Executive
Summary:
The regulatory framework has developed so much in the recent years. We
need to understand the old and the new regime in the regulatory framework, how
much the investors are important to the organization. The
accounting concepts will be discussed with the conventions of the regulatory
framework along with their strengths and weaknesses in detail. An
attempt will be made to prove that the criticism of the
concepts and the regulatory framework does not mean that published financial
statements do not provide investors with all useful information by explaining
that the regulatory framework did oblige the companies to disclose more vital
information needed by the investors rather than before. By explaining to what
extent the investors are depending on fuller accounting disclosures for
their investment decisions
we will be able to better understand the importance of the regulatory framework. An example will be provided of a company that disclosed wrong information
and their stocks fell down but it had nothing to do with the regulatory
framework.
What are the
purposes of budgets and the key benefits of budgets? Let us discuss how the
preparation of a budget and the monitoring of actual performance against the
budget are very time consuming activities and to what extent this can be considered
as a problem. By explaining the advantages and disadvantages of budgeting we
can try to find out whether the advantages to be gained from having a standard
system of budgets and budgetary control could not be outweighed. Many organizations
have a systematic budget and a budgetary control like Kraft Food Company. There are different methods of budgeting and
each one has a major disadvantages.
Introduction:
Accounting
concepts and conventions of the regulatory framework did help the investors very
much. In this assignment we need to discuss the strengths and weaknesses of the
accounting concepts and conventions of the regulatory framework (SSAPs and FRSs),
the information needed by the investor and whether published financial reports
provide them with what they need. The pressures that companies are facing from customers,
shareholders, employees and communities to disclose more financial and non-financial
information than ever before.
The budgets and
the preparation of budgets and the monitoring of actual performance against the
budget is very time consuming. What are the advantages of having system budgets
and budgetary control and what are the disadvantages? To what extent can such
time consuming be considered as a problem? In the final section of the assignment I will comment upon some of the
main issues raised in this assignment.
Main Body:
Q1. Discuss the strengths and weaknesses of the accounting
concepts and conventions of the regulatory framework (SSAPs and FRSs) that
govern published financial statements. Do the criticisms of the concepts and
the regulatory framework mean that published financial statements do not
provide investors with useful information?
Introduction:
In order to
discuss the strengths and weaknesses of the accounting concepts and conventions
of the regulatory framework we first have to answer why we need the regulatory
framework and why the investor is important to the organization.
We are able to
review the old regime (SSAPs), the new regime (FRSs) and GAAP and where they
came from.
Do the
criticisms of the concepts and the regulatory framework mean that published
financial statements often do not provide investors with useful or full information?
Main Body:
Accounting is a
purposeful activity and is directed towards the specific end of producing
financial reports, which contain information which is used by specific
individuals such as investors. Investors provide financial resources to the
organization (1). In order for the investor to invest in a specific company he
needs information and this information must be true and fair by reflecting the
actual financial position of the company. Limited companies are required by law
(the Companies Act 1985 or CA 1985) to prepare and publish accounts annually
(2). Many figures in financial statements are derived from the application of
judgement in putting those concepts into practice. As a result of that, every one
exercising his own judgement on the same facts often comes up with his own
conclusions.
Accounting
practice has developed gradually over centuries. There are many concepts which
are taken for granted in preparing accounts. Accounting concepts and conventions
as used in accountancy are the rules and guidelines by which the accountant is
guided. All formal accounting statements should be created, preserved and
presented according to the concepts and conventions that follow. There are many accounting concepts. In
the United Kingdom
- The Going Concern Concept implies that the business will continue in operational
existence for the foreseeable future, and that there is no intention to
put the company into liquidation or to make drastic cutbacks to the scale
of operations (2). Without this concept, accounts would have to be drawn up on the
'winding up' basis. That is, on what the business is likely to be worth if
it is sold piecemeal at the date of the accounts. The winding up value
would almost certainly be different from the going concern value (3).
- The Accruals Concept or
Matching Concept The purpose of this concept
is to make sure that all revenues and costs are recorded in the
appropriate statements at the appropriate time.
- The Consistency Concept states that with all similar items, similar accounting
treatments must be used.
- The Prudence Concept states if there are different procedures or different ways of
valuations that can be used we must chose the most cautions ones.
There are also
The Entity, The Money Measurement, The materiality and The Historical Cost
concepts.
From 1970 to 1990, the Accounting Standards
Committee (ASC) developed accounting standards with the aim of narrowing
the areas of differences and variety in accounting practices. The ASC published
25 statements of standard accounting practice (SSAPs).The SSAPs (Old
Regime) applied in particular to the accounts of limited companies in order to
give a true and fair view of an enterprise’s results and financial position (2).
In 1990 a new
system came into being for producing standards, following the recommendations
of the Dearing Reports, produced for the Consultative Committee of
Accountancy Bodies (CCAB) in 1988.This proposed that a two-tier system
should be established. The Accounting Standards Board (ASB) is much
better staffed and financed than the ASC. New standards issued will no longer
be called SSAPs but Financial Reporting Standards (FRSs) in the new
regime. In time, all standards will be replaced by or converted to FRSs (2).
Generally Accepted
Accounting Practice (GAAP) is a term that has
sprung up in recent years and it covers all the rules, from whatever source,
which govern accounting. Most countries have their own GAAP. GAAP is in fact a dynamic concept. This idea
that GAAP is constantly changing is recognised by the ASB in its Statement
of Aims where it states that it expects to issue new standards and amend old
ones in response to ‘evolving business practices, new economic development and
deficiencies identified in current practice ’(2).
The strengths
of the regulatory framework:
(a) They
reduce or eliminate confusing variations in the methods used to prepare account.
If we take, for
example, a company that purchases a new building, we can see many different methods
of recording it in the financial reports and the way it records depends on the
judgements of the accountant. This could
be confusing for everybody. If we take two identical companies and both of them
purchased new buildings with the same value we could well see two different
financial statements. The regulatory framework did solve this problem which was
causing a lot of confusion.
(b) They
provide a focal point for debate and discussions about accounting practices.
In this information
age, accounting has become more important than ever. For this reason,
accounting practices need a focal point for debate and discussions and this
problem is being solved by the regulatory framework.
(c) They
oblige companies to disclose the accounting policies used in the preparation of
accounts.
In accounting
there are different methods of recording inventory and also how to record a newly
purchased property. The regulatory framework has solved this problem by obliging
companies to disclose the accounting policies used in the preparation of
accounts. The way that this information will be recorded will affect the bottom
line of financial statements of the organization.
(d) They are
a less rigid alternative to enforcing conformity by means of legislation.
There were rigid
legislations before the regulatory framework. The pressures that the companies
faced from those rigid legislations were huge. The regulatory framework has
solved this by less rigid alternatives.
(e) They have
obliged companies to disclose more accounting information than they would
otherwise have done if accounting standards did not exist.
There were very
few companies before the regulatory framework who chose to report the cost of
sales in their accounts. Such useful information was needed by the investors
but many companies did not disclose it before the regulatory framework. This
problem, after introducing the regulatory framework, no longer exists.
The
weaknesses of the regulatory framework (2):
(a) A set of
rules which give backing to one method of preparing accounts might be
inappropriate in some circumstances.
This is a major
weakness in the regulatory framework. An example of the inappropriate circumstances
is when a company purchases investment properties. In this case applying
depreciation is not acceptable.
(b) Standards
may be subject to lobbying or government pressure.
The government
and the lobbying from some industries did put pressure on formulating the
standards. This pressure did cause some standards to be suspended like what
happened in USA
(c) They are
not currently based on a conceptual framework of accounting.
The regulatory
framework is changing constantly as circumstances alter through new
legislation, standards and practice. The conceptual framework of accounting is
no longer the base for the regulatory framework due to new economic developments
and deficiencies identified in current practices (2).The emphasis has shifted
from ‘principles’ to ‘practice’.
(d) There may
be a trend towards rigidity, and away from flexibility in applying the rules.
The reliance on
judgements in technical accounting matters seems to have gone (2). Every thing
in technical accounting now is relying on the regulations produced by the
regulatory framework.
Q. Do the criticisms of the concepts and the regulatory framework
mean that published financial statements do not provide investors with useful
information?
A. No, they do not.
Much useful information is provided in
published financial statements as a result of the regulatory framework. The
regulatory framework obliges companies to disclose the accounting policies used
in the preparation of accounts. Before the regulatory framework investors were
facing difficulties to get full information about the company they wanted to
invest in. Much critical information was needed by the investors but the
companies did not disclose this before the regulatory framework. Cost of sales
data is very important for investors but many companies chose not to disclose that
cost before the regulatory framework. More disclosure
of non-financial information, more forward-looking information and more
information about intangible assets was a result of the regulatory framework. For sure, the investors are still asking for more information. The
regulatory framework has helped the investors by obliging the companies to disclose
more information than before. Regulatory
framework is reviewed regularly for development.
Members of the Financial Accounting Standards
Board (FASB) and its staff have been active
participants in several efforts to improve the quality of business reporting,
which encompasses the broad spectrum of information that a company provides to
investors and creditors. The most recent effort was the FASB Business Reporting
Research Project. The Steering Committee directing that project published three
reports during 2000 and 2001, including Improving Business Reporting:
Insights into Enhancing Voluntary Disclosures. This Special Report is
another step in that process (4).
By the information now published in the
financial statements, investors now can analyze the company they want to invest
in a much better manner.
If we take a look at Enron Corporation and
what happened to it, we will find that they published financial statements but
with wrong information to look good in front of the investors. The following
chart will explain what happened to their stock price as a result (5).
A survey
by McKinsey & Company of over 200 institutional investors in 31countries
found that over 90% of them want a single unified set of global accounting
standards(5). Out of this study we can find that the investors believe in the
regulatory framework. The study also
found that ‘accounting disclosure’ is the single most significant factor
affecting their investment decisions. If we take a deep a look to the
result of this study we understand up to what extent the investors depend on
the accounting disclosures in their investment decisions.
As a result, the
criticism of the concepts and the regulatory framework does not mean that
published financial statements do not provide investors with useful information
but it helps the investors more than ever. We can’t say that what happened to
some companies like Enron that was caused by the regulatory framework. Investors
had gained a lot of benefits from the regulatory framework and they are still
asking for more. The development of the regulatory framework is trying to
supply investors with what they need.
Conclusion:
By discussing
the accounting concepts and the strengths and weaknesses of the regulatory
framework and explaining the importance of the investors in the companies, I
have tried to prove that the criticism of the concepts and the regulatory
framework is not valid.
Q2. In practice, the preparation of a budget and the
monitoring of actual performance against the budget are very time consuming
activities. To what extent do you consider that this problem and any other
disadvantages of the budgeting process outweigh the advantages to be gained
from having a system of budgets and budgetary control?
Introduction:
I will explain
what budgets are and the purpose of budgets. By discussing how the preparation
of a budget and the monitoring of actual performance against the budget are very
time consuming activities I will try to find out to what extent this can be
considered as a problem. There are advantages for having a system of budgets
and budgetary control and also disadvantages but does it outweigh the advantages
to be gained from having a system of budgets and budgetary control is what
needs to be discovered.
Main Body:
What is a budget?
A budget is ‘A quantitative statement, for
a defined period of time, which may include planned revenue, expenses, assets,
liabilities and cash flows (2).’
What is the purpose of budgeting (2)?
- To co-ordinate the activities of different departments towards a single plan.
- To communicate targets to the managers responsible for achieving them.
- To establish a system of control by having a plan against which actual results can be compared.
- To compel planning.
There are many steps in the process of the
preparation a budget. The co-ordination and administration of budgets is
usually the responsibility of the budget committee with the managing director
as the chairman of the committee. The budget manual is a collection of
instructions governing the responsibilities of persons and procedures, forms
and records relating to the preparation and use of budgetary data (2).
Identifying the principal budget factor is the first task in the budgetary
process. In order to have the master
budget many particular budgets needs to be first prepared. The preparation
of a budget may take weeks or months before the master budget (budgeted
profit and loss account and budgeted balance sheet) is finally agreed (2).
Amendments could be done many times to the functional budgets (sales
budgets, production budgets, direct labour budgets and so on) which will
consume time. It will require more paperwork and
extensive training in the techniques. It takes a lot of time to collect the
data in order to produce the master budget.
The master budget
prepared before the beginning of the budget period
is known as the fixed budget. Revisions to a fixed master budget will be
made if the situation so demands. A flexible budget is,’ a budget which,
by recognising different cost behaviour patterns, is designed to change as
volume of output changes (2).’If we asked ourselves what is the need for
flexible budgets we will find out that the flexible budgets must be used for
budgetary control variance analysis.
Budgetary control is basically the comparison of actual results against budgetary
results. After the comparison, the result could be negative or positive.
According to the result of the comparison, revisions to the master budget
will be made if the situation so demands (2). As a result, not only the
preparation of a budget takes a lot of time but also budgetary control. The
preparation of a budget takes a lot of time and this is a problem but we can
not say it will outweigh the advantages to be gained from having a system
budget and a budgetary control. This is will be clearer after we discuss the
advantages and the disadvantages.
The advantages of budgets:
- It provides a means of measuring
performance. A budget will show
the managers how the organization is performing and it will show the
managers how far along the workforce are doing toward reaching their
goals. "Knowledge is power," as the oft-quoted saying of George
Eliot goes, and knowing about your money is the first step toward
controlling it.
- It gives managers greater control. They
can make decisions based on variance analysis. A system budget is the key to enabling managers to take charge of the financial
positions of the organization. With a budget, managers have the tools to
decide exactly what is going to happen to your hard-earned money—and when.
Control the money or the money will control you.
- It enables forward planning and the
setting of targets to work towards. Knowing
the exact state of the organization will allow managers for forward
planning. The budget gives the mangers the tools for sitting of targets to
works so you can have estimation about your profit by the end of the
year. By this budget allows the
managers to take advantage of opportunities that they might otherwise miss? With a budget, managers will never have
to wonder again they will know.
- A budget sets motivating targets for
everyone to work towards achieving. Budget is a motivational tool it helps
to motivate the workforce towards the work.
Disadvantages of the budgeting
process:
- Frequent budgeting might have an off-putting effect on managers who doubt the value of preparing one budget after another at regular intervals, even when there are major differences between the figures in one budget and the next (2).
- The routine will affect the managers while preparing the budget. The attitude of the managers toward the budget will reduce the effectiveness of the budget. The managers will not react as required toward the budgetary control. It is human behaviour that will cause all of this.
Kraft
Food Company thinks that it is important to keep sight of the
organization’s long term
goals to avoid the risk
that budgeting might lead to short-term focus on financial results. This could
foster cost cutting exercises at the expense of strategy. In the worst
case, individual managers may pursue exclusively their own narrow goals rather
than business wide ones. If individual managers are not happy with the budget
they may co-operate poorly, so it is important to have detailed discussions to
achieve collective agreement. This is why Kraft as an organization retains a
consultative approach to constructing budgets (7).
If we
take a look for the different methods of budgeting will find that each one has
a major disadvantage:
- ZBB method is an extremely time consuming method for managers to produce it.
- Incremental Budgeting method builds on the historical information of the organization and managers are not given the opportunity to have a real challenge.
- Top-dawn method could be considered unrealistic.
- Bottom-up method also could be
considered unrealistic because, even if achieved, it may not deliver the organization’s objectives.
As a result,
there is a disadvantage in each method but we still need to ask ourselves if it
outweighs the advantages to be gained from having a standard system of budgets
and budgetary control.
In my opinion the advantages to be gained from
having a standard system of budgets and budgetary control can not be outweighed.
We must have a strong system budget and budgetary control because the routine of frequent budgeting could affect
the quality of the budget. We must take into
consideration that the human attitude and behaviour will affect the preparation
of the budget. As a result having a system budget and a budgetary control is
important and it needs to strong in order to be efficient.
Conclusion:
By explaining
the preparation of a budget and the monitoring of actual performance against
the budget I tried to prove that is it a very time consuming activity. I have discussed
to what extent this can be considered as a problem.
Having a system
budget and budgetary control is important but it needs to be efficient so
nothing could outweigh it.
Conclusion:
By using the
text book and other references I understand the main points in the assignment
that are needed to be analyzed, and covered the accounting concepts and the
developments of the regulatory framework. I explained the importance of
investors in the companies. By using the
references I believe that the accounting disclosures are the single most significant factor affecting
their investment decisions. An example is given of
one company where their problem was not caused by the regulatory framework. The
criticism of the concepts and the regulatory framework is not valid.
By having a
strong budgeting system, the advantages gained from having system budgets and
budgetary control can not be outweighed.
References:
- A.R. Drebin , J.L. Chan and L.C. Ferguson, Objectives of Accounting and Financial Reporting for Governmental Units (1981), American National Council on Government.
- Management Centre. (2002),
Accounting for Managers, University of
- http://www.duncanwil.co.uk/concepts.htm
- http://www.fasb.org/articles&reports/sr_new_economy.pdf
- http://www.enron.com/.
- IAS Plus, October 2002 (http://www.iasplus.com/).
- http://www.tt100.biz/.
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