Issues in Financial Reporting - Assignment Example

Issues in Financial Reporting Name A Report Submitted by You Course Institution Date Question 1 a) Advantages i) Comparability: International standardization brings about greater comparability between entities and companies across the globe. It also enhances evaluation and analysis by international investment groups and other users of financial statements. ii) Reduction of cost: It lowers the cost of preparation of financial reports since compliance will only be to a single set of accounting standards rather than multiple sets. For companies with multiple listings, they are able to get reduced listing outlay. The costs will also be reduced in terms of training accounting experts as the accounting practiced all over the world is similar, hence the need to retrain staff when they go to a country that has different accounting standards will not be there as opposed to the case now. This will increase efficiency and effectiveness and increase productivity, revenues and profits. iii) It also minimizes manipulation of accounting information since accounting reporting will be uniform in line with the international standard, unlike now where firms and countries can align with a standard that suits their objective. It will also be easy to understand and interpret these standards due to their uniformity across the globe hence any malpractice will be easily detected. iv) It will lead to the establishment of a more transparent accounting system with greater accountability. Additionally, it will help maintain credibility of financial reporting and increase the efficiency of auditing the accounting information. b) Disadvantages Inconsistencies- there is no complete uniformity in the adoption, application and implementation of these standards have different levels of expertise. The international standardization of accounting standards does not guarantee uniform accounting practices in all the countries. That is, the countries may have similar accounting standards but different accounting practices. It is difficult to provide radical evidence on the advantages of the uniform accounting rules nationally and internationally. Nature of converged standards; The nature of the standards to be converged are very different and this creates a big impediment to international standardization as different accounting bodies and countries will tend to pose resistance to abandon their own standards. International standard setting is a political process in the sense that it encompasses ongoing struggles between different groups of actors for symbolic power and decision-making. Actors from different sectoral, national and functional constituencies, with divergent views or even opposing interests, have been doing all they can to influence the process of rule setting and the concept of standardization. There are open conflicts of interests and also slight underlying differences interpretation, evaluation and understanding of accounting principles (p. 16). Question 2 Historical costs: This is the cost information where assets were acquired as well as liabilities incurred based on the market price. This is as opposed to fair value where information is based on current market prices. The assets and liabilities are recorded in the financial reports based on the amount at which they were bought or incurred. These ensure that fluctuations that might be brought by the fair value method of valuation is mitigated. This means that the value of assets is at the amount they were purchased with no matter the length and likewise to the cost incurred in terms of liabilities. Accumulated depreciation: As the assets are reported as per their historical costs, accumulated depreciation of the asset is calculated in equal periods, for example, annually, and is accumulated as long as the asset is in use or its lifespan is estimated and depreciation calculated. Accumulated depreciation then reduces the value of the asset gradually. This gives us the estimated worth of the asset in question at the particular time the financial reports are prepared. The accounting standards standardize the calculation of accumulated depreciation to avoid great variance in the percentage of calculation by different entities. Net Book Value: This is the net value of the asset after the accumulated depreciation has been deducted. This represents the estimated worth of that asset at the time financial reports are prepared. This helps to show the current value of the asset having taken into consideration the amount that have appreciated over time. This amount will be the one that appears as the value of the asset in the calculation of the Financial position Statement. The net book value will continue to deteriorate until the asset has completed its lifespan, or it has been disposed off at the net book value. i) Objectives of financial reports; The objective of these reports is to provide information of an entity to a wide array of users that will help them in making economic decisions. This includes information regarding financial performance, position and cash flows. Users of this information include the government for taxation purposes, formulation of policies and general planning. For example, provision of incentives, subsidies and to find a way of increasing the employment rate and in the process reducing unemployment in the country. Potential investors require this information to make informed economic decisions that will help them maximize their wealth. Competitors will want to gauge themselves against other players in the industry, which will help them benchmark with the best to be more competitive. Employees and other stakeholders require the information for diverse reasons. The financial standards, therefore, provide guidance in preparation of these reports to create uniformity and enhance comparability. ii) Issues regarding the assumptions undertaken while preparing financial reports. These include preparation of reports based on accruals and the assumption that an entity will continue operating for the near future as a going concern. The assumptions involved in the preparations of these financial reports are guided, by the financial standards, to ensure uniformity and relevance to produce accurate information. The accruals concept used should be uniform across the board to guard against over or under statement by the firms in the country. The entity should be assumed a going concern and treated as such, to allow for planning to be undertaken by the firms in their pursuit of profit maximization. iii) Qualitative characteristics of financial reports; these are the attributes that make the useful to the intended users and they include relevance, reliability, comparability and understand ability. The financial reports should be relevant to the intended users of that information to benefit from it otherwise it will be useless to them, for example, investors want information to do with performance and shareholding. The reports should also be reliable to users of the information in terms of consistency and accuracy of information with the relevant standards and other players in the industry. The reports should also be able to be compared with other business in the industry, country and even globally, so that users can be able to make informed and educated economic decisions and know the true financial position of the firm in comparison to others. The reports should also be able to be comprehended by the intended users of that information. The intended users should be able to understand the data to be able to make use of that information in their financial decisions. Question 3 Employees of pears R Us Pty Ltd cannot be treated as assets to the company since value and service cannot be quantified. As per the definition of assets by Statement of Accounting Concepts (SAC 4), as future economic benefits controlled by the entity because of past transactions or any other past events, employees are not assets. As they are involved in the utilization of other assets for the purposes of future benefits and not as an effect of any past transactions. An asset must have future economic benefits that must eventuate in all probabilities. AN entity must have future control of the future benefits expected from the asset in that it has the capability to deny or regulate the access of others to the benefits accrued. The occurrence of the event or the transaction bringing about the entity’s control over the future economic benefits is necessary. The asset must have a cost that can be measured reliably, which is not the case with employees. The liabilities are defined by the Statements of Accounting Concepts (SAC 4) as the future sacrifices of the monetary benefits that an entity is presently obligated to make to any other unit because of past transactions or other past events. There should be an existence of a present obligation as a responsibility or a duty of the entity to perform or act in a certain way. An obligation entails the association of two separate parties, which are the entity in question and a party external to the entity, as the party cannot be both the recipient of the performance and the party under the duty to perform. This automatically disqualifies the provision for the overhaul of the machinery as a liability since we expect to gain from it in the end rather incurs a cost. The enforceability of a liability at law also disqualifies provision for the overhaul of the machinery as a liability since it is not enforceable at law. The IASC has issued forty International Accounting standards (IASs) to date covering a range of topics such as interim financial reporting, inventories, depreciations, impairment of assets and financial instruments. Other related costs include business combinations, leases, costs of research and development, taxes (income), segment reporting, investments, earnings per share, intangible assets, employee benefits among others. Furthermore, it has also issued a Framework for the Preparation and Presentations of Financial Statements that sets forth the concepts underlying the preparation and presentations of financial statements for external users. Question 4 i) According to appendix A of AASB 3, Super Clean Carpet Pty Ltd. is not a reporting entity since the number of users dependent on general purpose financial reports is limited. This is because it is a family business, judging by the shareholding and management. This company is not required by the corporations act to prepare financial reports since it is a small proprietary company according to the act. This company has only four shareholders who are from the same family, and a family member is running the day to day operations of the company, the company also has no debts or liabilities, and this indicates that the number of users reliant on a common purpose financial reports is very limited. The shareholding is also way below 50 shareholders showing that it is a small propitiatory company, which is, not obligated to prepare financial statements. ii) Deep Green Ltd. is a reporting entity since, “it is reasonable to expect the existence of users who rely on the entity's general purpose financial report for information that will be useful to them for making, and evaluating decisions about the allocation of resources”, as per the definition according to appendix A of AASB. This company is required, under the act, to prepare and lodge the Australian securities and Investments Commission since it is considered a public company by the act. This company is a public company since it has 88 shareholders, which is above the 50 shareholders and below of a proprietary company. It also has a significant number of employees, which amounts to 260 full time employees. The sales were also huge amounting to $22 million revenue. This means it has a large number of users dependent on general-purpose financial reports, and hence, it is obligated or required to prepare and file reports with the securities and investments commission within a specified period. Reference List Botzem, S. and Quack, S., 2005. Contested rules and shifting boundaries: International Standard Setting in accounting. Read More