). In this context, we view these theories as follows:

5.1 Positive accounting theory

Positive Accounting Theory (PAT) is concerned with predicting actions such as the choices of
accounting policies by firm managers and how managers will respond to proposed new
accounting standards. The term ‘‘positive’’ refers to a theory that attempts to make good
predictions of real-world events (Scott, 2009). Watts and Zimmerman (1978) develop a positive
theory of the determination of accounting standards. They investigate the factors influencing
management’s attitude (lobbying behavior) on accounting standards including regulation,
political costs, management compensation plans, taxes and information production (e.g.
bookkeeping). They argued that individuals act to maximize their own utility and management
lobbies on accounting standards based on their own self-interests, for example managers have
incentives to choose accounting standards which report lower earnings due to tax, and political
and regulatory systems.

According to Basu (2009) positive accounting is very much different from conservative
accounting approach because it assumes that conservative accounting yields sub-optimal results.
Conservative accounting requires lower magnitude of verifiability to recognize losses whereas it
requires very high degree of verifiability to recognize gains.

5.2 Organizational Change and Financial Reporting theory

Growth in business activities has led to the emergence of all forms of organization structure as
simple, focused entities evolved and become complex with all attendant managerial challenges.
According to Baker, Lembke, King, and Jeffrey (2008) new product development and invasion
of the new market have led to business expansion internally. Baker et al. (2008) argued that
businesses have grown beyond internal developments by extending their networks through
combination with or acquisition of other companies. the complexities of modern business arose
from companies conducting business in different states and countries in which there is diverse
legislation on tax provisions and disclosure requirements. The growth in complexities gave birth
to emerging complex business enrollment and development of complex organizational and
ownership structures. Internal expansion takes place as the businesses expand the scope of their
operations through subordinate entities or subsidiaries or other outlets such as partnership and
joint ventures. A form of control is retained by the subordinating entity as the parent company
transfers parts of its assets to the former in exchange for receiving the equity ownership of the
subsidiary. Companies may engage in establishing new entities not necessarily for expansion of
existing structures but to do away with a part of their operations through outright sale. Other
reasons, underpinning the purposes of companies extending their tentacles to other entities
include limiting the extent to which the parent company’s assets may be exposed to legal
liability.
Baker et al. (2008) offered a working definition of control as the ability to give direction to
policies and management of a company. This power is often exercised by a parent company
during the annual general meeting. Business combination modifies the existing structure of
businesses, resulting in the emergence of conglomerates and large business undertakings. The
expansion in scope and size of operations often results in multiple unanticipated managerial
challenges and decapitations. The emerging complex business environment according to Baker et
al. (2008) introduces divergent kinds of business combinations, taking formal and informal
arrangements. Baker et al. (2008) argued that most companies prefer the formal structure while
keeping mute over informal structures on their books due to difficulty of enforcing the terms
therein. Informal arrangements, according to Baker et al. (2008), are often characterized by
freedom, separation of ownership, and ease of termination.

5.3 Signaling Theory

Signaling theory emphasizes the importance of information released by the company to

investment decisions outside the company. Information is an important element for investors and
businessmen because the information is essentially presenting the information, record or good
overview of the state of the past, present and future circumstances for the survival of a company
and how the market effect. The complete, relevant, accurate and timely information is needed by
investors in the capital market as an analytical tool to make investment decisions. The
information published as an announcement will give a signal to investors in making investment
decisions. If an announcement contains a positive value, it is expected that the market will react
to the timing of the announcement is received by the market. At the time the information was
announced, all market participants have received the information, and then market participants
beforehand interpret and analyze that information as positive signals or negative signal. If the
announcement is contained of positive signal for investors, and then there is a change in the
volume of stock trading. Announcement of accounting information give signals that the company
has good prospects in the future so that investor will be interested to trade their shares, thus the
market will react, reflected through changes in the volume of stock trading. Therefore, the
relationship between the publication of information both financial statements, financial condition
or socio-political to the fluctuations in the volume of stock trading can be seen in the efficiency
of the market. One type of information released by the company that can be a signal for outside
parties the company, especially for investors is the annual report. The information disclosed in
the annual report may include accounting information that is information relating to the financial
statements and non-accounting information that is information relating to the financial
statements. The annual report should contain information that is relevant and revealing
information that is considered important to be known by the user reports both the inside and
outside. All investors need information to evaluate the relative risk of each company so that they
can diversify their investment portfolio and the combination with the desired risk preferences. If
a company wants its shares purchased by the investor, the company must make disclosure of
financial statements in an open and transparent, Signaling theory classifies the signal into two
major groups, namely the direct signal and indirect signal. The direct signal is reflected in the
disclosures in the financial statements. While the indirect signal is not directly related to the
number of the sustained equity, quality audits, capital structure, dividend policy, the selection of
accounting policies, and publications forecasting firm. Accounting standards in force in a
country will influence the behavior of managers in sending a signal to investors. Scott (2009)
states that a standard that encourages the establishment of uniformity in accounting would reduce
the ability of the manager to send a signal to investors. On the other hand, the convergence of
accounting standards towards an internationally accepted standard that will improve the
comparability of the financial statements so that the signal received by investors reflects the
actual economic value of the company.

6. Conclusion

In this paper, we identified the development of The International Accounting Standards Board
(IASB).The aim of this paper was to provide a review of some practical and conceptual issues
related to accounting system of modern entities in parallel with Jordan and Romania. In 1973
the predecessor of the International Accounting Standard Board was formed. This international
body was assigned to develop Accounting Standards for international use. These Accounting
Standards are called the International Accounting Standards. Most of them have been developed
in the time between 1973 and 1987. During 1987 and 2000 the work efforts in the harmonization
process have been mainly influenced by the agreement of the IASB and IOSCO to develop a list
of IAS . The IASB has achieved major results in the harmonization process, but is still struggling
and searching for acceptance of its standards. However, for us, it seems that we have never been
so close to harmonized Accounting Standards than in the year 2002.

Additionally, we described implementation of financial accounting on a global basis. And we

provided the description of the accounting theories for accounting. From this we concluded, that
The International Accounting Standards Board (IASB) plays an important role in the field of
international convergence. This could be explained with the achievements of it. As a main
challenge of the IASB we see the need for a global enforcement to promote the uniform
application of IAS/IFRS. We claimed that in order to achieve that goal a uniform interpretation
and supervision of the standards is necessary. The aims of the IASB can be therefore considered
as very challenging and we are unsure, whether a global convergence of Accounting Standards
would be ever possible.

References

1- Akinyemi, (2012). The impact of international financial reporting standards

adoption on financial statement: The case of Nigeria. VAASA University of Applied
Sciences.
2- Altbach, P.G.(2004). “Globalization and the University: Myths and Realities in an
Unequal World”,Tertiary Education and Management, No. 1.
3- Baker, R.E. Lembke, V.C., King T.E., & Jeffrey, C.G. (2008). Advanced financial
accounting (7th ed.)New York, NY: McGraw Hill.
4- Basu, T., (2009). Conservatism Research: Historical Development and Future Prospects,
China. Journal of Accounting Research, vol, 2(1), pp. 3-4.
5- Butynets F. F. Accounting in foreign countries: study book for students of higher
educational establishments / Butynets F. F., Goretska L. L. – Zhytomyr : PP «Ruta»,
2002. – 544 p.
6- Deloitte & Touche (2003a). "Use of IFRS for reporting by domestic listed companies, by
country." www.iasplus.com/country/useias.html.
7- FASB. (2010). Conceptual Framework for Financial Reporting. Retrieved from
http://www.fasb.org/resources/ccurl/515/412/Concepts Statement No 8.pdf
8- Financial Accounting Standards Board [FASB]. (2010). Conceptual framework for
financial reporting (Chapter 3: Qualitative characteristics of useful financial information).
Statement of Financial Accounting Concepts No. 8, Norwalk, CT.
9- Frederick D. and Gary K. Meek , 2011 “INTERNATIONAL ACCOUNTING “Library of
Congress Cataloging-in-Publication Data , Pearson Education, Inc., publishing as
Prentice Hall, New Jersey 07458 .
10- IASB. (2010). Conceptual Framework for Financial Reporting 2010. Retrieved June 27,
2017, from https://www.iasplus.com/en/standards/other/framework
11- IASB international accounting standards board. (2010, March 29). Retrieved April 4
2010, from http://www.valuebasedmanagement.net/organizations_iasb.html
12- Mihaela Ionaşcu, Ion Ionaşcu, Marian Săcărin and Mihaela Minu,2014 , IFRS adoption in
developing countries: the case of Romania , Accounting and Management Information
Systems , Vol. 13, No. 2, pp. 311–350.
13- Scott, W.R. (2009), Financial Accounting Theory. 5th ed. Toronto: Prentice Hall Canada.
14- The Jordanian Association of Certified Public Accountants (JACPA), 2003,
https://www.ifac.org
15- Watts, R. &J. Zimmerman (1978), ‘Towardsa positive theory of the determination of
accounting standards’, The Accounting Review, 53(1), pp. 112–34.
16- Zahra Yousefi Amin, Masoud Yousefi Amin ,2015 ,” Impact of Accounting Standards on
Earnings Management in Selected Middle-East Countries “,international Journal of
Sciences: Basic and Applied Research (IJSBAR) , ISSN 2307-4531 .