Theory & Current Issues In Accounting: Analysis Of Different Financial Elements And Reporting Standards

Discussion

Discuss about the Theory&Current Issues in Accounting.

The purpose of this report is to analyze the different ways of the measurement of the five financial elements defined in the “International Financial Reporting Standards”. The five key areas for the analysis and the comparison of the measurement in the reporting are based on the areas related assets, liabilities, equity, income expenses, including the gain and losses and the changes in the presentation and the preparation of the cash flow statement (Iasplus.com.,2013). The report is not only limited to addressing the elements stated in the IFRS reporting but also related to inclusion of  different types of the elements from the U.S. GAAP, Chinese National Accounting Standards. The different types of the accounting standards and the conceptual framework for the adherence of the reporting standards differ with one another. The report intends to show the variations in the changes in the financial reporting standards in context of the IFRS reporting standards, which is being followed in Australia. The report not only provides the relevant examples for showing the changes in the reporting  standards, but it also shows the application of the knowledge in the different strategies in order to meet the present accounting issues and the  problems prevalent in  the new situation. The report shows the usefulness of the overall analysis of the different techniques and suggests which is more suitable in a practical scenario. The latter part of the report shows the application of the measurement model in the corporate accounting scenario. The practical example of the model in the list of companies is shown as per AASB guideline and how the measurement is recorded differently in the measurement of the aforementioned five key financial elements, which are assets, liabilities, equity, income expenses and cash flow statements (Harris & Arnold, 2013).

The first key element to show the difference in measurement is done based on the asset valuation technique of a company.  According to Hsu et al., (2014), the main ground for showing the measurement in terms of the assets of a company has been shown for the “long-lived assets” held for use. The impairment in these assets as per the US GAAP is two step process. The first process compares the carrying amount with the undiscounted cash flows. In case the carrying amount is observed to be lower than the undiscounted cash flows the impairment loss is not considered, in case it is higher, the impairment loss is taken as the difference fair value and the carrying. In case of the IFRS, reporting standards the carrying amount of a particular asset is compared with the recoverable asset (Pwc.com, 2016). The IFRS considers the changes in the market interest rate while computing the impairment in the long-lived assets hence the IFRS standard of measurement is considered more useful.

Inventory is an integral part of the nonfinancial assets. The IFRS reporting standard prohibits the use of last in first out (LIFO) costing technique, while this is allowed to be done as per the US GAAP reporting and measurement standards. The US GAAP uses last in first out (LIFO) as a general costing method for the inventories (Ey.com, 2016). As per the guidelines given under the Chinese accounting standards, the use of LIFO is prohibited. It is further suggested that the cost of the inventories needs to be stipulated as per the investment agreement. In practical scenario, a US GAAP company shows significantly lower inventory amount. Although this may look like a bad procedure but the company is significantly able to reduce the tax liabilities (Pwc.com, 2016). Hence, the LIFO method is more useful. It is further observed that in case of IFRS measurement, the de-recognition of the financial assets takes place in terms of the effective control over the financial assets. In such a case then transferred financial assets are legally separated for the transferor. In case of U.S. GAAP the de-recognition of the financial assets is done as per the mixed model which considers the transfers risks and the rewards for the control (Iasplus.com, 2016).

The next differentiating component chosen in the measurement of the financial element is liability and equity. US GAAP is observed to follow the guidelines given as per ASC 718, which classifies the liability or equity component as an award. IFRS is also considered to follow a similar principle classified under ASC 718, however IAS 32 has different arrangement with respect to IFRS 2. This particular regulation is important for assortment of awards classified under equity in case of US GAAP while the liabilities are considered under the (IFRS Acga-asia.org, 2016). In case of measurement of financial element as per the US GAAP regulations, the deferred compensation arrangement for the employee benefits is measured on the basis of present value of the different types of benefits expected in exchange for an service of employee till date. IFRS is not observed to distinguish the individual senior executive employment as it is done in US GAAP. The “People’s Republic of China” (PRC) GAAP uses the ASBE 9 guidelines for providing compensation to the employees during the termination. It also requires to assess the liability during the period of services and the employee benefits payable for that particular time. Under the PRC GAAP regulation, liabilities recognize only for alliances, bonuses, subsidies, staff welfare, cost related to education and salaries. As the IAS 19 recognizes the employee benefits on the basis of short-term planning it is considered to be most ideal in practical situation (Harris et al., 2014).

The next differentiating criterion has been selected as income and expenses. As per the guidelines given by US GAAP, the revenues linked separately with the price extended warranties and maintenance contracts should be deferred and recognized as income based on straight-line method of contract life. In case of IFR is the sale of extended warranty and the revenue generated from sale of the same needs to be deferred and recognized for the time covered under the warranty. As per the US GAAP model, the income taxes are recognized to record the deferred taxes under the compensation cost and considered it as a tax deduction (Giloz-Ran et al., 2014). The deferred tax measurement is computed on the amount of cost of compensation recognized for book purposes. In case of IFRS, the deferred tax asset is recorded each period based on the future tax deductions. As per the PRC GAAP guidelines, the deferred income is recognized as the non-monetary asset measured as per the fair value method. It has been also stated that only the useful life can be accessed of the relevant asset. Under the PRC GAAP, the entire amount of asset grant discredited under “capital reserve” on completion of construction of related asset (Evans et al., 2014).

The income statement as per US GAAP may be prepared either in “single step format” in which the expenses are categorized by the function and deductions are made from total income to be arrived before kissing the income before tax (IBT) or the “multistep format” suggests the separation of operating from non-operating activities before presentation of IBT. As per the existing regulations under US GAAP, all the registrants need to consider expenses in the income statement as per their function. It may be however observed that the depreciating expense needs to be presented as a separate income statement in the line items. For example, “the cost of sales” needs to be accompanied by the phrase “exclusive of depreciation”, this has been shown under gross margin. Under the reporting of IFRS guidelines, the presentation of the expenses can be done by its either nature or function, which is responsible for providing the information, which is more relevant and reliable depending on industry factors and nature of entity. Some of the extra disclosures of expenses by nature such as amortization expense, depreciation and expenses related to employee benefit is required to be shown in the financial reports under income statement. Moreover, the measurement of “extraordinary incomes” as per US GAAP is defined by being infrequent or unusual in practice. While in case of IFRS measurement model, the “extraordinary items” are prohibited (Stahlin et al., 2013). Under the income, section has been further noted that US GAAP does not include components such as active related income from comprehensive sources cannot be included. While in case of IFRS reporting the entities are allowed to be presented to report the other comprehensive income either in “single statement of profit and loss” or in form of “other comprehensive income”, but in two separate consecutive statements. As per the measurement model of PRC GAAP, the “consolidated income statement” needs to be presented after the profit had been determined for a particular financial year (Price, 2014). The gains attributed to the minority interests are not presented either as an income or as expense. In addition to this, it is not included before profit for the financial year. The changes in the equity and the minority interest are presented under the equity as per the current PRC GAAP.

The next financial element considered for showing the difference in measurement seen in the repression of cash flow statement. As per the guidelines given by US GAAP Model the excess tax benefits often termed as “windfalls” or “shortfalls” in case of reduction in the value of any equity, the excess tax benefit based on settlement of an award is reported under the cash inflows from the financial activities (Lin et al., 2012). In case of IFRS measurement, the expected tax benefit is lesser than the amount of tax effect of 10 from recognized expense. The IFRS 2 norms does not include the role of windfall tax for the waiver of the shortfalls under tax benefit. It has been also stated that the “tax benefits” or the “shortfalls” on the settlement of an award is considered under operating cash flows. Under the IFRS accounting method, the fair value of the insurance policies is determined based on discounted cash flow model where the discount rate is reflected by the associated risk and the expected date of maturity or the disposal date of the assets. The variations in the measurement of the cash flow statement are also seen in case of US GAAP (Price, 2014). In this case, the cash flows are expected from the usage of long-lived asset under the asset group over the estimated remaining life and the cash outflows are necessary to be included as per the future expenditures of the long-lived asset under the asset group. In case of the IFRS, recommendations the cash inflows from the continued use of asset or activities are included in CGU (Oliver, 2014).

Conclusion

The different types of variations in measurement can be seen as per stated under US GAAP, IFRS and PRC GAAP. Although the extent of five key elements in the financial statement for the measurement of the requirements is very large still the report provides the necessary information on the important aspects of equities, liabilities, assets and changes in the cash flow statement under the aforementioned accounting standards. The report also shows the rationale for stating the more usefulness of a particular application of model through critical analysis and relating the model in practical scenario. The report also provides the relevant examples to show the treatments of the measurements under the stated accounting standards. It can be concluded by saying that there is no particular best method for measurement of the financial entities, each standard excels in its own way during the measurement of financial components.

Reference List

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