Corporate Accounting and Generally Accepted Accounting Principles - Assignment Example

Corporate Accounting: Problem Solving Name Institution Corporate Accounting: Problem Solving Question ONE The awareness and knowledge about generally accepted accounting principles (GAAP) is considered or deemed very essential for business practitioners who aim at issuing stock or participating in mergers and acquisition in the future of their business. This follows the benefits that its knowledge can impact in a business such as assistance with the necessary information for hiring financial services in a frim, which have the potential of impacting ultimate change in the business on the basis of long-term sales and stock valuation potentials (Bradshaw & Sloan, 2002). Arline (2015) defines GAAP as a description of a set of rules, standards and accounting practices that accounting industry employ to prepare their financial statements issued outside the firm that meet the require standards. Similarly, Bradshaw & Sloan (2002) describes GAAP as rules and standards that mandated for creation and advocacy for uniformity, consistency, fairness, honesty, and accuracy whilst preparing financial reports of publicly traded companies. Therefore, since financial reporting is considered a language that communicate the information about financial position or status and results of operation of a firm, GAAP can be understood as the rules or guidelines that determine how the language is written for effectiveness and desired standards. Even though the ambition or rationale for GAAP is to promote transparency and consistency in accounting or financial reporting, it varies with difference in regions; there is no universal GAAP that applies to all the businesses (Doyle et al., 2013). GAAP, developed by the Financial Accounting and Standard Board (FASB), generally affects: the measurement of economic activities; the disclosing of information about an economic activity; preparing and summarising information related to economic activities, and ensuring that economic measurements are conducted and recorded at a regulated intervals. The regulation of GAAP does not enforce its use across all businesses; however, the SEC requires businesses to adopt GAAP whilst making their financial reports. The regulation of economic activities, especially those that issues stock or participate in mergers and acquisition are under the Securities Act and Security Exchange Act, which expect the companies to employ independent auditors to conduct audits annually. However, not all the times do the GAAP standards and rules apply to every firm; some instances present inaccuracy as the impact of GAAP on a firm financial reporting. In such cases, companies can make use of Non-GAAP to display their own accounting information; however, accuracy, legitimacy and consistency should be demonstrated in such cases. However, this idea has been subjected to various critics including inaccuracy caused by incentives of shareholders and corporate management not aligning. Both GAAP and Non-GAAP are sources of information for investors. They are required to consider the effectiveness of figures presented by either or both of the two criteria in where applicable. To identify an locate misleading figures that companies present using their Non-GAAP criterion, investors are advised to view and analyse the figures against those of the GAAP; misleading figures of Non-GAAP diverge from the statements of GAAP. Non-GAAP is mostly sued by the management teams to manipulate consistency and accuracy, especially by backing out losses than gains, to attract investors (Shumsky, 2016; Doyle et al., 2013). Therefore, it is necessary that investors consider the figure projected by the GAAP over those of Non-GAAP for investment help. Question TWO Whilst debate is continuously intensifying about the standards of accounting, the primary objective or goal of accounting practices remain one of the topics that have demonstrated difference in ideologies and perceptions. As one would argue that the primary purpose of accounting is to accumulate and report information concerning financial performance and position of business companies, the goal of the information obtain through such practices has reflected different views amongst business practitioners and researchers. Whilst some people argue that the primary goal of accounting is to address financial information needs of any person with legitimate interest in financial reporting and management orientation of a company, which describes potential investors’ view, others, particularly the shareholders, argue that the goal of accounting is to provide information only to the people financing the business and operation activities. However, the Public Sector Accounting Standards Board (PSASB) of the Australian Accounting Research Foundation (AARF) and Accounting Standards Review Board (ASRB) (n.d.) explain that the goal of accounting or financial reporting in an organisation is to provide resource providers, recipient of goods and services, parties performing a review or oversight functions, and management and governing body with the information necessary for making decisions about their roles in the firm and expected rewards. Therefore, accounting practices in accompany is oriented towards accumulating and reporting financial performance and position information to potential investors, shareholders, auditors and the management for decision making. Another aspect that has been an issue in the field of accounting is the accountability in accounting reporting; companies are manipulating financial reporting that they present to the public or investors. This practices and conduct subjects the accounting activities to accuracy, consistency and legitimacy issues that eventually catch up with and affect the firm. Since there is no universal GAAP to be adopted by all businesses, the idea of Non-GAAP accounting practices has resulted in cases of misleading information being reported in various organisational financial statements. The practices of setting their own standards have demonstrated the development of these standards with in-built biases, including prudence amongst others (Stafievskaya et al., 2015). Eierle & Schultze (2013) argue that managers and governors of firms are always disputing the universal accounting standards to give room for their manipulation practices towards misleading investors about their actual financial performance and position. However, the authors explain further that this practice is due to the unawareness amongst these managements about how these practices imply toward them as one of the users of accounting information. Therefore, even though other would argue in support of developing accounting standards with built-in biases, it is evident that such biases would eventually affect the decision making and other practices within the firm that requires application of unbiased standardised information. On the basis of the above biases issue in developing accounting standards, debate about the much discretion that should be allowed by the international accounting standards board (IASB) in developing standards has intensified. Some people argue that the Conceptual Framework should allow for biases whilst others oppose such proposition. Also, some people support that the Conceptual Framework should be discrete enough to allow for room and biases of future, but not instant, adoption of its requirements, whilst others support that the Framework should emphasise on reliability to ensure that all businesses consider and observe the specifications guiding the reliability of the information communicated by firms; however, Bauer et al. (2014) argue that, even though reliability is a concern, the Framework should for accounting approaches based on the settings of the firm; an implication of biases allowance. Therefore, the difference in ideologies presented by the SEC, FASB America and IASB is one points of argument in the debate concerning the idea to universally adopt the GAAP amongst firms as SEC requires. Non-GAAP and its consequences can be considered the impacts of the difference in specifications of standards by these bodies (Guillaume & Pierre, 2016). Therefore, the future of GAAP still relies on whether these bodies can agree and converge to a common ground of guidance. Question THREE As rules and standards of GAAP have evidently changed, the contemporary GAAP has been subjected to critics, as so is the traditional GAAP. Small firms that employ the traditional specification of GAAP tend to omit certain elements of entries in whilst preparing their financial reports. Such omissions have proved to impact the accuracy and consistency of information that the reports communicate, especially amongst the larger firms. Therefore, the competition in financial standards setting, which features GAAP for the public and private firms, has demonstrated certain instance of faults with the current GAAP with more rules than before, even though it proves to consider the elements of entries that were traditionally omitted. Baker (2016) argues that more rules have introduced in accounting practices by GAAP resulting in reduced innovation. This argument is true considering that, with the current GAAP, manipulation and Non-GAAP consequences have been common amongst many firms, hence the intense debate of opposition of GAAP’s many rules. Therefore, it can be argued that the introduction of more GAAP rules has impacted accounting with various challenges of opposition, fraudulent practices and misleading information, which; considerably; the other bodies governing the practice of accounting prove to address. The future of GAAP lies on if the worldwide convergence of these regulatory bodies to a single set of mandatory global financial reporting standards. As GAAP continues to compete with Non-GAAP and other bodies that enact and enforce accounting standards, it is mostly likely to end, just as Baker argues. Without any assistance towards innovation, GAAP is likely to be abandoned as a result of its increased rules and standards and other standards be adopted to allow flexibility and prudence amongst other. Also, the concept of the need for a local mandatory GAAP, as the SEC requires firms in America to adopt the GAAP, features instances of continued opposition and increased cases of fraudulent and other misleading accounting practices that due to the perceived more complex rules that are difficult to comply with during financial reporting (Buijink, 2014). Similarly, the idea of enforcing mandatory GAAP at an international level is more likely to face even much opposition as well due to the different perceptions and preference that various global companies have the standards and rules of accounting and financial activities. Therefore, the future of GAAP lies on the side of convergence with other standards or it ceases to exist. References Arline, K. (2015). GAAP: standards & rules for accountants, Business News Daily. Retrieved from http://www.businessnewsdaily.com/5486-generally-accepted-accounting-principles-gaap.html Baker, R. (2016). The end of accounting: book review. Retrieved from https://www.linkedin.com/pulse/end-accounting-book-review-ron-baker Bauer, A.M., O’Brien, P.C. & Saeed, U. (2014). Reliability makes accounting relevant: a comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2): 211-217. Bradshaw, M.T. & Sloan, R.G. (2002). GAAP versus the street: an empirical assessment of two alternative definitions of earnings. Journal of Accounting Research, 40(1): 41-66. Buijink, W. (2014). Implications of the history of the corporate form for the evolution of mandatory GAAP (Thesis). Department of Accountancy, University of Tilburg, Netherlands. Doyle, J.T., Jennings, J.N. & Soliman, M.T. (2013). Do managers define non-GAAP earnings to meet or beat analyst forecast? Journal of Accounting and Economics, 56: 40-56. Eierle, B. & Schultze, W. (2013). The role of management as a user of accounting information: implications for standard setting. Accounting and Management Information Systems, 12(2): 155-189. Guillaume, O. & Pierre, D. (2016). The convergence of U.S. GAAP with IFRS: a comparative analysis of principles-based and rules-based accounting standards. Journal of Business Policy & Governance, 3(5): 63-72. Shumsky, T. (2016). What exactly are non-GAAP numbers? Well, that depends, The Wall Street Journal. Retrieved from https://blogs.wsj.com/cfo/2016/07/05/what-exactly-are-non-gaap-numbers-well-that-depends/ Stafievskaya, M.V., Nikolayeva, L.V., Kkreneva, S.G., Shakirova, R.K., Semenova, O.A., Larionova, T.P., & Filyushin, N.V. (2015). Accounting risks in the subject of business system. Review of European Studies, 7(8): 127-136. Read More