CONTEMPORARY ISSUES IN ACCOUNTING

Solution Manual For Contemporary Issues in Accounting Michaela Rankin, Patricia Stanton, Susan McGowan, Kimberly Ferlauto & Matt Tilling

PREPARED BY:

Sue McGowan 1 / 4

Chapter 1: Contemporary Issues in Accounting

© John Wiley and Sons Australia, Ltd 2012 1.1

CHAPTER 1

CONTEMPORARY ISSUES IN ACCOUNTING

Contemporary issue 1.1 Abstracts from critical accounting research 1.In each of these abstracts the notion of true or fair accounting or financial statements is considered. Identify any requirements in accounting standards or corporations legislation that relate to the truth or fairness of financial statements or reports. (K) The accounting standards require that the financial statements provide a fair presentation and

state:

Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. (IAS 1/AASB 101, para 15).(It should be noted that the concept of faithful presentation and whether there can be a true and fair view is contested and this is discussed in Chapter 2).

In Australia Corporations Law, S297, requires that :

The financial statements and notes for a financial year must give a true and fair view of: (a)the financial position and performance of the company, registered scheme or disclosing entity; and (b)if consolidated financial statements are required--the financial position and performance of the consolidated entity.This section does not affect the obligation under section 296 for a financial report to comply with accounting standards.Note: If the financial statements and notes prepared in compliance with the accounting standards would not give a true and fair view, additional information must be included in the notes to the financial statements under paragraph 295(3)(c).There is similar legislation in many countries. 2 / 4

Solution manual to accompany: Contemporary Issues in Accounting

© John Wiley and Sons Australia, Ltd 2012 1.2 2.Can you think of reasons why there could be claims that financial statements that are prepared in accordance with accounting standards are not true or fair? (J, K, SM) The assumption made in the standards is that compliance with accounting standards will, expect in rare cases, result in a true and fair view. Reasons for considering that financial statements prepared in accordance with accounting standards may not present a true and fair

view could include:

•Some accounting standards do not allow professional judgment and have set rules, regardless of whether these rules reflect the substance. For example, in current leasing standards treat no assets or liabilities are disclosed for operating leases despite the fact that most of these leases would meet the definition and recognition criteria for such elements under the conceptual framework (Note: this deficiency is acknowledged and it is intended that this standard be revised). Another example is that internally generated intangible assets (such as goodwill, brands) are not permitted to be recognised under current standards, yet these may be valuable assets to an entity.•From a critical perspective, the limitations of information provided by accounting render these statements incomplete and biased, toward financially measurable elements, and so would not be considered true and fair (see answer to 3 below) Students may identify further reasons.

• The first extract states that current accounting “may disenfranchise those parties to

the dispute whose issues are not readily expressed in the common vocabulary of business’. What do you think the author means by ‘the common vocabulary of business’? Given this, what type of issues may not be included in accounting reports/statements and how could their exclusion impact on decision making? (J, AS) •The common vocabulary of business here would refer to monetary or dollars values (so financially measurable elements). This is also normally restricted to ‘direct’ and measurable costs and benefits (so other factors, eg: externalities such as pollution or employee satisfaction/morale are not included unless directs costs associated with these). Further, the prime objective of business is ‘profit’ and this profit orientation is reflected in what is included and how measured and gives primacy to economic factors/issues and often short term outcomes.•A few of the issues not included would be social justice, environmental concerns, and 3 / 4

Chapter 1: Contemporary Issues in Accounting

© John Wiley and Sons Australia, Ltd 2012 1.3 social equity issues. Typically decision making frameworks suggest that decision makers should take into account both qualitative and quantitative factors. However if the variable /factors considered are restricted to those in the financial statements this will effectively exclude most qualitative factors. A quote by John F Kennedy (although this is in the context of gross national product, this illustrates the limitations of quantitative information and hence can be extrapolated to accounting issues)

Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armoured cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. (Robert F. Kennedy, University of Kansas, March 18, 1968)

Review questions

• Define what is meant by ‘theory’ and explain how theory is useful. Do you think

theory needs to be considered in financial accounting?

There is no simple definition of ‘theory’ and in usage it is simply an opinion or explanation.

Macquarie dictionary definition states that ‘theory’ is:

• a coherent group of general propositions used as principles of explanation for a class

of phenomena

• a proposed explanation whose status is still conjectural, in contrast to well-established

propositions that are regarded as reporting matters of actual fact

• a body of principles, theorems, or the like, belonging to one subject
• distinguished from the practice of it
• / 4