Accounting Framework. The accounting issue that is discussed in the article is convergence of accounting standards for financial reporting. Without the convergence, there will be problems and complicated process to prepare the reports.

University Degree Business and Administrative studies

Table of Contents

Question 1:

Seven Users of the Framework for the Preparation and Presentation of Financial Statements:-

There are seven users. The first user is Investors. Investors are interested in the enterprise ability to achieve future earnings and to increase its wealth, taking into considerations the monetary flows released. They also need be able to assess whether the company will able to pay dividends, and to measure the performance of the business’ management overall.

The second user is Employees. Employees typically would require information about the stability and continuing profitability of the business. Such information can help them to increase the involvement in the company, the interest in work. The profitability, determined on the basis of the information offered by the income statement is essential information in their preparation for negotiating the increase of the wages or the improving of working conditions and benefits offered to them.

The third user is Lenders (debtors), customers and trade debtors required information about the ability of the business to survive and prosper. They need to ensure the companies’ abilities to repay the loans and interests on term, and does not grant without aa rigorous analysis of the companies’ financial performance. In this regard, the creditors assure that the short terms aren’t used to finance fixed assets, and the company has the ability to create profit, which is guarantee of the company to repay on time.

The fourth user is Suppliers (other trade creditors), take measure to which the debtor company will be able to carry out its financial obligations, analyzing the solvency of the company and other information which allow the assessment of compliance with payment fixed date. They also want to know the profitability to continue the business, paying attention to developments prospects of partners, which could have positive consequences in the future on their activities.

The fifth user is Customers. They need information to assess the continuity of the business and its growth prospects, in order to estimate the risks in their supply. In addition, they also interested to the prices used by the company, the possibility to get some price reductions, the possibility to get after sales services (such as maintenance, repairs), the maximum amount of commercial loans received, the time for pay accepted by the company.

The sixth user is Government. Government agencies are responsible for taxing, regulating and investigating the company. They need information on business profitability in order to levy and collect Corporation Tax. As a user, the state needs information for fiscality reasons, to determine the calculation of the base for taxes and follow the taxpayers pay them on time.

The last user is Public. Public represented by any users that has not been mentioned in the Framework but is interested in the accounting information within the economic organization. For example, the researchers interested in the shape, content and quality ...

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Accrual Accounting Concept:-

Accruals concept is described in FRS18 which is defined as the accrual basis of accounting requires the non-cash effects of transactions and other events to be reflected, as far as is possible, in the financial statements for the accounting period in which they occur and no any cash involved is received or paid.

Accruals concept greatly focus on the business output rather than the input, and it is more cost effective and efficient use of resources. The full cost providing to the products or services can be compared trough the industry standards and indeed will help in improving the accountability as well as enhanced better financial management.

In addition, accruals concept also beneficial to the government. It provides the business with better perspective of management performance and results. It’s a new point for the government in measuring up against the private sectors businesses, and also produces better management and efficiency from the public sector of the business world.

Then, there is also added advantage to provide accurate and useful information to the managers to evaluate the performance and profitability of the company. If there is a small business, the business owner would probably assess and evaluate whether the business is generating profit or vice versa. The owner can better assess profit levels because he or she can match income to expenses accurately when using the accruals concept method.

In conclusion, the accruals concepts is factual and objective as it is useful and accurate in the assessment of the financial position of the company

Historical Cost Convention:-

Historical cost is a generally accepted accounting principle requiring all financial statement items to be recorded based on the original cost. Accountants will record revenue, expenditure and assets acquisition and disposal at historical cost, that is, the actual amounts of money, or money worth, received or paid to complete the transaction.

Historical cost has been subjected to many criticisms over a period of time especially as it considers the acquisition cost of an asset and does not recognize the current market value. Another main criticism of historical cost method is the obvious flaws in times of inflation. The effects of inflation may not be same for all the companies and historical cost become almost helpless when comparing corporate performance.

Although facing heavy criticisms, still historical cost is the standard form of accounting due to its unique features and conventions that make it better than most almost available alternatives. Accountants are reluctant to price the assets at current market value. Over the years, number of cases relating to accounting malpractice and creative accounting have been exposed that have made accounting bodies reluctant from using current values which will directly affect the share prices. Under historical cost accounting, there is no room for manipulation and the data is supported by evidence such as invoices, receipts and others.

Moreover, the historical cost accounting provides managers with significant range of alternatives in recognizing, reporting and measuring economic information. It is useful for managers to forecast future operational costs based on past data. Without knowing the original costs, future projections are almost hampered.

Historical cost plays an important role here by providing this necessary information. Historical cost is based on recording actual transactions and also the figures are reliable and valid. No other method of accounting can provide exact information at a glance on the changes in trends in the company’s working like the historical costs method. So, I agreed that this practice should be continued.

Question 2:

Accounting Issue discussed in the Article:-

The accounting issue that is discussed in the article is convergence of accounting standards for financial reporting. Without the convergence, there will be problems and complicated process to prepare the reports. Evidently, having different national accounting systems is costly for companies and also investors. Companies have to keep duplicate accounting systems and thus investors are worry about buying shares that the companies’ accountants they do not understand. The board emphasis the convergence process is strategic way at promoting the adoption of IFRS but this is not an objective by itself. The investors were frustrated by the perceptions of IASB board which is convergence of accounting standards is just for their own interest and benefits.

Role and Objectives of International Accounting Standards Board (IASB):-

The objectives of IASB are to formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance. Besides, IASB also work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements. Then, in conclusion, ISAB need to develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated accounting principles.

International Accounting Standards is an independent regulatory body, and its main role is to set an single set of global accounting standards. Although the board members are all came from nine countries and have variety of functional backgrounds, the board committees is committed to develop in te public interest, a single set of high-quality, understandable and thus enforceable global accounting standards that might require transparency and comparable information. Moreover, the board have to cooperate with the national accounting setters to achieve the convergence of accounting standards globally.

U.S GAAP vs. International Financial Reporting Standards; UK (IFRS):-

U.S GAAP is a Rules-based accounting system which means that companies in the United States operate under a strict system of detailed rules when preparing financial statements. Some of the primary benefits of a rules-based system include increased accuracy, reduced ambiguity and a diminished possibility of lawsuits. The major drawback of rules-based system is the complexity in the preparation of financial statements.

U.K IFRS is a Principle-based accounting system which is based on a set of key objectives rather than detailed rules for financial reporting purposes. In principles-based accounting the guidelines are set but not necessarily dictated for every situation, which is one of the major concerns pertaining to this type of accounting system. Sometimes financial information can be inconsistent from one company to the next in the same industry damaging the ability of comparability. The major benefit of principles-based accounting is the guidelines can be applied in variety of situations/industries which avoids the need of managers to manipulate statements to fit a certain needs.

Table below shows that the benefits and significant differences of each approach:

Benefits:

Convergence of Accounting Standards is considered relevant or irrelevant:-

Convergence of financial reporting and accounting standards is a valuable process that contributes to the free flows of global investment and achieves substantial benefits for all capital markets stakeholders. It will improve the ability of investors to compare the investments on global basis and lowers their risk of errors of judgment.

Then, convergence of accounting standards might be cost saving for most of the companies. Internally, there is within a multinational group there is usually a network of national subsidiaries around the world. They have to report nationally using the GAAP and also have to report to their parent company, and there is dual accounting system using by the company. This is costly and it is also not easy to transfer accounting staff around the world because of the different local requirements and thus it is more expensive to retrain the employees.

Then, convergence represents the progress, and the direction for future globalization development. Convergence of international accounting standards will enhance the harmonization and embodies the requirements of integrating international economies. Harmonization will helps in ensuring the reliable and high quality financial reporting and disclosures. Besides, it also enables a systematic review and evaluation of the performance of multinational company having subsidiaries and associations in various countries having their own set of accounting standards. It may easier for the comparison of the performance against the domestic and international peers in more easier and meaningful way.

In conclusion, the international convergence of accounting standards has become a global economic stage of development inevitable trend. The main objectives of the convergence is to find appropriate ways to work together to build a global system of high-quality accounting standards. Convergence is a gradual and interactive process that requires countries and regions to put in efforts towards the process and thus conquered all the possible difficulties.

References:

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