Advanced and Intermediate Financial Accounting - Assignment Example

Advanced Financial Accounting Name Institution Course Date Question 1. Abstract Accounting profession is among the important professions in the society. The nature of this profession has undergone several changes to serve the ever changing needs of its stakeholders. Public interest has become a major concern in accounting. Accurate and reliable financial information is needed by various stakeholders such as governments, investors and the public. They used this information for making various decisions. Public interest should be the cornerstone in preparation of this information due to its significant implications to users of this information. The activities of accountants and auditors influences the activities of its stakeholders and at the same time it is influenced by their activities necessitating them to have a mindset of public interest in conducting financial reporting. Several changes have been undertaken over the last decade concerning the nature of financial reporting. This evolution was necessitated by the ever changing needs of users of accounting information. In the present context, capital and business markets have developed with more challenges and greater complexities in business models and sources of uncertainties and risks (Gibson 2012, p. 32). A desire for more relevant, reliable and accurate information by users of the accounting information can be attributed as a reason for this evolution. Disclosure requirements in the way financial reporting is conducted have responded to these changes through provision of more detailed information and disclosures in financial statements. In the wake of these new trends in importance and role of financial statement disclosures, issues and questions have arisen on how accountants and auditors should behave in conducting financial reporting and maintenance of public interest. The notion of public interest in accounting profession have become important especially its relevance in financial reporting. Accounting profession is an integral component of the society. It has a role in the corporate sector and state in general. Moreover, accountants are expected to undertake their duties in serving the public interest. Accounting emerges to serve the gaps that existed in the society and has since influence the society. It is also influenced by the society seen by the way it has evolved in meeting the needs and demands of the society such as provision of accurate and reliable information. Despite its evolution, Azim, Hossain and Rahman (2010, p. 2) contends that to identify, measure and communicate the economic information of a firm are still the key elements in the process of accounting. The focus of accounting has widened to incorporate social implications which are an extension of the profession beyond its technical skills. These social implications include the notion of public interest that accounting practice should deal with in serving its stakeholders. In most societies in the world, there exists a basic assumption that individuals should undertake their businesses in interests of their own. In the process of doing this, interaction with other people is inevitable hence influenced and at the same time be influenced by their activities. Nonetheless, when governments and regulators seek to intervene in pursuit of public interest, other influences on activities of the people are generated (Institute of Chartered Accountants in England and Wales (ICAEW) 2012, p. 04). It is at this point that understanding the meaning of public interest is important in pointing out its relevance to financial reporting in creating financial information useful in decision making. International Federation of Accountants (IFAC) (2012, P. 1) defines the notion of public interest ‘ as the net benefits derived for, and procedural rigor employed on behalf of, all society in relation to any action, decision or policy’. This definition applies to accounting profession and the responsibilities it has to the public. Accounting profession serves a lot of stakeholders that include investors, governments, firms and the general public. It should perform its function to include serving the interest of the public. Kaidonis (2008, p. 2) asserted that it is important for professionals to have and demonstrate elite and systematic knowledge in serving the public. The public may include groups and individuals that share a marketplace of goods and services. In this case, investors, business owners and shareholders fall into this group. In addition, consumers, suppliers, taxpayers, electorates as well as citizens in general are among the groups accountancy profession have a fundamental obligation in acting in the public interest when serving them. This should be done regardless of the proximity of accounting profession is to these groups which is generally what public interest entails. Financial reporting is useful to various stakeholders such as creditors, regulators and investors as they used the information on financial statements in making business and economic decisions. Credible financial information is crucial in realisation of efficiently functioning economy (Gibson 2012, p. 32). Furthermore, it acts as a basis for making decisions pertaining to allocation of resources. It is for these reasons that financial reporting should be conducted in the public interest. In this case, financial reporting has a responsibility of protecting the public interest. It fails to achieve this when standards of accounting and auditing are poor and audit reports and financial statements does not signal any frauds or failures in advance (Basu, Kumar, & Saha 2013, p. 170). Therefore, extensive and better forms of regulations are necessary in improving the quality of financial reporting. Basu, Kumar and Saha (2013, p. 170) argues that when financial reporting is regulated in achievement of social goals, it therefore becomes an argument of public interest involving normative judgement about how a society should allocate its resources. Although this is the case, no criteria for determining what accounting policy maximizes the public interest (Basu, Kumar & Saha 2013, p. 170). In conclusion, it is required that all the professions should act in the public interest. Therefore, accounting profession should act and serve in the interest of public. Financial reporting by companies should be conducted in a transparent manner in keeping public interest. Financial reporting information that is prepared according to accounting standards and is verified by independent auditors serves the public interest through promotion of efficient resource allocation in a society (Mourik, p. 191). In addition, it promotes the economy by enabling efficient functioning of capital markets and other markets. Therefore, acting in the public interest by financial accountants enhances the well being of society. It represents their professional responsibility. References Azim M, Hossain F, & Rahman S 2010, ‘Contemporary Challenges for the Accounting Profession: An Australian Perspective’. AIUB Journal of Business and Economics, vol. 9, no. 2, pp. 1-17. Basu, A. K 2013, Studies in Accounting and Finance: Contemporary Issues and Debates. Pearson Education India, New Delhi. Gibson, C 2012, Financial Reporting and Analysis (13th ed). Cengage Learning, London. Institute of Chartered Accountants in England and Wales 2012, Acting in the public interest: a framework for analysis, accessed 19 September 2014, < http://www.icaew.com/~/media/files/technical/ethics/public-int-rep-web.pdf>. International Federation of Accountants 2012, A DEFINITION OF THE PUBLIC INTEREST, accessed 18 September 2014, http://www.ifac.org/sites/default/files/publications/files/PPP%205%20(2).pdf>. Kaidonis, M 2008, The Accounting Profession: Serving the public interest or capital interest?. Australasian Accounting Business and Finance Journal, vol. 2, no. 4, pp 1-7. Mourik C.V 2013, Financial Accounting, Reporting and Regulation, In C V Mourik & P Walton (eds), The Routledge Companion to Accounting, Reporting and Regulation. Routledge, London, pp. 187-206. Question 2. Abstract Companies are required by law to regularly prepare and presents its financial statements. Accounting information should represent the firm’s events and transactions in a proper way. This is achieved by presenting and accounting all the transactions as per their economic reality and substance. Accounting standards are the guidelines used by firms in preparing its annual statements. It has also become important for companies to disclose the accounting policies they have chosen and adopted in preparation of the company’s financial statements. Reviewing the latest financial statements of a company listed on Australian Stock Exchange reveals its accounting policies. Of particular interest in this essay is Fortescue Metals Group Limited. Accounting standards should be followed by a company in preparation of financial statements. In addition, disclosure of accounting policies used in preparing those financial statements is necessary as they have an effect on the financial position and working results of the firm. Accounting policies are specific accounting bases used and followed by a company in a constant and consistent manner when preparing its financial statements (Mukherjee & Hanif 2003, p. 1.14). Due to different circumstances, different companies adopt different accounting policies. Reviewing the recent financial statements of an Australian Company listed on Australian Stock Exchange (ASX) will reveal the accounting policies it used in preparation of its financial statements. Foretescue Metals Group accounting policies used in preparation of its latest annual financial statements will be reviewed in this essay. Fortescue Metals Group is one of the listed companies in Australian Stock Exchange (Australian Securities Exchange 2014). In essence, accounting standards requires that all the important policies that have been adopted by a company in preparing and presenting its financial statements should be disclosed as they formed an important part of its financial statements. In effect, changes in the accounting policies of any kind and have a material effect should be disclosed in the financial statements (Mukherjee & Hanif 2003, p. 1.14). Additionally, the amount affected by such a change to any item should also be disclosed. A company chooses and adopts the accounting policies that are most appropriate to their circumstances for purposes of conducting preparation of financial statements. Accounting policies involve assumptions, judgements and estimates that have potential impacts on financial statements (Gibson 2012, p. 462). Revenue recognition, methods of amortisation, depletion and depreciation, and conversion of foreign currency items are some of the accounting policies adopted by companies. Furthermore valuation of fixed assets and investments are also among the accounting policies (Ramachandran 2008, p.496). Once a company chooses the accounting policies, they should use them in a consistent manner. This enables users of financial statements to undertake a comparison between the current financial statements with the previous ones (Flynn & Koornhof 2005, p. 10). Fortescue Metals Group (FMG) was formed in 2003 and has grown to become the current fourth largest iron ore producer in the world. It is also among the world’s largest seaborne trading companies. The tenements of Fortescue are located in Western Australia, Pilbara region. Its activities include iron ore mining, processing and transportation of mining deposits. Fortescue Limited is listed in the Australian Stock Exchange (Fortescue Metals Group 2013). FMG consistently adopts and use various accounting policies in preparation of its annual financial statements. The accounting policies that the company adopts are normally disclosed towards the end of its consolidated annual financial statements. Financial statements of FMG are prepared according to Australian Accounting Standards, pronouncements of Australian Accounting Standards Board which include the Corporations Act of 2001. Furthermore, the statements also comply with International Financial Reporting Standards (IFRS) which are issued by the International Accounting Standards Board. There are various accounting policies that a company can adopt in preparing and presenting its financial statements. Studying and reviewing the latest consolidated financial statements of FMG brings insight into what accounting policies the company adopts. Revenue recognition, methods of depreciation and conversion of foreign currency items are among the accounting policies used by FMG in the recent years. Revenue recognition determines the time when revenue is reported and recorded by a company. In this case, revenue is recognised in the period when revenue has been earned and collection of the cash is reasonably assured (Rich, Jones, Heitger, Mowen & Hansen 2011, p. 111). FMG used principle of revenue recognition in its precious financial statements as an accounting policy in measuring the revenue at a fair value. It recognised revenue when amount of revenue is reliably measurable and probability of future economic benefits will flow to the company (Fortescue Metals Group 2013, p. 96). Sale of products in the company is recognised when there is an executed sales agreement which indicates that a customer has been transferred the ownership risks and rewards. Services revenue is recognised in the accounting period that those services were rendered while effective interest rate method is used for the interest income that has accrued. FMG has a lot of assets at its disposal. The company’s property, plant and equipment are stated at historical cost and less any impairment loss or accumulated depreciation where applicable. Expenditure that is directly attributed to assets acquisition is included in the historical cost (Fortescue Metals Group 2013, p. 100). The accounting policy used in depreciating FMG assets is units of production method or straight-line method. Land is not depreciated. Depreciation starts when the asset is in a location and condition capable of operating in a manner that was intended by the FMG management. Gains and losses that arise from disposals of the assets are determined by conducting a comparison of assets sale proceeds with their carrying amount. They are then recognised in profit and loss statement. Fortescue Metals Group adopts United States dollars as the group reporting currency. It is also the parent company functional currency as well as majority of its subsidiaries. Conversion of foreign currencies is done at the exchange rates of the time the transactions of foreign currencies is undertaken. Any gains and losses resulting from settlement of these transactions are recognised in profit and loss statement. In concluding, accounting policies used by a company in preparing its annual financial statements should be disclosed in the financial statements. The accounting policies that are chosen by a firm should be applied in a constant and consistent manner. Fortescue Metals Group (FMG) is one of the largest Australian Companies listed on Australian Securities Exchange. The company is regularly required by law to provide its annual financial statements by following the set accounting sets. In addition, it should also adopt and disclose accounting policies that is relevant to its circumstances. Revenue recognition, methods of depreciation and conversion of foreign currency are the three accounting policies adopted by FMG and discussed in this essay. References Australian Securities Exchange 2014, The Official List (Listed Companies), accessed 17 September 2014> http://www.asx.com.au/asx/research/listedCompanies.do?coName=F http://www.fmgl.com.au/Investors_and_Media/Reports/Annual_Reports http://www.aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf Read More