Importance of Fair Values on Financial Reporting - Essay Example

Name Tutor Course Date Financial Reports Introduction A general view reveals that accounting standard measures are put in place to consider all accounting practices in economic, political issues and those that cover aspects of social consequences in accounting (Sommer 32). The accounting standards demand that all this issues be consistent with the view of financial reports, if they all work to comply with accounting standards among other generally accepted principles. Accounting concepts and laws are drafted to responsibly establish and enforce these accounting practices that are generally accepted in fulfilling auditing policies. These concepts are drafted to ensure transparency and the relevance of financial reporting and further improve performance of professionals in this field. The main aim of financial reporting is to ensure provision of financial information concerning organization’s financial performance. This information has to be fairly presented to promote decision making for both management and external bodies, such as investors (Deegan 99). Objectivity and neutrality in accounting are often identified to be the ultimate goals and general purpose of financial reporting (IASB, 2009, pp.220). On the contrary, there are several factors involved that makes these desired goals almost impossible to achieve. The main setbacks working against these objectives is perhaps social, economic and political issues that hugely influences accounting standards, in general these influence spills over into day by day accounting, with the personal gain placed on reliability and objectivity. Users of this financial information demands that their needs be silicified and the regulatory board be part of standard setting in ensuring that information is at its best, clearly explained and that it can be relied on. Considering these factors, it is difficult for firms to account professions to fully satisfy the clients as the rules regulating their practices are extremely strict (Curtis, Diamond and 41). On most cases the political, social and economical aspects are obviously the powerful driving force in any given society. The focus therefore has to be directed towards major decisions in the industries. The accounting industry heavily relies on social, political and economical issues in giving decisions within its limits. This profession has many standards and regulatory boards which oversee practices in which entities get to maintain their financial reporting aspects (Sommer 47). A fairly presented report often, serves to send guiding information that is useful to the present management system and further sends a positive signal to the interested investors, lenders among other stakeholders that may need this information for decision making, budgeting and evaluating the organization performance in their capability as main capital providers or controllers (Palea 23). The main users of financial reporting are investors and organization’s top managers. To achieve the required objective, financial reports should pass information of an entity comprehensively, fairly and meet all requirements outlined by recognized accounting standards. Deegan argues that there are few regulations that directly implicate operation of not for profit organizations, more specifically considering in the context of legal arrangements (78). Many of these kinds of organizations tend to follow more of indirect accounting measures for instance, the IRS reporting requirements. Most of these financing agencies identify and follow their own accounting standards situation that prompts actions that go against the required GAAP principles (Palea 127). Since, part of this policies governing accounting under non-profit making organization differ and only based on specific categories while reporting issues of income and expenses has to be allocated. Any organization that does not use these to build their accounting system on this basis in identifying either classes or categories may end up facing severe hurdles in preparing its reports to their funding body (IASB, 2009). Failure of accounting practices to meet these generally accounting standards perhaps can be explained by increased globalization (McGregor 52). A situation that has so far encouraged privatization of accounting practices that once were majorly done by public bodies and made a significant impact on relevancy of the financial information reported. Over the years, public regulation across the globe has made visible intentions by slowly moving away from the public bodies among other government elected agencies towards the private agencies and unaccountable associations. A typical example of this can be indentified to be the International accounting standard Board (IASB) a London based regulatory board; it formulates accounting regulation measures which affects organizations financial reporting specifically on all firms listed on the European stock exchanges. Often these kinds of firms claims to better company accountability and transparency however, itself is involved in secretive practices as it serves to meet demands of its financial sponsors (Palea 69). Evident from their recorded contents, the IASB’s claims that accounting standards are based on identified principles rather than detailed rules. Considering that these identified accounting standards can cover up to 3000 pages and beyond it sound to be a total myth. It turns out that some principles for example concerning honesty and those governing issues of social responsibility in play are equally difficult to put in practice. The truth behind all these perhaps reveals that these accounting rules are mire outcomes of politics and other bargaining within the corporate elites that work to popularize these kinds of private bodies (Previts and Robinson 123). Findings and Discussion Countries such as New Zealand have adopted concepts and philosophy of neutrality in accounting for activities in both public and non-profit sectors in their economy. Under this approach, accounting standards that are developed are established by this body. To them neutrality of the accounting choices is set by preparing of either public or private sector for purposes of financial reporting (McGregor 55). Importance of Fair Values on Financial Reporting Over the years there has been increased use of fair value which is viewed as a measure of objective in all aspects of financial statements. Fair value is applied in measuring assets and liabilities. There has been a growing trend for standard setters among other bodies, understanding that fair value provides the information that is relevant to financial statement users (Palea 117). However, their concern on the use of fair values focus on reliability of these estimated results. Other concerns are directed towards increased unpredictability in financial statements issues that may result from enhanced measures of fair values. The main concerns involved are related to identifying sources that create increased volatility of use by potential investors or if not them, the policy setters work to mitigate it. The widely accepted standard that handles financial statement basing on fair values as the standards get to change within a shorter time compared to the historical cost. This however does not indicate that the applied concept address all aspects fair representation in an open manner as the profession involve may fall short and hence create loop hole. A general view is that the world is an unpredictable and thus doing business entities remain exposed to volatility. This can be reflected in financial reports. In advocating for use of fair values as a basis of measurement in accounting then it will be quite evident that it will be pointed out that the historical cost-based on this context might be less volatile and this may result from events done to mask the underlying economic volatility and not the result of the superior financial reporting (Previts and Robinson 33). Commonly, this is a concern for entities in presenting their financial statements in a manner that the user relies on financial information to assist them in analyzing the economic risk the entity is involved in. More importantly the primary goal of financial reports is to point out to the users’ relevant information which reveals uncertainty and planning on timing future cash flows. Hence, issuing information that concern inherent volatility as it is important in completing these reports. In a case where the financial providers’ price is viewed as the organizational risk then the entity’s cost of capital will tend to increase as the risk increases. A priced risk does not include only systemic risk, but also has a lasting effect on informational risk as well. Volatility Risks are of particular concern for banking supervisors, often the professionals involved are charged with strict measures to guarantee stability and sound decision making. The goals of financial reports as revealed in by IASB on issues that concern preparation and presentation of financial statements (IASB, 2009) is provision of information about financial conditions, performance measures and changes in financial position of a given entity that may deem useful to a wide range of users. This is important for decision purposes; the users tend to use this information for making an analysis to reach decisions. The accounting practitioners being humans attempt to alter this information to best suit their interests and that of the organization (Rodgers 75). Often the accounting standards tend to raise concerns, especially on cases where politicians, civil servants among other influential bodies remains unsettled due to any disclosure more especially if it appears to have had evidence that can threaten to expose while making real of others causes a deeper problem in accounting information. In the view of accounting context no particular information can be viewed to be hard or soft (Palea 44). However, at different times there are particular types of evidence which basically had effect on the social ascription degree of hardness basing on this relatively challenging situation. A contemporary example can be explained in the claim that there are reports that can only be presented to members of the organization and uncovered to the public. Issues of Asset Valuation and accrual Body of literature has considered focusing on profession relationship in highlighting by the role of accountancy and its institutions (Previts & Robinson 67). Initially more focus was placed on conceptual setting in presenting financial report. Introduction of social theory is applied to interpret accounting informational data on different aspects. In our report, we work to identify roles of accountants and accountancy organization in undertaking investigations into wayward companies’ practices. According to this report the neutrality is a qualitative attribute of accounting information and indicates representational accuracy. Of particular concern is focus on the impact achieved by accrual accounting the concept of reporting as done in the public sector. Simpkins, demonstrates essential differences on assumptions that are inbuilt accrual accounting and reporting practices in the private against public sector, he argued that these differences in accounting policies choice has a substance impact on measurement of organizations financial positions (127). While it is important for accounting practitioner to provide insight useful information within the accounting policy choice and under a specified context, there is need to estimate within other settings that has specific outcomes on public division reform initiatives handling issues of accrual-bases practices (Previts and Robinson 49). The power and value of accounting to a large extend resides in the contribution achieved in managing impression perceived or that closely corresponds to what is represented on organization’s financial reports (Sommer, 2010, pp. 74). In this effect the authority vested in this unreservedly communicates the desired message. This is indicated to represent features of corporate reality. In doing this the vested value in interpreting socio-economic certainty is represented a factual statement of its most vital outline. In an event where a highly publicized business collapse may end up unsettling the authority in getting to understand the financial reports neutrality up to the required objectives. It thereby threatens to incur justifiable deficit, which more often takes the prospects that are not possible by managerial means to establish an effectual normative structures (Rodgers 83). Accounting Policy and standards Results from most of organization working according to the GAAP reveal a belief build in both public and private sectors has similar tendencies with respect to their working environments and the informational needs of the users of these reports. The GAAPs often generalized in all this sectors (McGregor, 1999). However, McGregor argues that support of this neutral approach in the required standards has failed to meet a universal and legitimacy of applying these standards in a manner that is predominantly developed within the private sector context, while to the public domain the standards still attracts increased criticism (Previts & Robinson 63). Nevertheless, the GAAP demands creates a context giving essential accounting practices that govern financial reporting for both private and public divisions. Although the benefits of these standards improve capability between reporting on entities that falls within the public- private division appears to be rational (Previts and Robinson 321). There are times that this neutrality may lead to misunderstanding and suboptimal outcomes. More emphasis directed towards public division in making reform on issues of cost, efficiency and value for the money. This makes measurement and reporting of organizational performance sensitive to any possible accounting principle, assumptions and choices made (Curtis, Diamond and Pagach 122). The accrual accounting requirement is often motivated with increasing demand to build a comparison on full cost on the public division supplied services with other suppliers. In examining to whether these objectives may result to adoption of the private segment or the public division has to develop its own practice. Within the accounting structure of GAAP, organizational managers do have a significant flexibility in giving judgment, on accounting choices that can be made when preparing financial reports. It is evident that the influence felt on substance or form of the report they may demand for publication. The management therefore has a role of choosing an isolated accounting policy. Hence, they are able to analyze the available standards and to identify a particular standard that best serves their interests rather than safeguarding or disclosing financial aspects that attempts to expose business risks to its potential investors, financial suppliers among other interested bodies on the public domain (McGregor 51). Theories of accounting establish policies that support choices and presume that individuals or business entities will be able to determine most suitable accounting measurement models, which create sufficient conditions in support of entities to select an applicable accounting measurements method for external reporting (Sommer 49). This allows the organization management to select policies that work to their interest an issue that eliminates fair representation and often the report that financial information carries little business risk exposure an element that most external users are keen to follow, for decision making. A firm that identifying it practices through this form creates a bias report which is misleading to both investors and institution financial suppliers among other business creditors. Conclusion The report addresses reality on accounting neutrality among different divisions and structures across the globe. It is evident, individual entities apply different accounting policies and management choice on which of the policies to be applied has a significant impact on the organizational or an individual entity financial reporting system, when comparing measurement of financial status on performance and the risk factor. We consider reviewing public sector verses the private segment entities. This is particularly done considering valuation of organizational assets basing on either fair value or historical cost valuation. On this it is important the look at the diversity that hinders effective reporting under the two valuation methods. Since the private and public divisions have varied terms of operating markets and profit goals, it is obvious that accounting choices are more likely to differ. Hence, there can not be a neutral practice across these sectors. Works cited Deegan, Craig. Financial Accounting Theory 3 edn. Melbourne: McGraw-Hill Education, 2009 Curtis Norton, Michael Diamond, Donald Pagach. Intermediate accounting: financial reporting and analysis. London: Cengage Learning, 2006. Gary Previts, Tom Robinson. Research in Accounting Regulation, Volume 19. London: Elsevier, 2007. IASB. International financial reporting standards. New York: Kluwer, 2009. McGregor, W. "The pivotal role of accounting concepts in the development of public sector accounting standards." Australian Accounting Review (1999): 9 (1), 3-8. Palea, Vera. IAS/ IFRS: the economic consequences of increased disclosure : the effects of the IAS/ IFRS adoption in the European Union on banks cost of equity. Milan: FrancoAngeli, 2006. Rodgers, Paul. International Accounting Standards: From UK Standards to IAS, an Accelerated Route to Understanding the Key Principles of International Accounting Rules. London: Butterworth-Heinemann, 2007. Simpkins, K. "A public benefit entity eye on revised framework." Chartered Accountants Journal (2006): 85 (6), 20-22. Sommer, Christoph. Separate Accounting or Unitary Apportionment? New York: BoD – Books on Demand, 2010. Read More