ACCT20074 Auditing Challenging Fair Value Measurements Assignment Sample

• Subject Code : ACCT20074
• University : Central Queensland University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Accounting and Finance

Contemporary Accounting Theory

Introduction and Executive Summary of Auditing Challenging Fair Value Measurements

Accounting standards are regarded as set of principles, procedures and standards that form the basis of the policies and practices with regard to financial accounting. These standards apply to the company’s financial picture comprising of assets, revenue, liabilities, expenses and shareholders’ equity. The standards have been made for valuing the intangible assets like goodwill, earn out agreements, patents, trademarks and research and development projects. The main purpose of the report is to analyse the improvement made in the accounting standards for financial reporting after the corporate failures and also to critically evaluate the political process of accounting standard setting. The annual report of a company named as Caltex Australia Limited has been evaluated to identify its compliance with the accounting standard meant for fair presentation and preparation of financial statements. It has been found that the financial report of the corporation has been prepared as a general purpose financial report and duly complies with all the necessary requirements of the AASBs and the Corporations Act 2001. It has been analysed that the new rules and standards have been made under both GAAP and IFRS that will help the companies in recognizing their revenue it the same year in which it is earned by undertaking estimates of future revenue and costs.

Improvement in The Accounting Regulations / Standards

The investors, executives and board members rely on financial statements of the company to undertake estimates of the future cash flows (Roychowdhury et al., 2019). They may undertake effective decision making process regarding their investment and therefore, encourage efficient allocation of capital. However, it has been found that the estimates of financial statements of the company can be widely off the mark, even after setting them in good faith (Dichev et al., 2016). The comparisons made between the companies may not act as an accurate way to calculate the value of any specific company. For instance, Enron collapsed in 2001, encouraging the route of the regulations of Sarbanes Oxley in the United States (Vasudev & Watson, 2017). After six years, the financial world distorted that lead to the acceptance of the Dodd – Frank regulations and a global initiative to settle the differences between international accounting regimes and U.S. The regulations listed in IFRS are applied differently in different countries. Every country has own described system of regulation and compliance. Recognition of revenue is considered as a tricky part of regulatory mystery. Under the recent rules of GAAP, if there is no defined way to compute the costs of the product beforehand, a corporation is not allowed to make a record of any revenue from such sale until and unless all the upgraded requirements are sent and their total costs are known. The drawbacks of practices of revenue recognition have lead the companies to undertake use of unofficial measures to report its financial performance. The success of social networks like Twitter, Facebook, and online marketing sites such as eBay, Alibaba, etc. have demonstrated that old traditional guidelines for revenue recognition and measurement were preventing them from presenting their true value of their businesses in the reported accounts (Young & Sherman, 2016). After some time, these companies have started began selecting alternative ways to account on their earnings. The new rules have been made under both GAAP and IFRS that will help the companies in recognizing their revenue it the same year in which it is earned by undertaking estimates of future revenue and costs. In today’s time, Sarbanes – Oxley requires the corporations on U.S exchanges to settle GAAP procedures of earnings to non-GAAP procedures. This similar required is also listed in IFRS. Moreover, the SEC also requires that the management of the company must be able to provide support to the reasoning behind including a different measure in its financial related disclosures. Investors and executives use two measures for determining the value of the assets of the firm, namely, the price that has been originally paid and the amount that can be received after selling those assets (Barker & Teixeira, 2018). After the financial crisis that were held in 2008, a number of adjustments to the procedures of applying fair value were accepted by the SEC, Public Company Accounting Oversight Board, U.S. Financial Accounting Standards Board. The standards have been made for valuing the intangible assets like goodwill, earn out agreements, patents, trademarks and research and development projects. When analysts, directors, accountants and investors discuss about the accounting games, they laid emphasis on how costs are accrued in the reports of the company (Lim et al., 2020). For instance, managers might choose overprovision to establish a hidden reserve that can be effectively released in future period of time to exaggeratedly increase profits. The GAAP regulations and IFRS rules have weakened the ability of the company to manipulate the financial reports. Post crisis, there are various developments that have been made in the accounting regulations or standards. The global financial landscape has gone under an important transformation. This transformation is attributable to dramatic changes in political and business climates, raising global competition, rapid improvements in technology and the establishment of more market based economies. Global financial reporting framework has been developed after undertaking the system of regulation mandating the protection of investors and helping them to undertake informed decisions regarding investment with the help of fair and full disclosure of financial statements (Dumay et al., 2017).

Political Process of Accounting Standard Setting

The process of accounting standard setting is defined as a delicate balancing act that point out the significance of the oversight function of the Commission. The objective of standard setting is to establish unbiased and high-quality accounting standards that will help in promoting transparency (Gordon et al., 2019). However, if the process of standard setting is subject to the unjustifiable political or commercial pressure, the potential participants present in the market may lose confidence in the financial information circulated by the firms. The setters of accounting standards are independent but along with that, they must also be held accountable. The Commission attempts to make sure that the process of standard setting must not be comprised by inadequate pressure and along with that, the process establishes standards of high quality that produce information that will effectively meet the needs and requirements of the investors and other stakeholders (de Aquino et al., 2020). It is designed to make sure that setters of standard must hear and take into consideration, distinct view points on complex and complicate accounting issues put forward by a wide range of stakeholders. For instance, with regard to fair valuation, the process of accounting standard setting has been improved and informed by the public debate among academics, policy makers, investors, issuers, prudential regulators and other market participants, etc. However, when the politicians and other people fail to undertake any principled arguments and rather threaten or may otherwise convey excessive pressure to bear on setters of standard in an effort to accomplish political or other ends such as to obtain advantage for corporations domiciled in certain jurisdictions. Even supposed gaps in the due process of standard setters can be extremely damaging and assist to undermine the efforts to accomplish high quality and efficient accounting standards. The main goal of financial statements is to fetch information to the existing and potential investors regarding the performance of the issuer in the market and its financial condition to enable them to undertake effective decision making process (Osadchy et al., 2018). It is considered essential to remain focused on the requirements of the investors in the reporting and analysis of financial statements and accounting standard setting. To fulfil this, setters of accounting standards must attempt to encourage transparency in the financial reporting by the corporations for the investors above all other things. Along with the interest of investors, setters of accounting standards must also take into consideration, the preferences and interest of other stakeholders in the process of accounting standard setting. The Financial Accounting Standard Board achieves its mission with the help of independent and comprehensive process that promotes board participation, effectively considers the views of all stakeholders and is subject to oversight by the Board of Trustees of Financial Accounting Foundation (FASB, 2020). The major principle that guides the work of Board is to establish standards when the advantages of a change justify the expected costs of that particular change. The political process of the embracing of International Accounting Standards and harmonising these standards with the Australian Accounting Standards have far reaching influences. This might be because of the impact of the boards, government, regulatory bodies and other corporations that are being involved in dominating the process of accounting standard setting. This can be seen by having a brief look at the history of the measures taken by each of such parties to alter the entire accounting world scenario. There are set benefits to the parties who influenced the variations in both social and economical ways. Along with some benefits to some of the parties, there are some disadvantages to those parties that have lost their power of influence. With the development and dissolution of different committees and bodies and legislative bills, the outcome was the acceptance of the standards of International Accounting Standard Board in the year 2005 (Camfferman, 2020). This complete process is said to be political in the sense that government wanted to restore its power and looked this area as an opportunity to grab that. The Treasury voluntarily took on this responsibility, the relationship of ASX with the Liberal Party allowed it to exercise large influence and therefore, push out rival exchanges. The large corporations had impact through the ASX and other present groups lobbied for their situation in this arena. Undoubtedly, there are various non-political influences that played a role in the factors for accepted International Accounting Standards like globalization (Miller, 2018). This must be considered as a non-political factor because although, it can be considered as political, globalization is also an evolution of the process of international trade with the help of advancement in technology.

Identification and Introduction of The Accounting Standards Complied with By the Selected Company

Accounting standards are defined as set of principles, procedures and standards that form the basis of the policies and practices with regard to financial accounting. These standards apply to the company’s financial picture comprising of assets, revenue, liabilities, expenses and shareholders’ equity. Analysts, banks, regulatory agencies verify the entity’s compliance with the standards in accounting to ensure that the information provided by the company is appropriate. International Accounting Standard (IAS 1 – Presentation of Financial Statements) describe all the relevant necessities meant for financial reports, involving how they must be structured, basic necessities for their content and intervening concepts like accrual basis of accounting, going concern and the current and non-current distinction. This standard requires a corporation to represent a full set of financial statements at least once in a year with comparative amounts meant for the preceding year (IFRS, 2020). This comprises of –

• Statement of balance sheet
• Statement of profit and loss and other comprehensive income for the particular period. IAS 1 allows a corporation to present both of them as two separate statements and a single combined statement of profit and loss and other comprehensive income.
• A statement of changes of equity
• Statement of cash flows
• Notes with regard to the above mentioned financial statements

The major objective of IAS 1 is to provide basis for the appearance of general purpose financial statements to draw comparison of the corporation’s financial accounts with the previous period’s performance and with other competitive firms.

In the annual report of Caltex Australia Ltd., all these financial declarations are effectively presented. The financial report of the corporation has been prepared as a general purpose financial report and duly complies with all the necessary requirements of the Australian Accounting Standards (AASBs) and the Corporations Act 2001. This report also conforms with the IFRS as adopted by IASB (International Accounting Standard Board). This financial report (consolidated) has been organized on the basis of historical cost, except for derivative financial instruments (Annual Report, 2019). These instruments are measured on the basis of fair value accounting. All the figures recorded in consolidated financial report is represented in Australian dollars which is considered as the efficient currency of the Group. The Group has accepted all the compulsory amended Accounting Standards being issued by the relevant Board relevant for its business operations and considered effective for the recent accounting period. The financial statements provide all the necessary information with regard to financial position, cash flows of the entity and financial performance that can be considered useful for both internal and external users while undertaking economic decisions. These financial statements present all the information regarding the assets, equity, liabilities, expenses and income and cash flows generated by the corporation. All this information along with other information in the notes helps the users of such statements to effectively estimate the cash flows of the corporation for the future time period. These statements fairly present the financial position and cash flows of the corporation. Fair representation needs the faithful presentation of the effects of events, transactions and conditions as per the definition and recognition criteria for liabilities, assets, expenses and income as provided in the framework. Caltex Australia Limited has prepared the financial statements after assuming that it is a going concern and will carry out operations in the future time period. It has retained the presentation and categorization of items in its financial statements from one period to another. This represents consistence in presentation of financial statements.

Critical Evaluation of The Accounting Standard for Fair Value Accounting

Fair value accounting is defined as a financial reporting approach in which impartial value is the amount at which the particular asset can be replaced and a liability can be effectively settled. (Toluwa & Power, 2019). In 2011, IFRS 13 has been issued by International Accounting Standard Board with regard to Fair Value Measurement. Developments in capital market and globalization have completely shaped the components of financial statements and interest of users. In recent times, investors laid emphasis on investment opportunity, future earnings and performance. The fair value measurement in the financial reports helps in providing information that effectively reflects the financial position of the firm and stewardship of the management by recording the liabilities and assets in the statement of balance sheet at their current market price (Zyla, 2020). Statement of income under the fair value measurement provides the economic income of the company as it replicates the changes in the value of the firm over time. This is due to the fact that fair value generates more understandable and relevant information required by the shareholders and other major stakeholders with regard to assets, income and liabilities in the financial reporting than other type of cost based measures (Barker & Schulte, 2017). Therefore, it can be claimed that fair value accounting in the balance sheet offers efficient value and the statement of income clearly reflects the information with regard to the performance of management and risk of exposure. Moreover, it reduces the ability of the company to manipulate its net income for a specified period. However, fair value measurements are subject to manipulations to show the result as desired by the management. In an ineffective economic time, reported income can be easily influenced by the management under historical cost accounting with the sales of assets (Cannon & Bedard, 2017). It is also been criticised as raising the volatility of the data recorded in the financial declarations that may corrode reliability and significance of the information for the investors. There are chances that fair value accounting may generate misleading results in the long run.

Conclusion on Auditing Challenging Fair Value Measurements

It can be concluded that the GAAP regulations and IFRS rules have weakened the ability of the company to manipulate the financial reports. After the crisis period, there are various developments that have been made in the accounting regulations or standards. The global financial landscape has gone under an essential transformation. This transformation is attributable to dramatic changes in political and business climates, raising global competition, rapid improvements in technology and the establishment of more market based economies. Global financial reporting framework has been developed after undertaking the system of regulation. The fair value measurement in the financial reports helps in providing information that effectively reflects the financial position of the firm and stewardship of the management by recording the liabilities and assets in the statement of balance sheet at their current market price.

References for Auditing Challenging Fair Value Measurements

Annual report. (2019). Caltex Australia Limited. Retrieved from https://www.caltex.com.au/annual-report-2019

Barker, R., & Schulte, S. (2017). Representing the market perspective: Fair value measurement for non-financial assets. Accounting, Organizations and Society, 56, 55-67.

Barker, R., & Teixeira, A. (2018). Gaps in the IFRS conceptual framework. Accounting in Europe, 15(2), 153-166.

Camfferman, K. (2020). International Accounting Standard Setting and Geopolitics. Accounting in Europe, 1-21.

Cannon, N. H., & Bedard, J. C. (2017). Auditing challenging fair value measurements: Evidence from the field. The Accounting Review, 92(4), 81-114.

de Aquino, A. C. B., Lino, A. F., Cardoso, R. L., & Grossi, G. (2020). Legitimating the standard-setter of public sector accounting reforms. Public Money & Management, 1-10.

Dichev, I., Graham, J., Harvey, C. R., & Rajgopal, S. (2016). The misrepresentation of earnings. Financial Analysts Journal, 72(1), 22-35.

Dumay, J., Bernardi, C., Guthrie, J., & La Torre, M. (2017). Barriers to implementing the international integrated reporting framework. Meditari Accountancy Research.

FASB. (2020). Standard setting process. Retrieved from https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692

Gordon, E. A., Gotti, G., Ho, J. H., Mora, A., & Morris, R. D. (2019). Commentary: Where is International Accounting Research Going? Issues Needing Further Investigation. Journal of International Accounting, Auditing and Taxation, 37, 100286.

IFRS. (2020). IAS 1 Presentation of Financial Statements. Retrieved from https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/#:~:text=News-,About,minimum%20requirements%20for%20their%20content.&text=a%20statement%20of%20financial%20position,comprehensive%20income%20for%20the%20period.

Lim, S. C., Macias, A. J., & Moeller, T. (2020). Intangible assets and capital structure. Journal of Banking & Finance, 105873.

Miller, R. C. (2018). International political economy: Contrasting world views. Routledge.

Osadchy, E. A., Akhmetshin, E. M., Amirova, E. F., Bochkareva, T. N., Gazizyanova, Y., & Yumashev, A. V. (2018). Financial statements of a company as an information base for decision-making in a transforming economy.

Roychowdhury, S., Shroff, N., & Verdi, R. S. (2019). The effects of financial reporting and disclosure on corporate investment: A review. Journal of Accounting and Economics, 68(2-3), 101246.

Toluwa, O., & Power, O. J. (2019). Fair Value Accounting: A Conceptual Approach. International journal of academic research in business and social sciences, 9(6), 683-696.

Vasudev, P. M., & Watson, S. (Eds.). (2017). Global Capital Markets: A Survey of Legal and Regulatory Trends. Edward Elgar Publishing.

Young, S.D. & Sherman, H.D. (2016). Where financial reporting still falls short. Retrieved from https://hbr.org/2016/07/where-financial-reporting-still-falls-short

Zyla, M. L. (2020). Fair value measurement: Practical guidance and implementation. John Wiley & Sons.

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