International financial accounting and theory - Term Paper Example

Topic: International Financial Accounting and Theory Affiliation: Introduction Contemporary accounting has emerged to be one of the diverse and dynamic concepts in financial accounting and reporting. Accounting practices of the modern times are faced with numerous factors to account for in the contemporary business environment. Social and environmental accounting is a contemporary component of accounting principles and standards. It goes beyond the formal record keeping and financial reporting to encompass internal and external information demands by accounting stakeholders in the economies. Accounting theories are primarily developed to enhance economic decision making prior to financial record keeping and reporting. In the modern times however, industrial activities have had both positive and negative impacts especially on the society and the environment. The government and the society have consistently aired their concern and pressure on companies to address the adverse impacts of business undertakings on both environment and society. In this regard, social and environmental accounting theories have been integrated into the accounting practices to account for these concerns. The strengths, weaknesses and limitations of these theories and their position in the current accounting frameworks are evaluated in this paper. Social Accounting Social theory in accounting practices is concerned with the social responsibility of entities in regard to their recording keeping and financial reporting. Although it is not necessary for companies and business entities to prepare income statements and balance sheets that pertain to social responsibilities, it is important for such entities to evaluate their social achievements and success by evaluating their social performance aspects. Social accounting is used to measure this performance and report the social responsibility of a firm given the social activities it undertakes (Business and Economic Review, 2006, p.21). Record keeping and financial reporting in social accounting is presented in terms of social benefits to the society by firms and social benefits to firms from the society. Strengths Natural resources utilization Social theory in the accounting practice is not only concerned with the social responsibility of firms to the society, but also considers the firms’ efficiency and effectiveness of natural resources utilization. In other words, proper use of natural resources in the activities of the firms is accounted for. Record keeping is done to enhance preparation of financial statements that point out to the utilization of naturally available resources by companies. The social aspects are integral to this pursuit because natural resources are socially owned and therefore the companies have a duty to account for the social benefits and/or costs to society in process of utilizing these resources. Current accounting practices and standards must therefore factor in this aspect during the development process. Employees Employees benefit alongside the larger society from the social responsibility performance of firms. Firms are socially accountable and the fact that employees are integrated in that process is strength. Many other accounting standards only focus on the investment undertakings when preparing financial statements. Social accounting incorporates accounting for activities focused on employee welfare like provision of education and health facilities for employees and their families free of cost transportation and favourable working environments (Auditing & Accountability Journal, 2005, p.346). Society This is primary emphasis of social accounting. It pertains to all social benefits and social costs passed to the society by firms. Adverse effects of the activities undertaken by business entities are accounted for by social accounting. Social responsibility is a mutual action between companies and the society. Both are bound to succeed from the social responsibility aspect. A major concern of social accounting is environmental pollution by firms in their line of business. The social concern by this theory is strength because previous accounting principles ignore benefits and costs that firms pose to societies and economies. Investors and other stakeholders Accounting principles and standards that did not encompass social accounting focussed on investor welfare in terms of providing investors with adequate financial information to aid their decision making (Pramanik, 2002, p.179). This concept has been built on and improved by social accounting. Investors also require sustainability accounting in the environment of business. When natural resources are safeguarded, then investors have a more strong foundation to build their investment portfolio due to the diversity of financial reporting taken care of in this case. Weaknesses and Limitations As already mentioned, record keeping, financial statements preparation and reporting is not compulsory. In this regard, many companies avoid this component of accounting. This is because social accounting has weaknesses and limitations that discourage its observance. Social accounting raises the cost of financial recording and reporting. Many social activities are primarily social benefits to the society and social costs to the companies. Secondly, this accounting practice fails to take into account that government taxes business entities to account for the negative externalities that these entities produce as part of its tax revenue expenditure. Thirdly, the theory argues that social responsibility is necessary due to the fact that companies utilize natural resources in production. In the real case, businesses obtain their raw materials at a cost and giving back to the society under the natural resources context is a double charge to the firms. Finally, there is lack of proper and harmonized mechanisms for the practice of social accounting. Placement within the Current Accounting Frameworks The UK observes a number of accounting standards, but the UK GAAP is the sole accounting regulator. These accounting standards include: Financial Reporting Standards (FRSs) and Financial Reporting Exposure Drafts (FREDs), Statements of Standard Accounting Practice (SSAPs), Statements of Standard Accounting Practice (SSAPs) and Urgent Issues Task Force (UITF) abstracts (Zappalà & Lyons, 2005, p.251). Social accounting fits into this spectrum prior to the need for firms to be socially responsible. It is important that firms undertake social activities and keep records, prepare financial statements like social responsibility income statements and balance sheets and further make financial reporting just like all other business activities are accounted for. Environmental Accounting This accounting practice identifies, compiles, estimates and analyses environmental cost information to enhance effective decision making within firms (Banerjee, 2002, p.64). The underlying interest of environmental accounting is the realization of business sustainability, based on economic and environmental optimal performance. The integration of environmental accounting into the current accounting practices does not only address environmental concerns, but also provide favourable environment through which financial decisions are made. However, this accounting practice has both strengths and weaknesses. Strengths Environmental accounting enhances effective management decision making based on informed knowledge. Analysis options available to decision making units are characterized by accurate information. This information is derived from identifying, measuring and communicating of costs or actual or potential negative environmental impacts that firms cause (Meldrum, n.d.). In so doing, business decisions taken by firms remain informed by sustainable development. This is not only beneficial to the firms, but also to the entire society due to the fact that the firms are sensitive and concerned about environmental welfare. It is important that firms evaluate and assess economic and environmental costs in their activities. Other forms of accounting practices and standards fail to account for this factor. Through environmental accounting, firms can work their way out to reduce negative environmental impacts and thus reduce their economic costs of operation (Cameron, 2008, p.119). This is therefore a wider scope of financial recording and reporting. Through financial statement preparation and reporting, environmental accounting places firms at a better position to understand the sources of both economic and environmental costs. Traditional accounting practices are primarily concerned with the measurement of assets and liabilities and therefore determine cash inflows and outflows (Pearce, 2005, p.83). In this regard, they hardly account for natural resources and natural wealth. Environmental accounting unlike traditional accounting practices considers both past and future financial concerns. In order to account for future environmental concerns, past, present and future financial expectations are essential to consider in a bid to account for natural resources and natural wealth. In other words, environmental risks are accounted for and all stakeholders in the accounting practice have a role to play in environmental accountability. Weaknesses and Limitations Environmental accounting lacks a standardized method through which its accounting principles are applied. These methods also vary across companies and from one region to another, making it difficult to undertake comparisons. Secondly, measuring environmental costs and benefits is a difficult task. Most of them are theoretically stated and means to quantify them are limited and technical. Thirdly, organizational environmental performance is at many times underestimated. This is due to the fact that inefficient resource utilization is not adequately accounted for and waste management is not always effective (Business and Economic Review, 2006, p.21). Costs of poor environment performance are therefore not measured to the latter. Another weakness and limitation of environmental accounting is that costs accounted for those within the company, while the benefits are quantified for both the company and the society. Failure to account for social costs is a limitation. Also, environmental accounting unlike many other accounting principles is long term process in nature. In this regard, its functionality is not independent of financial accounting. Placement within the Current Accounting Frameworks The accounting frameworks that are in practice in the UK were mentioned earlier. The integration of environmental accounting into the current prevailing accounting frameworks will diversify the variables that financial information treats during financial reporting. Environmental concerns are essential to account for since they primarily determine the extent to which sustainable development is pursued (Pearce, 2005, p.117). Making transformative and informed environmental decisions in the pursuit of promoting environmental welfare must require that environmental variables be accounted for. It is important to measure environmental costs and benefits to both companies and society especially with the consistent globalization that is leading to the standardization of accounting principles and practices around the world. Accounting diversity therefore necessitates the integration of environmental accounting into the UK GAAP among other accounting standards and practices. References Banerjee, B. (2002), Regulations of Corporate Accounting in India, Calcutta, the World Press Calcutta Private Limited. Business and Economic Review; Apr-Jun 2006; 52, 3; ABI/INFORM Global pg. 21. Cameron, J (with Gerrard, J), 2008, Thinking and Practicing Values: Community Enterprises in the Food Sector, Report on the ‘Community Enterprises in the Food Sector’ Workshop, CURS, The University of Newcastle. Environmental accounting and change in UK local government Amanda Ball Accounting, Auditing & Accountability Journal; 2005; 18, 3; ABI/INFORM Global pg. 346. Meldrum, B, (n.d.) Measuring Your Social Impact: A Practical Introduction, The Tool Factory, London. Pearce, J; Kay, A & Social Audit Network, 2005, Social Audit and Accounting: The Manual, Social Audit Network, Bolton, UK. Pramanik, A. K. (2002), Environmental Accounting and Reporting (eds.), New Delhi, Deep & Deep publications Pvt. Ltd. Zappalà, G & Lyons, M, 2005, Recent Approaches to Measuring Social Impact in the Third Sector: An Overview, CSI Background Paper No. 5, Centre for Social Impact, University of New South Wales, Sydney. Read More