Impacts of a New Accounting Standard on Profits and Value of the Firm - Coursework Example

ADVANCED FINANCIAL ACCOUNTING by Student’s name Professor’s name University name City, State Date Impacts of a new Accounting Standard on Profits and Value of the Firm First, the new accounting standards would make reported profits to be higher than they would otherwise be as a result of the goodwill amortization charges removal. According to the standards, goodwill turns to be instead subjected to yearly ‘impairment test’ where amortization expenses are eliminated thus increasing profits being reported. This can be evidenced by the fact that, if the application of the new standards were done to Foster’s ½ year accounts to 31 December 2004, Foster would have realised net profit amounting to $783.2 v $757 which was reported. On the other hand, the impact of the value of a firm would be that the net assets would plummet. For example, the change to International Financial Reporting Standards (IFRS) meant that the net assets of Foster were subject to fall from $4.6 billion to $3.37 grounded on its previous reported balance sheet, largely due to the inside generated goodwill on the brand names no longer being recognized. In addition to this, the reduction would also be occasioned by the prerequisite to permit for deferred tax liabilities grounded on the disparity between assets’ carrying value and their price base. The other impact would be huge increase in disclosures (Jianhua, 76). In this case, new accounting standards would pave way for huge augment in information revealed within the notes to the yearly fiscal statements. Actually, the accounting policies turn to be more comprehensive and more complex; information demanded on the impairment test turn to be critical; listed companies ought to offer information separated by subdivision. In this scenario, providing significant extra information would lead to attracting more customers and partners and raise profits which would in the long run, add value of the firm by having a strong capital ground. On the other hand, in regard to the new standard of accounting, profitability quantified in a similar manner might not be precise. First, there is alteration of the denominator. In this scenario, the only way for investors to know the performance of a company is through the financial statement. The new accounting standard does not classify non-operating returns or operating returns, but refers the two incomes together with other incomes as operating revenue. And non-operating expenses, operating expenditures together with other expenditures turn to be together known as operating expenditure (Jianhua, 78). In that way, it becomes impossible for investors to obtain information regarding the main operation of a company via the new fiscal statement. In addition, outcomes obtained by that method might provide investors an unbalanced feeling because non-operating revenues together with other incomes turn not to be normal items, which bring about huge changes to the operating income. On the other side, the focus of share value turn to be hugely on the financial debts and fiscal assets, but never on non-fiscal debts or assets. Thus, fair value alteration loss or profit should never be considered when quantifying the performance of a company as it is derived from fiscal debts or assets. Therefore, a new accounting standard impact on profit would as well impact the value of a firm as when the investors become incapable of calculating the firm’s profit, they loses interest of engaging in that firm’s business. This causes an effect of the company losing its value at the expense of profit. The other impact of profit on a new accounting standard on profit and value of the firm is on the fair value. For instance, the fair value of the assets which are quantified on the basis of share value requires being totalled each period, and overage or shortage of assets requires being calculated as being fair value variable loss or profit (Jianhua, 77). As the new standard of accounting permit fair value change loss or profit being portrayed within the income statement, a huge alteration of fair value of an asset for a certain moment might bring about a large alteration of the operating profit of a company, which for sure makes investors perceive that the profits and assets of a company are rising and falling. This makes the potential investors to either invest or not invest in the company thus, also impacting the value of the firm either positively or negatively. The other impact of new accounting standard on profits and firm’s is the revisions that have been made concerning methods of processing of insubstantial assets (Jianhua, 77). In this scenario, the new standard permits prices within the development process to be calculated as capital expenses provided it fulfils particular conditions. Those costs require being calculated as current loss or profit, which results to current decrease in income. This simply means that, the new standard might bring about extra revenue in earlier phase and a smaller amount in the time to come, as it causes delays of the moment expenses would be accounted as being current loss. Standard of fee loan possess the same upshot on revenue statement. The impact on profit also causes impact on the value of the firm because; as the profit decreases it becomes hard to increase capital thus affecting the firm’s value as it is incapable of expanding. Implications of Imposing a Particular Accounting Method for the Efficiency of an Organisation In point of fact, imposing a particular accounting method implies that efficiency of a company would be affected in that, a company would potentially announce deceptive profit figures and would also be unwilling to forecast profits of the future as a result of the doubt around a number features of the standards. This would make organisation planning difficult thus, lowering the levels of efficiency. Additionally, there would also be issues regarding the manner credit ratings would respond to such undomesticated swings within values of the balance sheet. On the other hand, imposition of a new accounting method would ease comparison of companies by the investment analysts to their international peers. For instance, in the case of Fosters, investment analysts would be capable of discerning better whether it is underperforming or outperforming brewing beers and global wine peers, for instance, Pernod Rica and Diageo. After realising the company’s performance better, it would be possible to make necessary decisions that would improve efficiency, beat the current competition and make more profits. The other implication of imposing a particular accounting method for the efficiency of an organisation is that; when the accountants of a company possess some doubts when preparing financial statements, they might take longer periods than required. Taking longer periods in making financial calculations would cause delay in accounting for what the company would be utilising and obtaining from either inside or outside of the company. In such cases, the company would sometimes lack enough materials for operating, therefore making the company not to meet the set goals. On the other hand, when the materials would become available, departments would be compelled to do extra work in order to compensate for the lost time, thus a number of times doing poor work. The other implication is that if imposing an accounting method turns to reduce the profits of a company, frequently, incentives and bonuses are removed or greatly reduced. Since many companies provide incentives and bonuses to their employees for improved performance, failure to give them would certainly kill their morale of working. As such, the employees would stop working hard and being innovative as a result of feeling being undermined by their organisation. Reduced bonuses and other incentives would cause inefficiency, since fewer products and services of lower quality would be produced. Conversely, imposing a particular accounting method would lead to increased profit thus, availability of additional incentives and bonuses. In this scenario, all employees would be working hard to meet the set goals while still maintaining quality in order to receive incentives and bonuses. As a matter of fact, imposing the accounting method in favour of the company would contribute to the company’s efficiency as in the long run, more high quality products and services would be produced. In addition to this, increased earnings would encourage innovation within the organisation. Similarly, imposing an accounting method that would bring more profits would lead to retention and hiring of more competent personnel. As every employee likes working in companies that pay handsomely, competent employees also falls within this group. Therefore, the company would be able to retain competent employees and be capable of hiring employees of varied competent levels that it desires. The other implication of imposing an accounting method for the organisation’s efficiency is improved machinery. As such, when an accounting method imposed turns to be associated with more revenue, the company would become capable of buying or hiring modern machineries that would help in the production of more products and services that are of high quality. Additionally, modern machinery produces modified products and services that meet the consumers’ needs and attracts competent personnel who are curious of the available machines. Overall, improved machinery improves the firm’s efficiency than it is expected. Work Cited Jianhua, P. Impact of the New Accounting Standards on Listed Company. Management Science and Engineering. 1(2). 76-80. 2007. Print. Read More