ASB produced 4 models for progressing convergence between UK standards and IFRs.1. Describe and explain each model proposed by ASB for incorporating international regulation into UK standards. The first two models that ASB has proposed were based on whether or not the entities has public accountability.a. Model 1- this is called the Full IFRs or EU-adopted IFRs. This model is applicable to all UK reporting entities, including listed entities, those that are similar size with the listed entities and those that have public accountability.
But private entities can also use this method if they wish to do so. The following types of entites are considered to be possible suited to fall under the category of full IFRs * listed companies that do not have subsidiaries and other companies accesing to public market. * parent entities that uses full IFRs or EU-adopted IFRs to prepare their consolidated account. * certain large unlisted companiesb. Model 2 – it is called the IASB Standards for SME or the SME plus.This is for Small and Medium Sized entities and those companies that do not have public accountability.
This is suitable for entities currently meeting the Companies Act definition of small entity and have 50 or less employees and has a turnover of 10 Million euro. But there are entities that fall in between the definiton of the two other models. They are neither small entity nor fall under listed entity. Therefore, they allowed some needed modifications for their financial statements and create two new models that will fit these entitiesc. Model 3 & 4 – this is called the IFRs Minus and the IFRs Plus respectively. This type of model is created to suit the entities that is covered by the UK Law. Necessary modification on full IFRs is made to suit the entities applying them.
This is suitable for the middle tiers.2. Comment for and against for each model, and thena. Model 1Full IFRs – the use of full IFRs is not practical for entities who do not have an international market to apply this kind of method because it is a very expensive.
b. Model 2 – this model promises to have a significant impact to the standardisation of accounting principles worldwide and easier to understand and contains more comparable information. This type of model is suitable for those companies that still do not have the capacity to move to Full IFRs but wanting to have an internationally comparable financial informationc. Model 3 & 4 – this type of model is one the most popular.3. Critically evaluate which model, if any the ASB should follow. Your answer should include both theoretical practice and refer to other European countires.
The saying “one size fits all” is not applicable to all the existing entities No single method is applicable to all the entities. Because they vary in size, in form and in function The full IFRs is not suitable for many UK companies because it is too complicated. There are also some international principles which is not based on sound accounting principle that is not applicable to be implemented in UK.
a. Some SME is encountering difficulties in communicating the effect of IFRs to their shareholders and a difficulty in adjusting to the new accounting standard.b.
The issues regarding the realised profit for the unlisted entity and non publicly accountable entities is another issue Therefore the ASB must deeper study the ways that will consolidate all the accounting entries. Carefully define and describe which should or which should not be in the financial statements and still works for that entity, those who are concerned with it and still has an international comparable financial informationQuestion #2:Two Fundamental Aim of 2002 FASB and IASB joint Project Revenue Recognition1. Revenue usually is the largest single item in the financial statement and the studies indicate that revenue recognition is the single largest category of the financial statement restatement. Consequently, issues involving revenue recognition are among the most important and most difficult- that standard setters and accountants face.
RevenueRecognition of IncomeThe gross inflow of the economic benefit during the period arising in the course of the ordinary activity of an enterprise.Increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilitiesThose inflows result in increase in equity other than increase relating to contribution from equity participants.The difference between the recognition of revenues and gains can mainly be attributed to the application of different measurement attributes.RevenueGainIncome is likely to recur on a regular basisIncome that incidentally occurResult from exchange of transaction with customersBy-product of the appropriate measures of the present value of the asset and liabilitiesSuitable predictor of the enterprise ability to generate cash flow in the futureLimited predictive value of the enterprise ability to generate cash flow in the future2.
For those who have spent the last year in the accounting wilderness, international accounting standards will come to the fore in 2005 when every European listed company will have to prepare their financial statements on the International basis. The benefits of international standards are plain to see – one set of reporting standards for every European listed company which will allow cross border comparison of companies. At present, analysts have to make accounting adjustments when trying to compare performance. (Sproul, 2003)The downside, which will be felt by UK companies sooner rather than later, is that they will effectively put their current set of accounting rules to one side and start to implement IAS. Also this new set of standards is continually evolving and won’t be finalised by the International Accounting Standards Board (IASB) until March 2004. Nobody expects a sea change in IASB thinking between now and 2004, but surely it would have been advisable to finalise a set of standards before trying to implement them? (Sproul 2003)IAS will not change significantly the way UK companies report performance but there will be some subtle differences in how this is done. For example, in the UK companies tend to subsume within goodwill their intangible assets without recognising them separately. The new standards will encourage companies to identify specific types of intangibles and will encourage the recognition of patents, databases, customer lists, intellectual property and know-how.
This move is welcome as it will improve transparency and give analysts more information as to the underlying business. Moreover, where companies make significant research and development expenditures, IFRS will require them to effectively grow development assets on their balance sheets – the current UK position gives companies the choice as to whether or not to capitalise. (Sproul, 2003)3. The IASB Framework as well as the specific standards contains elements of both revenue and expenses view and asset and liabilities view. This sometimes result to contradictory accounting treatments for enterprise’s financial position and performance. A supportive example for this assumption is the justification of the two opposing accounting treatments – the recognition of the gains resulting from in the increases in the fair value of biological asset and the deferral of income relating to the government grants – with the same concept, the accrual basis of accounting. The inconsistencies within the IFRS revenue recognition, that are all based on the asset liability view and the revenue expense view. Consolidation of items and definitions in this concepts should be done by standard setters to remove inconsistencies and grey areas in this field.
4. Explain the competing accounting paradigms of revenue and expense versus asset and liability approaches to revenue recognition and critically comment on the devise of long held accounting principles in the new approaches, new and old method of revenue and recognition.Paradigm of Revenue ; Expense ViewParadigm of Asset and Liabilities ViewObjective of Financial StatementTo measure the enterprise’s performance defined as efficiency and change of the efficiency in comparison of the previous accounting period.Provide information on the enterprise’s financial position interpreted as the enterprise wealth.Core principles§1 To recognise revenues when goods or services are exchange to match with the associated revenues.
§2 Recognise transaction and events in the periods in which cash is received or expensedDefinitions1. Asset and liabilities are defined as resources2. revenues and expenses are indirectly defined in terms of changes in the assets and liabilities.MeasurementNet periodic Income (profit) is measured by the excess of the enterprise’s accomplishment of operating activities (revenue) over related efforts (expenses)Increasing association with fair value measurement, but not bound with a single or particular measurement attributeCentral indicatorNet periodic Income (profit) is measured by the excess of the enterprise’s accomplishment of operating activities (revenue) over related efforts (expenses)Accounting Treatment in identical circustancesExample:(government grant in a form of a building)Income that result from the recognition of the building would need to be deferred and allocated to the periods in which the related amortisation expenses are recorded in order not to distort the comparability of periodic profit.
The entire amount of the income would have to be directly recognised in the income statement, as no obligation that would justify the recognition of a liability (deferred income) is related to the government grant.A paradigm shift is necessary because of the changes in our fast paced economy and changes in business models and forms. Companies are pressured to comply and report transparently to specific and appropriate Compliance organisation. The new method is much more complicated and the question is.
..is it necessary? Well indeed it is, because new forms of business models like software industry need a sensitive touch when it comes to handling revenue recognition.
Timing of recognition of revenue is an issue here and old accounting principles cannot be applied under this industry