Economic transformation in financial accounting--paper代写范文

51Due论文代写平台paper代写范文:“Economic transformation in financial accounting”，这篇论文主要描述的是西方发达国家从工业经济文明迈向了知识经济文明的过程，也就催生了社会对于财务报告的需求，在知识经济时代的今天，科技、创意、知识都是非常宝贵的财富，经济的转型与科技在社会各领域的应用程度相关。    

New Economy referring to an evolution of developed countries from an industrial-based wealth producing economy into a knowledge-and-idea-based economy due to effect of globalization. The key to success in the new economy are the extent to which technology can be utilized, quality can be provided, and ideas and innovation can be embedded in all sectors of the economy. Some features of a new economy are described as intellectual capital, The Internet, information, knowledge sharing, network effect and etc.

Due to the changing of economy, many commentators remarked on the disconnect between the new economy and traditional business and financial reporting. Information provided in the financial statements is deemed to be inadequate for its users in making investment decision. It is contended that more disclosure of nonfinancial and forward-looking information such as intangible assets, goodwill, management decision and analyst ant etc. are needed.

Therefore, FASB had carried out this Special Report with the intention to improve the quality of business and financial reporting. The main concern of the report is whether there is a need to change the existing reporting model, if so, how it will be done. This Special Report examine the following three areas and some recommendations from agencies in US and Europe which will be discuss in the next few chapters.

Vast information about nonfinancial value drivers

Forward-looking financial statement which present the entity’s creation of value.

Recognition and measurement of (externally required and internally generated) intangible asset in financial statements

Chapter 1 – Introduction to the Problem

Chapter 1 reviews the new economy and its impacts to the business and financial reporting. It is said that there are two assertions that lead to theinteraction between new economy and business and financial reporting. First, a change of economy of 2000 compare to economy of 1950 and before (From the Industrial Revolution to the digital age). Second, traditional financial reporting may not be able to capture the nonfinancial value drivers that dominate the new economy.

There are three propositions that some people view as accounting’s failure to keep pace with a changing economy. (Attributes of the disconnect between new economy and the business and financial reporting).

Proposition 1- Traditional financial statements are reported based on historical information and focus on the entity’s ability to realize the value from existing assets and liabilities.

Proposition 2- The key value drivers of the new economy are usually nonfinancial and do not present in a traditional financial report.

Proposition 3- Existing financial statements recognized only those intangible assets that acquired from others, there is no treatment or recognition and measurement for internally generated intangible assets.

Proposition 4 (rarely stated) – Existing business and financial reporting is adequate to the purpose for which it is intended (e.g. provide useful information for users of business and financial reporting in investment their decision making). A mandated change in the existing business and financial reporting might be harmful to the credibility of reporting.

In additional, there are several solutions that recommended by some accounting bodies, standard setter and government regulators such as AICAP, ICAEW, Netherland Ministry of Economic Affairs and etc. Mostly, all the agencies stated in this Series Report suggested at least a new metric that would measure and report information about nonfinancial value drivers while few of the agencies also proposed new paradigms that would measure information about future cash flow and recognition of intangible assets in balance sheet.

Chapter 2 – New Reporting Paradigm

Traditional financial statements are mostly backward-looking because the value was capture from the existing assets and liabilities. The new financial reporting paradigm comes out with the creation of value. There are two types of new reporting paradigm being proposed in this chapter- CICA Total Value CreationTM (TVC?) System and Accounting For The Future (AFTF).

The CICA Total Value CreationTM (TVC?) emphasises on the value-creating activities, different from the traditional financial statement which focuses on the value-realizing activities. It is initially designed for the internal reporting, and later after research process, brings into consideration to make the value creation performance accessible for the external stakeholders. Basically, TVC is a continuum step from traditional financial reporting to the measurement of the non-financial performance through capture the value creation. It is an event-based present value model which provides information related to company’s planned activities. It uses a fully discounted cash-flow model which offers timely information, complete transparency and professional assurance, due diligence, on changes to assumptions. It also disclose and analysis outcome variance. Through TVC, all the stakeholders would be able to assess the performance of the organization by assessing the ability of company to create value and future revenue. According to CAmagazine, some people think that TVC is leading towards the value-creation performance which has internationally accepted measurement and reporting standards.

CICA emphasize that TVC will not substitute for the traditional financial reporting for now and future because of its usefulness in reporting the realization of value. However, in this new economy, CICA see that the value creation process is always took place before the value realization. The traditional financial reporting has the limited capability to measure and report on this pre-transactional value creation. When the value is being realized and not being created, although traditional financial reporting will certainly captured the value, but it takes years to realize after creation.

Similar to TVC, in Accounting For The Future (AFTF), Mr Humphrey H. Nash presents a corporation’s activities in financial terms by utilizing a system of projected future cash flows are. He assigns new meanings to the traditional labels such as assets, equity and liabilities. He proposes as below:

AFTF value = Present value of entire expected future net cash flows discounted at the market cost of capital

Value added = AFTPend of a time period - AFTPstart of a time period

AFTF assets refer to the present value of entire expected future cash inflows into the corporation. AFTF liabilities refer to the present value of entire expected future cash outflows from the corporation. AFTF shareholder equity equals AFTF assets minus AFTF liabilities. Net AFTF shareholder equity is known as company valuation. AFTP assess the value of actual shareholders using present value.

From the observation, building up a new reporting paradigm has some limitations. First, cash flow projections can be costly and complicated. Secondly, difficulties of businesses to define their life because most entities are continuing entities instead of limited life venture. This make them could not easily identify the stage of a cash flow. Besides that, there is a need of decision regulations in order to ensure the information is understandable and comparable. And lastly, the existence andconsistence of assertions for TVC method is questionable. This is due to problems in examining the company assertions and company may not want to disclose some plans or business secret. In short, the author concludes that the above proposal cannot best satisfy users’ needs as there are much more to be done with the current technology to provide future perspective information.

Chapter 3: New Metrics

In this new economy, the government, private and standard setting board now are emphasizing on financial and non-financial performance information. They are currently making some proposals to get the information in a systematic ways, especially in terms of measurement. Those include balance scorecard, Skandish Navigator, Intangible assets monitor, value chain scoreboard and the value creation index.

Balanced Scorecard is now considered as intellectual capital by many companies and used it as management reporting. Balance Scorecard is believed can be used as the bridge for the interaction between investor and the others outside the company. The creators of Balance Scorecard emphasize on financial measurement on financial measures, customer measures, internal process measure and learning and growth measure. Yet, there is still criticism on balanced scorecard because it can only translate the company strategy into objectives. The measurement of non-financial matters largly depends on the company’s perception.

Swedish Insurance Company, Skandia, outlined that there are a few components under intellectual capital, which consist of human capital and structural capital (customer capital and organizational capital). Skandia has developed the Skandia Navigator to communicate the relationship between those components. For Skandia Navigator, they focus on customer, process, renewal and development, human and financial. There are some limitations with this metric. By looking at industry specific or business specific metrics, there are differences in relevant metrics from one industry to another industry. Therefore, we cannot make a judgement between the companies because comparable units do not present comparable metrics. Consequently, this outlines the importance of completeness by promoting voluntary disclosure culture whereby we can shift the burden from rule maker to preparer judgement. Another problem is the changing of metrics over time. Some people might think that manager is trying to undisclosed the bad news with the changing of metrics. In addition, some metrics in Skandia navigator are vague. There is no explanation about what’s being measured by the metrics to the users. Lastly, Skandia navigator provides many impressive and interesting metrics, but it tells little about intellectual capital.

Swedish management consultant Karl-Erik Sveiby proposes intangible asset monitor which consists of three components- external structure, internal structure and competence. Each group is then subdivided into three sets of indicators which are growth, efficiency, and stability. The author observedthat this metric is clearly build for professional services whereby some modification has been made to make it become more useful to business and environment. To ensure that the non- financial performance measurement can give a better picture to the user, it portrayed the trend of non-financial information and colour coding individual amounts. Last but not least, although intangible asset monitor is able to provide insights into individual metrics, it is based on subjective judgment.

The fourth one is the Value Chain Scoreboard. It is designed to communicate information about the fundamental economic process of innovation and how the metrics fix into the cycle of development and commercialization. The measurement should be in quantitative form, standardized and confirmed based on evidence. Through the observation, users are able to compare companies by using the standardization common language. However, there are still underdeveloped notions in the proposal.

The fifth is value creation index. This is developed to measure the importance of different non-financial metrics in explaining the market value of companies. A research shows that the value perceived by the customer who drives corporate value are different with those perceived by the corporate themselves. Through observation, it provides two insights- what management perceived important may not same as the factors that market considered as important and non- financial metric need to be industry specific.

There are some similarities between these proposals and the description of AICPA Special Committee on Financial Reporting- the performance of key business process largely depend on the factors that create longer tem value. The author concludes a few elements of useful presentation of non financial elements from the observation. First of all, the metrics need to be presented in a systematic and ordered way. The environment promotes measure of performance metrics for each rather than measuring the performance in theoretical terms. Another element is metrics presented must be shown in terms of industry or market. The author also observed that although unusual metrics is interesting, traditional measures is more useful as it can provide the information for the relationship between customer and employees, less costly to develop, more understandable, and more comparable from one entity to another. Besides that, the changes of metrics over time can provide consistency. Lastly, the metrics should, have ability to show changes over time, should show both good and bad news and provide information that enable comparison with comparable metrics presented by other companies,

Concerning on the cost and benefit, AICPA Special Committee outlined some ways for managers to control the cost of non-financial measurement. First, managers do not need to disclose the information that is outside the managers’ expertise. Secondly, managers do not need to report those information which will harm a company‘s competitive position. Additionally, managers do not need to forecast a company’s financial future. However, the users should be the one who take part in forecasting the financial future of the company. Moreover, managers do not need to gather information to manage the business. They just need to disclose the information that they know. Last but not least, manager can use flexible reporting.

In the modest proposal, the main objective of metrics for both old and new economy should be to capture and report business information that is not readily apparent from the financial statements. The approaches are in aim of having better metrics than those of in traditional so as to perceive value drivers in the new economy in terms of workforce, customers and ability to innovate.

Chapter 4: Intangibles Assets

This section examines the issues surrounding recognition and measurement of internally generated intangible assets such as research and development cost, computer software cost and so on. The discussion will be started from the definition of assets and intangible assets and follow by the structure of recognition criteria as well as three existing accounting standards that address intangible assets. It then continues to analyze the issue surrounding the recognition of intangible assets.

Both FASB and IASC similarly defines asset as a “future economic benefits as a result of a past transaction or event, and is controlled by the entity”. Assets can be divided into two parts which are noncurrent asset and current asset. The examples of noncurrent assets are properties, plants and equipment (PPE), building, machines and so on. While, cash on hands, bank and account receivables are the example of current assets. On top of that, FASB Exposure Draft also defines intangible asset as a noncurrent asset that lack of physical substance such as research and development cost, computer software cost, patent, goodwill, franchises and so on.

Besides that, there are four fundamental recognition criteria under Paragraph 63 of FASB Concepts Statement No. 5 to be followed to avoid any omission of recognition assets in financial statement. The first criterion is definition. As long as the item meets the definition of an asset, then it can be recognized in financial statement. Next, the second criterion is measurability. If the item has relevant attribute measurable with sufficient reliability, then it also can be recognized in the financial statement. The third criterion is relevance. If the information of an item is capable to make a difference in user decisions, then it can also be recognized in financial statement. Last but not least, the forth criterion is reliability. As long as the information could represent the faithful, verifiable and neutral, then it can be recognized in financial statement.

However, several questions about how to recognize intangible assets such as capitalizing or expensing it had been argued. Thus, three accounting standard have address on these questions. Thefirst standard is FASB Statement No. 2. In this statement stated that the research and development (R&D) cost (internally generated intangible asset) should be charged to expense as it incurred. This is because there is an uncertainty of future benefits. The failure rate for the project is high even after the R&D stage. Besides that, there is also lack of causal relationship between research and development (R&D) expenditures and extended future benefits. So, it is better to recognition the R&D costs as an expenditure instead of capitalizing it. In addition, the R&D cost should be charged to expenditure because of inability to measure future benefit. This means that unless a resource’s future benefits can be identified and objectively measured, it cannot be recognized as an asset for accounting purpose. Moreover, according to FASB Statement No. 2, capitalized research and development cost is not useful in assessing the potential profit of an entity. Thus, R&D costs should be recognized as expenditure because it is lack of usefulness if capitalizing it.

The second standard is FASB Statement No. 86. This statement divided the recognition of computer software cost (internally generated intangible asset) into two phases. The first phase is under Statement 2, the cost incurred to build the technological feasibility of a product is included in research and development (R&D) and should be recognized as expenditure. While, the second phase stated that the costs should be capitalized after establishing the technological feasibility and before the product is obtainable for general release. However, FASB chairman Dennis Beresford argues that, “the subsequent cost is inherently immaterial, so software development costs should be charged to research and development cost”. This will result in more consistency in financial reporting because there are obstructions in determining when technological feasibility is found.

The third standard is International Accounting Standards (IAS) 38. This standard is similarly with Statement 86 where no intangible asset will be raised from research project instead it should be recognized as expenditure. A research project will only be recognized as an intangible asset if there have technical feasibility; intention and ability of adequate technical, financial and other resources to complete, use or sell it; generate probable future economic benefits and the ability to measure the expenditure attributed.

Furthermore, there is a significant gap between the expenditure and efforts that create the item and the identification of the item as a candidate for recognition. Some intangible assets are valuable items but it is hard to estimate. For example, the value of a particular brand name and newspaper mastheads are hard to estimate. Thus, several questions have arisen from it. For instance, the values will become apparent at what point? What expenditures gave risk to the value of the brand name, if the cost is measurement attribute? Therefore, three possible approaches had been address on it.The first approach is retroactive capitalization or restatement approach. This approach stated that research and development (R&D) costs would be recognized as expenditure until the project produce a commercially viable product. After that, the expenditure would be capitalized and reported as assets. However, only little help provide by retroactive capitalization in addressing the recognition of brands and similar items that lack a series of discrete expenditures.

The second approach is discovery as a recognition event approach. This approach is a departure from accountants’ customary reference to discrete exchange transactions and external events. It is also consistent with the FASB and IASC conceptual framework because the cost will only be capitalized after it is arriving at technological feasibility (an identification point). However, some critic that the identification point is too flexible and the recognition can be delayed till remaining costs are immaterial. These weaknesses can largely be overcome based on the identification with either value-based measurement or a retroactive capitalization because a manager could not be avoided to recognize assets at some point.

The third approach is in-process assets approach. This approach divided into two view which are traditional view and modern view. In traditional view, in-process account is a device for accumulating the costs of something that will eventually become an asset. This means that the in-process account itself would not be recognized as an asset. For example, a particular cost will be charged as expenditure if there is sufficient uncertainty that the cost will eventually be associated with an asset. While, in modern view, work in process, especially in-process research and development (R&D) costs will be recognized as an asset in its own right.

The measurement of internally generated intangible assets should have a relevant attributable measurable with sufficient reliability, provide neutral and trusted information that can assist users of financial statement in their decision. There are different types of measurement. First, is the type of cost-based measurements that can be used for tangibles that have determinable costs. However, there might be cross-fertilization between the products or multigenerational intangible. Besides that, the inadequacy of system to compute the cost and the questionable of the relevancy of the cost-based measurement are among the limitations. In addition, some of the useful life of the intangible assets is indefinite. The intangible asset can also be measured using fair value. However, the rare of observed transactions on transfer of intangible assets cause the problem of estimation of fair value. Other than fair value, there are other measurement methods which more to emphasis on entity-specific value such as entity-specific measures or value in use which is not recognized by FASB.

According to IAS 36, the definition of the value-in-use is “the present value of estimated future cash flows expected to arise from the continuing rise of an asset and from its disposal at the end of its useful lifeThis method uses the cash flows that expected by the entity and a discount rate. Another method which is the method of real option, is useful to estimate the value of intangible assets which under development and yet to be prove to be commercially viable. The asset is viewed as a series of compound options that might generate other option and cash flow. Waiting to invest, growth options, flexibility options, exit option and learning option can be modelled as real option. The strength of this method is it solves the weaknesses of traditional present value analysis. A real option is consistent with an entity specific value or a fair value depends on whether it is available to any marketplace participants or it is entity-specific.The report subsequently reviews back the three pronouncements under the FASB Statement No.2 and International Accounting Standards Committee conceptual frameworks. The author concluded that the rationale of the FASB Statement No.2 cannot be hold up with the following statements. First, the conceptual framework of the accounting standards does not require certainty of “probable future benefits” and there is always considerable uncertainty underlying costs which are incurred in the business entity. Second, the lack of causal relationship, the lack of usefulness of such information and inability to predict cost that associated with future economic benefits are questionable as there are some recent academic research proposes that market attributes a relationship between current expenditure and future prospects. Third, some measurement might be able to objectively measure cost incurred.

Lastly, this report lists out the reasons of objections on this issue. In terms of cost and benefit of recognizing internally generated intangible assets, users of financial statement might enjoy the benefit of it but the companies might think there is no direct benefit to them. Furthermore, only few entities will have record of costs or value of intangible assets because most companies may not keep comprehensive inventories of those assets that are not required for the purpose of tax and financial reporting. Some of the reports claim that the benefit of it cannot overweigh the cost of recognizing intangible assets. Next, as discussed earlier, the lack of relevance of the intangible asset information with future benefit, difficulty in measurement and competitive harm are among the factors of objection. On the other hand, the value of many intangible assets is beyond the management control although the company might be able to adapt with the changes. The recognizing of intangible assets might introduce volatility to financial statement as the companies have the opportunity to manipulate the company’s income statement and balance sheet in the short term and long term by using the amortization and impairment tests or when recognize as expenditure. Some suggested disclosing the intangible assets in the financial statement instead of recognize it because both can also provide information to the users.

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