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The purpose of Q1 is to demonstrate that you can analyse a current accounting issue reported in a news article, and to write a report for the CEO that provides her with a deeper theoretical understanding of the issues identified in the news article.

A well-designed answer that addresses the specific aspects of marking rubric will:

a)Present as a report to the CEO

  • Introduction:
  • Include a copy of the news article

b)Identify, describe and discuss the key issues reported in the news article

c)Link the major issues to ACC518 topics and theories:

i)Identify a range of relevant accounting theories that are applicable to the issues reported in the news article

ii)Deconstruct and evaluate the issues reported in the news article through the use of theories

iii) Present a logical conclusion regarding the significance of the issues reported in the news article

d)Critically evaluate the underlying assumptions of the accounting theories, in particular, with regard to their application to the issues identified in the news article

Identify, describe and discuss the key issues reported in the news article

Tarca's speech contains a number of issues that are relevant to your studies:

a)The relationship between accounting information and share prices

b)Whether current accounting practices and changes in the economy have diminished the role for accounting information

c)The ways the IASB is addressing the issues raised by those who consider accounting has lost its relevance

The following outlines an effective method for answering this section:

  • First print the speech, then read it through in its entirety, making notes as you identify the key issues. Use a highlighter to outline important sections, and write your thoughts in the margin as you go.
  • Next you need to describe these issues by paraphrasing the speech.

oTo paraphrase is to include the ideas or information from an original source in your paper by rephrasing those ideas or information in your own words. The key to successful paraphrasing is to use as few words as possible from the original text (definitely no cut-and-paste/right click synonym), but be mindful not to change the meaning that you are trying to convey as you rephrase. Write with confidence as you extend your post-graduate English language skills...

The following are some questions and/or statements that can guide your critical evaluation of the news article. Remember, you are writing this report for the CEO, so use this critical evaluation to provide her with a deeper theoretical understanding of the issues identified in the news article through your insights, in your own words.

  • Is financial accounting information still useful?

Do capital markets still value financial accounting information?

Are contemporary financial statements biased towards balance sheet models?

If so, are balance sheet models biased towards fair value?

Has historical cost lost its significance?

  • Explain how the accounting theories help to provide the CEO with a deeper understanding of the issues discussed in the news article. oFocus your thinking on the interdependent relationships between measurement, normative accounting theory, the standard-setting process, and international accounting.
  • Comment on the role of the standard-setter:

oWhat are the IASB's goals

oWill the IASB achieve these goals?

oIf the IASB does achieve its goals, what will be the outcomes:

- for accounting?

- for the CEO and her organisation?

Identified Issues Related to Big Accounting Firms

This part of the report is developed with an aim to analyze a news article which addresses a recent accounting issue in context of Australia. The issues discussed in the article are described and discussed in the report. Further, the identified issues are linked to the theories and topics of ACC518. The article discussed in the report is on the role of four big accounting firms of Australia which could threaten the world economy. A screenshot of the article is also affixed in the report for the referencing purpose.

Even though the accounting seems to be boring but it is an important aspect of every business. Almost every economy of the world relies on accountants for their auditing work for verifying the financial records of the company. Auditing is crucial in determining the accuracy of the report provided to the different stakeholders of the company and safeguards the economy on a large scale (Abeysekara, 2013). But recent financial crises and scandals depicted that any failure in the accounting may lead to losing jobs in thousands of numbers and billions of dollars as well.

The major issue identified in the newspaper article is related to the auditing practices of the big accounting firms such as Deloitte, KPMG, Ernst and Young, and PwC. These companies are well known for auditing the big multinational corporation according to their market shares. The concern addressed in the article is about the losing insight of these companies in exercising their core business which is auditing. Rather, these companies are giving more importance on providing the consultancy services. Their reducing revenue from the work of auditing and increasing revenue from the sale of consultancy services is evident to this fact. These top accounting firms are no longer seems to be working for accounting profession. Earlier, the auditing was in majority of their profession and in the current phase it has reduced to one third and has turned into just one of a line of their business. Due to insufficiency in the auditing practices provided by these four big accounting firms to the multinational corporation, their businesses are getting affected in an adverse manner. All the decisions of the company are dependent on their financial statements and auditing them is the only tool by which the accuracy of financial statements can be tested (Ball, Jayaraman, and Shivkumar, 2012). But since the big organizations have routed their interest to constancy service many of the multinational corporations are facing with the accuracy of their financial statements. The incorrectly recorded transactions are not being checked for accuracy and due to which the proper evaluation of the company’s financial performance could not be done. The four accounting firms are selling consultancy services to the politicians and bureaucrats to whom there were providing auditing services before. This shows that the firms are becoming a consigliere to the government as the politicians and bureaucrats are taking advantages of their services and are able to hide their real financial positions. Apart from this, the investment related to major infrastructure, nuclear policy, and transport policy are driven by the advice from these major accounting firms (Brown and Zhou, 2013). It was also analyzed from the report that these major accounting firms are also planning to split themselves into consulting and auditing arms of the firms. In this way they will be changed from big four to big eight. In order to remove the profit motive form the accounting services, auditing can be done from public funding. This will be a significant move in differentiating the image if the auditing firms as an outsider.

Linking Identified Issues to ACC518 Topics and Theories

There are several theories and concepts of ACC518 which are in relatable in context to the above information analyzed form the news article related to the issue of decreasing importance of auditing and providing the consulting to the same clients by four big Australian companies. The concepts of ACC518 identified for the news article is related to the accounting policies and principles, procedures and rules which can be implemented in the preparation of financial statement so that their accuracy can be assured. The detailed information is mentioned below:

Organizations use accounting policies in order to avoid the potential mistakes in developing financial statements and making them more stable, fair and true in the eyes of different stakeholders (Scherer, Palazz0, and Seidl, 2013). The use of accounting policies in simply not enough to see whether the information mentioned in them is totally correct or not. Often when the financial statements such as balance sheet, income statements, and cash flow statements are prepared by the accounting personnel of the company there are chances of error and omission of figures and numbers. Due to these reasons the financial information becomes incorrect and an incorrect picture of the financial performance of the company is formed. The company makes decision on the basis of information contained in the financial statement but due incorrect information all the decisions and strategies based on them becomes vague (Drnevich and Croson, 2013). Therefore, there is strong need for the organizations to undergo auditing to increase the credibility and reliability of their financial statements.

Accounting standard

IFRS is developed by the IASB to develop global standards which will be used while preparing the financial statement. While auditing the financial reports of the companies the four big firms has to check whether their reports are in accordance with the IFRS. Since the four big accounting firms have mould their interest to the consultancy business, the organizations which are required to perform audit are also not focusing of conducting the audit in accordance with the IFRS. Complex activities and corporate governance are included in the IFRS due to which the cost of preparing the financial statement increases (Albu and Albu, 2012). Small firms invest money in the preparation of financial statements and the big accounting firms have limited their auditing services to multinational brands only. Due to this reason, the small forms are unable to check whether their financial statements are materially correct or not. This negatively impacts the operations of the small organization due to which many people have to lose their jobs. If more companies will shutdown then the unemployment level will be increased and GDP of the economy will decreased. This will lead to a global economic downturn if continued.

Assumption behind the public interest

It is assumed that IFRS is required by 120 nations in the reporting jurisdiction in the listed and domestic companies so that the financial statements can be prepared in a better manner. IFRS is helpful for the organizations to comply with all the accounting system regulation so that they can keep the interest of public at large. IFRS includes many elements which are at high level of public interest. These elements include financial sustainability, continuous public enhancement, transactions related to accounts in the preparation of financial statements and portrait of economic reality (Nobes, 2014). All these aspects can be assured only if regular auditing is done for the financial statements prepared under the consideration of IFRS. Therefore, the financial statements shall be audited to that the firms can maintain the public interest at large.

Critical Evaluation of Identified Issues

Private concern

Since the prime focus of big four accounting firms have moved from auditing practices to consultancy services the private companies can freely adopt the IFRS which could help them in complying with the accounting standard and reduce the chances of errors while making the financial statements. This will also enable them to build the confidence of the investors in the financial reporting. When the financial statement will be materially correct then the interest of the public as well as investors will be increased and people will not lose jobs (Levine, 2012). This could also reduce the rate of unemployment and the save the world from economic downturn.

It can be concluded from the above report that the accounting standards and auditing plays a vital role in the creation of financial statements. Accounting standards are useful in making the financial statements while auditing is useful in assuring that the financial statements are materially correct. Together the accounting standards and auditing can aid any organization in increasing the credibility of their financial statements and increase the confidence of investors as well as public. The private companies can easily opt for the IFRS to make their financial statements reliable and shall not rely on the big firms for the executing the auditing practices.

This report is prepared for developing the understanding about comments provided by different business organizations on an upcoming accounting standard in Australia. The upcoming accounting standard that has been taken in this report for analysis is accounting standards update no. 2018-13, fair value measurement (TOPIC 820): disclosure framework—changes to the disclosure requirements for fair value measurement. At the same time, four comments have also been included in this report for analysis purpose. The names of companies the comment letter of which are included in this discussion are RSM, KPMG, IAS Plus and Deloitte.

The proposed accounting standard Update: “Fair Value Measurement (Topic 820)”

Financial accounting standards board generally launches draft for the proposal to develop exposure before implementation of the new accounting standards in Australia.  The main purpose of the organization is to search for the comments from the experts in the industry and for the public to provide the views so that the shortcomings can be identified and the IFRS can be improved for better accounting and disclosures. FASB draft report is associated to the Fair Value Measurement (Topic 820).

The major focus of the updating in the accounting policy is due to the need to improve effectiveness of the disclosures while preparing the financial statements and providing notes to the financial statements. It facilitates clear communication of the information needed as per the generally accepted accounting principles. It includes a developmental framework to promote consistent decisions towards requirement of the disclosures as required by board. The second thing is the appropriate exercise of carefulness by reporting entities (FASB, 2018).

The part of the disclosure framework project and the amendments will lead to various changes in the accounting standard. These changes have lead to affect the entities that are covered under GAAP and have to follow disclosures towards recurring and non-recurring fair value measurements. There are some changes that are not needed to be implemented and followed by nonpublic entities (FASB, 2018). The main provisions are consideration of the costs and benefits due to which there are several removals of the disclosure requirements takes place.

Conclusion

The amount of and the reasons for the transfers among stage 1 and stage 2 of the fair value chain of command was removed. The next removed requirement is policy towards the transfer between levels, valuation processes under level 3 while carrying fair value measurement. At last the requirements that are removed for nonpublic entities includes the changes in the unrealized losses and gains for the time included in the income for the recurring stage 3 fair value measurements remained at the end of the period.

the modifications that were made under this amendment are in case of lieu of a roll forward at stage 3 FVM it is needed that a nonpublic entity disclose transfer towards and outwards under level 3 of the fair value chain. In addition to this the purchases or issues of assets and liabilities are also needed to be treated same. Similarly, in case of the investments in certain entities, the net asset value is needed to disclose at the time of liquidation for the assets of the investees as on the date when restriction from salvation might drop in case the investee communicate the timing/announce publicly (Deloitte, 2018). The last modification in this standard is the measurement of uncertainty disclosure to communicate the information regarding the uncertainty in measurable form as of the reporting date.

There is an addition in the disclosure requirements which are not needed to be followed by nonpublic entities.  There are changes in the unrealized gains and losses that are include in comprehensible income at level 3. The range and weighted average for the unobservable inputs are also needed to be disclosed up to a certain extent (FASB, 2018). The amendment will be effective for all the entities at the starting of the financial 2020. The valuation approach will be applied under three categories such as market approach was valuation will be made as per the quoted price in active market. The other approach will be income approach that will value the future amounts such as cash flows and income streams to present value on the date measurement. Under the last approach which is cost approach the valuation will be done on the amount that will be needed to replace the service capacity of the asset (FASB, 2018). The main concept behind the approach is an investor will not pay more for an asset then the cost to buy substitute or construct.     

Analysis and Interpretation of Comments Provided by Different Stakeholders:

As per the comments provided by IAS Plus, the ASC 820 accounting standards will lead to alterations in disclosure requirements in the faire value measurement. For this standard, the board has taken into account concept statements for enhancing the quality under ASC 820 disclosure requirements. The standards will be applicable with the business year that will start after 15 December 2019. According to the new disclosure requirements, the business organizations will need to clearly depict or disclose the value of net capital gain or loss that may entitle to change in the fair value of total liabilities or total assets of companies. The non-public business firms are not bound by such type of disclosure needs (IAS Plus, 2018). According to this accounting standard, the business firms also need to provide disclosure of quantitative value of different inputs that are not observable in nature. This is part of fair value measurement under level 3. There is incremental disclosure needs like disclosure of use of weighted average and range if used in the context of unobservable assets and liabilities in company, the process or way, in which weighted values have been calculated. But with such type of disclosure, the business firms do not need to present specific causes or reason behind omitting the weighted average.

In contrast to this, KPMG provides that in reality the ASCT Topic 820 of FASB was originally issued in September 2006. At that time, this topic was termed as FASB statement number 157. At the same time, equivalent to this, IFRS 13 provision or accounting standard was launched in May 2011. But different amendments have been planned and launched in the accounting standards for achievement of common fair value measurement methods. Finally, both IFRS 13 and ASC 820 standards are effective to provide fair value measurement approaches in accordance to inputs that have been taken into account by the companies for estimation of fair value and making the disclosure of measurement approach mandatory (KPMG, 2018). Initially, there were lot of differences between the accounting standards of IFRS and GAAP. But due to the new accounting standards, the differences have started to get diminished.

As per the comment letter of RSM, it is true that original date of application of accounting standard of ASC 820 is after December 15 2019. But the early adoption of this accounting standard is also permitted by regulators. According to the new disclosure requirements added by ASC 820, the non-public business firms need to provide details of transfers of out of and in to hierarchy of fair value level 3 and liabilities/ assets purchase issues in level 3. It is also mandatory for the companies to provide the details of liquidation timing of the assets of investee in the instances, when they are going to make investment in different entities (RSM, 2018). In the situation, when investee has provided timing of same, it is also duty of company to announce date of same publically. In simple words, the amendments made through new accounting standard of ASC 820 are effective to clarify that the events of uncertainty disclosures should always be communicated the relevant information publically.

As per the report provided by Deloitte, the new accounting standard of ASC 820 is quite effective to improve the disclosure of key financial/ accounting reports of companies. In other words, it would provide highly accurate fair value of different components of financial statements of the companies to the users (Deloitte, 2018). This way, it can serve the interest and expectations of potential users of key financial reports of companies in effective or productive manner.

Conclusion

It can be concluded that the updates in the standard will assure that the financial statements are having accuracy. It will also help to assure materiality in the accounts, notes to accounts and disclosures which will intend to promote and eliminate the errors of reporting and disclose material information’s. Some of the industry specific disclosure depicts it a costly and show disinterest towards these disclosures.  The reports of the Deloitte and KPMG were positive towards the amendments assuring the changes as positive sign for accounting.  

References

ABC (2018). News. Retrieved from: https://www.abc.net.au/news/2018-07-12/richard-brooks-accountants-who-broke-capitalism/9971084.

Abeysekera, I. (2013). A template for integrated reporting. Journal of Intellectual Capital, 14(2), 227-245.

Albu, N. and Albu, C.N. (2012) International Financial Reporting Standards in an emerging economy: lessons from Romania. Australian Accounting Review, 22(4), 341-352.

Ball, R., Jayaraman, S. and Shivakumar, L. (2012) Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting and Economics, 53(1-2), 136-166.

Brown, M.A. and Zhou, S. (2013). Smart?grid policies: an international review. Wiley Interdisciplinary Reviews: Energy and Environment, 2(2), 121-139.

Deloitte (2018). FASB issues standard to amend required fair value measurement disclosures. Retrieved from: https://www2.deloitte.com/us/en/pages/audit/articles/hu-fasb-issues-standard-to-amend-required-fair-value-measurement-disclosures.html

Drnevich, P.L. and Croson, D.C. (2013). Information technology and business-level strategy: Toward an integrated theoretical perspective. Mis Quarterly, 37(2).

FASB, (2018). DISCLOSURE FRAMEWORK—DISCLOSURE REVIEW: FAIR VALUE MEASUREMENT. Retrieved from: https://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176171179766&d=&pagename=FASB%2FFASBContent_C%2FCompletedProjectPage 

FASB, (2018). Fair Value Measurement (Topic 820). Retrieved from: https://asc.fasb.org/imageRoot/81/118196181.pdf 

IAS Plus (2018). ASC 820. Retrieved from:https://www.iasplus.com/en-us/publications/us/heads-up/2018/issue-14?id=en-us:email:HU083118

KPMG (2018). Fair Value Measurement: Questions and Answers to GAAP and IFRS (ASC 820). Retrieved from: https://home.kpmg.com/content/dam/kpmg/xx/pdf/2017/12/fair-value-qa-2017.pdf

Levine, R. (2012). The governance of financial regulation: reform lessons from the recent crisis. International Review of Finance, 12(1), 39-56.

Nobes, C. (2014). Accounting: A very short introduction. UK: OUP Oxford.

RSM (2018). Changes to fair value measurement disclosure requirements: FINANCIAL REPORTING INSIGHTS. Retrieved from: https://rsmus.com/our-insights/newsletters/financial-reporting-insights/changes-to-fair-value-measurement-disclosure-requirements.html

Scherer, A.G., Palazzo, G. and Seidl, D. (2013). Managing legitimacy in complex and heterogeneous environments: Sustainable development in a globalized world. Journal of Management Studies, 50(2), 259-284.

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