New Trends in Accounting
Discuss about the New Trends in Accounting.
This paper aims at explaining concepts of accounting in relation to theories, measurement of financial accounting, accounting regulation and politics and the standard setting process. It provides a wider scope on how emerging trends and confusing terminologies hindering the disclosure of financial statements can be dealt with.
Accounting is a branch of business dealing with identification, measurement and communication of economic information to allow judgements and decision making by parties concerned with the information communicated through it. It basically communicates financial status of a given entity in relation to assets, liabilities, and loss or profits accrued by the entity.
More often managers, shareholders, investors and financial institutions depend on accounting to gauge performance and predict future liability of an entity. Investors uses financial accounting to compare viability of different companies and recognize a company that best accrue investment in its operations. Supply- chain department too rely on it to derive wise decision for continuous and consistent supply processes.
Therefore, it is important for Accounting as a branch of business to have a reliable and global set standard of operations upon which regardless of culture, area, or country of location investors or any other relevant users can read and comprehend information with ease (Collins, & McKeith, 2010). Accounting is therefore important as it remove uncertainty of future consequences related to financial decisions made.
Information provided by Accounting can be used to gauge the performance of management through protection and management of company’s resources. Stakeholders and shareholders also can use it to understand their level of performance through investment growth (Collins, & McKeith, 2010).
To eliminate wishy-washy situations emerging in accounting sector, accounting theories, principles and standards should be universally used across the world. This can remove confusions and technicalities preventing users from knowing exactly financial and liability status of an entity.
Theories of accounting
Accounting theories are supported by bodies like International Financial Reporting Standards (IFRS), International Accounting Standards (ASB) and American Institute of Certified Public Accountants (AIPAC) to ensure that users are not confused by accounting terms which may be defined on an entity capacity in absence of these theories.
These theories are based on assumptions, measurement rules, principles and constraints for reliability purposes. Theories must be streamlined with the following assumptions;
- Business entity; accounting considers not parties involved in the control, management and performance of a business but on the entity itself ((Collins, & McKeith, 2010). All information provided in accounting are geared towards an entity. It treats a business as an entity with a legal right to operate on its own.
- Continuity; accounting assumes continuity of an entity unless there are termination reason either through sale of an entity or liquidation factors. Thus accounting is a continuous process as an entity continuous to exist.
- Measurement of money; money is considered important in accounting due to its measurability. Other forms which are unmeasurable are not a factor in preparing account ting statements. It uses monetary system of measurement for the sake of a uniform unit of measurement. In US companies are bound to use a Dollar a unit of monetary measurement.
- Money stability; monetary unit of measurement used in accounting is considered stable to avoid fluctuation of information contained. Us Dollar is always preferred due to its stability compared to other denominations (Connolly, 2008).
- Periodicity; while preparing accounting documents, accounts represent statements in period forms. This can be in months, or years. Therefore information prepared will be described by line with the period of evaluation used by accounts.
- Periodicity; this is where statements are prepared under the assumption of accruals.
Other important concepts of accounting worth noting are; double-entry concept, consistent operation (consistency), and general purpose financial statements.
To avoid global confusion created by emerging trends in accounting, the above assumptions should be used globally with no avoidance to ensure that all accounting concepts are familiar. They shape the scope, enhance reliability of information and eliminate frustrations that can hinder investor from investing due to complications fixed by accountants.
Measurement in Accounting
From the definition of accounting, measurement concept is incorporated. Measurement is used to know assets, liabilities and equity in the business as well as recognizing changes that can happen due to business related factors (Connolly, 2008). It enhances identification of net income accrued to the business over a specified period.
Often, measurement helps in estimation of net losses, net income, receivables, and liabilities among relevant components of measurement. It creates a universe situation where users are informed and assured of what to ask accountants in connection to business performance. Any trend in the field that negates measurement ideals are reinforced to tore line thereby elimination likelihood situations arising from wishy-washy ideas.
Principles Underlining Accounting Concept
International Financial Reporting Standards (IFRS) in collaboration with other accounting bodies like AICPA and IASB set standards of doing accounting. These conditions are referred to principles of accounting. These principles include;
- Cost principle; it is demonstrated when transaction happens between different parties. This can be inform form of purchasing or buying a product or a given commodity. To record the transaction in accounts, cost principle is applied. Information of the process if gathered and noted in the books of accounts.
- Revenue recognition; the principle states that revenue is earned before it gets recorded in accounts. In cases of long term projects, revenue recognition follows different methods of revenue collection.
- Gain and loss recognition; it suggest that accountant is required to record a gain after realization and a loss after being identified. This illustrates that records cannot be taken if gains are realized before losses.
- Matching; it illustrates that once an expenditure is realized, it should get recorded immediately to facilitate revenue production (Connolly, 2008).
- Full disclosure; full disclosure principle is a principle with a lot of contradictions and conflict between accountants and users of books of accounts. Accountants currently through IFRS are advised not to disclose all the information to investors unless they portray a positive willingness to invest in the business. A large scope of accounting world is having problems with such contradictions which do not posit as the clause. The debate around this principle creates misunderstanding among the stakeholders of an entity and economic world in general.
Accounting principles are important requirements that accountants should embrace to avoid complains and opaqueness of the accounting details.
Conventions in Accounting.
In situations not principle applicable, conventions are used to define the scope of accounting operations. Inventions are; disclosure convention-it requires that all information are disclosed. Accountant should be honest to reveal real figures in an entity. Conservative, materiality and consistency are also inventions important in accounting.
Positive Accounting Theory.
Positive theory explains what the business has done or is doing. It considers important actual observation on the practices performed by an entity. It fails to consider what is supposed to happen but guides accounting on what happens in the business. By explaining what is happening, users can use such information to solve a relevant scenario.
This theory considers an action which is supposed to be done or ought to be done. It does not indicate what is happening. It shapes accounting on things to be done. It is illustrated by use of a conceptual framework of accounting in line with set accounting standards (Craig, 2011).
Both the two theories are used concurrently by accounts to provide a predictive information to parties interested. However, failure to apply them appropriately hinders possibility of constructing information contained. They are supposedly used to clear confusions in accounting field.
Different bodies work in collaboration to ensure a pool of standards and policies to be followed by accountants globally (Craig, 2011). Financial Accounting Standard Board (FASB) has ensured that principles and concepts of accounting are adhered to and maintained. It interpret emerging trends in accounting in conjunction with Securities and Exchange Commission (SEC).
Accounting Principles Board (APB) has opinioned on CPA requirements by encouraging development and ethical practices. Honesty and integrity are among the values defined by the requirements. However in United States, IFRS has taken over control of accounting from other bodies a practices that increases inconsistency in their practices.
IFRS has weakened the disclosure principle where an entity can disclose material components depending on their will. It promotes different implementations and enforcement in accounting. The emerging inconsistencies are a threat to financial sectors globally due to eradication of a uniform gauge implement by IMFR.
Financial Accounting Standards.
The standards of accounting are determined by obeying the set objectives. The objectives are;
- Provision of useful information to potential investors and other parties interested in making a rational investment and relevant decisions. The information provided should be illustrative with a high sense of reasoning to business activities.
- Provision of information on equity, cash and dividend in the business by demonstrating securities and loans. These information can help investors make decisions.
- Provision of information on economic resources of an entity.
In addition, accounting should be characterized by;
- Value in prediction and feedback
- Faithful representation
- Neutral concept
- Ready to be verifiable
All the above explained concepts can bring harmony in accounting thus remove issues of contradictions among accountants, investors and other users.
Major Issues in the New Trend
The new trend covers on the cash flow at the start and end of the defined accounting period. It brings a concept of the statement of cash flow explaining a change in cash, cash equivalents and amounts during the period of accounting. That is a start period of operation and end period of operation by defining it as a restricted cash or restricted cash equivalent. Another issue is the reconciliation of the cash and cash flow once restricted. This change contradict the usual concept where the restricted funds were not considered appropriate for disclosure principle.
It enhances and promotes consistent as an objective of financial accounting on the restricted funds in an entity (Armstrong, Sappington (2006). It provides a beneficial outcome to users dependable on situations. However, it is challenging to firms used on cash and cash equivalents for reconciliation.
In general, closure principle which ensures that users access information on cash, liabilities and equity is captured. Reconciliation concept of the financial statement is too brought in. Finally, restriction concept of idea is elaborated and given more concentration.
Views of Different Respondents.
The respondents of my selection have points of concern that to an extent tally to the new trend. However, some contradict and differ with a new trend on some specific issues.
The Accounting Principles Committee of Illinois CPA Society agrees and appreciate the new trend proposed to facilitate consistency and benefits to decision makers. Although, they have issues with reconciliation of restricted cash and cash equivalent. They were used to cash and cash equivalents.
They think that forcing a reconciliation on restricted cash and cash equivalent curtail flexibility and efficiency in preparation of financial account (Victor, & Martin, 2008). They propose a separate presentation of restricted cash and cash equivalent and cash and cash equivalent on the statement of cash flow. Their opinion takes it beneficial if different presentation is implemented by accepting a balance in.
However, they accept restricted cash and restricted equivalent to disclose items as portrayed in the financial statement. Their perception on disclosure of gross transfer amount between cash, cash equivalent and amount described in a restricted cash and restricted cash equivalent resulting in a concurrent receipt or a concurrent cash payment to sources from outside is negative (Victor, & Martin , 2008). They believe on disclosure of information to users of financial statements. To their reasoning, they rely on entities acquisition thereby restricted cash and restricted cash equivalent are disclosed at reporting period.
The America Institute of CPAs agrees on the restriction and disclosure of different classification in the cash flow financial statement. Although they expect more clarifications on the transition disclosure (Clarke, 2003). Change in transition disclosure indicates a change in one of the important principles of accounting.
It agrees with the statement of cash flow to change during a period of cash, cash equivalent and amounts to be described as restricted cash and restricted cash equivalent due to its effectives in communication of cash flow and outflows. It posits that it can do away with a request to differentiate unrestricted ash and restricted cash. Thereby eliminating diversity.
However it supports disclosure principle on financial statements and amounts. On the disclosure of gross transfer it differs with the new policy. It states that such disclosure can add complexity in the system of statement of cash flow and is irrelevance to users of financial statement. Furthermore, the disclosure can create a state of confusion on the amount of new sources of cash and those that are not sources of cash.
On the application of retrospective transition, it agrees with the proposal by stating that it has a possibility of effective amendment process. It too accept the acquisition of disclosure but not on the proposed date. This is due to ambiguity of the content of explanation in connection to the date. According to TIC, modification of clarification is appropriate on the preference of change in accounting due to lack of establishment need.
According to a new change, there is need for an establishment or update on the changes made, a behavior that TIC considers of no value. It considers update as a way of making it sufficient for effective change.
TIC critics the new change implantation procedures as being confusing and contradictory. It believes that disclosure of a financial statement on the cash and cash equivalent in connection to nature of change and reason as to why change is happening should appear afterwards.
It then recommend various ideas to be implemented to eliminate confusion and unrealistic. It also proposes a long tern solution to the confusion problem noticed I the new change of principle. Principle change should connote reasons as to why a new principle should be adopted. In the amendment on the new change it propose that explanation why a change should be embraced.
On the period of amendment, TIC believes on a one year transition period through which a private entity can incorporate the proposed disclosure principle. Even though, it can’t last for more than a proposed period, time of issuance too should be centered. This can be best on a fiscal year which is effective for private entities. Tic assumes that relativeness of cost acquired in the implementation process by private entities however, they will only demand for enough time to fix and incorporate the new principle.
It suggest that the issuance of the period of integration to be conducted simultaneously with classification of certain cash receipts and cash flows and statement of cash flows. This is because they all affect classification of the statements. Those companies interfered with by the program will be forced to redo their cash flow statement for a span of two years.
Finally it believes on early adoption of the principles by entities for the benefit of consistency, and comparability of financial statements. The four respondents selected have different of view on the proposed standards. However they concur on slightly important areas. Every respondent has its way of evaluation.
Assumptions behind public interest, private interest and capture theories
Public interest is concerned with regulation of supply of goods and services to the market a process that demands regulation in case there is unequitable resources in the market (Graffikin, 2005). It assumes that fragility of market is in existence hence operates ineffectively and inefficiently if government fails to intervene.
Private interest theory operates upon self-motive of the market conditions. It assumes that regulation of the market situation should not only be done during market failures. It should be a continuous process.
Capture theory assumes that firms are self-motivated due to the resources they have to lobby for favorable market regulations. It posits that firms in the market are relatively few compared to public decreasing costs of organization (Graffikin, 2005).
According to the respondents’ comments, private interest best explains the arguments. It solidly support having regulations in the market regardless of the market situations. This helps to fix challenges experienced by entities and consumers at large.
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