Measurement in Accounting Theory, Measurement Models - Essay Example

? Current Issue in Accounting (Accounting Theory) Task Outline i. Introduction ii. Part A: Measurement in Accounting Theory iii.Measurement models a. Historical cost Advantages of Historical cost Disadvantages b. Net Realizable Value c. Present Value (PV) d. Fair Value (FV) e. Current Cost (Replacement Cost and Reproduction Cost) iv. Part B: Intellec-Morph Design Limited (IMDL) a. Compensation Structure b. Monitoring mechanisms c. Ex Post Characters of the managers v. Conclusion Current Issue in Accounting (Accounting Theory) Introduction Accounting measurement is the quantification of fiscal data in units that are able to highlight the assets in monetary terms. Accounting is considerably a measurement tool since it assesses the value and returns of the company in comparison to the costs. The measurement of fair values (FV) of assets is inclusive of numerous aspects, for example, market risk or credit risk. According to Schroeder, Clark & Cathey (2010) the U.S GAAP standards differ in specificity of the valuation models. Some corporations determine the fair value (FV) of their assets and liabilities as a net amount, and not them in their singularity. The Financial Accounting Standards Board (FASB) emphasizes that is imperative for corporations to associate their measurements on their business strategy approach (Schroeder, Clark & Cathey 2010). Part A: Measurement in Accounting Theory Measurement of financial statements encompasses the inclusion of accounting principles that will establish the true worth of the corporation of item (Schroeder, Clark& Cathey 2010). Some of the regulators of financial institutions argue that measurement of all financial instruments can generate predicaments in assessing the true value of the commodities. As such, measurement in accounting entails a collection of theories that conform to particular items but not a general formula. According to Christian and Musvoto (2011), there is no single approach to measurement theory. They assert that measurement theory in accounting can exist in two forms, which include “Representation Theory of Measurement” and “Classical Theory of Measurement” (Christian & Musvoto 2011). Representational measurement is what accounting standards are utilizing to in valuing the progress and items of an institution. Measurement models a. Historical cost Historical Cost entails recording the financial assets in the market value that was given to acquire it during the purchase period. The value of the asset is recorded inclusive of the liabilities that were considered during the exchange at their market values. The historical cost comprises of determination of the present value of the item after deducting the depreciation amount of the commodity over the years in use. The original value of the asset will be depreciated using two approaches either the “straight line method” or the “reducing balance method” (Walton & Aerts 2006). These depreciation adjustments will depend on the specification of the accounting principles applied by the company. The deductions on the assets of the institutions are made to the prior valuations and not the current values of the assets (Pratt 2011). The assets and liabilities held for trading functions is recorded under the market value method but the long-term financial products, for example, loans are measured under the historical cost approach. Advantages of Historical cost The asset is valued at the initial price and not at the market value thus making it easier to ascertain the useful life of the asset. Initial costs are better at ascertaining the true value of the commodity and an individual can prudently determine the gains from it (Walton & Aerts 2006). In addition, historical cost is easily comprehensive than the alternative measurement models since it entails adjustments to the consideration value of the asset. Subsequently, it is not intricate to calculate the historical cost, unlike other models since most of the costs have been determined. Disadvantages According to Walton & Aerts (2006), it is difficult to establish the credit risks of historical cost since the figures are not based on the prevailing rates but on costs of a prior period. Furthermore, historical cost does not entail the additional costs of installing the new equipment or acquiring the asset. These additional costs are essential in establishing the total value of the commodity. To add to this historical costs are not representative of the prevailing economic conditions (Dean & Clarke 2010). For example, if a customer acquires a loan of a substantial quantity and before his payment, the currency depreciates, the customer will repay the outlay in similar monetary quantity but the value of the money will be less than the one disbursed (Walton & Aerts 2006). b. Net Realizable Value This is the approximate value of the asset after deducting the estimate costs of completion and sale expenses that are necessary. The net realizable value is not the actual value but an estimate that is utilized in determining the measurement of future values of the asset considering it will be in possession of the same firm (Christian & Musvoto 2011). Corporations use this method to measure the feasibility of the project and if it will be sustainable for a definite period. This method considers the years of use of the asset and fluctuations in its value, which can emanate from factors such as salvage value or alteration of the depreciation approach (Musvoto p.27 2011). In addition, factors including disposal value, salvage value, repairing costs affect the net present amount of the asset. c. Present Value (PV) Present value (PV) is a technique that is normally associated to the calculation of future cash flows. The traditional system of PV assumes that it is possible to have a particular interest rate reflecting the expectations of future cash flows and premiums (Dean & Clarke 2010). However, this was not reflective of the contemporary economic environment. The FASB did alter this method to incorporate all the uncertainties of the fiscal environment and formulated the “Expected Cash flow Approach” (Dean & Clarke 2010). This method highlights the uncertainties in timing and determination of potential outcomes of the cash flow. d. Fair Value (FV) This is the amount of an asset or liability, which is consistent with the contemporary market conditions (Dean & Clarke 2010). This is the value that willing parties can agree to and illustrates the assets worth. The fair value is representative of the marketplace worth of the “asset or liability” at the measurement date. If there is no accurate price for the asset at the acquisition date, the FV will be an approximate value of the two individuals. e. Current Cost (Replacement Cost and Reproduction Cost) This is the current acquisition cost or consideration of a commodity that will have a similar capacity as the one owned (Dean & Clarke 2010). However, the current cost can change due to the technological change of the item. These alterations in the condition of the asset initiate costing through “Current Replacement Cost” and “Current Reproduction Cost” (Dean & Clarke 2010). The current replacement cost (CRC) is the consideration that is required to obtain the best available asset and is adjusted for impairment or depreciation. The “current reproduction cost” is the outlay of the asset that is not subjective to technological alteration hence it will be an asset of similar age and condition. Part B: Intellec-Morph Design Limited (IMDL) Intellec-Morph Design Limited (IMDL) is a company that is charting its success in the software business. To advance their prospects in consolidating the market share it is imperative they design methods that will propel their revenues to great heights. One of the main approaches will include improving the remuneration of the managers through compensating them for their contribution to the firm. This is an integral segment of IMDL’s strategy to induce their managers to advance the efficacy of the organization. The compensation package does not encompass the salary but rather a reward for exemplary commitment to the firm’s objective (Sanwal 2009). The employees have the capacity to engage in high productivity tasks and this can be initiated by a promise of benefits, either monetary or non-monetary to the employees. Furthermore, the compensation packages should not merely focus on fulfilling the individual needs of the employee but also the social and physiological needs. This can be through the creation of attractive packages that inspire the workforce. Sanwal (2009) states there are various incentives are that the corporation can create to facilitate the boosting of the input of the workers. They can incorporate benefits, for example, stock options in the benefit packages of employees. The management can decide to allocate some of the corporation’s shares to performing managers and ensure they own a piece of the company. Moreover, the corporation can include insurance and medical compensation to mangers and their families. This will ensure the manager’s families receive medical attendance at the expense of the corporation. This will add a human face to the corporation ambition and especially induce the employees that have families. In addition, bonus packages are a reassuring gesture to the employee’s efforts in promoting the corporations objectives. This will reward the endeavor of the employee and act as an immediate relief of his diligence. a. Compensation Structure Corporations spend significant time designing structures to reward their employees for outstanding efforts to improve performance. It will be imperative to relate this compensation structures to the job specification and the goals they are expected to satisfy. Madhani (2011) affirms the fixed compensation structure does not entail bonus remuneration packages and is not variable on the performance of the workforce. The fixed model is not cognizant of the outstanding efforts that an individual imparts on his/her occupation. However, variable compensation comprises of incentives on the context of performance and can bean initiative of less than a year or more. This variable compensation will establish the job analysis and work content that will guarantee compensation (Madhani 2011). This variable structure will include aspects such as promotions where an employee’s performance can qualify him to acquire a superior position in IMDL. Moreover, the company can specify the compensation allowances according to occupation hence creating diverse rewards for the different departments (Schubert & Barenbaum 2008). In addition to this, the compensation packages should be dissimilar from the prior rewards. Variation of the rewards will create interest among the management employees since it will not be predictable. Evidently, attractive compensation bonuses act as fuels of the workforce in actualizing the intentions of the company. If the Intell Morph Company provides weak incentives, the advancement of the company will reverse the progress of the company (Pratt 2011). In this software corporation, innovation and sales are pivotal to IMDL’s continuity in the market. In addition, this is evidence that compensations not only affect performance but also increase retention of employees and their job satisfaction (Sanwal 2009). The compensation packages will encourage the managers to reconsider leaving the company for promising prospects that will heftily reimburse their efforts. Intell Morph Company human resources segment can create a framework of separately compensating the technical team of the firm by different rewards such as promotions to the supervisor or senior engineer positions. Consequently, the sales team can be offered financial incentives for their relentless endeavor in enhancing Intell Morph’s goals. b. Monitoring mechanisms IMDL can initiate mechanism in the company to observe the progress of the managers to assist in clearly establishing the incentive packages. The strategic management team should set the targets of the company in various departments should fulfill. In addition, the executive should set up an oversight committee that will oversee the efforts of management in realizing the corporation objectives (Madhani 2011). The oversight committee will conduct its observation of the dealings of the managers. The oversight should constantly remind the managers of the targets of the corporation and ensure they are in the appropriate direction. This committee can elevate the targets if the managers attain their levels that were set for them. Moreover, the committee should introduce Performance Related Pay (PRP) that they converge their efforts to the definite targets (Sanwal 2009). This remuneration links the progression to an assessment of individual performance, which will be measured according to the aims set (Schubert& Barenbaum 2008). This will generate a competitive attitude among the management employees, which will enable the attainment of the organizational profit. Consequently, the oversight committee should conduct surprise checks on the managers to determine the authenticity of the efforts of the managers. c. Ex Post Characters of the managers The progress of the IMDL with also depends on the characteristics of the managers that will enable the corporation to survive the economic turbulences of the region. The managers can influence their subordinates to conform to the ambitious endeavors of the managers. Indeed, the mangers should act as servants since the employees respond positively to demonstrations from their superiors. This intervention of the managers can convince the workforce to cooperate with them. The consolidation of their efforts will advance the organizations profits (Pratt 2011). Moreover, punctuality is a character that assists the managers in ensuring the targets of IMDL are met in opportune time. The managers will ensure the production patterns conform to the demands of the clientele. This is a character that managers can have irrespective of the existence of the performance incentives. Finally, diligence and confidence are traits that the managers will encompass even in the absence of the compensation packages since it is their obligation to administer the company’s tasks (Pratt 2011). This will ensure the employees input their skills and techniques in furthering the company’s goals. Conclusion Accounting measurement policies are being challenged that they do not have a definite pattern of determining the true fair value of items. Accounting has several accounting approaches that utilize different formula to establish the worth of an asset. A majority of these measurement methods are not accurately representative of the definite value of the asset. For example, the historical cost approach is not considerate of the current economic conditions, which are imperative in determining the value of a business. Conversely, in IMDL’s case performance incentives for management can fuel the performance of the managers in striving to increase the organization profits. It is imperative to alter the remuneration incentives to enable them to stimulate the managers to administer wholly their capabilities into the organization. List of References Christian, C, & Musvoto, S 2011, 'The Accounting Concept Of Measurement And The Thin Line Between Representational Measurement Theory And The Classical Theory Of Measurement', International Business & Economics Research Journal, 10, 5, pp. 59-68, Business Source Complete, EBSCOhost, viewed 12 May 2012. Dean, G, & Clarke, F 2010, 'Ray Chambers And Ernest Weinwurm - Scholars In Unison On Measurement In Accounting', Accounting Historians Journal, 37, 2, pp. 1-37, Business Source Complete, EBSCOhost, viewed 12 May 2012. Madhani, P 2011, "Realigning Fixed and Variable Pay: Compensation Management", SCMS Journal of Indian Management, vol. 8, no. 1, pp. 5-17. Musvoto, S 2011, 'Implications Of The Homomorphism Definition Of Measurement On Accounting Measurement Theory', International Business & Economics Research Journal, 10, 5, pp. 23-32, Business Source Complete, EBSCOhost, viewed 12 May 2012. Pratt, J 2011, Financial accounting in an economic context. Hoboken, NJ, Wiley. Sanwal, T 2009, Compensation management. Paradigm, 13(1), 115-116. http://search.proquest.com/docview/214400509?accountid=45049 Schroeder, R. G., Clark, M., & Cathey, J. M 2010, Financial accounting theory and analysis: text and cases. Hoboken, N.J., Wiley. Schubert, w. & Barenbaum, l. 2008, "Equity-Based Executive Compensation", Journal of Leadership, Accountability and Ethics, pp. 28-40. Walton, P. J., & Aerts, W 2006, Global financial accounting and reporting: principles and analysis. London, Thomson. Whittington, G 2010, 'Measurement in Financial Reporting', Abacus, 46, 1, pp. 104-110, Business Source C the market value of the asset or liability omplete, EBSCOhost, viewed 12 May 2012. Read More