Accounting Theory and Practice - Assignment Example

Accounting theory and practice Introduction Replacement cost accounting can be defined as the concept or the method that is applied for focusing on valuation of assets and liabilities at which the company is required to pay on the basis of the cost of the company in order to replace the item. Replacement cost accounting emphasizes on mitigating the differences by providing the companies to value there assets at a particular period of time that is matched with the fair market value of accounting at the actual replacement cost of the asset. Replacement cost is generally applied in changing the depreciation due to the change in the value of the asset. The post balance sheet event that affect the financial statements are the events which takes place or occur between the date of the approval for preparation of financial statements and the date of balance sheet it indicates or resembles the requirements for making necessary adjustments that are related to the assets and liabilities at the date at which the balance sheet is prepared and the disclosure is made. Corporate governance is required to be maintained for protecting and safeguarding the stakeholders and the shareholders by the introduction of corporate governance code. The protection will assist in implementation of the laws, rules and regulations like the code of corporate governance that increases the accountability and transparency of the managers of the company and protection of the rights of shareholders. The Cadbury report deals with the financial fact of the corporate governance. The green bury report deals with the remuneration of the director and the Hampel report deals with the issues related to Cadbury and the green bury report. Discussion Question 1 Replacement cost accounting generally produces the reported figure that serves a better indication for improving the long run future performance when compared with the historical cost accounting. Replacement cost accounting tries to remove the twist in the financial statements of the company that is related to finding out the true value of the various assets and liabilities of the company. The depreciation of the asset is influenced by the replacement cost accounting whereas in case of the historical cost accounting it is required and expected that the company should record or value the asset of the company at the original price of the asset. The historical cost accounting helps in determining the salvage value of the asset and evaluates the valuation of the asset on monthly basis. Under historical cost accounting the balance sheet will decrease the original cost of the asset and also the true value of the asset reflected on the financial statement (Parker, 2007). The main limitation of the historical cost accounting is that it does not reflect the amount that the company is required to pay in order to purchase another item in order to replace the original item as required by the replacement cost accounting. In case of replacement cost accounting the assets and liabilities are maintained and included in the balance sheet on the basis of the cost of replacing them rather than the original or the actual amount that is spent for the assets or liabilities. The replacement cost accounting is applied or adopted which includes the current price for evaluating and calculating the value of the company. Replacement cost accounting is just the reverse of historic cost accounting. It is preferable to adopt replacement cost accounting rather than historical cost accounting because replacement cost accounting includes or incorporates the impact or the influence of the change in price that results from the change or the modification in the value of the items that are included in the financial statements of the firm. The financial accounting explains replacement cost as the approach that mainly evaluates or values the assets at a fair market value instead of valuing it at historical cost. In general or practically the replacement cost accounting can be ascertained in number of ways that comprises of the book value of asset. The reporting and recording of the transaction on the basis of historical cost generally takes a long time and it is a lengthy process. This approach is also faced with lot of criticism (Cox & Fardon, 2008). There are many alternative approaches adopted in replacement cost accounting for evaluating the financial statements. The main objective and aim of the replacement cost accounting is evaluating and recording of the financial assets and liabilities of the company at a fair market value instead of valuing on the basis of historical cost. But in reality it is very difficult and critical in determining the fair market value of the assets and liabilities of the firm. When the assets and liabilities of the company included in the balance sheet is recorded or evaluated on the basis of fair market values then any alteration will influence significantly in the income statement of the firm which will result in the distortion in the assumed and expected profitability of the company. The approach of replacement cost accounting is required to be applied as an extension or an improvement of the historical cost accounting since it is designed or introduced for taking certain important and vital decisions and comparing the performance of the company (Gary and Curtis, 2014). The limits for applying replacement cost accounting is that sometimes decision taken on the basis of the replacement cost accounting is unreliable because the information or the data that are collected may not be used for ascertaining the financial decision of the company. It is largely volatile in nature when the market price of the asset or liabilities cannot be ascertained or is not available then the value of the asset and liabilities are estimated and therefore reliable and relevant decision cannot be ascertained properly and adequately. The replacement cost accounting mainly ascertains the profit or loss on the revaluation as the extraordinary profit or loss on the income statement of the company. But it is beneficial or suitable for that asset that has increased in value but it is unfavorable for those assets whose values are decreasing. The application of replacement cost accounting is found to be mainly adopted by the oil companies because the oil companies are subjected to high volatility (Watson and Head, 2007). Question 2 The post balance sheet events that affect the financial statements are the adjustments done on the assets and liabilities that are not essential for events occurring on the post balance sheet date in case of the events or conditions that has existed at the time of the balance sheet date. For example the decline in investment in terms of market value among the date on which the financial statements are accepted and the date at which balance sheet is prepared. The fluctuations or changes in the market value will not reflect the condition or the aspect on the date at which the balance sheet is prepared. The events that take place after the preparation of the balance sheet will not reflect the financial statements that are not required for disclosures in the financial statements and also in the report for approving the authority for enabling the users of the financial statements for evaluating properly and taking adequate decision (Sofat and Hiro, 2008). The events though occurred after the balance sheet date is revealed in the financial statements because of the various statutory requirements or the specialty in their characteristics. Such type of items general includes or comprises of amount of the proposed dividend and the amount that is declared by the enterprise after the date of balance sheet in terms of the period in which the financial statements are prepared. The adjustments of the events occurring after the balance sheet date relating to the assets and liabilities are not proper or adequate and it provides material information additionally influencing the determination or assumption of the amount in relation to the condition that exists on the balance sheet date. For example the adjustment that is made for the loss occurred over the trade receivable account and is confirmed by the insolvency that exists after the balance sheet date. The events of the post balance sheet can also be explained with the help of the example is the deterioration in the operating position that reflects the financial position or the changes that influences the existence of the organization after the balance sheet date which includes the destruction by fire the production of major plant on the balance sheet date which indicates the requirements for considering the adequate use of the assumption of the fundamental accounting under the concept of going concern for the preparation of financial statements (Monks and Nell, 2005). It is required to adjust the assets and the liabilities for the events that are occurred after the balance sheet date and it provides additional evidence for assisting the estimation and evaluating the amounts that are related to the conditions that exists at the balance sheet date or the events that indicates the assumption of fundamental accounting under going concern concept. The dividends are required to be explained in terms of the period that is covered by the financial statements and the dividends that are declared and proposed by the firm after the balance sheet date but the dividend is to be adjusted before the financial statement is approved. The disclosures are to be incorporated in the report of the approving authority in case of the events that are subjected to the material changes or alterations and commitments that influences the financial position of the organization (Kieso, Weygandt and Warfield, 2007). When the disclosure of the events that are occurred after the balance sheet date are required to incorporate the following information or details such as the estimation of the financial effect or the preparation of statement that the estimate cannot be incorporated and the nature or feature of such event. The events occurring after the balance sheet date includes the remarkable events that are both favorable and unfavorable that takes place between the balance sheet date and the date of the approval of the financial statements. The types of the events can be classified or identified as those items that indicates the events that are subsequent to the date of balance sheet and those items that require further proof of the conditions prevailing at the date of balance sheet (Hopper, 2012). Question 3 Corporate governance is considered as the important practice by the companies throughout the world. The Omani companies have supported and adopted the corporate governance and safeguarding and protection of the shareholders and the stakeholders through the introduction of the code of corporate governance. Oman is in competition with the other GCC countries for becoming the best and most appropriate financial centre in order to attract more amount of foreign capital. The completion includes the laws and regulations that will provide protection to its investors (Youssef, 1991).The protection can be attained by implementing new financial rules, laws and regulations for ensuring protection to its investors. In case of the Oman Air the corporate governance is the important and compulsory governance that is required to be maintained by all public listed companies (Valor, 2010).The Oman Air is listed with the Muscat Securities market. The company has closed along with the joint stock company of Oman and therefore it is not mandatory for Oman Air to comply along with the circular that is stated in CMA. The board of Oman Air is complying or following the circular as the practice of corporate governance for ensuring high transparency level and accountability for carrying out the business. The auditors of the company have performed along with the laid or formulated circular of the Capital market authority (Rushton, 2012). The company has determined to maintain high level of corporate governance. The company emphasized and focused on the practice of the business fairly and ethically for achieving and attaining the ultimate objectives of the company and enhancing the value of the shareholders. The procedures and the systems are developed and improved on a continuous basis for evaluating and monitoring the process of the company and improving the performance for achieving the high standards required for corporate governance (Oman Air, 2012). The Cadbury report emphasizes and explains the corporate governance as the establishment of relationship between the management, stakeholders, and the board of directors of the company that influences the operation of the company. The corporate governance develops a structure with the help of which the objectives of the companies are established and also developing the means for achievement of the objectives and evaluating or monitoring the performance of the company. The Greenbury and the Hampel emphasizes and reflects the accountability and transparency in respect to the operation and structure of the board, directors and the establishment of the committee for monitoring. It will improve the practice of the corporate governance at the board of director’s level (McGee, 2012). The significance of the corporate governance in the Omani companies has currently increased after the occurrence of the global financial crisis and the administrative and financial scandals that differentiated the companies in Oman as a result of the inferior internal audit system. The corporate governance is engaged in protection of the rights of the stakeholders and the shareholders in defining the role and responsibility of the shareholders, stakeholders and the executive management and activation of the board of the respective companies (Utting, 2005).The corporate governance mainly focuses and emphasizes on decrease or reduction in the centralization of the management in distributing the power of the staff and the non executive staff of the companies and also reducing the application of the administrative power against the shareholders interest. The significance of complying with the corporate governance has lead to the generation of the sound management and effective and efficient regulation of the company by taking into consideration the various fundamental and vital factors that are required for building and developing the trust of the companies and also the market (Wasmi, 2011) Conclusion Replacement cost accounting mainly reveals the price or the amount that is paid for the use of the asset on the date of the balance sheet. Replacement cost accounting are changing rapidly in the business environment and also becoming more volatility. Replacement cost accounting is considered as the best and the most appropriate approach for estimating and evaluating the economic value of the stock and the inventories the current cost of operation and the productive capacity. It evaluates and estimates the value of the firm. The various accounting treatment are required to be included for the various events occurred between the balance sheet date and the date at which the financial statements are authorized or issued. It is required to include the financial statement on the basis of the going concern concept and when the management decides to determine or evaluate it post balance sheet date then it results in the liquidity in the entity that has no alternative. The significance and the importance of adopting, aiming and maintaining the corporate governance is upgrading and developing the public limited companies for prompting and developing the principles of liability, transparency, accountability and fairness of various parties that are required for complying with the adoption and implementation for regulating the corporate governance. Corporate governance utilizes the resources and controls and maintains all kinds of risk of the company. References Cox, D. & Fardon, M., 2008. Management of finance. 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