Essay International Accounting Standards

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International Accounting Standards
Advance Financial Accounting Reporting [PAA305]
Friday 28th March 2014

Table of Contents Pages

1.Part One – Baxen 1

1.1. Introduction 1

1.2. Rules-based System and Principles-based Systems 1

1.2.1. Rules-based Systems 1

1.2.2. Principles-based Systems 1&2

1.2.3. Consideration 2

2.Part Two – Fair Value 3

2.1.Introduction 3

2.3 Arguments For Fair Value Accounting 3

2.3.1.Accurate Valuation 3

2.3.2 True Income 3

2.3.3 Value Reversal 3&4

2.3.4. Market Effects 4
2.4. Arguments Against Fair Value Accounting 4

2.4.1. Frequent Changes 4 2.4.2. Less Reliable 4

2.4.3. Inability to Value Assets 4

2.4.4. Reduces Book Value 5

2.5 Historical Costing 5

2.6 Conclusion 5

3. Part Three – Substance over Legal Form 5&6

3.1. Substance over form 6&7

4. References 8

1.Part One – Baxen

1.1. Introduction

Many companies across the global have to prepare their financial statements each year, required by the Financial Accounting Standards Board (FASB). These accounting standard include rules based or principle based systems. Over the years companies have debated on if principle based accounting systems are more beneficial than the common rules-based accounting system. Also many ways of accounting standards has been beneath heavy deal of disapproval and many companies facing legal problems on the way they adopt these accounting based systems. Simply each system differs as principles based accounting delivers a theoretical basis for bookkeepers instead of list of specified rules.

1.2. Rules-based System and Principles-based Systems

1.2.1.Rules-based Systems

This type of accounting system is fundamentally a detailed list of rules that must be tracked when planning financial statement in the annual report. In the accounting industry many accountants favour using the rules-based than principles based system, due to in the lack of rules, they can be brought to court if their judgement of financial statements were incorrect or misleading. As accountants are pressured with strict guidelines that need to be tracked correctly, the risk of lawsuits is reduced. These are set instructions that accountants improve precision and ease uncertainty. The difficulty of rules, however, can cause unnecessary difficult in the planning of financial statements.

Companies need to produce a detailed rules-based system and how it should prepare and report financial transactions. Accountant must grasp and follow these rules, taking a company’s financial information and forcing it to meet this system. The rules improve verifiability for auditors and officials and can decrease in litigation. Also this system can decrease opportunities for earning management through judgements, can decrease the sort of imprecision, this can lead to forceful reporting choices by management. However, rules-based is challenging, due to accountant not knowing everything about the guidelines, this can result to accountants looking away round the rules and use legalistic methods.

1.2.2.Principles-based Systems

This type of accounting system, also known as generally accepted accounting principles (GAAP) is used as theoretical basis for accountants. The important aims are simply agreed and set out to certify suitable reporting when using this method. These samples are delivered as guidance and clarify the objectives when putting it practice. These guidelines and rules are used in different circumstances and many rules are unavoidable. Accurate requests can force managers to influence the statement to suit what is required. However the setback with principles-based guidelines, it absence of strategies can create
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