Challenges Facing Financial Accounting

by Angie Mohr; Updated September 26, 2017
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Financial accounting measures have developed in every country that has organized trade over hundreds of years. As trade becomes more global and complex in scope, the financial accounting industry faces increasing struggles with capturing the new economic realities in numbers. Companies that operate in multiple countries also struggle to report each unit consistently, but still within the accounting regulations of each country.

Valuation

Most financial accounting rules are based on historical cost valuation. That means valuing assets and liabilities at what they cost initially. Some assets are depreciated over time in order to represent their loss in value. However, the actual market value of assets or liabilities may be significantly different than their stated, or book, value. This makes traditional financial statements a poor indicator of the actual worth of the company. In particular, equity investments and land may rise in value over their book amounts, and this will not be reflected in the statements. International accounting standards are in the process of moving closer to market value accounting to address this reality.

Multi-Jurisdictional Reporting

Companies that have branches or subsidiaries in multiple countries face many challenges in reporting accurately. They must legally prepare financial statements in each country they operate in based on the generally accepted accounting principles of that country. These standards vary widely. The company must also report the entire group of companies on a consolidated basis, which requires restating all foreign reporting into the standards of the parent's home country. It is a time-consuming and complicated process. Many countries are agreeing to adopt the standards of the International Accounting Standards Board to make financial accounting more uniform across the board. The United States has agreed to adopt these standards by 2016.

Non-Financial Measures

There are many factors that indicate whether a company will be successful or not in the future. Many of these benchmarks are not financial in nature, such as customer satisfaction levels, the value of the company's reputation and its employment policies. None of these measures are captured in the traditional financial accounting model. They are also subjective and open to interpretation of the user, making it difficult to develop measurement standards. This continues to be one of the most pervasive challenges facing financial accounting.

Financial Instruments

As trade becomes more complex across the world, so does financing. Financing agreements can include many assets that have no real physical substance, such as repurchase agreements, forward contracts and options. The complexity of these financial instruments makes valuing them difficult. It also makes it easier for a company to manipulate the values of financial instruments. This was most recently evident in the sub-prime mortgage collapse in the United States in 2008. When the valuation was reviewed, it was discovered that these instruments were significantly over-valued. While financial accounting standards in many countries attempt to address this valuation issue, financial instruments become more complex and more difficult to account for.

About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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