Diverse ideas and assumptions that guide accounting

Discuss about the Inspection Improve Quality Of Internal Control Audit.

We know that accounting has several aspects and faces. Different countries and accountants follows different accounting assumptions, ways, procedures and processes which are almost impossible to summarise and bring to one common ground. It falls within the ambit of several inconsistent prototypes. Some classify it as social sciences which has perhaps no truth describing it. Some others classify it as a science, which has no theoretical reality besides which is giving rise to itself. However, its assumptions, principles and procedures are based on unverifiable qualitative characteristics, which cannot be measured, as it falls amidst past, present and present with some real values and other being made out based on assumptions (Belton, 2017). There is therefore a need for making accounting a much more value added activity rather than a static, redundant reporting which is far from reality.

In 2015, Jones mentioned that there is a wide level of diversity in how the accounting is being perceived and that there is a huge variety in how the accounting assumptions are being made and methodologies are being followed in the accounting discipline. This dilutes the process and make the same very inconsistent as the users get to see customized behaviour. MacNeal, while concluding the thesis, “Truth in accounting” concluded by providing two alternative means for accounting profession as a whole around 76 years ago (Alexander, 2016). One one hand, he mentioned that the accountants in different countries and geographies following diverse accounting culture and practices may almost refuse to revise the existing accounting policies, methods and assumptions being followed. Instead, what they may be doing is redefining the accounting function and its function as a whole and making it more restrictive in the coming days because of the continuous criticism (Bromwich & Scapens, 2016). They may slowly shift from the traditional accounting ways to the idea that accounting should exhibit present facts instead of the risks and opportunities in the business, which will make the accounting process to be more and more redundant, and a non-essential endeavour and finally the users of the financial statements will find it no more useful. On the other hand, the second alternative means which was given in the thesis was accounting off late will be recognised as one of the static and dogmatic activity which has missed the opportunity to be one of most significant functions of the business and of being great public service (Chron, 2017).

The need for accounting to be a value-added activity

Accounting is primarily guided by the conceptual framework, which is embedded with a number of assumptions, policies, principles, qualitative characteristics and other elements, which is a sum of diverse ideas. There are also various recognition techniques, valuation and measurement techniques and disclosure criteria that have evolved over time from various corners and depends on the individual company to take the decision to choose (Choy, 2018). However, off late, with the emergence and rising focus of corporate governance the value and importance of accounting has changed. It is no longer just a reporting and post mortem activity, which shows the final analysis and summary of what has happened but also helps in planning and take the investment decision based on the past results and forecast for the future.

There has been a considerable rise in the disclosure requirements including how the valuation is being done, what is the fair value, on what basis the impairment is done, what are the revenue recognition principles being adopted by the entity, provision is being taken based on what assumption and also the basis for all the calculations where judgements and estimates from the management is involved. Besides all this, the paradigms of accounting and the way in which it was being perceived has changed due to focus on internal controls, the design and methodology of accounting (Dichev, 2017). The old anomalies and shortcomings have been replaced by explicit importance to the public accounting as per the general purpose accounting framework, consideration of the ethical, social and environmental aspects of company’s work as one of the criterion to access the overall company’s effectiveness and whether or not it is contributing to the economic development.

The major anomalies in the past, which forms the pre-condition for the development of new paradigm of accounting, include:

1. Failure to meet the requirements of the end users primarily with respect to reporting information.
2. No correlation in the financial reporting (Farmer, 2018)
3. Significant differences between the book value and the market values of the company
4. Non reporting of intellectual factors in reporting and non-financial information

All these factors have led to scientific revolution in accounting practices and the new paradigm warrants for the social significance of reporting and accounting besides providing the relevant financial information to the stakeholders as per the conceptual framework. It puts more stress on the reporting formats and the methodologies involved. It needs the representation of potential of company’s intellectual system through means of accounting. The new system also takes into consideration effect of economic development through dynamic accounting approaches like deviation from historical cost approach in case of non-current assets and application of the fair valuation techniques (Defond & Lennox, 2017). Furthermore, the inability of the current accounting methodology to incorporate and measure the new objects have caused various accounting experts and scientists to insist on principles of creative accounting. Creative accounting here implies accounting judgements based on logics and sufficient back-ups, extensive use of freedom and creativity in accounting as the current procedures tend to hide the critical information and that can be decisive in terms of investment. However, such creativity should be applied with caution as the loss of formal structure of accounting can result into a number of manipulations and loss of quality of information.

New developments in accounting paradigm

Some of the examples of modern accounting include application of the similar recognition criteria for intellectual assets as applicable for the general assets like

• Entity should have control on the same (Heminway, 2017)
• It is probable that it would result in future economic benefits and the same will flow to the entity
• The cost of the given assets can be measured with reliability.

Similarly, the main reason for gap between the market value and the book value is due to undervaluation of the intellectual assets by the company. This is due to rigidity in accounting procedure, which is being followed, and many fictitious assets are being ignored which possess real value for the company. Therefore, some experts believe that there is a need of the methodological impasse to incorporate the values of self-created intellectual assets in the financial statements (Jefferson, 2017).

Conclusion

From the above analysis and discussion, it can be seen that the current level of reporting is characterised by low relevance and reliability in the absence of many critical information. There is huge level of inconsistency in terms of what the end users require and what is actually being presented. The basic reason behind this is the gap between accounting theory and the inclusion of environmental, social and ethical aspects to it. The same can only be changed and improved by the new developments in accounting paradigm like including the complete representation of the company’s intellection assets and consideration of ethical, social and environmental factor while reporting.

A financial asset may be in the form of cash, equity instrument of another company or a contract to receive a designated amount of cash or another financial asset in exchange of the given asset under favourable conditions. In the given case, the bond was initially being recognised a debt instrument (non-financial asset) and was being measured at cost. Now, since the same is being classified as financial asset, which will be measured at amortised, cost using the effective interest rate method. Amortized cost is primarily initial recognition – principal repayments – uncollectibility or impairment +/- cumulative amortization of the difference between initial recognition and the maturity value (Trieu, 2017).

The measurement of the bonds in the given situation when the company would be treating the same as financial assets at amortised cost has been shown below:

Tenure	6 years
Issue Price	$132,000
Coupon Interest Rate	5.50%
Market interest Rate	6.687%

Date	Opening Balance	Cash flow at contractual interest rate (5.5%)	Closing balance
30-Jun-19	132,000.00	7,260.00	139,260.00
30-Jun-20	139,260.00	7,659.30	146,919.30
30-Jun-21	146,919.30	8,080.56	154,999.86
30-Jun-22	154,999.86	8,524.99	163,524.85
30-Jun-23	163,524.85	8,993.87	172,518.72
30-Jun-24	172,518.72	9,488.53	182,007.25
Now, Present value of 182007 at 6.687%
	= 182007 / (1.06687^6)
	124035.1748

Financial instruments may be defined as the monetary contract between the two or more given parties. It can be created, modified, traded and finally settled. They can be in the form of cash, or interest in an entity in the form of ownership of shares or can also be a contract to receive or deliver a particular amount in cash or bond. It is an instrument which gives rise to the financial asset for one entity and financial liability for the. Trade receivables, bank overdraft, debt, equity and preference shares are some examples of the financial instruments(Linden & Freeman, 2017).

1. Financial Asset may be defined as any asset which may be in form of :
2. Cash
3. Any other entity’s equity instrument

• A contractual right to receive cash or financial asset of another entity or exchange one financial asset for another under favourable conditions

1. A contract that might be settled in company’s own equity instruments in certain given circumstances.

Importance of environmental, social and ethical aspects in reporting

Few examples include cash & cash equivalents, derivatives assets, equity instruments, etc.

1. Financial Asset may be defined as any asset which may be in form of :
2. A contractual obligation that might be settled in cash or another financial asset
3. A contractual right to pay cash or financial asset of another entity or exchange one financial liability for another under favourable conditions

• A contract that might be settled in company’s own equity instruments in certain given circumstances.

Few examples include equity shares, cash, preference shares, etc.

1. A derivative may be defined as the contract, which derives its value from the performance of underlying asset or entity or a group of assets. This underlying can be in the form of asset, or index or interest rate or any other thing in common. A future contract is a type of the derivative as it derives its value from the underlying contract. It is generally settled at a future date(Sithole, Chandler, Abeysekera, & Paas, 2017).

1. Financial assets can be classified in the following categories namely,

1. Financial assets through fair value through profit or loss
2. Available for sales assets

• Held till maturity

1. Loans and receivables.

They are generally valued at fair value at the time of recognition. Transaction costs are being included in the fair value determination. The subsequent recognition or measurement can be done at fair value and the changes in fair value will be through profit and loss account. For those held until maturity and loans and receivables will be done at amortized cost using effective interest method. Finally, the available for sale assets will be measured at fair value through other comprehensive income (Vieira, O’Dwyer, & Schneider, 2017).

1. Yes, in the given question, this is a financial instrument as it is price contract which is being fixed 6 months before and the settlement option is being given to be in cash based on the underlying asset i.e., market price of aluminium.
2. Hedging instrument may be defined as the instrument whose fair value or the cash flows is expected to offset the changes, negative or positive, in the cash flows or fair value of the designated or underlying hedged item. All the derivative contracts may be called as hedging instruments except for some options.

On the other hand, hedged item is the item that is being covered from the risks. In other words, it is the item, which puts the entity into risks due to changes in the cash flows or the fair values. It can be in the form of an asset, a liability, and group of assets or liabilities, non-financial item, investment or a portfolio hedge of interest rates.

References

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd. Retrieved from https://www.routledge.com/Competitive-Strategy-Creating-and-Sustaining-Superior-Performance/Belton/p/book/9781912128808

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Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, 1-35.

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Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1

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Vieira, R., O’Dwyer, B., & Schneider, R. (2017). Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).