Selection and Subsequent Impairments System

Question: Discuss about the Selection and Subsequent Impairments System. Answer: Introduction: Application of various accounting policies, particularly the choice of alternative processes has significant impact on the valuation of liabilities, capital and assets which in turn affects the financial results of the organization. Accounting policy on the revaluation and amortization of long term assets have a significant impact on the financial position of the organization. Apart from this, deferred items, reserves and intangible assets are also affected by the selection of accounting policies. Further, the selection of accounting policy becomes more significant when the amount of expenses, incomes, liabilities and assets can be altered by changing the policies (Gao and Liang 2013). The selection of suitable accounting policies is very crucial to get a clear idea of the financial information transacted in the financial statement. An organization must state the account ting policies that is used in preparation of financial statements as alternative treatments are also available for most of the transactions. If the accounting policies are not mentioned clearly, then the uses of the statement will not be able to compare the performance with other entities. Thus, accounting policies are the rules, bases, conventions, procedures and principles that are applied for the presentation and preparation of financial statements. With the application and choice of accounting policies, the fundamental strategies challenge each other (Dhaliwal et al. 2015). Therefore, while choosing the application of appropriate accounting theories, the following factors shall be considered: Goodwill method and valuation for presenting it in the financial statement Allocation of lease as financial lease and operating lease and method of allocation of finance charges related to lease and lessor. Development and research policies and the estimation of capitalization of these costs and resulting amortization. Use of closing or temporary rate for foreign currency transaction. The accounting theories that are to be selected are an integral part of the organization. Hence, the various accounting policies that are applied by the organization have considerable effect on the interpretation of annual reports through various ratio analyses. Various accounting policies have great impact on the financial position as well as the income statement. It has indirect as well as direct affect on the key ratios like gearing ratio and return on capital employed. The adopted accounting policies shall be understood so as to compare the performance of the organisation with other organization in the same industry (Ahmed and Duellman 2013). Focus of ASIC on material disclosures On 31st December 2016, ASIC announced their focus for the financial reports of the listed companies and other companies with public interest having many stakeholders. During 2016 June, they highlighted the organizations that should implement realistic valuations for the value of assets and apply suitable accounting policies. ASIC will continue focusing on the material disclosures like assumptions that will support the accounting projections, selection of considerable accounting policies and the effect of the new requirements. Further, they influence the organizations to communicate information more transparently in the financial statement. The focus area are the same as it were for the year ended June 2016 and must be consistent with the prior periods (Price 2014). These areas are Accounting for tax Recognition of revenue Analysing the value of assets and test for impairment Deferral of expenses Judgements of accounting policies and estimates Arrangements of off-balance sheet items Impact of the new financial instrument and revenue standards Auditors and prepares of of financial statements shall focus on the accurateness of major accounting policies that can affect the financial reports considerably. The requirement of disclosures needed with regard to the revised and new accounting standards must be considered carefully in the areas where the standards have not yet been implied. As per the AASB 108 Accounting policies, alterations in accounting policies and and errors that are required by the organization to disclose the reasonable estimates regarding the possible impacts. During December 2016, ASIC issued press release 16 442 MMR entities that are required to respond related to key standards. As per ASIC, the effect of new standards on the financial instrument, revenue, lease agreements might be more considerable as compared to the impact of IFRS. ASIC mentioned that different matters that are required to be considered before implementations of any plan regarding new standards, that involves required changes in syste ms, impacts of business, effects on alignment with disclosures, financial obligations, requirement of disclosures before the effective date of standards, disclosure obligation of possible disclosures and the effect of transaction documents and other fundraising approaches. With the new accounting standards for revenues, leases and financial instruments that introduce considerable alterations in the future, organizations are required to align with the obligations of AASB 108 and respond to the expectations of the regulations (Duffy 2014). With respect to the off-balance sheet agreements, the auditors and directors must review the treatment carefully for the joint arrangement accountings and disclosures of structured organizations. Moreover, the auditors and directors must review the revenue recognition strategies of the organization to assure that the revenue is recognized as per the substance of the recorded transactions. This assures that: Control of related goods has been delivered to the purchaser Services associated with revenues has been performed Revenues has been recognized in the financial instruments based on the suitable instrument class Where the revenue is related to both the sale of goods as well as provision of the associated services, revenue is suitably distributed over the components and identified properly Assets are segregated properly as non-financial as well as financial assets (Moroney and Trotman 2015). Requirement of suitable revenue recognition policy The suitable timing of recognizing the revenue may need to be considered carefully in the industries with difficult licensing and sales arrangements that may involve regular obligations like software providers. Moreover, the auditors and the directors shall assure that that the financial statements disclose the effect of upcoming obligations and revenue recognition. Previously, at the start of the year the international Accounting Standards Board releases a new standard for accounting on revenue and the other contracts (Holzmann and Munter 2014). The standard may have a considerable impact on when and how the revenue shall be recognized. It is projected that the corresponding accounting standards of Australia will be released for application in future years. The standards of accounting need financial statements to reveal the effect of the new requirements on the financial outcomes and positions. Disclosures for the upcoming effect of international standards and the newly applied acco unting standards will be applied for the preparation upcoming financial statements (Bradshaw et al. 2013). Organizations that are complied with the IFRS, for their financial reporting and their auditors must take care for the expected impact of the application of new accounting policies under IFRS 15 on revenue from the contracts with consumers and make suitable disclosures if needed. IFRS 15 was released by the IASB during May 2014 with the application date set for the period from !st January 2017. The work programme of AASB declared that the IFRSs Australian version has been issued in quarter 4 of the year 2014 (Christian and Ldenbach 2013). References: Ahmed, A.S. and Duellman, S., 2013. Managerial overconfidence and accounting conservatism.Journal of Accounting Research,51(1), pp.1-30. Bradshaw, M., Bens, D., Frost, C.A., Gordon, E., McVay, S., Miller, G., Pfeiffer, R., Plumlee, M., Shakespeare, C., Thomas, W. and Wong, F., 2013. Financial reporting policy committee of the American accounting association's financial accounting and reporting section: Accounting standard setting for private companies.Accounting Horizons,28(1), pp.175-192. Christian, D. and Ldenbach, N., 2013.IFRS essentials. John Wiley Sons. Dhaliwal, D.S., Lamoreaux, P.T., Lennox, C.S. and Mauler, L.M., 2015. Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence during the Post?SOX Period.Contemporary Accounting Research,32(2), pp.575-607. Duffy, M., 2014. Towards better disclosure of corporate risk: A look at risk disclosure in periodic reporting.Adel. L. Rev.,35, p.385. Gao, P. and Liang, P.J., 2013. Informational feedback, adverse selection, and optimal disclosure policy.Journal of Accounting Research,51(5), pp.1133-1158. Holzmann, O.J. and Munter, P., 2014. New Revenue Recognition Guidance.Journal of Corporate Accounting Finance,25(6), pp.73-76. Moroney, R. and Trotman, K.T., 2015. Differences in Auditors' Materiality Assessments When Auditing Financial Statements and Sustainability Reports.Contemporary Accounting Research. Price, J., 2014. Continuous disclosure.Governance Directions,66(1), p.6.