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Case 1: conceptual framework
Why principle based standards require conceptual framework (225 words)
Conceptual framework is a standard of reasoning and decision making conceptual framework make it possible not to get lost when making standards. Principle based standards without a conceptual framework can easily be influenced by several factors, which include individual concepts. This means that instead the standards would not standard for the norms in accounting but rather for the needs of the members of the board. This would also mean that incase these people stop serving as board members and their group takes over then the new people would bring ion their own ideas and thus keep changing the standard and in the long run the accounting standard would keep changing (Bullen & Crook 2000).
On the positive note conceptual frameworks provide a means of communication this can be termed as map in the development of the standards it is actually a guide. Without a conceptual framework, chances of diverting to what is not important are very high (Horngre 1981). At the same time, the use of a framework promotes credibility on the standards that makes it possible for the people who apply the standard to believe them and therefore apply them efficiently reasons why IASB and FASB should share a common conceptual framework (225 words)
By sharing the same concepts, it will be possible for the two bodies to converge their standards. This is because they will be using the same guidelines in essence it will be very easy for them to agree on issues. With different conceptual frame works each both will base its standards on its concepts making it almost impossible to reach a consensus.
Again, by sharing the same framework, it will be easier to improve the already existing standards since the two organizations could have same standards and thus provide a good base in noting what is right at what is wrong and what needs to be changed.
The other reason why a common framework is needed is that it only by cooperation is that the following issues can be solved. Generalization on the theory of accounting, the permissiveness of accounting today, interference of politics in accounting naturalness. These issues for them to be solved and the only way are for the two bodies to sit together. Sitting together without familiarity to some issues may be hard that is why the shared conceptual framework acts as the common thing between the two
Conceptual framework more important for some parties than others (225 words)
Yes, I concede conceptual frameworks to be more important to one party than the other does. The main reason why I support this is that the conceptual frameworks tend to either conflict or run in tandem with the objectives of the organisation. This is true since the frameworks being shared are purely laid out to develop standards. Whenever the preparers each was point where the framework conflict with their objectives in a common meeting the preparers of one party will support what is in their objectives while the other party will have no choice but to back down since the frameworks are clear. Thus, it is true one party may be favoured by the conceptual frameworks.
Furthermore, the idea of a conceptual framework is to
Meaning of crosscutting issue and examples
Cross cutting is aspect of bring into one sheet, two different scenario to develop an informed opinion about the two. As if it happens on movie creation, cross cutting involves cropping of a portion of a story and pasting to another body to make the story flow. Likewise with conceptual frame work, it involves two or more conceptual frame work bodies coming together and agreeing on terms, definitions and some fundamental principles which cuts across the accounting and finance world (Murphy, O’Connell & Ó hÓgartaigh 2013)
For instance, in conceptual framework, IASB and FASB joint sitting back in 2004, they together decided to run a project jointly.
They were therefore forced to agree on some matters, which cut across board.
Of the resolved issues were:
Qualitative characteristic ( sweep issues)
On this ground they were supposed to come into consensus of common ground on how to address quality on work ethics considerably and in uniform
measurements (Ruhl & Smith 2013).
The board agreed on measurents to put in place and implication and interpretation of different rates of different terms. Issues of measurements included rates as well.
The board also discussed the new chapter of measure (Kaminski & Carpenter 2011).
Change of terminology to qualitative characteristic.
The IFRIC considered a letter raised by IASB to chnge terms to qualitative and it was approved since the two bodies wre finding to strike a common ground (Heffes & Orenstein 2005)
Reporting entity
It was agreed that the length of the comment period for the Exposure Draft on the Reporting Entity Chapter of the Conceptual Framework be 120 days (Whittington 2008).
Topics were also introduced by noting that the objective of the meeting is to redeliberate the issues related to control of an entity included in the May 2008 Discussion Paper (Bullen & Crook 2000) (Heffes & Orenstein 2005)
Case 2
Q1 Fundamental Problems on Financial Statements based on Historical Cost Principle
The historical cost principle is a concept that basis its calculations only on the original price of an asset. This is to say that the amount recorded in the financial statements regarding a certain asset is the price it was purchased at (Rogerson 2011). The value does not change even in the light of appreciation and depreciation until disposal or sale. The concept is mainly oriented on the reliability of information in the financial statements. The argument is that factoring costs like replacement cost, current market price or the fair value of the asset is not reliable. This is because the calculations are based on market assumptions and expectations. The Historical cost principle is reliable as it is based on the real value of the asset when it was purchased (Abu Bakar & Said 2007).
The fundamental problem brought about by this principle is inaccuracy in the information provided in the financial statements. The value of assets may be overvalued or undervalued in the financial statements when they are recorded based on the historical cost. The effect of this is inaccuracy as overvaluing will show a better financial position of a company than the actual. Undervaluing, on the other side, will record a lower financial position than the actual. This therefore renders financial statements inaccurate due to these discrepancies. Investors will therefore make decisions based on inaccurate financial information of a company (Abu Bakar & Said 2007).
Accounts and Economic Reality
Accounting is mainly based on assumptions, rules and theories that were brought out by scholars. They are based on standards produced by regulators like International Accounting Standards. The information provided in financial statements is based on these standards and rules. Accounting procedures also differ from one company to another or from one industry to another and one country to another. There are no standard rules and standards for all accounting work done by all businesses. The effect of this is lack of reliability and hence an inefficient market. This means that information provided to the market is incomplete or inaccurate (Lee 2006).
The principle of ‘accounts must reflect economic reality’ is very crucial and may help minimize the inefficiency in markets. The principle that ensures that the performance and worth of companies is based on economic reality rather than figures produced from the many accounting rules. The principle ensures that the worth and performance of a company is measured more accurately. The concept though simple, provides in-depth analysis on performance than other accounting rules and measurements. Most traditional accounting measurement methods ignore very fundamental aspects in measuring performance. The concept of economic reality in accounts ensures that these aspects are factored into the measurement. This principle provides more reliable and accurate information on the worth and performance of a company than GAAP measurement methods and other accounting rules and standards (Lee 2006).
Measuring Economic Reality
Economic reality can only be measured by taking into accounting all fundamental aspects of an accounting system. All aspects that affect an economy and accounting variables as well are crucial in the measurement of economic reality. The market performances and the expectations can be used to measure economic reality. Economic reports can also be effective in the measuring economic reality to apply in accounting. The measurement of this concept is very complex as it includes very many aspects of an economy. Applying the concept in accounting is simple but very effective in measuring company performance and worth (Rogerson 2011).
For example, the traditional method of calculating Earnings per Share (EPS) does not include all aspects of an economy. In order to include them in the measurement, a measure of the economic reality based on market prices and rates can be used. This measure of economic reality can then be factored into the calculation of EPS to provide a more reliable and accurate figure (Rogerson 2011).
Reliability in Accounting
This refers to the application of objectivity in reporting accounting information. The concept ensures that what is included in financial statements is only that which the company can prove. Reliability means that information is dependable with absolute confidence. Accounting systems can only be termed as reliable if the information in them is materially accurate. The information should also faithfully represent the purpose it was made for. This can only be achieved if all material facts are included and the right measurement method is used (Bauer et al. 2014).
The measurements done should be done according to one particular rule and standard that conforms to the objectives of the company. The accounting rules and standards used should be reliable and up to date to ensure that the information provided is reliable. Reliability in accounting information is enhanced through faithful representation, completeness in the data and factoring in the concept of economic reality. Faithful representation refers to presentation of accounting information using a true and fair value. The information should also be complete, that is, does not leave out any material facts and information that are required to meet the purpose of a particular financial statement. Use of economic reality principle is also very effective in ensuring accounting reliability as it ensures all aspects that lead to effective measurement of a company’s performance and worth are used in the measurement (Bauer et al. 2014).
Case 3
Q1. How companies go about provission
In my own view, provision being directly proportional to profits, and with many corporate thirsting to record as highest profits as possible due to face gurd PR, these are the two ways companies would go for the case (Kaminski & Carpenter 2011).
Mothballing. According to Financial Accounting Standards Board(FASB), this is already a in market practice with many companies so as to escape the assignment of the day of discossure.
I’m therefore foreseeing many companies putting into suspension momentarily as many environment questionable liabilities as possible to avoid provision cost (Horngre 1981).
Some other companies will go to the extent of using such assets interchangeably with good ones to avoid further wear out (Kaminski & Carpenter 2011).
Dumping. The other method companies could use is to dump such asset whose provisions would cost more than selling them at throw away price. Dumping, which is predatory pricing, was once use by great Germany during their great economic crisis and it saved a situation (Whittington 2008). This involves identifying a ready market oversees where dumping rules and FASB rules are less strict and shipping the assets before they become a total liability to the company
Underquotation. the final in my list method the companies would go about this is by underquaoting the existing netbook value of the aaset. This will help such companies to lower the provision value since the value of the asset is low (Whittington 2008; Murphy, O’Connell & Ó hÓgartaigh 2013).
aspects of the requirements used by US companies to defer recognition of a liability
US companies used the following ways to defer recognition of a liability.
Recognizing immediately millions of dollars in their income statements
This one was done so as to protect profit margin while serving to comply with the FASB laid regulations (Heffes & Orenstein 2005; Murphy, O’Connell & Ó hÓgartaigh 2013).
Many companies went ahead and decleared huge amounts on their income statements so after the provisions their profits remained at the oordinary levels. This is upto date proofing treaky practice and becoming an issue with many and not only US firms.
Mothballing: Firms went ahead and suspended indefinitely some of their assets which could expose them to huge liabilities if provided for (Heffes & Orenstein 2005). Such was the biggest practice among many US firms. However, such assets would be used time to time but sparingly.
Establishing reserves: Some companies would identify and establish reserves today for eventual disposal of still in use assets (Murphy, O’Connell & Ó hÓgartaigh 2013).This aspect, though costly, was used to defer recognition and the company coulod continue using such assets without necessarily providing for it (Murphy, O’Connell & Ó hÓgartaigh 2013).
Q3 a)
When companies recognize liability in relation to future restoration activity, it would result into reduced profits for the company in the current and future years. This would be because provision for the future restoration would be recognized as an expense in the entity’s income statement (Bullen & Crook 2000).
Q3 b)
Recognition of the liability in relation to restoration activity would not affect the cash flow in the current year and future years if the actual cost of restoration is not incurred as this would be a non cash expense. The cash flows of an entity would only be affected negatively if the there is actual expenditure or eventual cost of restoration (Heffes & Orenstein 2005; Whittington 2008).
Q4
with environment conservation being more important than the profits we make, and with socio-ecomical aspects being more important than the financial figures,It is important to recognize environmental liabilities because of the high cost associated with disposing environmental waste or retirement of some assets (Heffes & Orenstein 2005).
Some environment waste disposal need some form of preapatory and pose cost implication to the society as well. So it is important this is taken into consideration when reporting on the performance of an entity (Murphy, O’Connell & Ó hÓgartaigh 2013).