Chapter 3: Standard Setting
Review Questions:
8-If the standard-setting process should achieve better information, what criteria would identify better information?
The relevance and reliability are the two main criteria that would identify better information since this would result useful and trustful information.
9-Is the setting of accounting standards desirable for society? If so, who should set standards?
Yes, the setting of accounting standard is desirable for society because it provides investors with relevant information. There are a variety of standards that each depends on its setter for example the “Public Interest Theory” aims to satisfy the needs of the Tax authority. Also the standard setters of ”The social Contract Theory” must reflect w composition of society affected by the standard and by the environment they apply.
10-How does good financial reporting add value to organization?
Good financial reporting results on accurate information which enhances the image of the organization consequently motivate investors, accountability with creditors and help manager to evaluate the performance of the company.
13-In your opinion, do the benefits from regulating accounting information outweigh the costs? Justify your answer.
The benefits resulting from the regulating accounting information are: * Increased efficiency in allocating capital. * Cheaper production of accounting information. * Check on perquisites. * Public confidence. * Standardisation. * Public good. * Comparability
The costs related to the regulating accounting information are: * The imposition of the requirement of standard accounting system on different entities. * Advantages of certain interest group through lobbying.
15-
In fact accounting standards setting is a two-edged sword :
Positive:
The standardization of accounting will reduce ambiguity in accounting reports, so that users will be able to make comparisons among entities.
Negative:
By reducing ambiguity, regulation also reduces the means of communicating information as well as stifling innovation in ways of presenting Financial Information.
17-What is lobbying’? Who would be expected to lobby an accounting standard, and why?
Lobbying is the act of attempting to influence business and government leaders to create accounting standards setters that will help a particular organization.
Any Individual, business professional association or regulator with an interest in the direction of the standard-setting process can become a lobbyist, but managers are more willing to lobby accounting setters.
Why?
This offers several opportunities and means by which those affected by the resulting standards can influence the outcomes.
20-In relation to the governance of the IASB, who governs the governor?
The IFRS is the legal entity under which the IASB operates. The foundation is governed by a board of 22 trustees.
Application Questions:
3.3-
a-
Lobbying is exerting pressure over the standard-setting environment to set standards in the favor of the lobby. b- The Australian Accounting Standard Board c- The adoption of IFRS would decrease the asset of the company which is overstated by $1.9 billion because it require that Coca-Cola Amatil re-write down this account.
3.4-
a-
Banks would be advocating for a single set of global accounting standards for many reasons: (Harmonization): * International comparability of Financial Statement would increase. * Increase the international investment and international market operational efficiency. * Decreasing the cost of capital. b- American Banks might be so willing to spend so much on lobbying because accounting standards can transfer wealth from investors to them (creditors) and as a result have an incentive to lobby standards setters to achieve a favorable outcome. c- Yes, I would be lobbying because removing the need for entities to produce two or more financial reports that comply with different standards will decrease reporting costs and listing rules or regulations will be lower.
Case Study 3.1:
1-
The GDP is one of the primary indicators used to measure the health of a country’s economy.
GDP=Government spending + country’s business spending on capital +net exports
2-
The Par-Value is the legal capital per share , it represents a minimum amount that is affords no significant protection to creditors.
3-
Yes, the lack of common legal enforcement mechanism for IAS considered a weakness because it doesn’t ensure consistency? However implementing and enforcing standards are important in giving accounting standards the capability to make accounting information relevant for capital market then fair and true financial reports will reflect really the financial position of the firm.