Discuss about the Accounting Theory for The Reporting Process.
Issue – Financial statement presentation
Reducing complexity in Reporting financial statements
The main that is involved with the financial statements is the reporting process. This has been stated by auditors and various users of financial statements. Therefore, it has been urged by many to the US financial accounting board and IASB to generate new standards of financial reporting that will help in reducing the complexity and will strive toward principle based approach. The discussion stretches to the main cause of complexity in terms of reporting the financial instruments. The discussion is even followed by the long term approaches that aim to eliminate the complexity. The main issue is the associated rules that are complex in nature and are used to evaluate the financial instruments. There are innumerable possibilities that put the users and prepares in difficulty. It becomes difficult to understand which study should be considered. This discussion will undertake various approaches that will help in reducing the problem.
The possible intermediate steps that can be taken to reduce the complexity involve several steps. The approaches that can be taken in this regard is to replace the standards that are existing with the fair value measurement principle and to have some exceptions that are optional in nature. Secondly, the measurement requirements can be amended that is the number of categories of the financial instruments can be reduced. Moreover, hedge accounting can be simplified that will lead to a better understanding.
All the three approaches can be taken into consideration or a combination can be used for an optimum result. This project is being undertaken to achieve a long-term solution that will help in eliminating the complexity. Long term solution is highly needed that will evaluate all kind of financial instruments that will further establish standard for financial statements. In this manner many rules that are associated with financial instruments can be eliminated. This will lead to a measurement attribute that is useful for every financial instrument and will enable smooth comparison between the entities and the accounting period. Fair value can be treated as the best measurement attribute that leads to all kind of information for the financial instruments. In reality, fair value is an apt example of current value. IASB has undertaken various projects that produce general principles in determination of the fair value. The concerns that are addressed through the discussion are earnings volatility, presentation of gains and losses that are unrealized in nature. Further the study is undertaken to give effect to the class of financial instruments. It is difficult to ascertain the class of financial instruments. This project is undertaken so that it comes to the forefront that there are various classification and it needs to be noted that which financial instruments should be treated a s equity, which instruments should be derecognized, etc.
The discussion stress that the measurement requirements of various types should be eliminated that will provide a better exposure and will not be complex in nature.
Issue - Fair value measurement
Accounting is considered as an important tool in business that helps the entity to assess the assets and settles the monetary factor that includes the aspect concerned with the real value of the assets. The main issue that crops is the fact that there are various accounting properties that helps in delivering the best result. However, the presence of different methods puts the users in a fix. The most popular of them all is the fair value. The method is defined as an essential prospect of the business. The main difficulty that is involved with the method is the value reversal. There are various challenges that arrive when the measurement is used like the market condition. When the market is uncertain, a huge volatility exists. The value of the assets and liabilities fluctuates. Hence, utilization of the fair value might lead to revaluation of the assets and liabilities. Large swings are noted that do not go in the good books of the user. When the market strengthens or pacifies then the value return to the original form indicating that the fair value has flaws when it comes to fluctuation of the market. Moreover, the use of fair value measurement might impact the down market in a negative manner. When the asset is revalued in a down market, the revaluation might lead to a huge selling pressure. Without fair value measurement, companies do not indulge in selling the assets. Therefore, it is an important factor when it comes to assets and its valuation. It is important to eliminate the deficiency so that the companies do not suffer from such a limitation.
The main motive of the discussion lies in the fact that fair value comprise of many citations and the modern market or business is present with different practices. The various parameters like values of depreciation and market value are unable to provide a credible amount into the computation of fair value. The values are computed on the growth prospect and financial risk assessment. The complex situation of the market and various other parameters has made the accounting insignificant. However, the existence of values is still present in accounting as a coefficient value. The fair value measurement is influence by the external value and hence, it is not completely correct in all respect. In the present scenario there has been a question on the transparency point of the measurement and hence subjected to innumerable controversies. This project is undertaken to shed light on the inefficiency of the fair value measurement. There are certain sections that are effectively dealt by the measurement but certain assessments are not complete in the scope. An apt example that can be cited in this regard is the premium and discount.
Therefore, the discussion clearly states that the inefficiencies of the fair value must be effectively dealt with the help of new standards. It is important that the regulators must consider the proposal and seek to address the point that has inefficiency.
Case Study 2
A Steward can be explained as the person that acts on the employer’s behalf. When it comes to local authorities they are stated as the government representative and needs to state that the assets held by the government are maintained in an effective manner and custody is strong. It is a fact that the major emphasis of IFRS is on the fair value, the ascertainment of the assets as per fair value projects the steward efficiency. Beyond question, IFRS is based on the concept of disclosure and hence, relevant in areas like accounting of lease, derivatives and schemes of PFI. The need of lease accounting under the old system was based on classification as operating or financial lease was based on scenario, but IFRS is not based on it. The theory of embedded derivative is needed when the agencies of the government need to test the financial instrument definition and then ascertain if a separate accounting is required depending on the fair value of the derivative. In link to the scheme of PFI, the original contract and the financial model needs to be ascertained. The gap between the land and building and various other disclosures needs to be done. Hence, it is evident from this that the need of recognition is stringent in nature followed by the measurement and disclosure concept. The financial scenario when the developments of the historical standard were done was completely apart from the scenario in the current scenario and hence the IFRS implementation needs immense effort and thereby subjected to huge variations. Considering such arguments, it can be commented that IFRS does not consider stewardship. IFRS is designed for the corporate sector that has huge class of investors who are needed to take decisions for buying and selling, etc. There are many factors that does not make it meaningful. At times it is seen that there is no presence of investors in the local authority because they do not give return and not displayed for sale. The financial statement users are not present and the main uses are for academic or informational needs. The decision making by the local authorities is not linked to the financial statements. Hence, for the mentioned reasons, it can be said that IFRS cannot be the best resource for the local authorities.
In reality, IFRS was floated by IASB and implemented in the listed companies. Secondly, it was done in the secondary market. Further this, there was no other place and hence IFRS was implemented in the local authorities. Hence, considering the discussion above I am satisfied with the statement that IFRS is correct in its stand and provides an equal treatment whether it is corporate or a local authority. Even after the IFRS implementation, the local authorities will not find a great improvement. The comparability of financial statements does not take a strong stand in the case of local authorities. Hence, it can be said that it is inviting for a disaster in the coming scenario.
4. many authors opine that IASB does not work in the interest of the public and therefore, a private tool that is promoted for the advantage of the Big 4. This statement reflects that the accounting forms are using the measure for their private interest and duping innumerable corporations that are using their services. Many authors have claimed the fact that IASB has provided advantage to small accounting firms however, it aided the big four firms in their accomplishment. In fact, IASB i composed of fifteen members that projects nine different countries and includes country like US, India, etc. A unity between the IASB and FASB was witnessed in 2002 with an aim to merge the knowledge and develop a set of accounting practices that are of high value. This is the main reason that goes in favour of the fact that IASB and Big 4 firms are the main player in the enhancement of the IFRS. Beyond question, the Big 4 firms have a strong edge when it comes to the resources, skills, diversification, etc.
IASB states that useful information as that needed by the investors to ascertain if shares should be buying or sold. It does not play any role in financial reporting. Hence, when it comes to UK, the entire focus of IFRS shifted from GAAP that was based on reporting of profit. It cannot be said to be a small concern because GAAP of UK was based on accrual system so that there is a match between transactions and helps in knowing what happened amidst a period. Moreover, in this procedure balance sheet is a strategy that is residual in nature. Hence, the GAAP was based on financial ability, stewardship and actions. On the contrary, IFRS is measurement of value at a point of time and differentiating it with another period. Therefore, it can be commented that balance sheet is predominant while profit ad loss account is secondary in nature. In a different manner, it can be said that IFRS gives due emphasis to the investors that are selected to be the main users of the accounting and as no one have the will to invest in local authorities, the investors considered by IFRS are not present in the local authorities. Therefore, IASB does not work in public interest and used as a medium for a financial disaster. Therefore, it brings more problems as compared to the solutions. Going by the very happening, it was decided that an alteration will be done in tune to the principles of IFRS. Moreover, the IFRS implementation in India is postponed owing to huge changes in the companies Act, SEBI and FEMA. It completely depends upon the action and the manner in which the standard will be implemented in other countries. In short, there must be other nations that pay attention to the implication and ensure its implementation. Hence, the laws of the host country needs to be altered to attain a better implementation.
5. IFRS undoubtedly assumes a place of special importance and going by the benefits and pace it can be said that the implementation is essential in every country. Going by this fact, it can be said that adoption in IFRS is essential. Accounting standards undergoes immense change with the due passage of time. Changes happens so that the stakeholders are able to get proper set of information and hence, the decision making process is smooth. IFRS standard are endowed with innumerable and adoption of it will lead to a better external environment. Adopting the IFRS system will bring immense advantages to the country (Australia) in terms of transparency and manner of reporting. This will disclose the information to the stakeholders in an effective manner and hence, will bring a greater result. Moreover, the policies will be standard in form and uniform in nature thereby facilitating an enhanced level of practice. The accounting system will be vastly influenced and a better progress will be witnessed. Reconciliation on a retrospective basis will prove to be of great help and this will match the company in its performance. It is one of the unique feature of IFRS that will bring additional benefits. The implementation of IFRS is endowed with ample advantages and hence going by this fact, Australia must implement IFRS. The information will be projected in a better fashion and will help in attracting the investors. This will lead to an overall positive advantage for the company. On the contrary cross border holding will be enhanced in the presence of such a standard. The processing cost of information will reduce thereby enabling a strong goodwill of the companies. This will create a balance and harmony that will attract the foreign funds. The resources will be utilized to the optimum level. Moreover, it has been noted that when IFRS is implemented a strong change is seen in allocation, as well as ownership. Further, the comparison will be uniform in nature and any chances of deviation will be eliminated.
The implementation of IFRS will bring positive impact to the ASX too. The ASX will benefit in terms of foreign direct investment. One of the major positive point for IFRS is the pooling of capital and providing strength to the organization. Hence, it can be seen that the benefit of the IFRS is manifold and Australia is bound to get a strong support from the IFRS implementation. Teh overall economy will undergo immense change when the implementation of IFRS is done. Further, the protection of the investors is one of the major factors that need to be taken into consideration by any country and this is what IFRS is capable of. The benefits will persist in the economy for a longer time frame and hence, Australia must implement IFRS to avail numerous benefits. Going by the above discussion it is clear that the IFRS standard is a vital requirement for progress and therefore should be adopted by the authorities of Australia.
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