Measurement in Accounting - Coursework Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Measurement in Accounting Tutor : xxxxxxxxxxx @2010 Measurement in Accounting Introduction The value of goods is measured in terms of the money. Accounting is a pre historic quantification of processes made up of everyday’s transactions between financial entities hence accounting models which entail such transactions ends up having their counterparts in a true economic world. Therefore accounting dynamics are effectual tools for improving, analyzing, predicting, and depicting the real state of resource distribution in social system. Accounting measurements has special implications on the nature of the social processes, thus it has three basic necessities. First it has to have a monetary scale which is a universal denominator to assess all the activities but the value for each monetary unit changes with its considerable power of purchasing which depends on chronological date of business deal. The second necessity is the distinctive measurement of double entry book keeping. Transactions are measured by applying a monetary unit and recording in the debtor and creditor columns of corresponding accounts and the sum total of both columns should be equal. The last requirement is accountability; this means the social obligation of a steward reporting his economic performance to the equity owner. Thus accounting measurement is not just valuing goods or services, but also confirms a human relationship concerning charges and discharges accountability through performance evaluation of measurements (Haldane, 2004). Accounting measurements and global crisis Accounting measurements greatly contributes to today’s financial crisis and the greatest criticism is seen from the point of view of the methods applied to accounting for financial instruments and the need to fairly value them. For example, in US accountants and financial directors were summoned before boards so as to explain why the earnings had started to deteriorate and the big losses in the re-measurement of the fair value. The United States home loans, house in specification special purpose vehicles began to default due to reducing house prices and as a result a number of financial institutions holding the lowest credit values that had opted these vehicles instead of paper experienced great losses. This clearly indicates that the market for the low quality paper diminished leading to decrease in the fair value of the paper. The effects of subprime crisis spread throughout the world, for instance, European financial institutions had a share of the low quality paper so as to be part of the profitable market. Therefore when the market of the papers went down the Europeans also recorded extensive losses. This led to global financial crisis; the disaster having begun with the well established entities was transferred to the growing nations which depend on them (Choi & Frost, 2002). Currently wide political pressure reinforced by the world of business from European and US congress are forcing both the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to accelerate the timetable to rewrite the provisions of the financial instruments standards. As we have indicated earlier one of the requirements of the accounting measurement is accountability which in the beginning of the accounting period is charged on the debtor side of the balance sheet as the total of assets and discharged o the credit side to show the profit made. The bodies responsible for accounting, for example, the IASB had to sit down and review the off balance sheets. When this was started some positive effects were felt in the market though much attention is needed to change the economic status (Jefferson, 2003). The current worries in the market raises questions concerning the impairments, variations and how to recover assets and variation of liabilities appearing in the financial statements. This is intended to help the accountants to identify issues concerning the current economic environment which are likely to have negative effects in their field of responsibility. Although the accounting statements are meant to keep records and provide them to people, the financial derivatives are held responsible for the international financial down fall of the economy. The endorsement of fair value is reflected on the business so that the outcome of the financial constrains spreads to these financial businesses more widely. Fair price is the measurement standard or the current market price of a community and not really the wishes of the people doing the transaction. In the today’s market, the use of fair value is not applicable as they are many defects that result from it, for example, the inaccuracy of the fair value in the market. The value of the assets and liabilities deviate the steadiness in accounting. It is not easy to evaluate the value of the commodities which keeps on changing their values. Another defect is the negative effects during economic disorder. The use of the fair value as an accounting measure has reduced the capability of the financial institutions to resist danger. In an active market the commodities which are measured by the fair values are lucrative and managers tends to be unrealistically optimistic but once the market shows a weaker tendency, the value of financial assets will be undervalued (Springer International, 2001). The international Accounting Standard, financial institutions should accrue to impairments according to the measurements attributes of the assets or reduces the owner’s equity. The other defect is the unreasonable guide of people’s economic behavior. Misuse of fair value induced the public irrational investment behavior. In financial agencies often change the credit rating of the same bond in order to avoid their responsibilities (International Monetary Fund, 2005). Balance sheets are integrally involved in the greatest economic crisis since globalization has intensified the linkages between economies, financial systems, and industries. For example, In US the Bush’s administration increased the fiscal injection. Due to the government spending more than its revenue, there was a incline of the dollar denominated assets in the world’s financial system. Some nations like china which were running fiscal surplus decided to invest in these assets hence partially obscuring rise in the liquidity of the financial system. However a share of the added assets reached the financial institution’s balance sheet and they decided to use them to increase their lending leading to a wide spread of investments in assets at unsustainable prices. Although the assets were almost evenly spread to various areas, there was a great loss recorded since they devalued. This arouse financial constrains which widely spread due to globalization (Zyla, 2009). The effects of irrationality of the fair value are bounded by the degree of development of country. The higher the degree of development and globalness of accounting standards is, the greater the loss caused by global financial crisis. This is because of the transactions that take place and the many losses incurred. We cannot treat the impact caused by the International Accounting Standards (IAS) to the world to be too negative during the time of financial crisis. The probability of market failure is small and may come and go but the system remains. A business oriented nation like China should be much careful when applying the fair value accounting. The financial regulatory should be put first so as to prevent the global financial risks to prevent devaluing their commodities. Most of the finance institutions set the prices according to the use of the assets or liabilities regardless of the intent or ability to use it. This highly affects the performance of the market because if the use of the assets reduces it means that its value goes down even below the standards hence recording a loss. The three techniques of valuation are: market approach, income approach and cost approach. These are the inputs that should be used to price an asset so as to ensure that its value is constant in the market (International Monetary Fund, 2005). The financial institutions contributes to the financial crisis since the prices they set to their commodities change with time and because they do not alert them when their prices is due to change they are caught unawares hence they make losses. They should be careful on the fair value accounting and avoid the off balance sheets (Zyla, 2009). Conclusion The global financial constrains in the today’s has got a lot of effects especially in the developing countries. This is because they depend on the outside donors to implement their projects. The value of commodity is determined by its market price and the value of the currency is measured in terms of the commodity but this should not be the case since the commodities should have a standardized value which is not affected by any external factor. The International Accounting Standards should make should that the value of commodities is not exaggerated either below or above their average so as to ensure that abnormal losses are not recorded in case the market fails to meet the actual value of the commodity. They should also try as much as possible to avoid the off balance sheet s, these are those that entails unrealistic entries such wrong entry on the either side just to make sure that the statement is balanced. The accountants should also include the replacement cost in their statement so as to cater for the assets in case they are lost. This is because assets are the profit generating means, the derived value will act as returns in future and it is a current valuation without taking into account intended future use. Bibliography Zyla, L. M., 2009, Fair Value Measurements: Practical Guidance and Implementation, John Wiley and Sons, New York. Jefferson P. J., 2003, Global Economics Crisis Resource Center, 2009, Global Economic Crisis: Impact on Accounting, Cengage Learning, London. Springer International, 2001, The International journal of accounting, Volume 35, University of Michigan, Michigan. Haldane, A. G., 2004, Fixing financial crises in the twenty-first century, Routledge, New Jersey. Choi, F.S. & Frost C. A., 2002, International accounting, Prentice Hall, California. International Monetary Fund, 2005, Global Financial Stability Report-market Developments And Issues. International Monetary Fund, Washington DC. Read More