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Contemporary Accounting Theory

Introduction to The Politics of Accounting Standard

In the past, many corporate failures and scandals have caused changes to made in accounting regulations and accounting standards for the purpose of financial reporting in the subsequent periods. At times, the process of setting up of accounting standards is subject to much political intervention. This report explains and provides instances of corporate scandals in the past and how these scandals led to improved accounting regulations/standards. This report also identifies accounting standards followed by selected company (ALQ). It provides critical evaluation of political process in accounting standard setting and critically evaluates the accounting standard related to fair value accounting.

How Corporate Crises/failures in Every Era Lead to Improved Accounting Regulations/ Standards for Financial Reporting in The Subsequent Periods

 Once a corporate scandal happens, there is extensive investigation by government, accounting professional bodies etc. Accounting regulations are criticised, and new accounting regulations are introduced (Jones, 2011). In UK, in response to financial reporting deficiencies due to failure of UK companies such as Polly Peck, Cadbury committee was formed which set out a corporate governance framework (Jones, 2011). Many legislations and regulations stemmed from other scandals (Holgate & Buckley, 2009).In response to failures of organisations like Parmalat USA issued the Sarbanes Oxley Act in 2002 (Solomon, 2007).Corporate failures, due to any reason lead to criticism of auditors and accounting and auditing principles, practices and standards and lead to reforms in governance including changed and improved accounting regulations and standards for financial reporting in the subsequent periods. Another example is the the fall of energy giant Enron corporation.

For strengthening confidence of general public and investors in auditing and financial reporting, the process of quality monitoring and disciplinary proceedings need to be structured. There are vulnerabilities and weaknesses involved in accounting which need to be resolved. It has been noticed that there is much eagerness shown by accounting profession to work with regulators in order to build a better regulatory system for the external auditors. (Pishay, 2003).

The regulators in the UK have worked towards strengthening audit standards in response to corporate failures where auditors failed to point out concerns about company’s viability.

The Financial Reporting Council (FRC) in UK have revised the standard pertaining to ‘Going Concern’ for strengthening the requirements to be followed by the auditors that that required by international standards. The regulator in UK has also held discussions with its counterparts in Australia, Canada and Japan who are also expected to follow the suit.

The revised standard requires:

Expansion in scope of procedures on the part of auditors to make an assessment of going concern by extensively checking the appropriateness of supporting evidence.

Revised requirements pertaining to reporting to be followed auditors to arrive at the conclusion as to whether management has made appropriate assessment.

Critical Evaluation of The Political Process of Accounting Standard Setting

Political lobbying is seen as a significant hurdle in the problem of accounting setting by the accounting researchers. Excessive political interference prevents setting up of objective accounting standards.

Lobbying has influenced the process of setting accounting standards in many countries. There have been examples from various countries and international lobbying on IASB standards. Political influence implies intentional interference by any entity in order to serve the self-interest of that entity which clashes with the goal of accounting regulator.

Politics can impact the process of setting up of accounting standards to a large extent. The extent to which standard setting is affected depends upon many factors such as personal characteristics of regulators. Hence, is very important determine the extent to which personal characteristics affect the process of standard setting.

Information/Data has to be collected for a number of regulators on their personal characteristics and professional background (Gipper, Lombardi, & Skinner, 2013).

The process of setting up of Accounting standards is slowed down by olitical pressures especially if the regulators aim to have high level of disclosure requirements in the financials. (Bertomeu, 2015)

However, many regulators insist that process of setting up of accounting standards should be overseen by political elements.

Governments influence the process of accounting standards acting through the regultors.

There are reasons for political interference in standard setting process which are as follows:

Accounting rules often have political aspects.

There are parties who want to influence the accounting regulator out of self-interest.

The Political Nature of Accounting Standard Setting in Australia

Off late, many changes have been made by the Government pertaining to the setting up of accounting standards which indicate shifting of large amount of power in favour of government from the regulators. Hence, transparency in accounting standards is of utmost importance which needs political intervention. There has been large amount of responsibility put on the politicians to ensure that an effective system for setting accounting standards is in place. Due to these reasons, government supervises the process as to setting up of reliable and transparent accounting standards.

Often, Accounting standards are the product of self-interest of the individuals. Accounting regulators are influenced by lobbying .This viewpoint may aid get an insight into the process of determination of accounting principles but very low understanding about standardised how accounting principles are determined, as a descriptive matter, but provides little insight into issues related accounting (Penman, 2013).

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

The following Accounting Standards are followed by the group(ALQ):

AASB 16 : Accounting for leases

This accounting standard provides guidance on a single lessee accounting model. The standard requires that lessee should recognise assets and liabilities for all leases which have a lease term of more than 12 months.

AASB 9: Accounting for impairment of Financial Assets

This accounting standard provides guidance on financial reporting of financial assets and financial liabilities with the purpose of providing accurate information to people who would be using the financial statements

AASB 124: Related party disclosures

This accounting standard requires to disclose the existence and transactions with the related parties in the financial statements .

AASB 112: Income Taxes

This accounting standard explains the accounting requirements pertaining to Income Taxes.

AASB 119: Remuneration reporting

This accounting standard provides guidance on accounting and disclosure requirement for employee benefits.

AASB 133: Earning per share

This accounting standard provides guidance on calculation and disclosure of basic and diluted earnings per share.

AASB 107: Statement of cash flows

This accounting standard provides guidance on classification of cash flows into operating, investing and financing activities and preparation of cash flow statement.

AASB 10: Consolidated Financial Statement

This accounting standard provides guidance for consolidation procedures to be adopted in one entity controls other entity (for e.g Subsidiary companies.)

AASB 137: Provisions, Contingent liabilities, and Contingent Assets

This accounting standard provides guidance on recognition and measurement of provisions, contingent liabilities and contingent liabilities and also prescribes disclosure requirements.

AASB 2: Share based payments

This standard provides guidance as to reporting to be done entity in case of its undertaking of a sharebased transaction..

AASB 8: Operating Segments

This accounting standards provides guidance on segmental reporting in case a business has multiple business segments.

AASB 15 : Revenue from Contracts with Customers

This accounting standard provides guidance as to how the revenue from contracts with customers should be recognised.

AASB 121: Foreign currency Transactions

This accounting standard provides guidance on how foreign currency transactions and foreign operations are included in the financial statements and how financial statements are translated into the reporting currency of the entity.

AASB 116: Property, Plant & Equipment

This accounting standards provides guidance on how to account for property, plant and equipment i.e. purchases, sales and write offs of property, plant and equipment.

AASB 123: Borrowing Costs

This accounting standard provides guidance as to capitalisation of borrowing costs that are directly related to acquisition, ,construction or production of a qualifying asset.

AASB 138: Intangible Assets

This standard provides guidance on recognition of intangible assets in the event specific criteria are met. It also provides guidance as to measurement of carrying amount of intangible assets.

AASB 128: Investments in Associates and Joint Ventures

This accounting standard provides guidance for accounting and disclosure requirements for investments made in associates and joint ventures.

AASB 110: Going Concern

This accounting standard requires an entity to adjust the financials for events occurring after the reporting period and disclosures required as on the date when financial statements are approved. This standard also provides that financial statements should not be prepared on going concern basis if the events after the balance sheet date reflect that this assumption is not appropriate.

Critical Evaluation of The Accounting Standard for Fair Value Accounting

Accounting standards related to the valuation of financial assets have experienced significant changes over last around 20 years.

 A lot of challenges are involved in calculation fair valu (Avele & Edimo, 2015). Fair value is a substitute to historical cost or NRV. (Rabiu & Ma'aji, 2016). Fair value is the amount for which an asset can be exchanged, a liability can be settled or an entity instrument granted could be exchanged between knowledgeable, willing parties in an arm's length transaction (Rabiu & Ma'aji, 2016).

Hence, it can be said that measurement on the basis of fair value causes income statement to convey information about performance of management and exposure risk. It also prevents an organisation to misrepresent the figure related to its net income.

But, at times , the concept of fair value accounting has been criticised to much extent.

The measurement of fair value has been criticised as it increases the information’s volatility which eventually diminishes relevance and reliability of information for investors.

The concept of fair value measurement has been criticise for misrepresentation of results in the market conditions which have existed off late. It has been argued that this concept leads to high risks inherent in the portfolio of the companies

With the adoption of fair value accounting, there is a change in criteria of recognition and measurement which normally the users of financial statements are used to. It gives a false indication that unrealised gains which arise due to fair value accounting are realised in the form of cash. The statement that can overstep fair value accounting and the traditional accounting model is the cash flow statement. High amount of attention should be given to cash flow statement. The investors and shareholders should be well versed with these analytical tools (Fahnestock & Bostwick).

Points in favour of Fair value accounting : As per the regulators, fair values for financial assets and financial liabilities provide more reliable information than historical cost based measures. Over the period of time, historical prices become immaterial for assessment an entity’s current financial position especially to those who believe that accounting should be reflection of substance over form rather than the cost. (Columbia Business School)

Conclusion on The Politics of Accounting Standard

There is much to be learnt from the Corporate Scandals and regulators have acted in response to them and brought out new legislation or made changes in existing legislation. Although, political interference in setting up of accounting standards may prevent setting up of objective standards, but at times political intervention is necessary. The standard related to fair value of accounting has been criticised at times despite of many arguments in its favour.

References for The Politics of Accounting Standard

Avele, D., & Edimo, P. N. (2015). INDERSCIENCE Online. Fair value in International Accounting Standard setting: literature review and critical analysis on its practice in the different accounting standards.

Bertomeu, J. (2015). Political pressures and the evolution of disclosure regulation. SpringerLink.

Camferrman, K. (2020). International Accounting Standard Setting and Geopolitics. Accounting in Europe.

Columbia Business School. (n.d.). Principles for the Application of Fair Value Accounting. 61-62.

Fahnestock, R. T., & Bostwick, E. D. (n.d.). An analysis of the fair value controversy. Journal of Finance and Accountancy , 1-1.

Gipper, B., Lombardi, B., & Skinner, D. J. (2013). The Politics of Accounting Standard-Setting:A Review of Empirical Research. 1-38.

Penman, S. (2013). Accounting Standard Setting: Thoughts on Developing a Conceptual Framework.

Pishay, A. A. (2003). The fall of Enron and its implications on the accounting. CSUSB ScholarWorks, 1-25.

Rabiu, S., & Ma'aji, M. (2016). A Critical Evaluation of the Measurement and Effects of Fair Value in Financial Statements. ResearchGate, 82-82.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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