Set of Accounting Standards - Case Study Example

Accounting Theory Assessment Students Name Institution Supervisors Name Date Justify Australia`s approach to imposing its set of accounting standards on all reporting entities. The companies and organizations in Australia are guided by the Australia Accounting Standard Board (AASB) when computing their financial reports. The European commission once welcomed all the companies to compute and prepare their accounts in relation to the International Accounting standards (IAS) where the regulation would help in eliminating the barriers of trading the securities across borders (Barth, Beaver and Landsman, 2001). Generally, IAS ensures reliability and the transparency of accounting information when preparing financial reports. The European commission worked closely with the European Financial Reporting Advisory Group which is responsible in providing knowledge and expertise in the legal issues of the European Acts in setting of accounting standards (Barth, Landsman, and Lang, 2008). Below are some of the reasons why Australia has imposed accounting standards to all reporting entities: 1. Transparency. While reporting guards against corruption which occurs when information is only available to a few individuals and they use it for personal gains. Australia has imposed accounting standards to all reporting entities (Barth et al., 2001). 2. Reliability. All reporting entities are subject to similar set of accounting standards and this assists investors in decision making if they are confident that the financial reports they use are reliable as they are all guided by the standards (FASB, 2002). 3. Relevance. An organization using accounting standards help them to generate the data that is relevant and reasonable to all people interested in the information. In conclusion Australian accounting standards emphasize on the relevance to discourage misdirection of observers by providing relevant information (FASB, 2002). 4. Comparability. The accounting procedures help the information of different non-governmental organizations to be same and this results to easy comparability of financial entities. Therefore, Australia based this reason when imposing its set of accounting standards. 5. Audiences. The financial reports of different organizations are used by different stakeholders in making their decisions. The works of investors, reporters, and taxpayers highly depend on the accounting standards and hence, Australia imposed their accounting standards to help the audiences in proper decision making (Ruland et al., 2007). 6. Understandability. The accounting information prepared in accordance to the accounting standards become very easy to understand and this is essential since the data is used by different people. Australia`s reports are prepared according to the accounting standards to encourage understandability (Ruland et al., 2007). 7. Bookkeeping guidance. The accounting standards guide the accountants to correctly enter the different entities. The environment in Australia generally changes due to technology and other factors and this leads to emergence of new entries such as internet market sales and this accounting standards help to correctly enter such entries (FASB, 2002). 8. Protecting investors. The accounting standards protect the investors from losing their capital after investing in an organization. The accounts help the investors to make rational decisions which will help him protect his investments (FASB, 2002). In conclusion, AABS are a vital element in ensuring the success of IABS. Through AABS, high quality solutions are made to problems, acquiring resources, understanding differences in operating environments and reaching interested parties (Barth et al., 2008). Outline reasons why people in different countries or from different cultures will have different accounting information demands and expectations. Accounting information can be analyzed either through standardization or harmonization. Standardization is a process by which a given set of rules are imposed on a particular item, process or practice, while harmonization is the process of improving the functions in accounts by setting bounds to their degree of variation (Bradshaw & Miller, 2007). As elaborated below, each country will have different accounting information as shown in the below reasons: 1. The nature of business ownership and financial system in companies in different countries is a reason occurrence of different accounting information demands and expectation (Bradshaw & Miller, 2007). 2. Most countries were colonized by different colonies who used different accounting styles and hence they adopted them to date hence the difference in accounting information. 3. Every country has her own way of taxation which differs from the other countries. This causes a difference in accounting information when the companies` profits are taxed (Bradshaw & Miller, 2007). 4. Most developing countries are prone to inflation risks of different magnitudes and hence, they are required to alter the accounting systems to reduce the inflation and this therefore leads to different information demands and expectations (FASB, 2002). 5. The level of education of accountants in the country also influences the different accounting information demands and expectations. The accounting information of a professional accountant cannot be compared to a person with a certificate in accounting. 6. Age and size of the accounting profession. Civilization in different countries occurred in different years and hence this led to different ages and sizes of the profession in different countries (FASB, 2002). 7. Language barrier. Most countries around the globe have different communities speaking different languages. This causes different understandability in the accounting standards and hence different accounting demands and expectations. 8. Religion. There exists different religions in different countries and this influences the use of different accounting standards by different organizations using different religions. Outline the main agency cost of debt and explain how debt contracts can be designed to reduce those costs. 1. Agency cost of debt can be referred to as a problem resulting from two groups of people in a company such as the management and stockholders. Agency cost of debt may arise when the manager tries to impress the shareholder by investing in very risky investment to yield high returns for them but bondholders put sanctions and restriction on the companies` resources against risky investments to protect them from high risks (Palmrose & Scholz, 2004). The conflict leads to loss of money and this cost is what is called agency cost of debt. When the manager`s interest slightly diverge from those of the shareholders, it is the latter who bear this costs. Therefore, the agent cost will consist of the cost of suboptimal decision and the cost incurred in monitoring the management (Benston, Bromwich, Litan, and Wagenhofer, 2006). An example of the agency cost of debt is when issuing dividends. The managers when computing their calculations may decide to give cash dividends to shareholders and paying very less to debt holders. Paying the interests before dividends is one of the measures to avoid such situation. It is generally considered that the managers are more knowledgeable to information of the business compared to shareholders and debt holders. This is referred to as information asymmetry. This greatly affect the agency cost where the higher the asymmetry, the higher the agency costs (Ruland, Shon, & Zhou , 2007). 2. Covenants are designed to reduce agency cost and they control the agency cost of debt by offering stockholders motives to follow a policy. The management may in some cases agree to get used to certain methods of accounting if they will lead to debt capital cost reducing. Conservative methods of accounting discourage from identifying losses than profits, consistent with the traditional `doctrine of conservation`. The use of conservative methods of accounting ways shows that the debt covenants must cover interests, will always consider to be more restrictive. Binding agreements provide an early warning of risk and hence reduction to the exposure of the risk (Palmrose & Scholz, 2004). For a person to acquire funds or loans at lower interest rates, he or she must borrow using the conservative method of accounting. Therefore it is true to state that adopting a method of conservation will always bring capital at low costs. Adoption of conservative methods also exposes the likelihood of violating debt contracts very soon. The value of the firm would be the value of the firm in addition to the interest tax shield of debt. Each added value of debt leads to the increase in value associated to interest tax shields Benston et al., 2006). A clothing manufacturer has decided to close its factory in a regional Australian town and move its operations offshore to another country where they are going to be able to employ workers at substantially lower cost. Closing the factory will result in the loss of 600 jobs in the town. The social contract theory states that among the rules that govern behavior, morality is consistent in the set of rules that certain individuals would accept, on condition that other individuals accept them as well. In our scenario, the clothing manufacturer will create a conflict with the employees because of exercising his natural rights. Essentially for a person to live in a society, he or she must surrender a small amount of natural rights through social contract (Ruland et al., 2007). Based on our case, the manufacturer acted on his own self-interests and hence led to loss of 600 jobs in the town. The manufacturer will not only be considered as immoral, but will be seen as a fool for breaking the implied social contract since they are working for their self-interests. The manufacturer will also loose the market he had in the town because of abandoning them and his disloyalty to the social contract. The 600 employees in the firm will lose their job as a result of the firm`s decision to relocate to another location. This is disadvantageous for them as they will be left jobless. It will be advantageous for the firm to move since they will employ different workers who will be paid less hence saving on costs. The firm on the other hand will lose market in the country it relocated from because he broke the social contract. The customers will also not be able to access the firm and this is disadvantageous. The clothing manufacturer would have given a 3 month public notice that it would move from its current location. This would have helped because the employees would have made a decision to look for another job before they loosed their current. The manufacturer would have given the employees a decent send-off such as a certain amount of money to cover their loss. To reduce the negative reaction to the decision, the manufacturer could have negotiated with them as to why he is making this move and its advantages so as to encourage understandability. References Barth, M.E., W.H. Beaver and W.R. Landsman. 2001. The Relevance of the Value Relevance Literature for Accounting Standard Setting: Another View. Journal of Accounting and Economics 31: 77-104. Barth, M.E., W.R. Landsman, and M. Lang. 2008. International Accounting Standards and Accounting Quality. Journal of Accounting Research, forthcoming. Benston, G., Bromwich, M., Litan, R., and Wagenhofer, A. 2006. Worldwide Financial Reporting: The development and future of accounting standards. Oxford University Press. Bradshaw, M.T., and G.S. Miller. 2007. Will Harmonizing Accounting Standards Really Harmonize Accounting? Evidence from Non-U.S. Firms Adopting US GAAP. Working paper, Harvard Business School. Financial Accounting Standards Board (FASB). 2002. Principles-based approach to standard setting. http://www.fasb.org/project/principles-based_approach_project.shtml. Palmrose, Z.-V., Scholz, S. 2004. The circumstances and legal consequences of non-GAAP reporting: Evidence from restatements. Contemporary Accounting Research 21: 139-180. Ruland, W., Shon, J., and Zhou, P. 2007. “Effective controls for research in international accounting.” Journal of Accounting and Public Policy, Vol. 26, pp. 96-116. . Read More