Accounting Statements and Current Financial Reporting Issues

Requirement

1- Write a report on Current Issues in Financial Reporting in 2000 words with reference to APA.

Solution

Answer to Question 1

The issue that has been presented in the question refers to the fact that being a Chartered Accountant of Dynamics Co Ltd, it has been asked to solve certain issues that the firm has been facing while preparing the accounting statements of the corporate entity. This means that while preparing the financial statements of the corporate entity it has been found that the company had sold some trade receivables to a factoring company on 31 December 2016. The trade receivables that had been sold are unlikely to be defaulted. The company has resulted in providing the factor a guarantee that it will result in the reimbursement of the amounts that have not been received by the factor. The corporate entity of Dynamics did receive $90 million from the factor as because 90% of the trade receivables have been sold. Moreover, it has been mentioned in the case study that the trade receivables have not been included in the statement of the financial position of the corporate entity. Moreover, the amount of the trade receivables that have still not been received has been written off against the financial component of the retained earnings. Now the particular accounting treatment for the specific financial situation can be defined with the help of the accounting guidelines that have been produced with the help of the accounting regulatory body of the International Financial Reporting Standards (Carey, Knechel and Tanewski 2013). 

Therefore, after proper understanding the situation that has been presented in the case study, it has been found out that the firm has not included the accounts receivable in the accounting statements of the corporate entity due to the fact that the business entity would benefit from the particular business venture. This can be further explained with the help of a particular instance that a corporate entity that has the target of achieving a certain amount of profit might suffer due to a huge amount of the trade receivables. This initiates the companies to process the particular financial component of trade receivables by selling it at the end of the financial year so that it does not have to be included in the financial statements of the corporate entities.

Moreover, the reasons behind the selling of the receivables can be listed down accounting statements follows:

  1. The corporate entities are in the need of cash and does not have the time to wait till the clients make the payment of the invoices

  2. The corporate entities do not feel the need to deal with the credit risk of the clients

  3. The corporate entities do not want to involve in business where they have to keep an eye for the collection of the receivables.

  4. The corporate entities might also engage in the particular process of window-dressing of the financial statements of the corporate entities

In case of the provided case study, it has been found out that the corporate entity of Dynamics had sold the receivables to the factoring company on 31 December 2016. The reason that has been mentioned in the case study states that the payment of the trade receivables have been delayed in regards to the payment until the time of 1 July 2017. This means that the particular reason behind the corporate entity of Dynamics selling its trade receivables has been that the receipt of the receivable amount will be in the next financial year. Thus the selling of the receivables will result in the enhancing of the aspect of profitability of the corporate entity in regards to the annual report of the company (Carey, Knechel and Tanewski 2013). 

The major issue that has been represented in the question is that the it has to be determined whether the accounts receivable should have been mentioned in the financial statement of the corporate entity. It should be mentioned here that the financial asset might be derecognized however, the process of recognition of a financial asset is much easier than derecognition of the asset. The specific accounting guideline that should be followed for the purpose of determining the recognition or the derecognition of the asset is IFRS 9 that deals with the treatment of the financial instruments. This particular guideline states that the selling of the receivables should be carried out with the help of transferring the risks that are significant in nature and the rewards that are associated with the ownership. In case of the situation that has been defined in the case study there is a continuing involvement in case of the receivables so that they cannot be derecognized fully (AASB 2015). 

The next issue that has been mentioned in the case study is that the corporate entity of Dynamics had initiated the construction of the new distribution center that involved the utilization of the bank loans. Furthermore, it has been mentioned in the case study that the loan for the financing of the construction had been carried out with the help of the general loans that have been of the amounts of $2 million and $3 million. The particular accounting standard that can be utilized for the treatment of the general borrowings or the third party loans is the IFRS 9. The details of IFRS 9 can be defined as the financial instruments that can be utilized for the purpose of acquiring the required amount of money refers to the fact that the business firm can utilize the facility of loans for the purpose of acquiring the required amount of money. Moreover, in accordance to IAS 36, it has been mentioned that the borrowing costs have been directly attributed to a construction or acquisition of a qualifying asset, which forms a portion of the cost of the asset. It should be noted here that the borrowing costs have to be capitalized and the non-current assets have been debited and the income statement should be credited

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Answer to Question 2

The International Reporting Financial Standards have gained worldwide recognition in regards to the accounting guidelines that have been utilized by the corporate bodies for the purpose of treating the different financial components. This can be further explained with the help of the financial reporting standards that are maintained by the different corporate entities all over the world. Different surveys that have been conducted have revealed the fact that the accounting regulatory body had established the accounting standards in such a way that an increasing number of corporate entities and international accounting regulatory bodies have been adopting the International Financial Reporting Standards at an accelerated rate. However, there have been certain disadvantages of this particular accounting regulatory body (Hughes and Hoy 2013). Therefore, the advantages and the disadvantages that have been faced by the corporate entities for the adoption of the International Financial Reporting Standards has been mentioned in this particular study.   

The advantages of IFRS can be listed down as follows:

  1. The adoption of the IFRS has resulted in the business entities being more focused on the aspect of the investors of the company. This can be further evidenced from the fact that the adoption of the particular accounting standard will result in the preparation of the annual report of the corporate entities that are more comprehensive, timely and accurate in nature. The accounting regulations also results in the preparation of the financial statements that can be easily understood by the investors of the company. 

  2. One of the key features or benefit that the companies adopting the IFRS, can acquire is that the utilization  of the accounting standards result in the immediate recognition of the loss that has occurred due to valuation or other financial transaction in the books of accounts. The adoption of the IFRS also results in the increased amount of transparency in the books of accounts which further reflects the fact that the lenders will be able to interpret the required financial information. The timeliness is a major advantage that has been provided by the International Financial Reporting Standards (Grossi 2015).

  3. The adoption of the IFRS will result in the enhancement of the particular quality of the financial statements that is comparability. The IFRS provides the accounting guidelines that have been used by more or less most of the corporate entities all over the world. Thus, it aims to provide a common platform for the purpose of analyzing the accounting statements of the corporate entities. Moreover, this particular feature also facilitates the providence of a common platform that can be accessed by the management of the different corporate bodies and other entities for the purpose of understanding and comparing the financial performance of the firms (Hughes and Hoy 2013).

  4. The providence of a common platform for the purpose of analyzing the financial performance of the corporate bodies has also resulted in the removal of the trade barrier of the related industry. 

  5. The consistency and the transparency of the accounting statements of the firms have also increased post the adoption of the International Financial Reporting Standards (Hughes and Hoy 2013). 

  6. The implementation of the International Financial Reporting Standards have resulted in the better accessing of the capital markets that are foreign in nature along with the investments in the foreign markets. This is primarily due to the fact that the IFRS have been adopted by the different business entities all over the world which has resulted in the better and smooth access of the foreign markets (Hughes and Hoy 2013). 

  7. The relevancy of the accounting statements also improve with the implementation of the International Financial Reporting Standards. The new IFRS standards have reflected on the economic substance more than its legal form. It must be noted here that the accounting statements particularly the balance sheet that has been prepared under the guidelines that have been provided by IFRS reveals an improved quality of the financial statements. This means that the balance sheets that have been prepared under this particular regime are more useful in nature due to the consistency and the layout of the financial statement. 

  8. The implementation of the International Financial Reporting Standards have also been cost effective in nature that has increased the adoption rate by the multinational corporations (Grossi 2015). 

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The disadvantages of IFRS on the other hand can be listed down as follows:

The major disadvantage in regards to the adoption of the International Financial Reporting Standards has been that the costs that have been incurred by the multinational corporations for the adoption of the International Financial Reporting Standards have been huge. This is due to the fact that the corporate entity has to make the already existing standard compatible with the new standard and also has to arrange for the imparting of the proper training to the employees in the usage of the new accounting standard (Hughes and Hoy 2013). 

  1. The issue of enforcing the adoption of the IFRS by all the corporate entities in a particular country is a major disadvantage 

  2. Other issues like the recognition of the loss or gain that has been extraordinary in nature is not allowed by this particular accounting regulatory body which is a potential disadvantage

  3. The adoption of the IFRS faces huge competition in regards to the other accounting regulatory bodies. This means that the corporate entities adopting the accounting regulations in regards to Generally Accepted Accounting Principles might be reluctant to adopt the International Financial reporting Standards. However, it can be stated here that the firms adopting this particular accounting standard will result in the reflection of the financial statements that are more accurate and complete in nature (Hughes and Hoy 2013).

  4. Lastly, the most important problem in regards to IFRS is that the accounting regulation appears to be more complicated in nature. Moreover, the small scale business enterprises find it difficult to adopt the IFRS.

References and Bibliography

  • Howieson, B., 2013. Defining the Reporting Entity in the Not?for?profit Public Sector: Implementation Issues Associated with the Control Test. Australian Accounting Review, 23(1), pp.29-42.

  • AASB, C.A.S., 2015. Financial Instruments

  • AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.

  • Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.

  • Hughes, M. and Hoy, S., 2013. Two Steps Backward and One Step Forward: The IASB's Response to Off-Balance Sheet Financing Through Investments in Other Entities.

  • CÎRSTEA, A. and CIOLOMIC, I.A., 2014. Public Sector Consolidated Financial Statements–Area and Methods. AMIS 2014, p.594.

  • Taylor, G., Richardson, G. and Taplin, R., 2015. Determinants of tax haven utilization: evidence from Australian firms. Accounting & Finance, 55(2), pp.545-574.

  • Carey, P., Potter, B. and Tanewski, G., 2014. Application of the reporting entity concept in Australia. Abacus, 50(4), pp.460-489.

  • Gordon, I., 2012. Superannuation in Society: What are the Accountability Relationships and is there a Role for (Group) Accounting?.Australian Accounting Review, 22(2), pp.142-154.

  • Grossi, G., 2015. Consolidated financial statements in the public sector. Public sector accounting, pp.63-76.

  • Director, I., Director, M.K.S.L.E. and Director, M.J.K.S., 2014. Company Secretary. Paul Schultz HEAD OFFICE & REGISTERED OFFICE Level, 1, p.91.

  • Carey, P., Knechel, W.R. and Tanewski, G., 2013. Costs and Benefits of Mandatory Auditing of For?profit Private and Not?for?profit Companies in Australia. Australian Accounting Review, 23(1), pp.43-53.

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