Going Concern Research Paper Examples

Introduction

Accounting practice is an extremely disciplinary practice that helps government’s entities, private corporations, and non-government organizations understand the economic viability of their operations through understanding, recording and interpretation of accounting processes. The practice of the accounting process is by the principle of going concern concept that assumes that business entities are artificial persons that will continue to operate their activities in the current and unforeseeable future.

A history is surrounding the FASB/IFRS statement, outlining why and how the report evolved.

Government and business entities are obligated to keep records of their accounting procedure and analyze them in a manner that all pertinent stakeholders may be able to interpret and understand. To enhance uniformity in accounting standards, Financial Accounting Standards Board (FASB) was established in and operationalized in 1972 as a private entity to develop and improve the financial standards of accounting and reporting to enhance formidable decision making process for investors and other pertinent stakeholders.
The international accounting standards were developed following a period of inconsistent in accounting reporting formulas by various entities – a situation that hindered effective understanding of entities performance and created a loophole of mismanagement of funds due to the concept of information asymmetry. Before its establishment, the Accounting Principles Board was mandated to establish and improve accounting standards for all public entities in the United Standards between 1959 and 1973.
Over the years, different companies have grown in production capacity and revenue base thus considering the need to extend its products and services globally. As a result, there was need to create a formidable accounting procedure and interpretation that would accommodate the organizational cultural diversity that accrue from the globalization process venture. The Financial counting standards board advanced the accounting standards to the International Financial Reporting Standards (IFRS). The essence of establishing the universal financial standards was aimed at harmonizing the accounting reporting standards across the European Union in creating an enabling platform for internal and external users of accounting information to understand interpret and compare various accounting performances for most companies across the globe. Surprisingly, the international financial reporting standards have been adopted by most countries in the world, replacing the previously held international accounting standards.
The international financial standards reporting standards through the Financial Accounting standards Board (FASB) should emphasize on standards that justify the perceived cost of a particular business operation and safeguard the credibility of an entity’s objectives to its stakeholders. The Financial Accounting standards board is mandated by the law to formulate accounting policies and procedures that promote universal practice and accommodate stakeholder’s sentiments with intent to continuously improve the accounting and reporting procedures in relevance to the rapidly changing global economy. Despite the global development of international Financial and reporting standards (IFRS) United Sates has been reluctant to integrate the accounting standards fully to its acceptable accounting procedures citing inconvenience in financial reporting. Others such as the European Union upheld the application of the standards in its financial accounting rules subject to scrutiny and approval by the Accounting Regulator Committee upon receiving advice from the European Financial Reporting Advisory group. It would be worth to note that in as much as local accounting procedures are upheld by various countries, all local companies must align their financial reports in a manner that conforms to the international financial and reporting standards.
In general, the emergence of the accounting procedures to accommodate the international financial and economic changes has led to the growth and development of integrity and accountability by public and private entities and facilitated the globalization strategy by corporations through mergers and acquisitions. Most stakeholders from diverse backgrounds can scrutinize and understand various financial reports as a tentative approach towards investing their resources into the company.
A discussion of how certain items are accounted for under the new statement as compared to how they had previously been accounted for.
One of the major roles that characterize the presence of the Financial accounting standards Board (FASB) is to inject resources into analyzing the effectiveness of the prevailing accounting principles and modify them to conform to the changing economic conditions. The board has been critical in advancing the international financial reporting standards based on the conventional accounting practices. Over the years, the board has engaged in various participatory deliberations to modify the arising accounting reporting standards manifested in the existing reporting procedures. Some of the key amendments to financial reporting and recording include;

Abolishment of Goodwill amortization in favor of impairment tests

Goodwill is an intangible asset that is when a company purchases another company. The goodwill asset is termed as intangible because it can neither he nor seen and the management reserves the privilege to notice and assess its value on a yearly basis to determine whether its fair value exceeds or falls below the historical cost. If the latter scenario occurs, the accounting practices demands that the cost must be to the fair market value through an impairment accounting record. Notably, goodwill is only generated when an enterprise changes hands through acquisition and not otherwise through internally generated operations. Upon goodwill realization, amortization calculated on an annual basis under a presumed economic life of 20years.
However, the new international financial reporting standard have revised the traditional provisions of goodwill by emphasizing that goodwill should be separable from its entity and should be upon assessing the difference between the net fair value of all acquired net assets and the total value fair value of the transferable value. According to the IFRS standards, amortization of goodwill is abolished, and instead impairment test based on the present value of future cash flow method tom determine the exceeding value necessary for recording (Artigas, Lorentsson & Nilsson, 2014). The new standards outline negative technological changes, rising market rates and economic changes as the core factors that companies should consider in evaluating the presence of impairment in asset value. The carrying value; that includes the summation of book value and good will fewer liabilities, is subtracted with the fair value and the resultant figure in excess of the fair value must be adjusted to level the carrying value. The standards recommend that an impairment loss be in the income statement.

Recording assets in historical concepts to fair value

In the conventional accounting standards, all assets are their historical value based on the historical concept of accounting. In this case, an asset would entrench in the balance sheet at the cost that it was purchased regardless of any ensued loss or increase in market value. Hence, the value of the assets would be immune from any market or changes in economic value in a bid to maintain consistency in financial reporting. However, the financial accounting standards board (FASB) converged severally and deliberated on the need to consider the value change in an asset over its useful economic life. The claimed the inability of the historical concept to realize the changes in market value of an asset over time. Therefore, fair value accounting concept was retained for non-financial assets and abolished in financial securities. The amended financial standards indicated that contractual terms bound financial securities and, therefore, could not be to alternative use until the expiry of the contractual period (Emerson, Karim & Rutledge, 2010). The amendment served in solving the accounting dilemma associated with historical concepts that did not specify the fair value of financial assets, no financial assets, and liabilities.

Revenue recognition principle

In accounting standards, revenue is recognized when goods are one entity provides form on entity to the other or services to another. In this case, the timing of receiving cash is disregarded in the accounting procedure. On the other hand, cash received is recorded in the books of accounts regardless of when the transaction had taken place. For instance, the essence of recognizing revenue before payment has exposed most companies to recording of bad debt that accrue from unpaid but recorded revenue. For that reason, the Interactional Financial accounting standards(IFRS) has formulated a new revenue recognition concept based on a five criterion framework to seal the bad-debt and revenue overestimation loophole. For instance, a contract must be identified with the customer before estimating revenue recognition. Further, the accounting principle recognizes the need to identify separate performance obligations of an asset such as its ability to generate gains to a customer on its own or in supplement with other available resources (Wüstemann & Kierzek, 2005). The ultimate key is the need to calculate the expected transaction cost that each entity anticipates gaining. The effectiveness of this adjusted policy is that it eliminates the unforeseen revenue recognition circumstances such as overestimation of income and also helps in accounting for incremental costs that accrue in obtaining a contract.

Derivatives and hedging

In the previous accounting standards, it would be difficult for entities to differentiate between bifurcated embedded derivatives and the host contract since the system is inadequate to do so. In the proposed accounting amendments, it is entrenched as mandatory criteria for entities to disclose information that links each derivative with its associated host contract to enable investors make informed decisions and avoid losses (FASB, 2015). The reported linking information must be in line with the balance sheet and income statements period when the both the separated embedded derivatives and related host contracts occur.

Changes in lease accounting procedures

The international financial reporting and accounting standards have made amendments to the traditional accounting procedure for recording leases transactions. The prevailing standards demand that the lessor and the lessee should account for the lease transactions as either operating or financial lease. In operation lease, the transactions are not recognized as liabilities and assets in the accounting period while the same is for financial lease. Such a discrepancy of accounting recording without accompanying facts to prove has been cited as misrepresented criteria of lease transactions. For that reason the financial accounting standards board has been holding extensive discussions on the best method to represent lease transactions in the accounting books to ease understanding and interpretation by users of accounting information. Based on the revised draft, leases would be realized as assets and liabilities depending on rights and obligations it creates (IFRS, 2013). Additionally, the lessee would be permitted to lease a property for more than 12 months. Lease equipment’s and vehicles would have to be amortized and reported in separation with the interests accumulated on liability. . In summary, the amendment indicates that information on cash inflows generated from the lease transactions should be precise to enable understudying by users of accounting information.
The impact of the statement on financial statements and the reaction of the business community to the new or proposed statement
The financial standards amendment met criticism from various quotas who claimed that the proposals would adversely affect the reporting standards culture as well as incur further transaction cost for shifting to the new framework. Most businesses oppose the recording of assets on market value claiming it will portray a deemed picture of the assets value especial with the interference of unforeseen calamities. The fair value accounting principle was cited in mild way as the cause of the 2007 global recession due to its wrong interpretation of mortgage based securities market value. However, the claims could not hold sustainable grounds for long. For the business community, it would be an uphill task to prompt them to convince their shareholders of the impeding financial reporting changes and subsequently develop a reporting procedure that would enable all stakeholders understand the financial reports effectively.

References

Wüstemann, J., & Kierzek, S. (2005). Revenue recognition under IFRS revisited: conceptual models, current proposals and practical consequences. Accounting in Europe, 2(1), 69-106.
Emerson, D. J., Karim, K. E., & Rutledge, R. W. (2010). Fair value accounting: A historical review of the most controversial accounting issue in decades. Journal of Business & Economics Research (JBER), 8(4).
Artigas, D., Lorentsson, M., & Nilsson, A. (2014). Goodwill Accounting-A study of public groups in Sweden, Germany and the United Kingdom before and after IFRS.
IFRS - IASB and FASB propose changes to lease accounting. (2013, May 16). Retrieved from http://www.ifrs.org/Alerts/ProjectUpdate/Pages/IASB-and-FASB-propose-changes-to-lease-accounting-May-2013.aspx
Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives. (2015). Financial Accounting Standards Board (FASB).