CURRENT ISSUES in FINANCIAL ACCOUNTING Essay Example

Discuss whether accounting standard setters should continue to grant discretion and flexibility to companies in making accounting choices.

No, it accords opportunities for fraud, it negatively impacts on the accounting reporting system’s entity, and it compromises integrity of the accounting profession, it allows for the compromising of business ethics and allows for opportunities of misrepresentation of accounting information. Flexibility and discretion has led to the advent of creative accounting. Creative accounting is conducted despite rules and regulations as it enforces discretion. It is defined as the art of dealing with matters that pertain to conflict resolution and judgments that occur between the competing approaches of financial results’ interpretation and transactions (Hooper et al, 2008). It may also be referred to as earnings management, cosmetic accounting, earnings smoothing and financial engineering (Amat, 2004). Creative accounting therefore accords opportunities for deceit, misrepresentation and manipulation. The following are examples of creative accounting; income smoothing, distorted reports of financial results, big bath accounting (which entails showing that any incurred losses are the fault of a previous manager in the event of any given take over), earnings management, choice of approaches that reflect results in a mode that favors the organization’s method of reporting for instance revaluation and depreciation techniques. However, it is noted that creative accounting is necessarily not a case of illegality but it is the deliberate manipulation of information for instance the creation of a reporting picture that would not be the case.

Explain how a fair value hedge works. In your explanation include a description of the recognition and measurement requirements for fair value hedges as contained in NZIAS 32 and NZIAS 39.

NZIAS 32 are a set of rules that are used to disclose and present financial instruments while NZIAS 39 are a set of rules that are used to recognize and measure financial instruments. According to NZIAS 39 s.86 there are a number of hedges which include; fair value hedge, net investment hedges that are made use of in foreign operations and cash-flow hedge. Hedging is described as the action taken on an object so as to avoid or minimize likely adverse effects on the movement of market prices or exchange rates. A hedge contract is an arrangement that exists with a given party in which the party accepts all the risks that are associated with any changes in exchange rates or changes in the prices of commodities. Fair value hedge (NZ IAS 39, 2004) is made use of in the hedging of given liabilities or assets. It is noted that if the criteria of a given hedge arrangement is satisfied then both the hedged instrument and hedged item are evaluated at fair value and any differences represent losses or profits on the hedge and the hedge being put on the income statement. It is further stipulated that unless any strict requirements are put into place (NZIAS 39, 2004) then any loss or gain on the given hedging instrument is taken as loss or profit. On the other hand, (NZIAS 32, 2004); stipulates that a given entity should describe its policies and objectives on financial risk management that should be inclusive of policies on hedging every forecast transactions that is utilized by hedge accounting. It further states that disclosure of information that pertains to fair value should include disclosure of the method that is made use of in the determination of fair value and any other relevant assumptions that are used in its application. A good example would entail the assumptions made with regard to discount rates, prepayment rates, interest rates and rates that pertain to credit losses.

References

Amat, O (2004). Creative Accounting: Nature, Incidence and Ethical Issues. Oxford Brooks University. Retrieved April 12, 2011 from http://www.econ.upf.edu/docs/papers/downloads/749.pdf

Hooper et al (2008). Conceptual Issues in Accounting: A New Zealand Perspective. Cengage Learning: Melbourne.

NZ IAS 32 (2004). Financial Instruments : Disclosure and Presentation. Retrieved April 11th 2011 from http://handbook.brookers.co.nz/icanz/resources/IAS/NZ_IAS_32.pdf

NZ IAS 39 (2004). Financial Instruments: Recognition and Measurement. Retrieved April 11, 2011 from http://handbook.brookers.co.nz/icanz/resources/IAS/NZ_IAS_39.pdf