Advanced Issues in Financial Accounting - Assignment Example

Advanced Issues in Financial Accounting Name Institution Date Question 1 Measurement in an accounting context Measurement in the accounting context refers to the principles, exceptions and assumptions underlying the financial statement. It comprises of recognition of revenue and the way financial statements are affected. The money measurement concept looks forward to transactions being measured in monetary terms. Measurement is the process through which the determination of the monetary amounts where by elements of the financial statements are to carried and recognized in the income statement and balance sheet. This entails the selection of the particular foundation of measurement. According to Robertson (2009), accounting information measurement is not a process that is straight forward; it entails judgment making concerning the value of assets a business owns or liabilities that the business owes. It involves of measurement accurately how much loss or profit has been realized in a given period. Question 2. Alternative Measurement systems that have been put forward: Net realized: An asset’s net realized value is the estimated price of selling in the business ordinary course minus the costs estimated of completion and the costs estimated required to affect the sale. Value in use: An asset’s value in use is the present value of future cash flows estimated and expected to go up from the continuing asset’s use and from its disposal at the elapse of its useful life. Fair Value Fair value is the amount for which a liability or an asset could be exchanged between knowledgeable, parties that are willing in the transaction arm’s length. In the acquisition accounting is the amount at which liability or an asset could be exchanged in a transaction that is arm’s length between willing and informed parties, other than in a liquidation or forced sale. Some suggested terms replacing fair value are fair market value, market equivalent value, and market value (Coombs & Jenkins, 2005). Deprival value: Deprival value is the loss that an entity is expected to suffer if it was deprived of an asset. It is the lower of recoverable amount and replacement cost on the date of measurement, with recoverable amount being the value that is higher in use and net value realizable. Question 3 Current measurement systems currently used in financial accounting in those countries that subscribe to international accounting standards Historical costs In historical cost the asset are recorded at the fair value of the given consideration to get them during the time of their acquisition. The liabilities are also recorded at the fair value of the received consideration in exchange for the incurrence of the obligations during the time they were incurred. The IASB explains that are recorded at the cash equivalent or amount of cash paid or the fair value of the given consideration. On the other hand, it goes on to state that liabilities are to be recorded at the amount of received proceeds in exchange for the specific obligation (Schroeder, Cathey & Clark, 2010). Current costs Current costs are the assets most economic costs or of their equivalent service potential or productive capacity. This includes replacement cost and reproduction cost. Reproduction cost (of an asset): It is the current cost of most economic of replacing an asset existing, with one that is identical. Replacement cost (of an asset): This is the most current cost that is most economic of replacing an existing asset with an asset of service potential or production capacity that is equivalent. Replacement cost is defined by IASB standard as the acquisition cost that is current of a similar asset, used or new, or of an equivalent service potential or productive capacity (IAS 15.13). Question 4. Effect of the use of the current measurement systems Accounting for construction contracts Construction contracts accounting which are long term constitute question as to when revenue must be recognized and how the revenue in the contractor’s book. Owing to the fact the construction contract period is long; work of construction commences in one year and is completed in the next year or after 4-5 year or around there. Consequently question arises how the loss or profit of construction contract by the contractor should be determined. There may be two ways of determining loss or profit: on the completion of the contract or on year-to-year basis based completion percentage. Since many contracts of construction constitute the execution of many acts by a contractor, the contract method completed is not applicable under GAAP. Since the contract initial costing in the bidding phase is founded on the total costs estimated, total actual costs to for competition of a contract will change as the project progresses. As an outcome, it is necessary for management to make its best costs estimate to complete a project for determination of the expected total cost of the project. There is effort required on the management to estimate costs to complete contracts that are in the progress. The frequency by which a contractor is required to provisions for financial statements to its surety of company or bank will determine how frequently these estimates will have to be made. A majority of the contractors are required to report on interim basis. Accounting for leases Recognition The lessor possesses a performance obligation to allow the use of underlying asset in the lease term. At the start of the lease, a lessor would recognise a lease liability that is equal to the present value of the anticipated payment of the lease which is equal to the sum of the present value of the payments of the lease, comprising of initial costs that are direct and incurred by the lessor, discounted by the use of the rate that is charged by the lessor. The lessor can not derecognise the asset underlying. The lease receivable initial measurement at the inception date of the lease would based on the longest lease term possible that is more likely than not to occur determined by use of an expected outcome approach. According to Coombs and Jenkins (2005), residual value and contingent rentals guarantees that the lease provide are constituted in the measurement of the receivable, nevertheless, as opposed to lease accounting, these amounts would only be included if they can reliably measured. A lessor will utilise the forward rates readily available or indices, or if not available, the indices or rates prevailing for contingent rentals that rely on a rate or index. A lessor is not allowed to change its discount rate owing to changes in the term of lease or when the payable amounts under contingent rentals vary, unless the contingent rentals are contingent on reference rates of interest, in which case the lessor is able to revise the discount rate for changes in the reference rates of interest. Initially leases will be measured at cost which is the present value of the payments for the lease inclusive of direct costs incurred by the lease. The lease asset will be subsequently measured at the amortised cost. The recorded expense would be represented as amortised expense as opposed to rent expense. The obligation of the lessor would be measured subsequently at amortised cost by use of effective interest rate method through which payments would be allocated between interest over the term of lease and principal. The outcome is that the interest expense will be higher in the early years of the lease than the prevailing straight line treatment for rent expense. These changes will consequently have an effect on ratios of accounting, which may in turn affect covenants of loan, the credit ratings and more external financial strength measures. Lease accounting changes will have serious impact on the lessor’s businesses since some lessees may opt to buy as opposed to leasing if operating leases are alternatively eliminated (Zambon & Marzo, 2007). Intangible Assets: If an asset that is intangible is acquired in a business combination, the intangible asset cost is its fair value at the date of acquisition. The intangible asset fair value reflects expectations in the market concerning the probability that the economic benefits in the future embodied in the asset will flow to that particular entity. The probability effect is reflected in the intangible asset fair value measurement. Market prices quoted in an active market give the most reliable estimate of the intangible asset fair value. Firms with investment that is significant in intangible assets will face higher levels of information asymmetry with stakeholders from outside as opposed to firms having lower levels of intangible investment. Epstein & Lee (2011) point out that asymmetry of information is detrimental to both the society and the firm. Regulating concerning reporting of assets that are intangible can influence directly the information symmetry level. There are presence microeconomic effects that are negative for firms investing in assets that are intangible via increase information symmetry around the firm. It would be anticipated that the effects would flow eventually through the economy bearing a negative impact on the macroeconomics variables such as productivity and economic growth. Across industry differences, and other technology and business factors, have an influence on the range of benefits firms can capture from their investment in intangible assets. This has resulted into valuation of goodwill, property rights, intellectual property and deciding the wholesome worth of a business entity (Maskell & Baggaley, 2004). Accounting for foreign currency transactions: Transactions of foreign currency are converted at the exchanged rate ruling on the date of transaction. The used rate to convert liabilities and assets of foreign currency depends on whether or not the currency risk is hedged. Liabilities and assets that are unhedged are remeasured at every period-end at the period-end rate of exchange and the resulting difference in conversion is recorded below the margin of operating. A foreign currency transaction is a kind of transaction that is dominated or needs settlement in a foreign currency and includes transaction emanating from when an entity lends or borrows funds when the receivable or payable amount are dominated in a foreign currency; sells or buys goods or services whose price foreign currency denominated; or otherwise disposes or acquires of assets, or settles or incurs liabilities, foreign currency denominated. A transaction in foreign currency shall be recorded, on initial recognition in the functional currency, by application to the foreign currency amount the spot exchange rate between the foreign currency and foreign functional currency at the transaction date. This has led to increase in international trade, growth of multinational and increased activities in different trading regions. It has also enabled exchange of currency across nations (Anthony, 2004). Translation of foreign operations: Translation of foreign currency is very crucial for many banks and companies in the United States since they are involved in transactions of foreign currency and/or foreign operations that will result in financial results that are different. On the foreign operation disposal, the cumulative amount differences of exchanges concerning that to that foreign operation, recognised in other comprehensive income and accumulated in a separate component of entity, will be reclassified from equity to loss or profit. The following are more so accounted for in a foreign operation, recognised in other accumulated in a separate entity component and other compressive income, shall be reclassified from equity to loss or profit (Heidmann, 2008). Agricultural assets: Initial recognition The significance of IAS 41 is to put in place accounting involving activity in agriculture-the biological transformation management of biological assets (animals and living plants) into agriculture produce (product harvested of biological assets of the entity). An agriculture produce or biological asset should be recognised by an entity only if the asset is controlled by the entity as an outcome of previous event; it is possible the economic benefits in future will flow to the entity, and when the cost or fair value cost of the asset can be measured in a way that is reliable (IAS 41.10). Assets of biological nature should be measured on initial recognition and at the reporting dates at the fair value deducting costs estimated to sell, unless fair value is not able to be measured reliably (IAS 41.12). Produce of agricultural type have to be measured at the fair value minus costs estimated to sell at the point of harvest. Since produce that is harvested is a commodity that is marketable, there is absence measurement reliability exception for the produce (IAS 41.13). Initial recognition gain of assets of biological nature at fair value deducting cost of selling, and changes in the fair value minus costs to sell of biological asset during a given period, are reported in net loss or profit (IAS 41.26).The initial recognition gain of a produce of an agricultural type at fair value minus costs to sell should be comprised in the loss or net profit for the period in which it happens (IAS 41.28). All costs that can be traced to biological assets measured at fair value are recognised as expenses when they are incurred as opposed to just costs for purchasing the biological assets (Anthony, 2004). Often entities will get into contracts to the purpose of selling their agricultural produce or biological assets at a date in future. The prices of contract are not necessarily relevant in fair value determination, since fair value reflects the current market in which a willing seller and buyer would enter into transaction. Following this, an agricultural produce or biological asset fair value is not consequently adjusted because the contract existence. In particular cases, an agricultural produce or biological asset contract may be onerous contract. References Schroeder, R.G. & Cathey , M.J. & Clark, M. W. (2010). Financial Accounting Theory and Analysis: Text and Cases. New York City: John Wiley and Sons. Robertson, L. (2009). CIMA Official Learning System Financial Management. London: Butterworth-Heinemann. Anthony, R.N. (2004). Management control systems. New Jersey: McGrawHill/Irwin. Epstein, M.J. & Lee, Y. J (2011). Advances in Management Accounting. Bradford: Emerald Group Publishing. Heidmann, M. (2008). The Role of Management Accounting Systems in Strategic Sense making. North Carolina: DUV. Coombs, H.G. & Jenkins, D.E. (2005). Management accounting: principles and applications. SAGE. Maskell, B.H. & Baggaley, B. (2004). Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press. Zambon, S. & Marzo, G. (2007). Visualizing intangibles: measuring and reporting in the knowledge economy. Ashgate Publishing, L.t.d. Read More