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Accounting Best Practices

ACCOUNTING THEORY

  1. The development of accounting standards in the United States of America, United Kingdoms and at the International arena, accounting standards has been developed by various accounting bodies. The development of accounting standards in the United States is made in authorization from the American Institute of certified public accountants.  The institute was commissioned in 1939 by the United States Securities and Exchange Commission to create a committee for accounting procedures.  The committee that was created in 1939 was called financial accounting standards board which is in charge of developing accounting statements and interpreting them.

    In the developing generally accepted principles in United State Authority is exercised as follows:-

AMERICAN Institute of Certified Public Accountant The issue authorities to various bodies in developing accounting standards.  The boards under the institute include financial accounting standards board, accounting principals board, accounting research and bulletins, accounting statements of position This is the most authoritative body in the setting of American Accounting standards
Financial accounting standards board This body is given authority from the institute and security exchange commission In charge of developing accounting statements.

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Emerging issues task force It gets authority from financial accounting standards board in charge of emerging issues like issues of telecommunication
Accounting principles board Get authority from the institute In charge of opinions and principles
Accounting research bulletins Gets authority from the institute in charge of research and reporting

From the table we have seen the most authoritative as the institute .The others are committees under the institute, although the institute works in conjunction with other authorities like the Securities and Exchange Commission.

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The setting of the international accounting standards and the United Kingdoms standards is the duty of International accounting standards board that is based in United Kingdom and the board is working with very many accounting bodies across the globe.  The standards set are called International financial reporting standards. The international accounting standards that have been developed have been adopted by various accounting bodies world wide. The international accounting standards have taken as a pace setter for financial reporting standards for various countries including Japan with the best accounting standards in world.

The responsibility of setting this standard in the United States, United Kingdom and International accounting standards board rests upon the boards appointed by various institutes and bodies.  In the United States, it rests upon the American Institute of Certified Public Accountants.  The International Accounting standards have developed to be accepted all over the world.  Many countries are trying to converge towards the International accounting financial reporting.

The Americas financial accounting standards board is working in conjunction with international accounting standards board in developing a converging document towards international accounting standards.  The differences in the two documents especially in the areas of valuation, taxation and revenue recognition are being ironed out. Read about ig Bath accounting

The historical costs realized method has many advantages and disadvantages, which we shall highlight in this discussion. The historical costs of revenue realized models of financial accounting requires that revenue should be recognized based on the acquisition value not the market value or fair value.  The models assume many factors like inflation changes in price, the time value for money and many other factors.  The method is in use in United States however; the international accounting standards have adapted the fair value method.  The shares and stocks are reported at cost although the price may have changed because of time or inflation.

The advantages of this method include: – that assets are recorded at cost the actual price that was paid. This does not over value the company and the owners get the actual cost.  Stock or inventory is recorded at the price it was acquired; this will make accounting easier especially when arriving at profit   if the prices have changed positively of negatively in the market.  It removes biasness and subjective stock value especially if the prices are fluctuating because of inflation or other factors.

The disadvantages of this historical costs revenue realized does not consider the inflation aspect, while valuing inventory, assets and intangible assets and inflation is very important especially when the business is in the process of liquidating.  The method does not also take the time value for money, if a stock as acquired two years ago will also be reported in the books in the historical cost method, which ignores that the dollar invested yesterday, is not equivalent with a dollar invested today.

The historical costs method can be adjusted using the current purchasing power of the people without necessarily using the fair value method.  In arriving at the current purchasing power of the economy, indices of various purchasing powers of individuals are calculated or provided by the statistical department.  This method is very cumbersome and may require an extra person in implementing this method.

International accounts standards board has commissioned many projects aimed at creating uniformity in financial statements reporting worldwide. The board has appointed many bodies using conceptual framework of 1984, which a constitution is governing the activities of accounting policy making.  The current project that has been commissioned of “towards the international convergence of accounting standards” has been commissioned and given the business accounting council, which has also appointed planning and coordination committee to discuss the accounting convergence, this has brought together securities regulators, accounting standards board of various countries and the American Financial accounting standards board.

The conceptual framework that was developed in 1980 has seen many standards being developed and ensuring many countries have adapted international accounting standards.  The emerging issues in accounting provisions have also been taken care of by the conceptual framework.  The issues like converging into uniform international standards and the fair value theories have been handled using the constitution that was developed.

The Enron saga that show the corrupt of the 5th largest accounting firm in the world has also brought a new emerging issue in the accounting fraternity that show a creation of a new standards. Among the projects that have been undertaken using the constitution or conceptual framework include; emerging issues reporting, converging towards International accounting, introduction of Generally Accepted Accounting Standard software and introduction of forensic accounting principles.

Barth discussed new empirical theory in managerial accounting in 1994. In carrying out the research economists found out a number of problems while trying to come out with empirical managerial accounting.  The control of the accounting department as was proposed by the economists it found no basis because most companies does not have enough resources to employ fulltime accounting staff therefore it will be very difficult to swift the accounting practice to consultancy like in a company.  For example take instances of a company with ten employees; it will be very difficult to make the accounting department independent from the activities of the company.

Research has contributed greatly to the development of accounting standards and new empirical research method proposed although not working as brought new emerging issues like accounting for rebates, discounts for telecommunication companies and electronic  companies like Micro soft, Yahoo, and Google. The empirical theory on managerial accounting  puts emphasis on the independence of the accounting department within an organization by acting like consultants. This would not be possible where the firms are small in size and has one or two employees in accounting department. However , in large corporates, the consutancy theory would work with some costs being high.

Current accounting cost method of financial accounting has brought many contributions to current purchase power adjustments. Current accounting cost method is where prices under historical cost are re-adjusted to the current costs. This is done in order to accommodate changes in inflation and other factors. Before adjusting any accounting information to reflect the purchasing power of the company,  current costs accounting is used.

Current cost accounting relies mostly on the current prevailing prices in the market not necessarily the market fair value in preparing the financial statements.  After the financial statements have been prepared using this current costing method then, the indices for the purchasing power are calculated for purposes of adjusting the accounts. The accounts are adjusted using the current purchasing power that has been subjected to the rates of inflation prevailing in the area that time.

Take an example of Zimbabwe where inflation rate is currently 1,400% an item that was purchased in Zimbabwe January 2006 at 1500   currently will cost 21,000 if the inflation rate is included.  However, the item can be sold in the market at 6,000 therefore, the current costs accounting figure will be 6,000 which will be subjected to the inflation rate of 1400% fair value. The advantage of this method is that the accounts reflect a true and fair view of the prevailing economic conditions.

The international accounting standards board has requested companies listed in the European Stock Market to adapt international accounting standards for purposes of uniformity and the major feature of international financial reporting standards is the fair value reporting.

The concept of fair value is not applicable in the United States and it states that stocks, assets and other costs should be recorded in the fair value and not the historical cost.  In the United States the historical cost method is adapted while in the international arena fair market value is used in recording assets and liabilities.  For example the valuation of the inventory for companies likes Enron World Com and Microsoft that brought controversies in the reporting of assets of the company.

Because the United States they use the historical cost value method and the companies used the fair value market price was questioned even a commission of enquiry was appointed by President George Bush to investigate the consult of chief financial officers.  The case of Enron was audited by Andrews and associates which was a respected firm in the world but the issue of fair value and historical cost method costed the companies their good will and eventually they collapsed.

The concept of capital maintenance within the international accounting standards has been addressed by international accounting standards number 16,40 and 17 relating to property, plants and equipments, investment property and leases.  The capital maintenance concepts require assets to be recorded in the fair market value either through valuation or depreciation/ amortization.  Assets can be valued upwards or downward, the fair valued under international financial reporting standards is normally the market value but not always fair for those building that are owned and occupied by owners.  In changing the accounting standards form the historical cost value to fair value is still under discussion.

Using watts and Zimmerman arguments about empirical management, companies listed in the stock exchanges will wish the prices of common stock in the market to be lower  or to  report lower revenues .This is  because if the company reported higher profits , they will be subjected to higher taxes culminating into a higher  payment of  salaries to their employees .Employees’ wish is that their remuneration commensurate with what the company is making as profits.

Zimmerman contented a number of issues in developing empirical management accounting. The contention included lack of reliable and consistency information regarding managerial accounting, and he also discovered that theorists did not take the economic impact in studying empirical management accounting.  A company called Microsoft  practiced the reporting of the reduced revenue theory and a controversy emerged  which led to the  court’s intervention.

REFERENCES

Bragg Steve ; Accounting Best Practices; Wiley, 2003

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Accounting Best Practices. (2020, Jun 01). Retrieved from http://studymoose.com/accounting-best-practices-new-essay

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