Accounting Standards Boon or Curse - Coursework Example

Accounting Standards – Boon or Curse? Task A: Summary of Baxter’s views on accounting standards. Initially, accounting was without any aspect of commonality or standardization. Nevertheless, starting 1938, the desire to have a standardized way of accounting for the costs and revenues incurred by institutions arose, promoting the provision of the Statement of Accounting Principles, which were published by the American Institute (Baxter, 1979 n.p.). Although there was no authorization into the principles so raised, a greater desire to have a standardized method and practice of accounting was sparked off, giving rise to various accounting principles that were developed by different accounting institutions to guide the accounting practice. From this point, the accounting institutions embarked on seeking an alternative to different accounting principles they had already developed, by generating alternative procedures, which were superior to the others. This move was sparked by the desire for good accounts for the companies that were growing during this period, and the higher desire for uniformity in accounting procedures (Baxter, 1979 n.p.). This move was emulated by the Institute of Chartered Accountants in England and Wales immediately after the end of World War II, and eventually many other countries followed. Although it did not initially start as a mandatory move, there was a high recommendation for companies to apply the generated standardized accounting procedures, without seeking the consent of such companies. The accounting bodies majorly depended on the loyalty of the members, to comply with the standards, since there was little they could do to enforce these standards to the companies and other bodies that were not willing to adhere to them (Baxter, 1979 n.p.). However, since companies and their auditors could be required to explain any diversion from the standards, and since the governments eventually supported the adherence to the established accounting standards due to taxation purposes, the move has eventually become inevitable. Thus, the gradual rise of standardized accounting procedures and practices as mere guides to accounting has now become firm rules, which are backed by laws and sanctions (Baxter, 1979 n.p.). Thus, in Baxter’s view, accounting standards entail; accountants showing what they are doing, enhancing the uniformity of accounts presentation layout, providing the basis of accounting for some economic phenomena and making essential disclosures (Baxter, 1979 n.p.). Task B: The extent to which Baxter’s views have influenced the development of a conceptual framework for accounting In Baxter’s view, there are four major factors that form the subject matter of accounting standards. First, the accountant must be able to inform others what he/she is doing, to the stakeholders who may not possess the accounting knowledge, through the published reports, which clearly indicates the policies and procedures followed to arrive at the final financial statements (Baxter, 1979 n.p.). Secondly, the accounting standards enhances the standardization and creation of a uniformity in the layout and presentation of accounts, making it possible to compare the account information of one institution to that of the other, while also enabling the evaluation of the accounts for the basis of taxation. With a uniform layout of institutional accounts, it is possible to determine the revenues and the expenditures incurred by the institutions, while understanding the accounting and taxation policies applicable. Thirdly, Baxter presents a view that another subject matter of accounting standards is disclosure (Baxter, 1979 n.p.). This, according to him, entails the revelation into particular details of certain accounting aspects, where the reader of the final results is expected to make their own judgments. One such component that calls for disclosure is depreciation, which is an element that seeks the percentage change in value of an asset over time, in terms of the diminishing asset value. Such disclosures allow the parties interested in the affairs of a company to evaluate its worth in terms of asset base and also its financial muscles, and therefore determine whether it is worthwhile to commit their investment into such institutions (Baxter, 1979 n.p.). Finally, Baxter holds the view that accounting standards helps us to understand how certain economic phenomena can be measured. This is because, certain economic phenomena have various ways of assessing them, which does not translate into similar final results. Thus, accounting standards helps in the development of procedures, through which such economic phenomena, for example stock value can be assessed, and a final financial report generated without any misleading information (Baxter, 1979 n.p.). Baxter’s views have influenced the development of a conceptual framework for accounting to greater extent. This has occurred through the following: Adoption of policy statement in the conceptual accounting framework There are several standards that have been developed to guide the accounting practices and procedures by different accounting bodies. Major accounting bodies, though applying accounting standards that differ in various senses, have adopted the principle of accounting policy statement (Chalmers & Godfrey, 2007 p12). This accounting principle requires that an accountant states clearly all the policies they apply in their accounting duties, and in accounting for various transactions. This is relevant since, despite the essential component of the accounting practice for the final financial reports being applied, the application of policies that differ can give rise to different set of results (Greuning & Koen, 2001 p43). For example, while accounting for stock value, the application of the First in First Out (FIFO) stock evaluation policy would most likely give different profit figures than the application of the Last in First Out (LIFO) stock valuation policy (Lewis & Pendrill, 2004 p56). The difference in the stock value and the value of sales, incomes and profits given by these two stock valuation policies would lead to different tax assessment values for the same business, within the same financial period. Therefore, it becomes very vital for accountants to state the accounting policies applicable in their accounting practices, which will enable the other stakeholders to understand how the values in the final financial reports have been generated, thus eliminating the confusion that could arise (Wood, 2008 p33). Therefore, Baxter’s view regarding the principle of policy statement have eventually been adopted into the conceptual accounting framework, which have been eventually developed by different accounting bodies all over the world, due to its relevance in helping avoid the confusion that could arise where the accounting policies applicable in generation of a given set of financial reports are not clearly stated. Adoption of uniformity of layout and presentation Considering the differences in accounting standards and procedures developed by various accounting bodies in the world, there have been an attempt to strive towards harmonizing the standards, and applying uniform accounting practices and procedures all over the world, or at least, for many countries of the world (Chalmers & Godfrey, 2007 p22). Most notable is the difference that exists between the International Financial Reporting Standards (IFRS) and the generally Acceptable Accounting principles (GAAP). While the IFRS are adopted by over 100 countries in the world, including the European Union, the US has not yet incorporated these standards into its accounting practices, since it applies the GAAP, which are developed by the Financial Accounting Standards Board of the US (Greuning & Koen, 2001 p40). There are several differences between the IFRS and the accounting standards that are issued by FASB, which have always been a course for concern for these countries. This has led to an attempt to harmonize the different accounting standards, and emerge with a set of standards that are procedurally superior, but acceptable to all the countries. Nevertheless, the differences that exist between the set of these standards are such vital, such that the attempt to harmonize them have always backfired. The process of harmonizing these standards has accelerated of late, with a prediction that the whole process will be over by 2016, where the US will finally adopt the IFRS (Lewis & Pendrill, 2004 p50). Therefore, Baxter’s views have significantly influenced the development of a conceptual accounting framework, through the attempt to harmonize various accounting standards, and emerge with a uniformed layout presentation of financial reports. Adoption of the principle of disclosure Baxter’s view that disclosure forms the subject matter of accounting standards have become a reality, with various accounting bodies adopting the principle of disclosure in their accounting standards. The principle of disclosure requires that the accountant discloses all the financial transactions, details, developments and changes during a particular financial period (Wood, 2008 p37). For example, it is required that in preparing the final financial statements, an accountant will disclose the value of either depreciation or appreciation that has occurred on the assets of the company during that financial period. This is vital because, accounting for the assets of a given company is done on the basis of cost. However, there are some assets which depreciate in value over time, for example machineries and buildings, due to tear and wear, while others appreciate in value, for example land (Lewis & Pendrill, 2004 p61). While such depreciation or appreciation in value of such assets is not factored into the financial statements that are prepared by the accountants, the final financial reports would be misleading, as regards the value of the assets that the company holds. Therefore, the disclosure of the gain or value of the assets held by a company is essential, in reflecting the true net-worth of that company (Chalmers & Godfrey, 2007 p16). Therefore, Baxter’s view regarding the importance of disclosure has eventually found its way into the development of a conceptual framework for accounting, through the adoption of the principle of disclosure into the accounting standards that have been developed by various accounting bodies in the world. Adoption of measures of specific economic phenomena The whole business of accounting is to determine the revenue and cost transactions that have marked the financial period of a certain company, with a view of establishing whether the transactions generated either profit or loss for the company. However, there are certain economic phenomena, which prove difficult to measure, for example the value of stock held by a company, since there exists various ways through which the value of stocks can be evaluated (Greuning & Koen, 2001 p45). Through his view that accounting standards tell us how we should measure such economic phenomena, Baxter advocated for the standardization of such measures (Baxter, 1979 n.p.). Eventually, various standards of measuring such value have been developed, with various accounting bodies coming up with stock evaluation methods such as FIFO and LIFO (Lewis & Pendrill, 2004 p55). With such measures in place, it has become possible to estimate the value of stock that is held by an enterprise at the close and opening of a financial period, which helps in determining the value of sales made, the income generated and the consequent profit obtainable. Despite the fact that different accounting bodies advocates for different methods of evaluating the value of stock, the adoption of the measures of specific economic phenomena has made it possible to prepare the final financial statements with a great sense of precision, as opposed to the application of mere estimation in measuring the value of such phenomena (Wood, 2008 p32). Word count Task A: 360 Task B: 1444 Total Word Count: 1804 References Baxter, W. T. (1979). “Accounting Standards – Boon or Curse?” London School of Economics. Chalmers, K., & Godfrey, J. M. (2007). Globalization of accounting standards. Cheltenham: Elgar. Greuning, H. V., & Koen, M. (2001). International accounting standards: a practical guide. Washington, DC, World Bank. 3 Lewis R, and Pendrill D (2004) Advanced Financial Accounting (7th edition). FT Prentice Hall. Wood, F (2008). Business Accounting 2. (11th Edition) FT Prentice Hall. Read More