Looking for Accounting Standards - Essay Example

Financial Reporting Name Course Instructor College Date of Submission Contents 1.0 Compliance with Accounting Standards 3 2.0 Looking for Accounting Standards? 3 3.0 Primary Objective of GPFR 3 4.0 Helpful Qualities of Financial Statements 3 5.0 Financial Information Regulation: Free Market Perspective Arguments 4 5.1 Market for ‘Lemons’ Argument 5 5.2 Private Economic Based Incentives Argument 5 5.3 Market for Managers Argument 6 5.4 Market for Corporate Takeovers Argument 6 6.0 Conclusion 6 7.0 References List 7 8.0 Appendix: Assessment criteria 8 1.0 Compliance with Accounting Standards Entities that have to comply with accounting standards are the public entities (PEs) and the non-business entities in the private sector. According to SAC 1, an entity is ‘any officially permitted, managerial, or fiduciary agreement, organizational arrangement or other party (including a person) containing the ability to organize limited resources so as to pull off set objectives’. 2.0 Looking for Accounting Standards? Accounting standards applicable in the Australian company law are developed, provided as well as kept by the Australian Accounting Standards Board (AASB). Other overseas bodies that issue accounting standards include the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). 3.0 Primary Objective of GPFR The principle objective of General Purpose Financial Reporting (GPFR) is to endow users with information that is helpful for crafting plus weighing up decisions concerning the share of scarce resources. The provision of information for answerability reasons is an essential role of the practice of GPFR; mainly as regards public sector entities as well as non-business entities in the private sector (SAC 2). 4.0 Helpful Qualities of Financial Statements To gratify the information requirements of various users, financial statements should have essential qualitative attributes that boost their meaningfulness to such users. However, the accounting framework does not put down conformity with these to anyone's discretion. Financial statements plus reports have to possess particular qualities; the four key attributes are relevance, reliability, understand-ability along with consistency (Victor 2013). Relevance. Given that financial statements are for users to put together economic choices, the information is supposed to be relevant to the desires of the users. This may perhaps entail covering mostly relevant information, or information whose exclusion or misstatement might sway the economic choices of users. Once all substance in a financial statement assist users to appraise past or upcoming actions, the information in the statement is relevant to the users. Reliability. The information has got to be gratis of material error and bias, as well as not deceptive. Therefore, the information must devotedly and constantly provide information regarding the feat and financial situation of an entity, reveal the causal matter of dealings, and carefully symbolize approximations and worries through appropriate revelation. The core drive of the auditing task is to strengthen the reliability of information offered in financial statements. Understand-ability. Though financial statements can be rather complex for the inexperienced to comprehend, the information should be clear to users of the financial statements. This relates to the layout of the statement, the expressions employed in the statement as well as the policies, techniques along with theories used in setting up the statement. Consistency. The information has got to be as good as to the financial information accessible for other accounting times, so that users are able to spot drifts in the performance as well as financial position of the reporting entity. Above and beyond understand-ability, reliability, relevance and consistency, additional qualitative qualities of information comprise completeness, uniformity, prudence, neutrality, materiality, faithful representation plus substance over form. From time to time, there is a trade-off stuck between or amongst qualitative attributes. The financial accountant generally exercises carefulness where any variance may well crop up (Victor 2013). 5.0 Financial Information Regulation: Free Market Perspective Arguments The lawful as well as regulatory setting in which business entities function has evolved quickly in current years. On the other hand, a number of researchers have recommended that accounting rules are not obligatory, for the reason that the marketplace is able to come to a decision regarding what accounting standards to require. Persons who oppose accounting regulation put forward that the yardstick setting procedure is prejudiced in support of the setters. The participation of diverse bodies plus institutions in this course has noteworthy persuasion (Shah 1996, p.30). Other concerns are openly linked to the life and events of the rule setting practice. Baxter (1978, p.34) cautioned of the faults and shortfalls of values. According to the free market perspective, accounting information ought to be treated like other goods. The forces of demand and supply are supposed to be left to function liberally in order to engender a most favourable supply of information regarding a reporting entity. This school of thought is supported by Jensen and Meckling, Smith and Warner, Smith and Watts as well as Watts and Zimmerman (Collins & White 2006, p.73). The argument by some advocates of the ‘free-market” perspective is that in the absence of regulation there will be private incentives to produce accounting information. Some support the Markets opinion as it is well-organized and the markets will offer incentives as well as punishments to make sure that managers do as the market anticipate. Other views are the market for takeovers and the market for ‘lemons’ (Collins & White 2006, p.73, Deegan 2009). 5.1 Market for ‘Lemons’ Argument There are a lot of markets in which buyers make use of some market value to evaluate the worth of potential purchases. Therefore, there is motivation for managers to market pitiable quality information, given that the proceeds for high-quality accumulate largely to the whole group whose assessment is affected rather than to an individual manager. Consequently, there appears to be a drop in the standard quality of information plus the size of the market (Akerlof 1970, p.488). Concerning, accounting information, Akerlof (1970, p.490) suggests that there is no information taken in a similar way as awful information. According to his argument, the market may well craft the judgment that silence means the organisation has dreadful news to release. As a result the managers will be stimulated to release good along with bad news equally. 5.2 Private Economic Based Incentives Argument Even in the absence of regulation, there are private based economic incentives for the organization to produce credible information regarding its business dealings as well as performance to interested parties outside the organization. Failure to do this would lead to an increase in the organization’s operational expenses. In other words, organizations that do not produce information will be penalised by higher cost of capital. This will be propagated by other parties including owners of the entity who are not involved in the day to day running of the organization who assume that managers might be running the business for their individual gain. To attract investors, managers will willingly initiate contractual agreements based on financial information with the shareholders along with lenders of providing optimal information. Although conflicts may arise stuck between external owners and internal management, such may be settled by an audit of the financial information (Collins & White 2006, p.75). 5.3 Market for Managers Argument According to this argument, managers would desire to earn more in the future. However, their command for increased wages will be pegged on their present or past performance outcome from their current employment or in other companies. Therefore, even if regulations were not present, the managers would put in place policies that will get the most value out of their organization. To further enhance their performance, managers will release most advantageous amount of financial information (Deegan 2009). 5.4 Market for Corporate Takeovers Argument This argument states that managers of a given organization will be motivated to maximise the worth of their firm. The reason advanced is that an underperforming firm is likely to be taken over by another organization that is performing better leading to the present management team being replaced. The managers will be pushed to provide high quality information so as to lessen the cost of capital resulting to a higher firm value. A higher firm value will diminish the probability that the firm will be taken over at a low price. An important point to note is that managers are wary of the marginal costs as well as marginal benefits of information (Deegan 2009). 6.0 Conclusion The ultimate argument is that there is that there is an association of managerial cost and benefit. This is because the revelation of information will be in the concern of both managers and shareholders. For that reason, even in there not being regulation, organizations would still be stimulated to reveal not only good news but also will reveal bad news concerning the financial feat along with the financial position of the organization. Revelation of bad news is disturbing, if the management succumbs to these worries, the market may conclude by itself as regards the management’s silence that the organization has extremely awful information to reveal. Moreover, managers may well injure their repute should they fail to reveal the awful information in time. Investors will choose not to put money in business entities whose managers refuse to give information, further, analysts may decide not to keep an eye on these organization’s stock activities. Lastly, economic forces in the modern day markets present inducements for gainful financial reporting to managers even in the nonexistence of a regulatory framework. 7.0 References List Akerlof. 1970. The market for lemons: Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84:488-500. Baxter, W.T. (1978), "Accounting Standards: Boon or Curse", The Emanuel Saxe Distinguished Lectures in Accounting, The Berhard M. Brauch College, The city University of New York, New York, 25-40. D. victor, 2013, The four main Qualitative Characteristics of Financial Statements, viewed 21 April, 2013 Deegan, C 2009, Financial accounting theory, 3rd ed, McGraw-Hill, North Ryde Collins, S and White, G, 2006, A Free-market Perspective for the Prepares and Users of Financial Accounting Information Today,  Journal of Contemporary Issues in Business and Government, 12, (1), pp.63-73. Shah, A, 1996, "Creative Compliance in Financial Reporting", Accounting Organizations and Society, 21 (1), 23-39. Statement of Accounting Concepts (SAC) 1, Definition of the Reporting Entity Statement of Accounting Concepts (SAC) 2, General Purpose Financial Reporting (GPFR) 8.0 Appendix: Assessment criteria This assessment task is criterion-based. A copy of the marking sheet is included for your reference. Student Name…………………………………………….…… Student No…………………………….. Assessment criteria Indicators Marks Marks awarded Question 1 (a) Who has to comply with accounting standards (b) Where to find accounting standards (c) Primary objective of General Purpose Financial Reports (d) Qualities that make financial statements useful As per SAC 1 who has to comply with accounting standards Mention where students have to look into to find the accounting standards As per SAC 2 what is the primary objective of GPFR Students should provide a detail explanation on qualitative characteristics of financial statements 2 1 3 6 Question 2 (a) Explanation on each argument Students should provide a detail explanation on each argument 3x4=12 ( Written presentation) Quality of written presentation, logical flow of discussion and use of correct referencing style Students should present logical arguments and discussion. The essay should be free from grammatical and spelling errors. The essay should have a logical flow with clear linkage between topics. Also it should demonstrate correct application and use of in-text referencing and a reference list. Referencing should be styled in accordance with Kaplan guidelines. 2 TOTAL 26 Read More