External reporting is an important part of a public company's duties to the public. These reports largely effect the perception of the company's economic strength. As such, it is important that they are prepared faithfully. To do so, these external reports are governed by the US's current rules-based GAAP. Globally, public companies are most likely using International Financial Reporting Standards, either as a required or an acceptable standard for reporting. There is currently a push to have the US use the same system. While the decision is slow to be made, it warrants a look at what the US convergence with the principles-based IFRS, away from the current rules-based system used today, might bring.
With many systems and classifications, it is not always easy to pin down the right approach to accounting for a transaction. It is almost necessary for there to be multiple reporting methods. For example, there is no one method of valuating inventory that is superior to the others in all industries. Different needs have to be met, so rules are put into place to allow multiple approaches. Those vested in seeing the company succeed might think that the company should use whichever acceptable method reflects the company standing in the best light as possible each year. Changing methods each period can help the perception of the company's health, but it is not in the best interest of those using the created documents. Doing this would make period to period or even industry comparisons difficult or impossible. It makes sense, then, that rules have been put into place to help prevent such presentations of information.
These rules are generally a firm and concrete method of reporting. This does, however, allow a company to target certain areas for favorable classifications, by following the form of the law, but not necessarily the function. In many ways, rules-based accounting can allow for skirting the line of legality. An example would be in area of accounting for leases. Under the current system, leases are classified as capital leases if they are leased for 75% or more of the economic life of the asset, or the present value of the minimum payments are 90% or more of its fair value. There are many advantages to having a lease classified as operating lease over capital lease. The desire to influence classification has created the practice of entering leases for 74% of the asset's life for 89% of its fair value. Without the rule, companies would enter leases under terms that are not substantially different from purchasing the asset, yet taking full benefit of the advantages of a lease. The rule in place helps minimize the advantage of receiving both benefits.
The advantages of the rules-based system do not end there. However close they are to line, so long as they operate within the rules, they are safe from litigation. The switch to the principles-based IFRS removes such security for the company and its accountants. Classifications will be made not from predetermined criteria, but by active decisions and professional judgment. This opens them up to scrutiny, and may be the focus of a lawsuit. Further, the accountants themselves could potentially be targeted should their decisions be questioned. Companies stand to lose both a powerful tool and a level of legal security in the switch.
The switch to IFRS may help increase the integrity of the documents created by the accountants. Classifications will be made by seeing the substance of the transaction, not by the individual details. The decisions made will be based on professional judgments based on a simpler set of principles, over a long checklist of items. This flexibility allows for the more relevant information to produce a more robust report on the situation. While there is a greater possibility of a difference in judgments, there are fewer opportunities for overt manipulation.
The US convergence to IFRS is going to play a role in the years to come. Though the decision is being postponed here, IFRS continues to be used around the world. The timeline for convergence seems to be stretching farther than the initial forecast of 2014. The current rules-based system has its flaws of unclosed loopholes and inflexible reporting, but there are those who prefer it to the principles-based system, where two different reports could be prepared from the same data, based on the perceptions of those reporting.
The forex market has caught a lot of attention in past couple of years. Maybe because the promises seen on the sales pages of forex brokers and vendors seem to point to it as a way of easy money. However, because this market has some peculiarities which traders must be thoroughly at home with, many unprepared traders have seen themselves at the wrong end of the market. Investments vary in degrees and conditions. Some people will only invest with reputable institutions in order to reduce risk. With the use of popular online Search Engines, one is able to look around and search for the options that best fit them. On the flip side; with Search Engine Optimization, financial institutions (and other entities that perpetrate as such) can now search for customers who want what those institutions have. Bitcoin is what some online investors have been using since its creation in 2009. With that and the introduction of binary options, some investors consider these crypto and cyber currencies as a litmus test of how the "normal" (or legal) markets are doing; while some have yet to approve the entire scene all together. Pros and cons of Binary Options One advantage of binary options is that payouts are higher, fixed and known to you before you begin trading. Another significant benefit is that you can earn money regardless of the magnitude of the price change in the stock, commodity or index you chose. The binary options market allows traders to trade financial instruments spread across the currency and commodity markets as well as indices and bonds. This flexibility is unparalleled, and gives traders with the knowledge of how to trade these markets, a one-stop shop to trade all these instruments. Bitcoin, on the other hand, is no more arbitrary than derivatives or credit default swaps. Given that regular folks (if they're nerdy and interested in Bitcoin) can use the currency for all manner of things, including illegal things; it's arguably a far less arbitrary instrument. The major drawback of high-low binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options (not high-low) may provide payouts where the reward is potentially greater than the risk. Final Verdict For those investors who are looking to invest over a long period of time, binary options may not be the best facility for this. At the heart of binary options, is its ability to provide fast turnarounds to investors. In a number of binary options platforms, there are longer term investments that are available but other traditional investment options which are tailored to long-term results are more suited to meet these financial needs. Also binary options cannot typically be executed before the expiration time while traditional options can be executed any time before the expiration time. Keeping this in mind can help investors understand how the payout is calculated and which timeframe they should be monitoring for their investment. If one were able to ensure digital security of intangible assets, then Bitcoin would be the investment for the longer term. The price of this crypto-currency and many like it have been all increasing exponentially. I would think about a portfolio that includes both Bitcoin as well as Binary Options. This can supplement current stocks, bonds, forex, and precious metals portfolio and be managed by an Information Technology specialist. Trading binary options is a choice that helps to develop and complement a financial strategy. Trying out this method of investing can lead to simple, profitable and fast returns for the global investor.