Accounting Theory and Current Issue

Executive Summary – This individual assignment in which we have to solve the two different cases based on the accounting. Both the cases are about the current issues and theory related to account which we need to resolve in the case study for better understanding about the accounting problem.

Table of Contents

Executive Summary. 1

Case 1. 2

Introduction of case. 2

Analysis of Case. 2

Case 2. 4

Introduction of Case. 4

References. 6

Case 1 –

Introduction of case –

This case study is related to the characteristics of the conceptual framework exist in the accounting standard. In the case study we have covered the drafting of accounting standard and process, what is the requirement for drafting of accounting standard, what criteria must be considered in drafting of accounting standard etc.

Every accounting standard are prepared to resolve some of the problem facing by organisation in accounting provision for charging expense, recognising revenue etc With harmonising accounting concept in all the companies within the country. Before drafting accounting standard we have an idea about the problem facing by the organisation coz we cannot resolve the problem for which we have not idea about the problem and implication of problem. In this case study it is given that only identification of problem does not mean that we have identified the solution but for identification of solution we have to identified the problem and analyse the problem from all the aspects which provide the way to resolve the problem. For understand the accounting standard drafting process we have understand the case name as Miller and Reading (1986, p. 64).

Analysis of Case –

For understand what accountant needs to do with the transaction can be resolved by understanding what action maximum accountant taken with the situation. History of accounts reveals that account body not accept all the suggestion and feedback on account from the people rather they decide on their own. Looking to Miller and Reading case we found that account body is identified some of problem the problem related to the accounting but not taken initiative for resolution of problem. There should also be solution of the problem which identified by the Board. FASB identified the problem which is accepted by both the user and accounts preparers but we should consider the usefulness of the problem in identification of resolution. As identification of problem by financial accounting standard board cannot be considered that they will resolve the problem rather there should be chances of resolution of problem as some of the issues are there which cannot be resolved in timely manner due to change in people suggestion as some of understand the problem in different manner where some people understand problem in some other manner. In order to resolve the problem we FASB should have resolve the problem with conceptual framework in the manner which will be accepted by all the member of board with user as well. If board wish to resolve the problem they have idea about the problem and their impact hence they can identify the different available solution on it. Without prior sense about the likelihood of resolution of problem board also not resolve the problem hence board have to develop mind set for resolve problem by thinking on all the area of problem. Faithfulness of reports prepared according to the accounting standard can be increased based on the reliability of the standard but if board could not resolved the problem than reliability of standard also reduced.

Accounting standard prepared by the board is not based on the board discretion rather it is prepared based  on the constituency support, member agreement on the point and consideration of all the situation of problem hence board have to initiate prescribe procedure for increase reliability on the financial statement. Neutrality and representational faithfulness is one of the characteristics of the conceptual framework of the accounting projects. Problem related to the accounting issue should be resolved by the board should be according to the constituency requirement of the country otherwise organisation need to maintain dual accounting for meet the criteria of both the requirement of constituency and accounting standard. Now organisation are going to follow accounting standard for harmonisation, standardisation, transparency but board also have one problem for making harmonise in accounting process as accounting standard board need to prepare accounting standard according to the constituency but constituency requirement of each country also differ hence of board try to meet harmonisation than they cannot prepare standard according to the constituency requirement and if board try to meet constituency requirement than they can board cannot achieve harmonisation which is actual objective of the board hence for the board also it is tough situation that which initiative they should take. In order to resolve all this kind of problem board should have to gather all the information and constituency requirement in prior manner hence that information can be helpful for the board at the time of this situation. Financial accounting standard board is responsible for drafting of standard and make them effective within country hence if board will try to undertake this kind of situation then board also need to accept the suggestion from the other member as well. After drafting of the standard generally board pronounce for the suggestion and feedback from the member and other people who are impacted from the decision but whenever board identify any kind of the problem which is not bearable than also board need to discuss with the member as suggestion from member also helpful some time. Member and account preparer have more idea about the problem and they also have an idea about the solution some time hence taking feedback from the account preparer become road map to resolution of problem.

Therefore it is advisable to the board to not take the formal project which is not closed with the solution rather board need to take the project which can be resolved with member and other account preparer. As discovery of problem is not a big task coz all the account preparer are aware about the problem they are facing in preparation of account hence they need board support to resolve the problem which meet constituency need as well. We are agreed with the statement provided in the case as solution is necessary for the problem because likelihood of prior sense provide solution timely for problem.

 Case 2 –

Introduction of Case – This case is related to the accounting concept of positive accounting theory. Ross L. Watts, Jerold L. Zimmerman writes books on positive accounting theory. Positive accounting theory is the theory which provides the prediction about the three hypotheses i.e. Bonus Plan Hypothesis, Political Cost hypothesis and debt covenant hypothesis. In the concept of positive accounting theory it is explained that what polices organisation will select for recording business transaction as all the firm need to use different accounting concept for preparation of their books of account. Positive accounting theory also provides the best efficient way to reduce cost of the organisation.  

Analysis of the case –

In this case it is provided that positive accounting theory is explained about the accounting practices and it does not provide which firm should use which methods for accounting. As per the positive accounting theory organisation should predict which is beneficial for shareholders and organisation but it does not mean that manager should predict always in the interest of shareholders. Using of prediction and accounting system is depend on the industry as some time valuation and prediction use by the organisation may not be in the interest is shareholders but due to industry requirement we have predict in that manner and use the method which is used by the whole industry. Different industry have a need of different accounting method for example in case of preconisation of revenue in construction industry contractor need to predict all the cost of contract before initiating the contract and if he found that cost of contract is more than revenue contract than contractor should recognise loss first. But in case of other industry loss from the project should be recognised in proportion mane hence every industry have some specific requirement. But all the accounting method and concept are based on the single concept as well. In the accounting concepts manager have flexibility to use the method which is best suitable to the industry and organisation. Positive accounting theory is about the bonus, debt and political cost of the organisation. In the same manner empirical research on the positive accounting theory done by the
Ross L. Watts, Jerold L. Zimmerman in which they have research about the positive accounting theory. Research reveals that maximum managers are used the accrual concepts of accounting for bonus plan as in this plan provides the higher expected bonus. By this way firm also manipulate their net income and not showing the actual situation of the firm in terms of profit. Positive theory of accounting also have concerned with the accounting practices used by the business manager in their business but problem is about the policies used  by the organisation as theory does not provide which method and policies of accounting need to used in a business hence if it will provide the policies and concepts used need to be used by the business than it can be more beneficial for the user and account preparer. Hence based on the research and analysis we can conclude that positive accounting theory are used for predict and comprehended the policies of accounting that develop by the firm. It also introduces for merging of market theory with economic consequences of the market.  Hence positive theory of accounting should provide the policies which need to be used by the organisation in preparation of accounting records. Currently positive theory of accounting does not provides which method organisation should used rather it only provides that designed to explain and predict which firms will and which firms will not use a particular accounting method. It only due to provides freedom to the manager for select the method which is best suit to the organisation as based on the business every organisation have some different accounting standard applicability. In the same manner accounting policies also differ to the organisation based on their business hence it is up to the manager of the organisation to select the method of accounting based on the suitability of accounting to their business. Some of the business need to select accrual concept of accounting whereas as some of business need to accept cash method of accounting. In the same manner method of depreciation also differ to industry to industry as electricity generating industry used straight line method for depreciation whereas other industries are using WDV method of depreciation coz electricity producer company have best suitable method of depreciation is SLM. So we cannot say that this represents an ‘abrogation’ of the academics’ duty to serve the community that supports them   if board himself provides that which method should be used by the organization than organization does not freedom to select the method which they think appropriate. Even in some time they have to adopt the method which is not suitable to the organization due to boundation of the organization hence positive theory is drafted in proper manner in their way. We are not agreed with the statement provided in the case as positive theory is best suitable theory for the organization as it is not considered as abrogation of the academics duty for the organization. Every organization is operating to generate profit and manager of the organization is responsible to provide profit making situation to the organization hence if in positive theory of accounting organization bounded to use the method mentioned by them than manager of the organization cannot take the decision which they should take at the time of decision making. Provision of positive theory of accounting is suitable to the manager as it will motivate to the manager for taking the decision which best suit to them.

From the whole analysis of the case we concluded that we are  not agreed with the statement “this represents an ‘abrogation’ of the academics’ duty to serve the community that supports them?” as positive theory is providing freedom to take decision instead of abrogation.

References –

Citeseerx, N.D. “ Positive theory of Accounting” Accessed on 9^th December 2015 <http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.195.8073&rep=rep1&type=pdf>

Deegan, 2006,“ Financial Accounting theory” Accessed on 9^th December 2015 <http://highered.mheducation.com/sites/dl/free/0074716719/363734/sample_ch01.pdf>

FASB, 1998,“ Setting of international accounting standard” Accessed on 9^th December 2015 <http://www.cs.trinity.edu/~rjensen/Calgary/CD/fasb/intnacct.htm>

Ruth D. Hines, (1989) "Financial Accounting Knowledge, Conceptual Framework Projects and the Social Construction of the Accounting Profession", Accounting, Auditing & Accountability Journal, Accessed on 9^th December 2015 <http://dx.doi.org/10.1108/09513578910132268>

Ross L Watts and Jerald L Zimmerman, 1990, “Positive Accounting Theory” Accessed on 9^th December 2015 <http://faculty.etsu.edu/pointer/watts%26zimmerman2.pdf>

M Huamyun Kabir, N.D., “Positive Accounting Theory and science” Accessed on 9^th December 2015 <http://centrum.pucp.edu.pe/adjunto/upload/publicacion/archivo/positiveaccountingtheoryandscience.pdf>