International Finance - Accounting and Its Branches - Assignment Example

QUESTION ONE Definition of Accounting and it branches Accounting is the process of identifying, measuring, recording and communicating financial information in order to allow users in the process of deciding on whether to invest, withdraw or any other related decisions. It involves summarizing financial transactions and activities and deriving a meaning out of it. This information must be of economic importance to the enterprise for which it is prepared for. It is divided into many branches including: financial accounting, tax accounting, cost accounting, managerial accounting, and auditing (Weil, et al., 2012). Users of Financial Information Information derived from this process are of importance to the following categories of stakeholders; management, present and future potential investors, employees, funders, government and customers in general. For the purpose of this paper, I will concentrate on financial accounting. Financial accounting is a branch of accounting that deal with the collection and processing of accounting data as well as proper reporting of the same to interested stakeholders within or outside the organization of concern (Weil, et al., 2012). Uses of Financial Information Financial information can be used for different reasons depending on the person using it. The following are possible uses; Planning and decision-making. This use is most relevant to managers who will use this information to compare the actual performance to the estimated performance and thereby make necessary adjustments in terms of budgeting and operations to help them achieve the desired results. Present and potential investors are also consumers of this information and may use it to decide whether to invest in the organization or withdraw the investment depending on how the company performs. They may also want to check the risks inherent in the venture the business is going into. Employees on the hand use this information to determine how their employer is performing as this may make them to have faith and trust in it. A poor performance takes away morale from employees since their job stability may be in line. This is because such an organization may reach a level where it may not even be able to pay their remunerations. 6 FINANCIAL ACCOUNTINGS T U D Y T a E X T Creditors too use this information to judge the credit worthiness of their clients as this will determine their ability to pay back or no the amount forwarded to them. Governments use this information to determine how to regulate the operations of the business, which they do through taxation (Weil, et al., 2012). Purposes of Financial Information In general, the purposes of financial accounting may include; i. To provide information to be used in decision making ii. To give an image of the business’ worth in terms of cash and assets (wealth level). iii. To give profit and loss state of the business iv. To provide an account of assets and liabilities of the company. Limitations of Financial Information However, there are a number of limitations associated with financial accounting. By way of listing, they include; inability to provide cause and effect analysis, no techniques for evaluating other alternatives, historical nature of its information and inability to provide details on cost and its control. It does not also provide information on efficiency of the business (Ja Teline, 2010). The International Accounting Standards Board (IASB) It is a non-profit body accounting standard setter based in London founded in the year 2001. It assumed accounting standard from the predecessor, IASC from the same year. Its objectives includes; Developing a single form/set of internationally accepted and enforceable accounting standard. To tailor their operations to be in line with public interest especially when it comes to the quality and general purpose financial statement To see through the adaptation process of those standards To corporate with national accounting standard setters in converging national accounting standards and IFRS. Key Developing Issues in the International Financial Reporting In 2002, EU member states required their listed companies to use IFRS methods by 2005. By 2003, more than 19 countries required compliance to this standard. By 2007, 40 large economies like USA, France and Brazil still preferred local accounting method to IFRS. From then many countries have contemplated adopting the standard considering the rapid globalization of economies or to drop it all together. The proponents of IFRS argue that the continuous opening of world economies may make it important to have a uniform but reliable accounting system recognized everywhere. As capital and information become globalized, it would be rational for all parties to develop one conversance with one universal global standard rather than many different inconsistent methods. However, scholars argue that the adoption ability of this method is likely to be minimal within countries with high relative quality of local government institutions like the GAAP. Other scholars also argue that since IFRS is more associated with Europe, then countries not friendly to Europe will be unlikely to adopt it. Another possible determinant to adoption of this standard is the internal politics, activism or difference in ideologies as well as its inability to help inflationary economies solve their problem like the Zimbabwe. According to the studies done by Karthik Ramanna of Harvard university and Ewa Sletten of MIT Sloan school of Management, the possible reasons that influenced adoption included the factors above as well as the network effect (Ramanna & Sletten, 2009). They reported that there is evidence of some sort of trend in adoption of IFRS. By this, they meant that a country’s decision to implement this recommendation was highly influenced by other countries in its geographical location adopting the same. This is also true if its major business partners have adopted or are planning to adopt IFRS. This simply means that for this standard to be adopted faster and in large scale, there needs to be to be a strategic play with the proponents in a way that network effect will just drive even the opponents to adopting it. Political influences also seem to be a factor not to be underestimated. It is attested by some scholars that countries that are more powerful are less aggressive in adopting IFRS as proposed by the IASB. They probably see this as giving up their role of setting rules in this area to the latter. When powerful countries which also happen to be trading partners of middle income countries become hesitant to fully implement this international standards, their friendly partners also shy away from doing the same (Ramanna & Sletten, 2009). In fact, some scholars argue that countries still use the standards of their colonies and tend to adopt IFRS partially. The same trend is also evidenced among other bigger economies like China, which adopted this standard partially (Nobes, 2011). Other Asian countries are also adopting it but at a slower pace probably because they are still translating it to their national languages. Challenges to Adoption International Financial Reporting standard. In brief, the report on the challenges that has faced implementation of IFRS are the following; Regulatory issues- who will regulate and how will they do this. Cultural issues especially cultural barriers to the methods recommended The cost of compliance. This is a major concern for developing countries worrying about its impact in terms of the expenses they will have to incur to in training the accountants and other related costs. Language barrier- this may force these countries to first translate the whole IFRS to their national languages before implementing. Lastly, as stated above, there is political unwillingness, and this is also passed to other friendly countries (Landsman & Lang, 2008). Pros of Common International Financial Reporting standard However, countries have continued to weigh those factors against the potential benefits achieved from implementing IFRS and observed more benefits than disadvantages. The possible benefits include but not limited to; Ability for investors to compare needed information for their decision making. Foreign investors would need style that they are conversant with and which won’t take them much time to understand. Higher economic growth resulting from foreign investments and the need for local firms to expand into foreign countries. IFRS leads to a better allocation of resources and ability to compare different financial information (Wong, 2004). Reduced cost to International Corporation since they will not have to report under different sets of standards and reduced capital cost. However, the statement by the vice chairperson of IASB can be as true as he believed it but that will be subject to the challenges above being addressed conclusively. Otherwise, going by the current trend of adoption which true to his statement, is enhanced by globalization of trade, many countries will fully adopt IFRS. It is just a matter of time and necessity. QUESTION TWO Accounting for Intangible Assets An asset is anything monetary or non-monetary that can be used as a resource to the business to increase wealth. Intangible asset is a recognizable nonphysical/monetary asset that can be used in the production and or supply of goods and services, hiring to others or for management reasons. They should be identifiable and have control over the future economic benefits of a given business. For the case of an item that does not meet the above criterion, the cost of its development or acquisition is only recognized as an expense at the date of its occurrence (Thornton, 2010). They include; intellectual property, copyrights, license, motion pictures, quotas, customer loyalty, franchise, marketing rights, computer software and applications, patents and logos. In fact, an asset may both be tangible and intangible at the same time. For this case, whichever part appears dominant will influence whether it will be intangible or tangible. Another unique intangible asset is the goodwill, which is because of acquiring or purchasing a business but can also be generated from within. Identification Intangible asset should be identified clearly from the goodwill. This is because, for goodwill resulting from the purchase of a business, the purchaser makes payment in anticipation of future economic benefits. An intangible asset should be different from the goodwill if the former is separable, for example, if its future benefits can be sold or distributed without interfering with the future benefits flow resulting from other assets used to produce the same revenue (Thornton, 2010). Control A business controls an asset if it has the power to harvest the benefit from the asset presently and in future and if it has the ability to lock others from accessing the benefits through legal means. Example is an organization that after putting efforts to develop customer loyalty, expects the customers will continue doing business with them. This may not be absolutely true especially if it was not entrenched in law. In absence of law, this relationship may not be guaranteed. Future Economic Benefits This may include profits or revenues which may result from selling the company products. It may also be in terms of cost saving that occurs solely from the use of the asset by the business. Example is a company that uses such asset in production but realizes reduced expenditure instead of increased profits. Recognition and Initial Measurement of Intangible Assets. An intangible asset will be recognized as one only if the future economic benefits attributed to it, will continue to flow to the acquiring business and also if it’s current cost can be measured with reliable precision. These conditions may add to the ones discussed above. For these reasons, an acquiring business should conduct market research to determine the reliability of this speculated future economic benefit flow that will result from the use of this intangible asset (Young, 2014). Separate acquisition Separately acquired intangible asset can be measured reliably and easily especially if payment was made in cash or any other monetary form. Normally the cost of this asset would consist of its price at purchase time, any import duties if imported and any other related taxes expensed in preparing the asset for use. However, it is notable that any discounts are deductible from the original cost to arrive at the cost. Assets exchanged for shares or other securities of the acquiring business, should be reported at either its fair value or the securities’ fair value. Acquisition as Part of Amalgamation For this case, the above discussion should apply. Financial statement of the acquiring company should assign the identifiable asset and cost on the basis of their fair values. There is a need to be sure that this value can be measured for the purpose of reporting. The normally used price is the present bid price but the most recent bid price of a similar transaction can be used as a basis for price setting if present bid price is not available. If there is no active market for the asset, then the cost would be the one, the business would have paid at the time of acquisition in an arm’s length negotiation between willing and informed buyers (Young, 2014). If the cost of asset acquired through amalgamation can’t be reliably measured, then the asset should not be recognized as a separate intangible although it is still included in the goodwill. Other methods in which an intangible asset can be acquired includes exchange for another asset, or by government grants. Accounting for government grants requires accounting at their acquisition costs and nominal values for non-monetary asset. Internally generated intangible assets This is divided into research phase and development phase. Costs incurred in the research phase are recognized as expenses when incurred and no intangible asset at this stage should be recognized. Intangible assets from the development stage should be recognized if the business has demonstrated ability to use or sell the asset, feasibility of completing for use the asset, ability to value the expenditure used in developing the asset. The cost for such asset include: registration fees, overhead costs incurred in developing the brand, remunerations paid to staff developing it, material expenditure on it and other related materials used to develop and avail the asset. Recognition of an Intangible Asset. All expenditures on the same should be recognized as expense when incurred unless the item is acquired through amalgamation but can’t be recognized as intangible asset. For subsequent expenditures on the asset after purchase, expenditure should be recognized when they occur unless if it is possible the asset may generate future economic benefit more than its original estimate and or when the expenditure is measurable and attributable to the asset. Subsequent expenditure on a recognized asset is an expense if it is required maintain the asset’s standard. Measurement of Intangible assets After initial recognition, accumulated amortization and other impairment losses should be deducted from the cost of the intangible asset. Amortization This should begin at the same date the asset is availed for use. The depreciable value should be assigned through the useful life of the asset for those with finite life. Those with indefinite life are analyzed for impairment annually instead of amortizing. The cost of the asset minus residual value is assigned over its useful period as an expense. The various method of amortization includes: straight line, reducing balance and the unit of production methods. Amortization is taken as expense but may cushion the economic benefits used by the business to produce other assets instead of producing an expense. In such a case, the amortization charge is put in the carrying amount. Residual value This is normally assumed to be zero unless stated otherwise to which the possible reason have to be indicated. This is after the economic life has expired. A value greater than zero would mean the firm wants to dispose it off before expiry of its economic life. This value is estimated using its value at its acquisition date. An intangible asset should be removed from the balance sheet at the expiry of its economic life. And the retiring amount should be the carrying amount at the date of disposal. Disclosure The following should be included in the financial statement for each category of intangible assets i.e. amalgamated, internally generated or any other. Amortization rate used and recognized during that period as well as the useful life Amortization methods Carrying amount Retirements and disposals and other impairment losses in profit and loss statement for a given period The origin of intangible asset QUESTION THREE Different accounting methods may result to different financial reports. This may lead to different information being derived from a financial statement. Example is the difference in the financial outcome report that may be produced by using GAAP and the use of IFRS. The differences include less implementation guide given by IASC than US GAAP method. Recording of pension liabilities and capital costs yield different results under the two methods. In terms of tax code requirements, GAAP requires that companies use historical costs while tax code requires the full disclosure. On the part of depreciation, there are a variety of methods that are used to calculate it. Most common methods are reducing balance and straight line methods. However for this assignment, I will use a straight line method. A common format for reporting depreciation follows this method below: Depreciation will be Cost/valuation as at the beginning of the year xxx Add Purchases during the year xxx Less Valuation as at the end of the year (xxx) Depreciation for the year xxxx Calculation 5000, 000+200,000+100,000+200,000= £5,500,000 400,000-20,000= 380,000 1,000,000+5,000,000+200,000= £ 6,200,000 Assuming a straight line depreciation the total depreciation of the machine only for the first 4 years with no salvage value; =5,200,000/4 =1,300,000 per year The first 2 years will therefore be £ 2,600,000 Third year will be; overhaul cost+ remaining undepreciated amount=1,000,000+2,600,000 = £ 3,600,000 Since we are not told how this overhaul will affect the number of years and rate, we assume the number of years will remain the same =3,600,000/2 = £1,800,000 This will be the amount depreciable on the machine after the third year and same amount on the fourth year. This brings the total depreciated amount to over the original cost at £ 6200000. Bibliography Ja Teline, 2010. What are the limtations of financial accounting. [Online] Available at: http://www.preservearticles.com/20110923140411/What-are-the-limtations-of-financial-accounting.html [Accessed 8th May 2015]. Landsman, W. R. & Lang, M. H., 2008. International accounting standards and accounting quality. Journal of Accounting Research, pp. 467-730. Nobes, C., 2011. International variations in IFRS Adoption and Practice, London: CAETACCA(Lincolns inn Fields). Ramanna, K. & Sletten, E., 2009. Why do countries adopt international financial reporting standards?, London: Harvard University Press. Thornton, G., 2010. International Financial Reporting standards( IFRS). IAS 38 Intangible Assets FACT SHEET, pp. 1-6. Weil, R. L., Schipper, K. & Francis, J., 2012. Financial Accounting: An introduction to methods and uses. C.A: Cengage Learning, Inc. Wong, P., 2004. Challenges and success in Implementing in implementing international standards standards: Achieving convergence to IFRSs and ISAs, New York: IFAC. Young, E., 2014. Intangibles-Goodwill and other. Gguide to financial reporting developments, pp. 2-74. Read More