Financial Accounting Policy and Practice - Example

FINANCIAL ACCOUNTING POLICY AND PRACTICE Name: Course: Professor’s Name University Name City, State Date due Introduction The accounting activities has changes, is changing and will likely be changing in future [Nap06]. Continuous research has over the years been conducted on by the financial accounting standards board staff, the IAS setting board and the foreign national to ensure that the standards provided by the study are credible, reliable and comparable by all users around the world. For this reason, Irvine (2008, p. 127) argues that the emerging economies need to adopt the IFRS standards and western accounting technologies in order to gain credence in the global capital markets. Given the process that is involved in developing the accounting standards, all possible shortcomings in the standards are eliminated to make them reliable and comparable as provided by the European commission’s statement in 2002. The constituents involved in the European Union drafting of standards provide their submissions on exposure drafts so that they can have their reports unified so as to harmonize the accounting practices around the world [Irv081]. Approaches to accounting The major approaches that are used for standard settings are the principle or concept based approach and the rule based approach. The approaches are adopted with reference to the Financial Accounting Standards Board (FASB) directives as they complement each other to help produce reports that reflect a true and fair value and those that can be readily accepted and adopted for decision making purposes. Rules based accounting standards approach The rule based accounting standards approach ahs over the years been used by the International Accounting Standards Board to set their accounting standards. The rule has however not been adopted by the Financial Accounting Standards Board thus bringing in a gap between the two bodies and reducing the chances of unifying the international financial standards. There is a gap in reporting between the countries that have adopted the FASB standards and those that have adopted the IASB standards. The rule based approach is usually broad and has been adopted since it provides details in reporting. The FASB, IASB and their predecessors have effectively developed new standards in the past that are rule based to help meet the increasing demand by the accounts users and the preparers of financial reports. The major parties that have demanded for rule based standards to be developed and implemented in the accounting standards are the managers and the auditors. The two parties are determinant of performance while at the same time; they are expected to act according to set rules that govern their action. Truthfulness is thus a character that they are expected to portray and breach of any of the set rules is usually accompanied by stiff penalties. It is for this reason that they require clear answers to each and every accounting issue that is brought before them. As (Schipper, (2003) points out, the risks that law suits that are based on breach of accounting rules makes the auditors and managers to demand for a clear answer to each perceivable issue. It is for this reason that the accountants, managers and auditors ask for guidelines from the accounting standards setting bodies to help protect them against criticisms that may arise and lawsuits. With the adoption of the new accounting standards that are rule based helps reduce the instances that managers will use personal judgements to manage their earnings; rather, it allows them to have an authoritative guideline for which they can use to manage the earnings [Sch03]. Weaknesses The rule based standards however, has its weaknesses among them being complexity of usage and the numerous exceptions that are present during the preparation of the financial reports that use the approach. According to FASB, (2002, pp. 2-3) the demand for rule based approaches to accounting standards by the financial reporters and users has driven the standards to becoming complex. Furthermore, the complexity has been driven by the introduction of numerous rule based standards that need to be adopted cocurrently to reduce risk of errors and falseful data reports. The numerous exceptions have also been a challange to the rule based approach. The exceptions made by the FASB have been as a reuslt of the board being forced to have to compromise with the powerful interest groups that influence their activities has making the board not achieve its objectivity optimally [FAS02]. Principles based accounting standards approach The principle base approach is widely used for accounting standard setting. The approach has been adopted by IASB and FASB since the approach is cheaper to adopt, it results to less accounting scandals and the benefits of the approach with reference to the rule based accounting approach are more. The Financial Accounting Standards Committee uses the principle based standards as they emphasize on the economic substance for disclosures and implementation of the accounting guidelines rather than the descriptions made to particular transactions as they are presumed to be subject to the standards. According to George, et al., (2006 p. 171) the principle based standards usually promote the the financial goals and objectives as established by the FASB. It is a usual undertaking that the FASB has set up its conceptual framework that acts as a guideline to the determinants of the standards that are to be set for accounting. The concept based approach is uaually a more consistent application of the Financial Accounting Standards Board conceptual framework. The approach also enhances a better understanding of the framework by the end users of the standards such as the preparers of the financial statements. In their search for a universal accepted approach to standard, the FASB has significantly increased the guidelines to be used for the principle based approach. Among the most important guidelines set for the standards are the true and fair value of the standards and providing recognition of the formats of standards relating to the contents of the standards [Geo06]. Justification for the principle based approach The principle based approach provides more relevant and reliable information that can be used for decision making. Apart from the information provided being reliable and relevant for the users, the approach also provides the information in good time. With relevant and reliable information being provided by the approach, the quality and transparency in accounting and financial reporting is achieved. The quality of decisions made is improved thus the final outcome of the usage of information provided by the approach is profitability on the organizations. The simplification of the approach allows preparation and reporting to be done in good time while at the same time allowing a better understanding of the financial statements. The principle based accounting approach allows for the harmonization of the major accounting bodies around the world. The major accounting standards setting bodies in the world are the Financial Accounting Standards Board (FASB) that is based in the United States and the International Accounting Standards Board (IASB) that was formed by the European Union. Given that the world is increasingly become a global village with a great increase in cross border trade, the international accounting standards need to increase the transparency in preparing and reporting the financial statements to encourage cross border investments and related activities. With the accounting bodies working towards unifying the accounting standards, the principle based approach to accounting standards focuses on issues that relate to the quality of information that is provided during reporting and the simplicity of the standards settings and their adoption to different organizations around the world. The IASB and FASB will provide more benefits and solutions to the current accounting problems around the world. All the participants in the capital market will benefit from the move as the investors will have more investment opportunities around the world, the foreign firms will enjoy reduce financial costs for preparation and presentation of their financial statements and world market will enjoy better market efficiencies thus encouraging growth. The principle based approach also allows for the cultivation of high quality accounting talents. The approach allows for value in accounting and while at the same time makes sure the language used is easy to understand and implement. FASB plays a vital role in enhancing the value of the standards provided by the principle based approach. Shortcomings to the standard setting approaches The current accounting standards that have been developed try to give best reporting systems. However, due to the lack of an agreement between the IASB and the FASB, the reporting systems usually pose some significant consequences to the users. It is most likely that when the reporting is done some individual groups are likely to suffer while other enjoy and benefit greatly from the reports. It is therefore, true to say that there is no standard that has been currently developed under the principle based approach that satisfies all the needs of each individual group and reduces the controversies available during reporting. The current mode of reporting by the principle based approach has excessive documentation procedures that need to be used. In the current market structures, time remains a limited factor, thus very few individuals have the time to read through the whole documentation structure and understand it. According to Evans, (2003) a report prepared for lease usually contains about fifteen different statements and about twenty interpretation. In such a case, the whole document could contain about 800 pages. With such a large form of documentation, there are only a few who would read throug the whole document and none among them would fully understand the details that are given by the document [Eva03]. The complications of the regulations provided by the accounting standards that have been set usually lead to undetected errors. The standards require a lot from the accountants and the auditors and given the fact that they are only human being, they are likely to make errors during preparation of the statements and during the auditing process. In as much as the standards provided by the IASB and the FASB offer simplicity in understanding, they are far from being simple in preparation. For this reason, consistency in the standards provided is not guaranteed. Currently, as provided by the major accounting setting standards bodies, the drivers of the means of standards setting have laid emphasis on particular standards rather than the critical issues that affect the standards. The important issues that affect the professionalism of the accounting practice are sometime not fully adopted in the standard setting practices. Application of the approaches to standard setting in accounting Free market approach The free market approach uses the supply and demand chain to determine the accounting standards that are to be used in such a market. Most world markets usually operate as free markets such that the prices of goods and services are left for control by the demand and supply forces. In such markets the only control is a few government regulations that are placed as measures to control market. There is need for accounting information to be provided to all the players in the free market economy thus the standards that are used to be simple so as the reporting structures can be easily understood by all the key players. The approaches that are used to set the accounting standards need to adhere to the agency theory such that reporting should be done in conformity with the agency relationship that are present with a given economy. The accounting standards set should thus contain details that when used by any organization to prepare their financial statements, the results should reflect a true and fair value of the organization and can be relied upon for decision making purposes. Regulatory approach The theory of the regulations approach is a criticizer of the free market economy. Since the world is increasingly changing and most of the financial related activities are the cross border activities, the theory encourages for regulation to control the cross border investments. The regulatory approach emphasizes that the market cannot control itself thus power is granted to the governing authority to control the financial activities in the world markets. The approach proposes that two forms of regulations be imposed on the markets to ensure that the accounting standards and controls are properly implemented in any given market. These regulation strategies are command and control and the self-regulation strategy. The command and control strategy spells out the activities that should be carried out in any market structure and provides penalties to those who breach the regulations. The self regulation strategy is usually set by the board in the accounting practices that control the accountants to act with diligence and due care. Private or public sector approach There have been two major accounting bodies in the world. Each of the bodies provides regulations according to what they deem best for the accounting practices in their region. It is therefore hard for the different organizations to determine whether to adopt the American based FASB standards or the European based IASB standards for their accounting activities. The public sector usually determines the accounting standards to adopt based on the regulatory authority of the country that they operate. However, the private sector is left to be controlled by individuals thus the accounting standards that they adopt will be what they deem best for their organization. Conclusion In conclusion we can say that the accounting standards bodies have been keen on their toes to ensure that they provide standards that can be relied upon for sound decision making processes. However, there are a few issues that both the FASB and the IASB should consider while preparing new standards for use by the accountants. The major issue is the harmonization of the accounting standards. They should ensure that the provide harmonized standards that offer the same results for thus the preparers of the financial statements can adopt either of the standards and get the same results. The documentation should also be reduced so as to allow the users to read and understand the financial statements provided by the financial preparers. Finally, they should ensure simplicity in the preparation of the financial statements to ensure that the there is no room for errors and reduce the accountants and auditors risk of lawsuits. REFERENCES Nap06: , (Napier, 2006, p. 445), Irv081: , (Irvine, 2008), Sch03: , (Schipper, 2003), FAS02: , (FASB, 2002, pp. 2-3), Geo06: , (George, et al., 2006), Eva03: , (Evans, 2003), Read More