Preparation and Presentation of Financial Statements

Question: Discuss about the Preparation and Presentation of Financial Statements. Answer: 1 Part A The accounting treatments for tenants will affect negatively for tenants with debt covenants. Existing many tenants recognize their lease as operating lease which doesnt not require the lessor to recognize and asset or corresponding liability. Since the new standard requires all lease agreements including operating to recognize the right to use as an asset and record the corresponding liability. This may affect the relationship with creditor as there is an covenant signed and the creditor may require to terminate the lease agreement or may require the debt back. As per the debt hypothesis of Pat the tenants may show higher profits and better liquidity position in its financial position to enhance its position. (IFRS, 2016) Part B The new standard will have many social and economic impacts such as There will be increase in transparency which will enhance the shareholders trust in the financial statements. This increase in trust will encourage investors and affect the over market positively. However there could also be some negative consequences as the new standard will require companies to record lease assets and liabilities which in turn will affect the companys financial ratios and financial reports. This may affect companys share price, if so, the stock exchanges will be affected negatively. Additionally due to more recognized liabilities, the company may not be able to obtain further finance. (IFRS, 2016) Part C Accounting standard setters should consider the economic and social implications of the standards they set. AASB states that the accounting and financial reporting have the basic purpose of presenting true and fair picture of the financial statements. This is due the fact that presenting true and fair view will enhance the investors trust in the financial system. Increased investor trust will result in increase investment in the economy. Accounting standard setters should ensure that accounting standards should present true and fair view of the company and increase investment. 2 Part A Positive accounting theory while analyzing facts continues to suggest how the businesses operate, what their thought processes are and what are their basic goals and expectations. According to the Positive accounting theory, businesses or entities aim ensure their survival by maximizing its profits. It observed that in cases where exists conflicts of interest between the company and its mangers, the managers chose their benefit. Due to such reason, share based payments were introduced. (Watts and Zimmerman, 1986) According to the bonus plan hypothesis of the positive accounting theory, managers will shift the future profits to current year in order to increase their bonus in case where they are offered bonus schemes. Part B Normative theories are based on values and are subjective where as positive theories are based on facts and are objective. Positive theories dont need to be always correct. But they should be able to be tested. Public interest theory suggests that the regulatory authorities operate in the interest of the public. Accordingly as per the theory, every decision the authorities take is in the best interest of the public as large. Accordingly it is considered that these bodies are neutral. (Watts and Zimmerman, 1986) This theory could be tested through the example of Sarbanes-Oxley Act in which the government made and implemented regulations to ensure that public interest is served. 3 Part A Professional judgment has these characteristics: a process that involves making choices or decisions about courses of action in a certain activity these choices or decisions are made in the context where there are standards to be followed such choices or decisions require certain skills, knowledge and experience to be used in making such decisions, and those making them have to exhibit certain qualities For example, an accountant can decide that an asset can be measured through fair value or historical cost. His decision would be based on his professional judgment. If his judgment is incorrect, this would result in overvaluation of assets. (Dagwell, Wines and Lambert, 2007) Part B AASB supports both stewardship and information usefulness in the information required regarding information provided in the financial statement. Decision usefulness is related to the information that would enable the users of the financial statements to make sensible and known decision. This could be reflected in the conceptual framework as the conceptual framework requires the information presented in the financial statements to be relevant to the users of the financial statements. Relevance here refers to the characteristic that the information should enable enable the users of the financial statements to make sensible and known decision. (Amendments to the Australian conceptual framework, n.d.) Secondly Stewardship refers to the relationship between the owners and the managements of the company. Accordingly managements serve as stewards for the owners and have provide accountability. The conceptual framework requires the management to prepare financial statements and get them audited before being presented to the owners. This asserts that AASB also highlights stewardship. (Australian Accounting Standards Board, 2014) 4 Part A It is highly observed that companies provide information about their activities when it its feasible and beneficial for the company. The primary objective of a business is to earn profits for the owners of the company. Companies do not consider social information as their responsibility thus they prefer to provide such information only in the cases where such information will provide financial benefit to the company. However, if provision of such information is made mandatory, it will increase the costs incurred by the company and this will not be welcomed by the company as per the capitalist view. (Gaffikin, Dagwell and Wines, 2004) Part B Yes it would be agreeable that companies will not provide social and environmental in the absence of regulatory requirements. This can be evidence by the following arguments. Normally companies follow capitalist view that assert, company have the basis purpose to earn profits for its shareholders, since providing such information will increase companys costs, company would avoid providing such information In most of the cases, companies provide social and environmental information as they assume that such provision will improve the companys image among he consumers and will enhance companys profitability. Company may not provide all the necessary information if it considers that such information will affect the company negatively. (Gaffikin, Dagwell and Wines, 2004) References Amendments to the Australian conceptual framework. (n.d.). . Australian Accounting Standards Board, (2014).Framework for the Preparation and Presentation of Financial Statements. Victoria. Dagwell, R., Wines, G. and Lambert, C. (2007).Corporate accounting in Australia. Sydney, N.S.W.: University of New South Wales Press. Gaffikin, M., Dagwell, R. and Wines, G. (2004).Corporate accounting in Australia. Sydney: UNSW Press. IFRS, (2016).Effects Analysis International Financial Reporting Standard 16 Leases. Watts, R. and Zimmerman, J. (1986).Positive accounting theory. Englewood Cliffs, N.J.: Prentice-Hall.