Advance Accounting Theory - Essay Example

Advance Accounting Theory Contents Contents 2 Question 4 Question 2 6 Question 3 9 Aim or the Objective of Performance evaluation 9 Theory for justifying the performance evaluation 9 Ways in which the individual or the group respond towards the performance evaluation 10 Factors affecting the individual to the group towards the implementation of performance evaluation 10 Parameters for performance evaluation 11 Question 4 11 Importance of Segmental Reporting 11 Steps of segmental reporting 12 Advantages of the Segmental Reporting 12 Reason for considering Segmental Reporting as controversial 12 Recent developments adopted by IFRS 13 Question 5 14 Criticism of traditional budgeting 15 The concept of traditional budgeting is considered as the time consuming process that is not responsive towards the external changes. Traditional budgeting is mainly based on the past information and the past performance which has negative impact on the aspect of budgeting. One of the example of traditional budgeting is the incremental budgeting where the budgeting is done based on the past information without considering the various areas where the business is under performing or over performing in case of the incremental budgeting. Another example of the traditional budgeting is the performance budgeting where the budgeting is done on the basis of the evaluation of the performance at the end of the financial year which can affect the preparation of budget since the preparation of budget at the end of the year can result in the deficiencies since under traditional budgeting the budget is prepared on the basis of the historical cost and on the basis of the past data and information and traditional budgeting is unfavourable for establishing cost and benefit relationship since the process of traditional budgeting is very complex in nature. 15 Concept of Beyond Budgeting 16 The concept of beyond budgeting have been introduced in order to overcome the deficiencies of the traditional budgeting which explains that beyond budgeting is considered as the most appropriate method of budgeting which includes responsiveness, flexibility and coordination. The concept of beyond budgeting has been introduced in order to abandon the concept of traditional budgeting since the beyond budgeting will focus on both financial as well as on non financial measures. This process of beyond budgeting is required to focus and establish standards or benchmarks and identify its competitors rather than framing or establishing its internal targets. The concept of beyond budgeting has become popular in the recent years among the various multinational companies for example a Scandinavian bank has adopted the concept of beyond budgeting which has facilitated the bank to undergo cultural change from establishing of budgets to setting of targets and the improvement in the performance that has resulted in the cutting down of cost. Beyond budgeting has facilitated each unit to have different and separate profit centre. Therefore beyond budgeting is considered as an important budgeting that will overcome the limitations and the disadvantages of the traditional budgeting (Hope and Fraser, 2003). 16 Principles of beyond budgeting 16 References 18 Question 1 In the light of recent trends, companies voluntarily furnish their social activities report to meet the expectations of the stakeholders. Stakeholders seek information about company’s financial performance and social implications of their business activities. The investor community wants to find out that their funds are invested in legitimate business activities that conform to the vision and mission of the company. In order to meet such expectations companies around the globe have started to report their social activities and practices. Though it is not mandatory to furnish its sustainability report, still companies report it to show their brand equity. Various regulatory authorities have made reforms relating to ethical business practices. It highly discourages the practice of using harmful chemicals, child labour, harmful waste etc to create a sustainable environment. Recent trends have witnessed that companies have a dual role of not only earning profits but it also help build communities in which it serves. Corporate responsibility also has various implications which are as follows: According to the positive accounting theory, companies invest their wealth in social activities to reduce the visibility of their political participation. Managers report such activities in the interest of the company and not as ethical responsibility. They furnish information that is aimed at increasing the firm’s value. The theory justifies the rational behaviour of the managers of the companies, as they report the activities to the extent of the expected increase in the firm’s value. The legitimacy theory explains that companies will voluntarily do business within the social boundaries. It is the moral responsibility of the company to meet the expectations of the community in which it serves. Companies report their social activities to show their conformity with the societal norms without any underlying interest. Though there are no stated or explicit expectations of the stakeholders, firms disclose their social responsibility report to legitimise or warrant their actions as ethical to the community. The theory aims to rationalise the actions of a company in respect to the society i.e. they honour the social contract. Often at times, involuntarily companies face situations where its legitimacy is at stake i.e. in case of accidents and calamities. During such conditions companies as a measure to restore the community faith, it publishes its social contributions in the annual report (Aras and Crowther, 2009). As per the stakeholder theory, it divides the objective of the company based on two premises i.e. managerial and ethical. From the managerial perspective, companies look to meet the demands of its key stakeholders, who have strong influences on its resource and operations. If the key stakeholder community seeks the sustainability report or want the company to make charitable contribution to the development of communities, then it has to inevitably report its social activities. On the contrary, under the ethical premise firms voluntarily inform the stakeholders as a moral obligation and not as a stance to please a few parties. Under this approach companies report the details of their social activities to keep its stakeholders well informed about its non business operations. The institutional theory outlines the need of organizations to supply its social activity report as an act of compulsion. Various institutions like foreign investors, government would extend its funds or make grants based on its social participation. This is an indicator that shows the community participation of the company. Such institutions encourage that business’ across the globe meets the expectations of the local community that it caters. It wants to foster a culture that looks to build communities. Companies in order to benefit from the perks offered by such bodies, engage in social activities. It closely follows the managerial theory, but under this theory companies produce their sustainability report as an imitating act. This is called coercive isomorphism i.e. they under no obligation to make social disclosures, but since their peers do it, they follow suit. Apart from coercive isomorphism there are two more factors that influence such behaviour i.e. mimetic isomorphism and normative isomorphism. Mimetic isomorphism is when companies follow such practices anticipating a loss in their brand value or reputation and normative isomorphism says that corporations are in practice of such reporting owing to its moral obligation and to honour the norms of the society and not for its own or related parties interest (Louche, Idowu and Filho, 2010). Question 2 IASB as a part of its convergence project introduced IFRS. Adopting IFRS (International financial reporting standard), as a standardised method to report financial transactions across nations and economies has inherent problems that inhibits the implementation of the program itself. There are two ways to integrate the financial reporting system across nations i.e. standardization and harmonization. Harmonization aims to bring about parity in the financial reporting standards of countries around the world, whereas standardization aims to integrate the already existing accounting and reporting practices. Various nations have different legal, cultural, business; accounting profession and political environment that impedes the implementation of harmonization of IFRS. The key factors affecting the implementation of IFRS are as follows: Political and legal system is an important factor that impedes harmonization of accounting standards. Local laws and parties influence the financial reporting standard of that country. Expectations of various parties i.e. government, investors, exchange regulators impact the accounting and reporting standards. The economic and financing level of a country determines its legal system. Countries have different legal systems i.e. common law or the Roman law that impacts the business structure, resulting in different recording and reporting standards. (Kirk, 2009). Cultural impact also acts as a barrier in implementation of IFRS. The value system and the sub culture influence the company policies that determine its financial standards. Hofstede formulated the cultural dimension which is used to find the degree of variance across countries based on individualism-collectivism, power distance, uncertainty avoidance and masculinity/ femininity. Research made on countries have shown how US, Italy, Brazil, Germany, Switzerland, Denmark and Sweden have scored the highest in Hofstede’s cultural dimension. US has high individualism, Italy and Brazil have high power distance, Germany and Switzerland are high on uncertainty avoidance and Denmark and Sweden have high equality i.e. male to female ratio. The above cultural dimensions influence the accounting principles of a nation. High accounting conservatism can be associated with countries having low individualism and high uncertainty avoidance. High accounting secrecy can be characterised by countries having high uncertainty avoidance and power distance, but with low individualism. The above cultural dimensions affect the accounting principles which results in varied financial reporting standards of countries. Apart from Hofstede’s cultural dimensions there is another important factor that discourages the adoption of IFRS i.e. level of education. Different countries have varying levels of financial expertise that will hinder the adoption process. Countries do not have equal access to information and resources that will lead to financial harmonization. With different educational level and expertise it is very difficult to follow a standardised reporting of financial activities. Introducing a complicated way of reporting standard will result in slow response from countries having low education level. With better and developed economies, there is a need of more effective reporting technique that will cater to its level of expertise. Adoption of IFRS without considering the impact of educational aspects will lead to wrong or misinterpretation of financial results, leading to increased cost and time. Tax structure is a key determinant inhibiting the harmonization of IFRS. Various economies have their own way in computing its taxes. Open, closed and mixed economies have certain tax implications that are incumbent on the nature of trade. Companies in these economies follow the tax regime that suits the nature of trade. Moreover they have no choice but to follow the guidelines of the respective authority. Companies as a practice try to reduce the tax burden by following the local tax laws. Implementation of IFRS would be detrimental to the earning potential of the company. A shift of reporting standard from GAAP to IFRS would bring about changes in the inventory calculation i.e. companies will have to bear a tax cost owing to the non acceptance of LIFO method of inventory valuation. Under IFRS fixed assets are valued at fair price which will impact the interest expense i.e. depreciation, resulting in higher tax payments. Tax calculations will witness an overhaul after adoption of IFRS that will cost companies by way of higher corporate taxes. Thus, under the given proposal of implementing IFRS across nations, it is less likely that it will be adopted as a standardised method of reporting financial transactions. Implementation of IFRS, convergence of financial standards has various implications on different aspects that discourage the harmonization programme. Though in the shorter time horizon the adoption will be very difficult, but in the long run it will observe convergence of financial practices for better and effective financial code (Shamrock, 2012). Question 3 Performance evaluation is considered as an important aspect in case of budgeting. Since the evaluation of performance of the organization becomes difficult with the expansion of the organization and therefore the managers of the organization is required to evaluate the various financial and non financial aspect of the organization and also implementing different strategy for evaluating the performance for different forms of the organization and therefore in order to improve the performance of the managers that is associated with the organization which is required to be linked or connected with the promotion , bonus etc Aim or the Objective of Performance evaluation The management accounting research has revealed the main purpose or the objective in the performance evaluation of the mangers of the organization are assessing the responsibility that is allocated to the managers, ensuring that the managers are assisted and motivated towards the4 attainment of the organizational goals of the organization and the performance evaluation facilitates the management in evaluating and identifying different areas for evaluation of the performance of the different departments of the organization (Cox and Fardon, 2008). Theory for justifying the performance evaluation The management has also applied the concept or the theory of Mc Gregor which explains the theory X and theory Y which explains that theory X mainly emphasizes on the autocratic leadership in which the performance of the employees of the organization is mainly guided or assisted by providing reward to their employees and providing direction to the employees and the concept of theory Y mainly focuses or emphasizes on participative structure where the employees are motivated as they feel that they are the part of the organization. Ways in which the individual or the group respond towards the performance evaluation There are different ways or process by which the individual or the group respond towards the performance evaluation of the organization. The different ways includes the budget constraint style where the punishment and the reward that is provided to the employees as a technique of performance evaluation is linked or related to the budgetary performance. Even if the budget information do not reflect the performance of the organization it is still used for evaluating the performance of the organization, the profit conscious style mainly reflects the evaluation of the performance of the managers and the increase in the effectiveness and it reflects the profitability of the organization and the non accounting style which deals with the concept of theory Y that mainly emphasizes on the reward and the punishment that is linked or related to each other (Shapiro, 2005). Factors affecting the individual to the group towards the implementation of performance evaluation The psychological factors in case of performance evaluation generally reflects the role or the performance of the managers in the organization and it decreases or reduces the conflict that may arise in the organization, it results in the increase in empowerment, participation and explanation on the basis of which the performance of the organization or the performance of the members of the organization is generally measured on the basis of the target or the goal that has been established and the achievement of the target acts as a source or the factor of motivation or encouragement, fairness and trust also acts as a factor for the performance evaluation of the organization which explains that the establishment of the target and the budget is required to be fair and adequate and it is required to be measured effectively and efficiently for achieving the consistency and objectivity, The turbulence which acts as a factor includes the changes that is adopted in the fast and the competitive environment, the affect and the impact on legislation, and the requirement for the innovation in the fast moving industry. The performance evaluation is considered as the successful if it considers the important aspect for the measurement and evaluation of the performance (Kieso, Weygandt and Warfield, 2007).  Parameters for performance evaluation The main aspect or the parameters for the strategic alignment of the performance evaluation of the organization is guided or assisted by measurement driven aspect, assessment driven aspect, outcome driven aspect and the solution driven aspect. Therefore the above factors for the implementation of the performance evaluation affects both financial and the non financial perspective of the organization and the performance evaluation in relation to the performance budgeting will assist the manager in setting of the budget towards the achievement of the target and it will align along with the overall strategy of the organization. Question 4 Importance of Segmental Reporting Segmental reporting is considered as the important aspect in the area of financial reporting by the standard setter, preparers, auditors and the various users of the financial statements of the multinational companies in order to facilitate the users in order to understand the previous performance and activity of the different sectors of the business, assessing and evaluating the risk and return of the business and providing judgment about the entity as a whole. Steps of segmental reporting The main steps that is required to be followed in case of segment reporting under the IFRS mainly includes determining the chief operating decision maker, the next step includes determination of the operating segments, the third step includes the aggregation of the operating segments, the fourth step or the stage deals with the determination of the reportable segment and the final step includes the segment disclosure of the various information. Advantages of the Segmental Reporting Segment reporting assists the users in understanding the economic dynamics and the corporate business models. It generally allows the users in evaluating the risk of the business. Segment reporting has been classified as internal and the external segment reporting. Segment reporting reflects the operation of the business. It improves the capability of the users in predicting the future performance of the company and also highlights the important factor and the related risk of the company. Reason for considering Segmental Reporting as controversial Segment reporting in case of financial reporting is considered as controversial since apart from the various importance of segment reporting it also has disadvantages or limitations which can be explained as it is very difficult in ascertaining the segment asset of the company. The utilization of the asset is required to be disclosed in the balance sheet or in the foot notes for providing a fair and clear view of disclosure which is not disclosed in case of the segment reporting; the information that is disclosed by the segment reporting does not always fulfil the requirements of the strategic information of the organization. Segment reporting cannot allocate the common cost proportionately since sometimes it allocates the cost on the basis that is not desirable and justified, the basis of segmentation in case of segmental reporting is not properly and adequately defined and the diversification may exist in case or in the form of different product lines, industry and different geographical areas. The information that is disclosed is not in accordance with the GAAP principle and the internal information is disclosed rather than disclosing the information for the external users. Segment reporting is very difficult to standardize because the operating segment for different company is different. Recent developments adopted by IFRS The recent developments that has been adopted by IFRS is standard has been established for measuring and evaluating the financial performance of the various segments of the organization or the enterprise. Entities have been developed in order to reconcile the financial statement of the company in accordance with the consolidated financial statement of the enterprise. The main step that has been adopted by the IFRS is identifying the various steps of the segment reporting and then identifying the various reportable segments. Identifying the various operating segments on the parameter of internal reporting that is regularly reviewed and evaluated by the auditors, decision makers on a regular basis for allocating the resources to the segments and then assessing the purpose or the objectives of the segments. IFRS is required to disclose the information that is required in the decision making process. And it has focused on providing more important and clear information for preparation of the reconciliation of statement, in case of reconstruction more disclosure is required to be provided. IFRS is required to disclose the information that is mainly used by the CODM in order to evaluate the segment results and the allocation of the resources and IFRS is required to disclose the cash flow information for reconciling the cash flow to the total revenue of the entity and the profit earned or the loss incurred before the tax and the total assets. IFRS is required to disclose the information related to revenue to entity, segment asset of the entity and segment liability of the entity (Taylor, 2000). Question 5 Beyond budgeting is considered as an improvement over the traditional budgeting and it is defined as the process in which it is required for the purpose of planning and controlling. Beyond budgeting can be explained as the process of budgeting that considers the aspects beyond the control and the command of the management model. Criticism of traditional budgeting The concept of traditional budgeting is considered as the time consuming process that is not responsive towards the external changes. Traditional budgeting is mainly based on the past information and the past performance which has negative impact on the aspect of budgeting. One of the example of traditional budgeting is the incremental budgeting where the budgeting is done based on the past information without considering the various areas where the business is under performing or over performing in case of the incremental budgeting. Another example of the traditional budgeting is the performance budgeting where the budgeting is done on the basis of the evaluation of the performance at the end of the financial year which can affect the preparation of budget since the preparation of budget at the end of the year can result in the deficiencies since under traditional budgeting the budget is prepared on the basis of the historical cost and on the basis of the past data and information and traditional budgeting is unfavourable for establishing cost and benefit relationship since the process of traditional budgeting is very complex in nature. Concept of Beyond Budgeting The concept of beyond budgeting have been introduced in order to overcome the deficiencies of the traditional budgeting which explains that beyond budgeting is considered as the most appropriate method of budgeting which includes responsiveness, flexibility and coordination. The concept of beyond budgeting has been introduced in order to abandon the concept of traditional budgeting since the beyond budgeting will focus on both financial as well as on non financial measures. This process of beyond budgeting is required to focus and establish standards or benchmarks and identify its competitors rather than framing or establishing its internal targets. The concept of beyond budgeting has become popular in the recent years among the various multinational companies for example a Scandinavian bank has adopted the concept of beyond budgeting which has facilitated the bank to undergo cultural change from establishing of budgets to setting of targets and the improvement in the performance that has resulted in the cutting down of cost. Beyond budgeting has facilitated each unit to have different and separate profit centre. Therefore beyond budgeting is considered as an important budgeting that will overcome the limitations and the disadvantages of the traditional budgeting (Hope and Fraser, 2003). Principles of beyond budgeting The main or the important principles of beyond budgeting are it focuses on the principle of leadership which explains the focus or the attention on the customer outcomes that formulates and organizes a network of the accountable and responsible team that enables everyone to act and perform accordingly , principles are to be established on the basis of the goals or the objectives for the continuous improvement or development and the reward is required to be shared on the basis of the performance and continuous planning is required to be undertaken and the principle is required to be developed on the basis of the trend and the indicator. The beyond budgeting concept focuses on the maintenance of the governance and the transparency that will increase the value, building of trust and accountability of the teams, setting of the goal and achievement of rewards, coordination, planning and control of the resources. The concept of beyond budgeting is used for the promotion of the firm by strategically focusing on the behaviour of the firm and therefore it is recognized as an important concept in the aspect of budgeting and it provides a greater flexibility as compared to the traditional budgeting and beyond budgeting mainly aims at better forecasting with the limited amount of resources available with them. The concept of beyond budgeting has been adopted by the organizations it has many advantages over the traditional budgeting but the beyond budgeting concept also includes some limitations and criticisms and in order to overcome the limitations it has focused on the techniques such as the activity based budgeting, value based budgeting , zero based budgeting and the rolling budgeting. The US organizations are adopting the concept of beyond budgeting as according to the record as 50% of the senior level managers cannot comply in accordance with the traditional budgeting. Therefore the organizations focused on beyond budgeting for increasing more value and the concept of traditional budgeting is not suitable and preferable in the current environment. The concept of beyond budgeting has facilitated the US organization in improving, forecasting, planning and controlling the various planning and budgeting techniques. The concept of beyond budgeting has been used for focusing on the fixation of the budget targets and decentralizing the performance of the organization (Libbya, and Lindsay, 2010). References Aras, G. and Crowther, D., 2009. Global Perspectives on Corporate Governance and CSR. England: Gower Publishing, Ltd. Cox, D. and Fardon, M., 2008. Management of finance. Worchester: Osborne Books. Hope,J. and Fraser, R., 2003. How Managers Can Break Free From The Annual Performance Trap. Beyond Budgeting, 25(9), pp: 4-6. Kieso, D. E., Weygandt, J. J. and Warfield, T. D., 2007. Intermediate Accounting. New York: John Wiley and Sons. Kirk, J., R., 2009. IFRS: A Quick Reference Guide. UK: Elsevier. Libbya, R. and Lindsay, M.R., 2010. Beyond budgeting or budgeting reconsidered, Management accounting research, 21(1), pp: 54-57. Louche, L. C., Idowu, S. and Filho, W., 2010. Innovative CSR: From Risk Management to Value Creation. UK: Greenleaf Publishing. Shamrock, E., S., 2012. IFRS and US GAAP: A Comprehensive Comparison. New Jersey: John Wiley & Sons. Shapiro, A. 2005. Capital budgeting and investment analysis. New Jersey: Pearson Hall. Taylor, P., 2000. Consolidated financial reporting. London: SAGE. Read More