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What are the differences between a ‘decision usefulness approach’ and ‘accontability and stewadship function’ to financial reporting? Analyse the arguments and determine which approach you think is better. Which approach you favour is up to you, but you m Essay Example

  • Category:
    Finance & Accounting
  • Document type:
    Research Paper
  • Level:
    Undergraduate
  • Page:
    2
  • Words:
    1249

7DIFFERENCES IN APPROACHES IN FINANCIAL REPORTING

Differences in approaches in financial reporting

Differences in approaches in financial reporting

Financial reporting is the process of assessing the financial performance of an entity. The assessment should be able to provide the current and any potential investors or creditors with information about the value of the firm, in terms of its assets and liabilities. It also gives an investor the information on the entity’s future cash flows (Alexander & Britton, 2004). This information helps them to assess how much returns they will get in the future, or the warning signs that they need to be wary about. In assessing the financial performance of a person, a company or an institution, various models or approaches can be used. These include a decision usefulness approach, and accountability and stewardship function (Bebbington et al 2001).

Decision usefulness approach focuses on the grounding of pecuniary accounting information that studies the assumption of investor resolution making in order to deduce the nature and kind of information needed (Staubus, 1998). In many cases, the most beneficial use of the financial report is in making investment decisions. For an investor to make a decision, there are a number of factors that must be considered all which are aimed at ensuring that the decisions that made are rational and will yield maximum returns. Decision usefulness approach aims at relaying the most relevant information that the investors, creditors or any other interested party will need.

This calls to a good understanding on how they make decisions. Decision usefulness approach requires that one do a careful and broad analysis on the factors that will influence decision making, hence provide these interested parties with the relevant information. Key in this discussion includes the financial performance of a company and the prospected growth and performance in the near and far future. An investor would need to know such information so that there is a minimal risk to loss of the investment that he makes. On the other hand, a creditor would require such information so that he can assess if he is going to be paid or if he should take other drastic measures. To satisfy this information and needs, one is expected to do a careful analysis on the kind of information that these entities need so that when giving the financial reports, the information will be helpful and be beneficial to the user. A good knowledge of various decision-making theories is therefore; particularly necessary since they assist in knowing how an investor makes the decisions.

Accountability and stewardship function focuses on the accountability of the management whether it is the directors or the management board, to the owners or proprietors of the entity. Stewardship tries to look at what has been done in the past, rather than what is being done now or in the future. By studying this, quality of the decisions made by the management in the past can help to deduce what is going to happen in the future. The main emphasis here is how accountable the management has been in making sound decisions and policies for the organisation in the past.

Studying the performance of a firm by looking at the past managerial and decision-making policies is a useful approach that can help an investor form some reasonable forecasting on what is going to happen to the company in the future, if there is consistency in the current policy implementations. Chances are high that the level of accountability that has been witnessed in the past will be repeated or carried on in the future. Thus, if there has been gross negligence or poor policy and decision-making, it is going to be replicated in future. If the management cannot account properly for what has been done in the past, there is also no guarantee that there will be accountability in the future. An investor or even a creditor will therefore, be particularly interested in assessing the accountability and the stewardship of the management of an entity (Walker, 2003).

There is no conflict between stewardship and decision usefulness approach in financial accounting. The main difference in them is primarily their area of emphasis, whereby the two emphasise on different aspects. Stewardship may lay greater emphasis on the past transactions or events while on the other hand, decision usefulness approach places greater emphasis on the current and future transactions and events. Whatever the approach taken, it gives a potential investor or any related party some exceedingly useful information that will assist in making sound decisions or in taking the necessary precautionary measures (Frecka et al 2004).

When choosing a suitable approach in financial reporting, one should consider several factors. The primary of these is what is the use of the information and what are the kind of decisions that need to be done. In my own view, a stewardship approach is more valuable due to the fact that it aims at looking at the accountability of management in decision-making. To give an investor the best information that can be used to project what will happen in the future, it would be prudent to give an analysis in trends of a company in the past. On the other hand, it would help to promote accountability in the future since the decisions and policies that the management makes today will be under focus particularly soon so as to determine their soundness and importance. By carefully analysing what the management has done, it will be remarkably easy to infer what the management is going to do in future (Zeff, 1980). This can help to give an investor a likely idea on how the firm will be performing, since performance is pegged on the quality of decisions made (Staubus, 2005).

The limitations with looking at the accountability and stewardship function are that it does not take into consideration some current issues in a firm. These could include current restructuring to promote efficiency, or any other recently implemented change mechanism, especially in the management of the firm. This is because it tends to focus on the past rather than on the current things. If there is a current change to the firm that translates to high efficiency and performance, it may be overlooked, making the user of this information miss out on key details about the firm.

References

Alexander, D. & Britton, A. (2004). Financial Reporting. London: Cengage Learning EMEA.

Bebbington J., Gray R. & Laughlin R. (2001). Financial Accounting: Practice and Principles. London: Cengage Learning EMEA.

Dickhaut, J., John W. & McCabe .A. (1997). The Behavioral Foundations of Stewardship Accounting. Behavioral Research in Accounting. 9, 60.

Frecka, T., Morris, M. & Ramanan, R. (2004). Back to the Future: Implementing a Broad Economic, Inquiry-Based Approach to Accounting Education. Journal of Education for Business, vol. 80 (2), 69-74.

Lennard, A. (2007). Stewardships and The Objectives of Financial Statements: A Comment on IASBs Preliminary Views on An Improved Conceptual Framework for Financial Reporting: The objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. Accounting in Europe, vol. 4(1), p. 51-66

O’Connell, V. (2007). Reflections on Stewardship Reporting. Accounting Horizons, vol. 21 (2), p. 215-227.

Staubus J. (1999). The Decision Usefulness Theory of Accounting. London: Routledge Publishers.

Staubus, J. (2005). Ethics Failures in Corporate financial Reporting. Journal of Business Ethics, vol. 57, p. 5-15

Walker, .G. (2003). Objectives of financial reporting. Abaccus, vol. 39 (3), p. 340-355.

Zeff, .A. (1980). «Intermediate» and «Advanced» Accounting: The Role of «Economic Consequences». Accounting Review, vol. 55 (4), p. 658-663.