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Case study 1
1. Explain why principles- based standards require a conceptual framework
According to Persons, (2014) The possibility of a standards based way to deal with principles and guidelines given by FASB (body for issuing accounting standards in United States) is not recent approach. The FASB theoretical system comprises of the collection of rule that marks United States bookkeeping and detailing. While taking into account wider approach can be visualised to set the nature and purpose of book keeping. The FASB has utilized the reasonable structure in building up the standards in bookkeeping benchmarks for over the period of 20 years. Utilising the methodology on the basis of principles, the book keeping standards would keep on being produced from the applied conceptual structure. Still it will apply comprehensively under the existing guidelines. Notwithstanding, many affirm that the principles have turned out to be progressively point by point and guidelines based with "splendid lines" that concentrate on the frame as opposed to the substance of exchanges which are hard, troublesome and expensive to put on.
Conceptual structure is the declaration which provides thoughts and goals and follows the path of building up a consistency regarding financial detailing. It provides an appropriate picture of budgetary book keeping and detailing. Theoretical and conceptual framework helps in setting out the farthest point while recognising the nature and capacity of monetary book keeping. Standards won’t just give the obliged strategies to be utilised as a part of demonstrating any financial data in various accounting and financial statements but additionally helps in maintaining the complete record of financial data and fulfilling requirement of its reporting segment.(Lakovic & Fuglister 2013)
2. Why it is important that IASB and FASB share a common conceptual framework?
Both International accounting standard board (IASB) and financial accounting standard board (FASB) are the non profit, private organisation responsible for issuing standards and guidelines to be followed and practiced in preparing of various accounting statements. On one hand area or scope of work of IASB is related at international level while on other hand FASB issues standards keeping in sense requirement of United States. With the global expansion of companies and various economies it is immensely required to have a common accounting and financial frameworks, methods of presenting financial statements across the globe. In present time both IASB and FASB have their separate guidelines and standards. Conceptual structure of IASB can be depicted in a report, “Framework for preparation and presentation of financial statements”. Similarly FASB has his own standards guidelines in a documented form (Cellucci, 2011).
As per Hoogervorst & Seidman ( 2012),accounting and financial standards boards such as FASB & IASB are presently taking a shot at a joint venture to create an enhanced common accounting structure that will help in giving a impactful establishment to future book keeping and accounting principles. IASB & FASB both the bodies are characterising the book keeping norms yet are diverse in different nature. Therefore there is immense requirement that there should be common principle and guidelines to create better understanding of financial statements for its users. Both the bodies are pointing a shared based objective to make their standards uniform. This will help the organisation to contrast their financial articulation effortlessly across the globe. Presently norms and rules vary in both the standards, common system and approaches will curb such duplication of endeavours.
3. Parties benefited from utilizing conceptual framework
Various parities can profit or gain by implementing conceptual system in its overall accounting and financial framework. This gathering incorporate or consists of finance related preparers (book keepers), checkers and auditors. As per IASB, (2013) the other primary users which have an immense requirement of above framework are financial speculators, various government departments and its offices, workers & employees of organisation, business clients, money lenders and budgetary experts. These users require accounting and financial data of an organisation. Through reasonable edge of common presentation of data for its users it enhances better understanding of the data.
Further it helps in giving guidance to the internal and external audit & accounting professional for creating appropriate comprehension on the measures of book keeping. It provides the direction for irrational and unpredicted business uncertainties. Applied structure of financial and accounting principles enhances the faith towards the organisation among its various stakeholders. Business stakeholders utilise the organisational financial data in settling of numerous choices. Appropriate structuring while presenting the accounting and financial statement as per uniform guidelines and standards empowers the investors to have a view on the organisational activity execution and development. In addition while accomplishing the implantation of reasonable system in helps in bringing consistency all through various stages. It also empowers the equity holders to have appropriate comprehension on budgetary proportion and money related terms (IASB, 2010).
4. Meaning with examples of cross cutting issue
Cross cutting issue is the difference in the methodology, speculation in diverse book keeping benchmark and standards. It alludes to the territories that show contentions or differences between the standards issued by different accounting standards and guidelines issuing bodies. Standards, guidelines and principles issued by IASB and FASB might show contrast in the same venture. It is observed in various situations that various similar ventures are distinctive in the international accounting standards (IFRS) and United States generally accepted accounting principles. For instance organisation dealing with speculation business, mutual funds or private equities set up their budgetary explanation utilising the FMV (fair market value) approach. Accordingly merger or consolidation of various accounting and financial report are not being made due to factor that investments are being presented at FMV value. On the other hand IFRS issued by international accounting standard board does not permit measuring financial information and other investment at FMV value.
From the above example it has been witnessed there has been various issues arise duet o differences in the accounting and financial statements. It creates the distinction in the financial sentiments of the individuals in tolerating the regular differences in the principle based guidelines or standards. Due to this reason both the archives (IFRS & U.S. GAAP) should be refined, upgraded to come at the basic approach in book keeping structure (Swanson, et. al., 2013).
Case study 2
1. Fundamental problem with financial statements due to historical cost measurement principle utilised under US generally accepted accounting principles
Historical costs are immaterial on the grounds that they do not reflect or exhibit monetary conditions identifying with financial assets and commitments. Utilising historical cost method will not be dedicated presentations of various assets and liabilities in the financial statements. They likewise do not weighted appraisal of expected future money inflows and outpourings. As per Uzma, (2012) historical cost methodologies are not tantamount in the light of the fact that the cost of specific resource or obligation will be same all the time. On the other hand fair value system are opportune in the light of the fact that they reflect changes in monetary conditions when those conditions changes. Only advantage in utilising the approach of historical method upgrades consistency since they mirror a similar kind of data in each of the financial period. In this rule of historical cost method business assets are valued at cost of procurement. This does not demonstrate the genuine photo of the budgetary explanation. As organisation financial statements are viewed by the stakeholders, this historical cost idea will prompt to indicate higher benefits which will build desires of various stakeholders of the organisations. Stakeholders will expect higher returns from the organisation and organisation inability to cater those desires will baffle the equity holders while diminishing the overall the worth of the stock value.
2. Principle of ‘.... accounts must reflect the economic reality’ used as main principle of measurement of accounting and financial data
Standards of book keeping are the set rules in giving the different norms while dealing with the book keeping data. The IASB and FASB board helps in providing standards that is focused on conveying principles that provide the relevant financial data to speculators looking to settle on normal choices about the assignment of various business assets. According to Chea, (2011) various standards and principles of accounting ought to plan mirroring the genuine and fair photo of the financial data. Economic and monetary reality considers the value of all the organisational business transaction as per the present value system. It will rather enhance the trust and faith among the users of financials statements. The major issue from the shareholders part is that they them self can’t understand the objective and facts of the data they require or to crave from the financial report of the organisation. Rather they believe on the perception which are made by others and reports of those perceptions which are imparted as data. Various conditions and law of the land puts the stakeholders of the business organisation to believe on the financial statements provided by the organisation in form of financial statements. Moreover they are compelled to believe on the budgetary statements and annual reports provided by the business firms for the financial data required by them. With various instances of unethical behaviour of accounting and auditing professionals while presenting the financial statements, the respectability of business executives is under doubt. Various accounting and financial norms endorsed by the boards of issuing accounting standards helps to concentrate on the incorporation of correct monetary value while preparing book keeping and financial records.
3. How to measure economic reality
For a considerable length of time various business organisation have been measuring their financial performance as per standards and principles mentioned inn GAAP and according to formulae of EPS valuation. Since then GAAP and IFRS markers have gotten to be trademark estimation in present commercial and financial centre. But to be realistic in the present era, GAAP, IFRS and EPS disregard various critical areas which need to be analysed. To overcome the shortcoming of above tools the evolution of Economic value method (EVA) has been implanted in many organisations. Using economic reality approach in monetary disclosures while presenting financial statements of the organisation will give its genuine photo with the consideration of clear estimation of the organisational economical conditions (Schiller & Lundh, 2013).
Organisation can quantify its execution according to the external & internal economic environment which utilising the technique and tool of Economic value added. EVA will help the Companies to recognize the esteem made among the equity holders in overabundance of the required return provided to them. While utilising the EVA approach financial specialist now have a superior approach to gauge the genuine execution of company’s financial structure. Business administrators now have a superior methodology to handle critical business conditions and to generate incentives for its investors.
4. What is reliability in accounting
Reliability in book keeping is the idea which goes for demonstrating the monetary data with no scope of errors and frauds. The concept of reliability by nature guarantees that financial data is free from mistakes, biasness and inclination. It loyally speaks to what it actually indicates. Loyalty combined with the affirmation from the client which comes through confirmation through various means that the particular financial statement has the representation quality. In this way, the essential segments of reliability are representational unwaveringness and certainty. According to this concept of reliability the main concept behind this idea is to record only those business transactions which has a backup proof for justifying it to be accurate and consist basic norms of integrity (Nobes & Stadler, 2015)
Various cases of target proofs are
1. Bank proclamations
2. Promissory notes
3. Purchase and sales bills
4. Challans & trade bills
From the above instances it has been visualised that these documents are provided by different parties such as clients, providers, valuation specialist and banks. Since these parties are external or outsiders, records and proofs provided by them are thought to be of higher incentive then comparing records provided by those of internal parties to the business. Business needs to legitimize its routine activities with a definite investigation and internal control with a motive to sustain accuracy of financial data presentation. Reliability in the accounting and financial statements presentation proclaims in the light of genuine circumstances, presents various financial and non financial occasions of the company which might affect its going concern.
Case study 3
1. If fair market value of environmental cost can easily be estimated then does FASB require companies to record provision of retiring assets environmental cost.
According to the body of issuing accounting standards (FASB) in United states, various guidelines has been issued in the year 2003 for creating environmental liabilities for the disposal of resources being utilised by the administration of the company over the period of time. Organisation will likewise require getting it perceived in the financial statements. As per the standards and guidelines issued by the FASB and IASB provisions for environmental expenses of resigning business resource are given in the relevant standard of FASB 143. Company should follow the appropriate guidelines mentioned in the above standard. The main motive behind this guideline issued by FASB is that it provides goals that helps in promoting the fact that organisation have a lawful commitment to hold for or creation of various reserves which is related with inevitable retirement of various business assets. An element might perceive the fair value of a risk for a benefit retirement commitment in the period in which it is caused if a sensible gauge of fair value can be made. Further taking into consideration if sensible gauge for fair value can’t be made in a reasonable period of time, the company should recognise adequate liability of creating reserves when a sensible gauge of fair value can be made.
Companies should not create reserves as and when required rather it should create liability from time to time to create a backup for the purchase of assets. For instance as in case of asbestos-debased industrial facility assets cannot be just retired in a single day without sufficient liability reserves in hand to take care of possible expense of expelling the asbestos machineries and reinstalling the new one (Fornaro & Huang, 2012).
2. Requirements used by US companies to defer recognition of a liability
Organisation in United States while resigning their business resources need to make pre arrangement through creation of various reserves towards the environmental obligations. These pre arrangements can only be made when fair market value of resource can be assessed. As per the United States board for issuing financial standards and guidelines, each organisation needs to create the pre arrangement for the cost brought about in resigning the retired business assets. These pre arrangement or creation of reserves requires the organisation to represent the liability against the depreciation on the resource being resigned from the business administration. As per Rose, (2010) it is mentioned in guidelines to protect the external environment from the utilisation of resource which are either of no utilisation or have diminished in value. All the origination is liable to government and state strong waste transfer perquisites for non risky material and refuse. A division should perceive the liability for future resource rebuilding cost in the relevant period for which the resource is put into administration and when a sensible gauge of estimations can be made. The underlying evaluated reclamation cost might be fair value in the light of the best data accessible when the resource is first set in administration. For instance cost of restoration or amount of reserve liability should be according to cited current market costs in dynamic market or costs for comparable work.
3. Methods to recognise liability regarding future restoration activity affecting net profit in the current & future years and cash flow position in the current & future years.
Albeit recognising and presentation of required financial data pass on conceivably to the clients regarding money related explanations, the financial accounting standard board (FASB) which monitors and issues accounting and financial guidelines in United States has over and over underlined that disclosure in financial statements in neither a substitute for, nor another option to recognise the relevant standards. Disclosure of financial data that might be given by notes to accounts or other monetary or financial explanation is never a substitute for financial proclamations. The cost evaluated for the environmental obligation will be adjusted along the life of the resource. This cost consists of every incorporated happening to the resource for instance repairing, restructuring and other related cost. Upon beginning while recognising liability for retirement commitments a business organisation should create reserves with the appropriate wear and tear of assets over its life. While creating the reserves for future uncertainties that might occur to business resource due to its repair, maintenance and other cost that will involve appropriate cash outflow. Though the reserves are created in past company’s profits are not affected. For instance cost of purchasing the fixed asset will not affect the current year’s profit as due to depreciation impact, total cost will be diversified over the life of the asset
4. Disclosure requirements relating to environmental liabilities across many countries around the globe
Presenting the relevant environmental liabilities become more difficult with the change in compliance, book keeping rules and guidelines in dynamic external environment. Previously the pertinent book keeping norms supported the projections over its hypothetical probability. But with the change of time newly implemented book keeping standards are probably going to dislodge this view of the world. Moreover administrative states of mind are moving towards expanding the straight forwardness of public organisations. As per Barbu, et. al., (2014) initiatives made at government and state levels are in progress that could trigger extra divulgence needed for dangers related to changes in external environment. There are further requirement mentioned by various laws which are needed to be disclosed in accounting and financial statements. These requirements or disclosures are tabulated in below mentioned table
Capital expenditure disclosure
It obliges organizations to unveil any material impact that consistence with government, state, and neighborhood laws and controls may have on the capital consumptions, income, and aggressive position of the organization.
Legal proceeding disclosure
Organizations must uncover a procedure that incorporates a claim that is material to its business or money related condition. Secondly, organizations must unveil a procedure that includes a claim for harms or includes potential money related authorizations or capital uses that surpass 10 percent of the financial assets of the organization as per accounting report.
Discussion of management and analysis
Item 503 (c)
Management relevant risk that might affect the going concern of the organisation must be reported and disclosed.
Barbu, E.M., Dumontier, P., Feleag?, N. and Feleag?, L., 2014. Mandatory environmental disclosures by companies complying with IASs/IFRSs: The cases of France, Germany, and the UK. The International Journal of Accounting. Available at - https://hal.archives-ouvertes.fr/halshs-00658409/document
Cellucci, R., 2011. The international accounting standards board. The Neumann Business Review, Available at- http://www.neumann.edu/about/publications/NeumannBusinessReview/journal/Review2011/Cellucci.pdf
Chea, A.C., 2011. Fair value accounting: its impacts on financial reporting and how it can be enhanced to provide more clarity and reliability of information for users of financial statements. International journal of business and social science. Available at - http://ijbssnet.com/journals/Vol_2_No_20_November_2011/3.pdf
Fornaro, J.M. and Huang, H.W., 2012. Further evidence of earnings management and opportunistic behavior with principles-based accounting standards: The case of conditional asset retirement obligations. Journal of Accounting and Public Policy Available at - https://www.researchgate.net/profile/Jim_Fornaro/publication/238504609_Further_evidence_of_earnings_management_and_opportunistic_behavior_with_principles-based_accounting_standards_The_case_of_conditional_asset_retirement_obligations/links/53fb219b0cf27c365cf072fa.pdf
Hoogervorst, H. and Seidman, L.F., 2012. IASB-FASB Update Report to the FSB plenary on Accounting Convergence. FASB. Available at- http://www.fsb.org/wp-content/uploads/r_120420d.pdf?page_moved=1
IASB, 2010. The Conceptual Framework for Financial Reporting 2010. IFRS. Available at - http://www.ifrs.org/News/Press-Releases/Documents/ConceptualFW2010vb.pdf
IASB, 2013. A Review of the Conceptual Framework for Financial Reporting. International Accounting Standards Board. Available at - http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf
Lakovic, T. and Fuglister, J., 2013. The international accounting standards board’s progress in promoting judgement through objectives-oriented accounting standards. International Journal of Business and Social Research, 3(7),Available at - http://thejournalofbusiness.org/index.php/site/article/viewFile/244/241
Nobes, C.W. and Stadler, C., 2015. The qualitative characteristics of financial information, and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business ResearchAvailable at -http://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2014/October/ABR-2014-0103-Qualitative-characteristics.pdf
Persons, O., 2014. A principles-based approach to teaching InternationalFinancial ReportingStandards (IFRS). Journal of Instructional Pedagogies. Available at - http://www.aabri.com/manuscripts/131593.pdf
Rose, R.R., 2010. Environmental Liabilities with the Codification—Is It Simpler? Better?. Environmental Claims Journal, 22(1) Available at - http://www.roselink.com/references/rose_codification_2010.pdf
Schiller, S. and Lundh, S., 2013. IFRS accounting in progress: from a student perspective. Linköping University Electronic Press.Available at - http://www.diva-portal.org/smash/get/diva2:624936/FULLTEXT01.pdf
Swanson, Z.L., Singer, R. and Downs, A., 2013. Goodwill impairment: A comparative country analysis. Academy of Accounting and Financial Studies Journal,Available at -http://www.alliedacademies.org/articles/aafsjvol1712013. Uzma, S.H., 2012. Accounting of Intangible Assets under FVA. Research Journal of Finance and Account. Available atwww.iiste.org/Journals/index.php/RJFA/article/download/2397/2396