Understanding financial crisis

Questions: 1. Explain why principles-based standards require a conceptual framework? 2. Why is it important that the IASB and FASB share a common conceptual framework? 3. It is suggested that several parties can benefit from a conceptual framework. Do you consider that a conceptual framework is more important for some parties than others? Explain your reasoning? 4. What is meant by a 'cross-cutting' issue? Suggest some possible examples of crosscutting issues? 5. What you think is the fundamental problem with financial statements based upon the historic cost measurement principle used under US GAAP? 6. What do you think of the principle' ... accounts must reflect economic reality' as a core principle of measurement in accounting? 7. How would you measure economic reality? 8. What is reliability in accounting? 9. The article states that the US standard setter FASB requires companies to record a provision in relation to environmental costs of retiring an asset if its fair value could be reasonably estimated. How do you think companies would go about estimating such a provision?10 What aspects of the requirements were used by US companies to defer recognition of a liability? 11. In what ways does the recognition of the liability in relation to future restoration activity affect net profit in the current year and future years; and cash flow in the current and future years? 12. The article refers to changes in disclosure requirements relating to environmental liabilities in many countries around the world is it that companies recognise the liability? Answers: Introduction: This given case study depicted about the IASB and FASB boards planning for develop a conceptual framework to help the users of all the financial documents. It has been planned by IASB to prepare a new conceptual framework by using the previous adopted principles. This step is planned by the boards to help the companys and its stakeholders to understand the financial condition of a company perfectly. This given study also described that many problems and critics has been faced by the boards for planning a new framework. A common conceptual framework is required for the boards to remove the complexities from the previous framework. This is also depicting about the similarities, difference, relevancy, importance etc. The case study depicts about US GAAP accounting techniques that is historical cost accounting. It says that this technique become quite outdated so US GAAP must replace this technique through launching a new technique or take consideration of any other board. It has also been said that fair value accounting would work well for the identification of real worth of the asset and present a true worth of the business. It has also been described that because of old technique boards as well as company had to face many problems so the country and the accounting standard board are thinking about the replacing of the technique. The case study explains that a countrys environment and society plays a very crucial role in life of an organization as well as an individual. It also found that now days it is quite important for every human being to take care about the environment and society. Every company must prepare such policies that it could also focus on the sustainability of the environment as well the welfare of the society. It depicts that every individual become so concern about the environment so if a company want to survive in the market, it is mandatory for the company to make such policies and follow them. These strategies would also help the company in attracting more investors. 1. Conceptual Framework: A conceptual framework is a technique used by individuals to do a work with full of perfection. Many principles, rules, tactics, regulations etc have been used by the preparer of the framework to make a good framework. In the consideration of accounting, a framework is theoretically prepared document to help the preparer of financial statements in preparing and presenting the good financial documents (Csikszentmihalyi and Larson, 2014). This framework is prepared by the boards after analyzing all the aspects, rules, assumptions, nature, guideline, principles etc to implement a great concept of accounting. Framework is a bundle of fundamentals that help every related party. Conceptual Framework requirement: The given case study describes that a revisiting of the framework has been started since 2002. This revision and the development of this framework lies on many objectives, characteristics, criteria and many more of both the boards i.e. IASB and FASB (Jones and Wolnizer, 2003). The main reason behind revisiting both the boards for prepare a common conceptual framework is making it easy for the follower of both the boards to prepare and understand the final financial documents. This revisiting has been done to introduce a new framework by considering all the great principles of both the boards. The case study also highlights that the main goal of the boards is to provide the easiness and perfectness to their client and it could be possible only if both the parties come together and analyze the principles together with the help of analyst and researchers. It would be easier for all the related parties to understand the documents in case of a common framework (Xia, Monroe and Cox, 2004). Thus it could be said that a common conceptual framework is very important for everyone to understand the position of the company, identify many issues in the company, sort out all the issues of the company and present the documents perfectly. 2. Importance of common conceptual framework: Through the study, it has been analyzed that the country (United States) has taken many steps to adopt the IFRS. And IFRS and FASB have planned to come together to develop and implement some new accounting standards. All the countries follow the different rules and accounting standards to prepare the financial documents. Thus it becomes complex sometimes for analyst to understand the real situation of a company (Ross, Westerfield and Jordan, 2008). Some of the standards and tactics of accounting depend upon many factors like transaction of business, nature of business, area where company is operated etc. thus it could be said that all the standards are different from each other and the result also differs from each other. IASM frameworks main motto is to assist and guide all the standards of accounting while making the financial statements. Next, this case study also depicts that a common framework would help the stakeholders, auditors, creditors, banks etc to analyze the finical condition of the company (Ross, Westerfield and Jordan, 2008). The FASB boards framework allow preparer to make financial statement according to individual interpretation. This is the main reason which differentiates both the boards. Thus, the main motto behind combine both the boards and make a common framework is because of resolving the disputes, help the users, ease in comparison etc. 3. Importance of common conceptual framework for different parties: Conceptual framework is a fundamental body of accounting. It provides a guideline to the financial statements provider to make and present the financial document in a great manner. Further, this framework could also help a company and its related parties to identify and analyze the true worth and condition of the organization (Narrow et al, 2013). The parties for whom the common framework would be beneficial is company, managers, CCFO, accountant, stakeholders, creditors, shareholders etc. The boards and all the above mentioned parties would be beneficiary in case of a common framework is implemented by the boards. But basically, it would be more helpful for the researchers and analyst as they dont have to research and analyze different principles, regulations etc to understand and analyze the condition of a company. 4. Cross Cutting issues: Cross cutting issues are those kinds of issues which occur at the time of combining different principles together. Cross cutting issues could be seen everywhere now days as the rules and regulations are different each other so an individual go through such process approx on daily basis (Hollander, Kim, Braun, Simeon and Zohar, 2009). These issues could also be described as such issues which could be arising as a special result at the time of analyzing a particular field and doing some operations. In accounting, cross cutting issues have special concern of. Some of the examples of cross cutting issues in accounting are related with presentation, tactics, standards, rules, understanding etc such as the issue between the IFRS and FARS related to their principle, the issue between the countries for their different framework etc (Kim, 2011). thus it could be said that it becomes tough for a person to understand all the principles and work accordingly. 5. Historical cost technique fundamental problems: Fundamental problems are those problems which are related with the principles, law and rules regulations. Historical cost accounting is a technique which depicts the purchasing value of an asset, no matter how much difference has been arise in the worth of that particular asset (Ross, Westerfield and Jordan, 2008). This case study explains that many problems have been faced by the US GAAP as analyst and researcher concluded through their studies that this technique is not at all relevant for any of the party. The main fundamental issues are such as it does not show the real worth of an asset, the written value of asset is not relevant, depreciation value is not realistic, it is not useful for the investors and analysts, it shows a higher profit of the company, the price level never get change, provisions value are fake etc (Pearce, Barbier and Markandya, 2013). thus it could be said that the existing technique has many fundamental issues in it. 6. Economic reality as core principle of accounting: The economic value and accounting value of an asset or business could differ and conflict sometimes but this situation could never be helpful for the chief financial officer, finance manger and accountant of a company as well as all the related parties. As CFO has to deal with creditors, lenders, analyst, investor and many more of the company and it is compulsory for him to present a true value of his business to them (Uno and Bartelmus, 2013). It has also been studied that those countries that are following the fair value technique could also mislead their investors but the chances are rare. It also analyzed that both the technique have some issues but if a comparison analysis has been done on both than it is suggested to opt the fair value technique (Laux and Leuz, 2009). As this technique at least help the investors to find the real worth of the business and analysis that the worth is honest or fake and it could also be check that the provisions are of true value. Thus it could be said that economic value could play a role of core principle of accounting. 7. Economic reality measurement: Economic reality is the real value or worth of a business according to the current situation and economic condition. It becomes compulsory for a business to identify the economic reality to present a fair statement of finance (Laux and Leuz, 2009). This method is to identify the business and its transactions nature to determine the real worth of organization under many circumstances. It helps a business in identifying the real worth. Economic reality measurement could be done on the basis of fair value accounting. However, every country opts the different method for identify the economic value according to their nature of business, worth of business, their standards, principles, frameworks etc. the main reason for determine the economic value is to make the statements more reliable. There are many factors which affect the measurement techniques and it is not possible for make a control on all the factors worldwide (Moser and Ekstrom, 2010). But country could manage all the factors lies in it. More, it has also been observed that some factors do not create an issue like provisions and depreciation. So it could be said that measurement techniques are not same at all the places but it is suggested to the board to implement the fair value accounting technique to determine the worth of economic reality (Zio, 2009). 8. Reliability concept in Accounting: Reliability is the main factor in every part of an individual. If an individual find reliability in anything, than only he get attracted towards that. Basically, it is the quantitative information. Reliability only takes place when all the information is error free and bias free. In accounting, the reliability depends upon the honesty accountant show at the time of making the final documents (Mellino et al, 2015). The basic principle of reliability is faithfulness and verifiability. The reliability of accounting depends upon the proofs and their verification like invoices, bills, receipts, statements, documents, documents from third party etc. all the proofs must be cross verified by the investor before taking any decision. Sometimes, it become tough for the investor to check that the documents are reliable or not because of some factors like provisions, depreciation etc (Low, Lacasse and Nadim, 2007). So board must also introduce some new principles to generate the reliability. Thus it could be said that reliability is very important in a business. A person could make himself reliable only if he found that all the evidences are in the favor of the statements. 9. Companys environmental provisions liability: It has been found that every individual as well as organization have few liabilities for the place they are living, the society they are serving and the environment. Mostly the reasons behind pollutions are manufacturing waste. So it is mandatory for the companies to make such strategies through which the pollution could be reduce and society needs not to face that much harm (Bezemer, 2010). An accountant is obligated to record about these expenditure too so that all the parties get to know about it. Board has planned a framework to record such kind of expenditure (Whittington, 2008). Some company thinks that spending money on such policies or society is a waste and it occurs the more cost but if it has been talked in a broad manner than it is compulsory for every business to grab more market and attract more investors. Company is a part of the society so it becomes a duty of the company to serve the society in a well manner (Glasson, Therivel and Chadwick, 2013). So an accountant must prepare a special provision and budget while preparing the financial documents. 10. Liability Recognition requirement: All the organizations worldwide are required to follow the guidelines of their board to make provisions for the welfare of the society and retaining a less polluting environment. Every board has different guidelines, but for sure it all are focusing for retaining good environment. FASB explains that every organization which are having polluting assets need to maintain a different provision for the society to save the environment (Schroeder, Clark and Cathey, 2001). More, it has also been said that a good provision could only be made if company follow the new technique i.e. fair value accounting. If a business do not follow such rules than it becomes tough for the company to remain in the market. However, it has also been analyzed that such provisions helps a company in developing its operations and attract the more finance from the market (Hk, Moldan and Dahl, 2012). It is also said that if a business want to be in the market for a long period than it should spend some of its amount in saving the environment and help the human community or society to grow up. Many companies who are focusing on the sustainability have achieved a high growth in the market. 11. Effect of Liability Recognition: Policies on sustainability, saving environment, society welfare, corporate social reasonability etc leads an organization towards a great investment. As company need to spend lot of money and that money is not at all helpful for the companys products and lead it to a high investment. Further, it has also analyzed that there are many attributes due to that the cost of capital would increase but this investment would be inn favor of the company to attract the investors and stakeholders (Evangelinos, Nikolaou and Leal, 2015). The net profitability condition of the company might decrease because of such expenditure but ultimately it would be beneficiary for the company. Thus the planning and implementation of such policies is important to enhance the total profit of the company. If cash flow is taking concern of than it has been analyzed that such cost and spending amount could decrease the percentile of profit but with the time the total profit amount would be higher because people and investor would start showing trust on that organization. Thus it could be said that it is necessary for a company to maintain some reserve and provisions for such policies to attract and gain the profit of all the investors, stakeholders, customers, society etc (Manfredi et al, 2015). a great maintenance of such policies would lead the organization on more profitability path and this would also help the organization in retaining in the market for long term. 12. Environmental Liability disclosure: Liability is a kind of duty that is has to perform by every individual. Normally, every human being has some responsibilities and liabilities towards its environment. Basically, if an organization is taking concern of than the main factor behind environment loss is manufacturing waste (Arena, Conte and Melacini, 2015). Environment could also destroy by doing some polluting stuff by company. Individuals are showing more concern towards their environment now days. So it is almost compulsory for the management to take a step towards saving the environment. So it is compulsory for every organization and their manager to maintain different budget for the sustainability of environment (Hk, Moldan and Dahl, 2012). This is important to measure the performance and its enhancement on environment. This is important in enhancing the goodwill value too. Now days it becomes a trend in organizations to spend money on sustainability and CSR. A good policy of recognition could help the company in enhancing its worth and goodwill value. Conclusion: It can be said through doing a study on the case and other published books that IFRS and FASB have different principles and their reporting principles are also different from each other. So it creates a problem for the analyst and researchers. It is suggested to the board to make a common framework for the easiness of the parties. It could be said by doing a study on the given case study that US is suggested to the change the accounting technique of cost and introduce the new technique i.e. fair value accounting technique. It has been found that the existed technique is quite old and it is not at all useful now for the investors and it doesnt depict a true value of accounts. So it is compulsory for the country to make changes. Fair value accounting would be more helpful for every party as it depicts the true worth of asset as well as business. 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