International Accounting and Finance: IASB Issues

 

 

Question 1

Introduction

It is the responsibility of IASB to regulate the disclosure requirements for financial instruments. This has been in an effort to ensure that there is transparency and proper reporting. The work of the IASB has not been possible without challenges. The IASB has been able to face several challenges and controversial issues on the way. However, through proper analysis and lobbying, the board was able to regulate the disclosure requirements.

The controversial issues the IASB faced when attempting to regulate the disclosure requirements for financial instruments

One of the issues that the IASB faced while addressing the disclosures requirements in financial instruments is the resistance by the various stakeholders. Resistance to change is one thing that exists in almost every environment. The many people who prepare or rely on financial reporting and accounting profession have been able to give the IASB hard time trying to push the standards to acceptance (Langmead & Soroosh 2009.This has been because the stakeholders have been feeling that some disclosures are too much or are unnecessary in accounting. Some of them even felt that some disclosures are stealing the confidentiality of business entities. This claim went ahead to even assert that the IASB was working towards creating an environment where competition would not be fair to the company’s whose disclosures have been done. This has been a very big challenge in the process of increasing the level of transparency in reporting. It is worth noting that transparency is a very important thing in the process of achieving high standards of financial accounting and reporting (Young 1996).

The other issue which has been able to come up in the process of addressing the disclosures in financial instruments is about categories of financial instruments. The process of categorizing financial instruments has been very complicated. There has not been a proper agreement regarding the criteria of coming up with the correct categories. Some stakeholders have argued that some financial instruments do not belong to the same category against the views of the IASB. There have been very many disputes regarding the criteria of categorizing the various financial instruments. This has been very challenging since the disclosures are made depending on the various categories of financial instruments.

The other controversial issue has been brought about by the existence of risk in the use of various financial instruments. The determination of the nature and extend of risks associated with certain financial instruments has been an issue facing the IASB (Schroeder, Clark & Cathey 2011). Many stakeholders have not been agreeing with the provisions issued by the IASB. They have felt that the measurement and definition of risks has not been complex enough and thus not widely acceptable. For example in the disclosure of credit risk, many entities have felt that the level of the loss to be incurred upon a party failing to carry out an expected obligation is not easily determined.

As a result of the need to accommodate the disclosure requirements by IASB, business entities were required to put in place certain policies and procedures. This did not go down well with most business entities. This is because they felt that the requirements of the IASB were too demanding thus affecting the operation of the entities. The entities have observed the requirement of policy and procedure adjustment to meet the requirements of the IASB as very demanding and retrogressive in terms of meeting the strategic plans put in place. This has led to the IASB struggling so as to address the disclosure requirements of financial instruments.

Conclusion

IASB has been very ambitious in setting the level of disclosures in financial instruments despite the numerous controversial issues. The issues related to resistance, categorization and financial instruments risk issues. This has been able to harmonize the transparency standards in the accounting practice. Interested people have been able to assist in making the effort of the IASB a dream come true.

Question 2: Accounting for income taxes

Introduction

In accounting, some aspects are usually more challenging some others. Accounting for income taxes is one of the things which have been found to be quite challenging. The challenges are usually brought about by various aspects of income tax environment and requirements (Dyson2010).  Despite accounting for income taxes being one of the challenging things in accounting, the IASB has been able to define how they should be treated.

Accounting for income taxes and its challenges

One of the issues which create such a hard time is the determination of the amounts to be applied as tax base. Secondly, the process of recognizing the income tax components creates more challenges too. Additionally handling of dividends in income taxation is also very challenging. This is brought about by the need to accommodate the possible consequences of such dividends. Additionally, the fact that the rules that govern handling of tax comes from various places is a major cause of the challenges involved in accounting for income tax. This means that an individual carrying out income tax accounting should have thorough knowledge on all technical aspects of income tax. This is issue is made harder by the need to have proper synchrony with the various areas of profession. Moreover, the judgemental aspect of income tax accounting makes the process of accounting challenging. There are areas which are usually high in judgement such as the assessment of valuation allowance. This means that assumptions and estimates have to be done something which may not be done correctly.

IAS12 has been brought about to create ease in the way income taxes are accounted. This means that the objective of IAS 12 is to give guidance on how income taxes should be treated in accounting. It achieves its objective through giving guidance on how to iron the difficulties existing in arriving at final figures in income tax accounting.

IAS 12 gives guidelines regarding certain facts in accounting for income taxes. One of the issues addressed by this international accounting standard is that of current tax. This standard observes that a business entity should treat the current tax as a payable to the tax man as long as it is not paid. It should also be treated as an asset to whenever the tax already settled is higher than the current tax.

This international accounting standard also gives guidance on how deferred tax liabilities should be handled. Firstly, this international accounting standard prescribes how deferred tax liabilities should be recognized. IAS 12 holds that deferred tax liabilities should be noted for all taxable temporary variances. However, this standard holds that there are certain instances when deferred tax liability may not be recognized. One of the instances occurs when liabilities arising from the first recognition of goodwill whose amortization could not be deducted for tax purposes. The other instance when liabilities arise when initial recognition of asset or liability takes place except when business combinations take place. The other instance when recognition of liabilities may not take place is when they arise as a result of undistributed profits.

IAS 12 is also very clear on how deferred tax assets and liabilities amounts should be arrived at (Poterba, Rao, SN & Seidman, 2011). This international accounting standard holds that the tax levels or rates which would be used for a given span of time as the asset is realised or liability is paid. This should be done in line with the statutory provisions issued by the end of a given reporting period. This accounting standard provides that the measurement of an entity’s tax assets and liabilities should be done as per the wishes of a company and the date of the income of comprehensive financial position.

It is worth noting that IAS 12 also gives guidance regarding the criteria in which tax expense or tax income should be identified. IAS 12 holds that current or deferred tax can be recognized and shown in the profit and loss of an entity unless it arises from a business activity that has no direct recognition in equity or has been treated in accounting as an acquisition (Skinner 2008).

Regarding the impact of dividends, IAS 12 holds that disclosures regarding tax consequences of dividends together with the nature and values of such dividends be done.  This is usually explained in IAS 12.82A.

IAS 12 is usually very clear on the disclosures that ought to be done regarding income taxes (Hope & Briggs 1982). The disclosures are based on the components of tax income (expense) as per IAS 12.80. The current expense (income), changes in previous reporting periods and amounts concerned with deferred tax to backward adjustment of related differences among others. Additionally, IAS 12.81 has certain disclosure requirements. This section of IAS 12 requires that disclosures related to total current and deferred tax for items shown directly in equity and details of the way tax expense and the specific tax expected are related by using the current tax rate.

Conclusion

Accounting for income taxes has also come with its challenges. For example challenges related to amount determination and recognizing the income tax components came on the way. The most important thing is to know when to recognize the assets related to income taxes. It is also important to know how to come up with the right amounts in recognizing tax assets.

Question 3: IASB 38 (Accounting For Intangibles)

Introduction

IASB has been able to come up with IASB 38, which prescribes the treatment of intangible assets. Just like in the other standards, this board had to address certain challenges so as to set the standards. This is because there are certain elements of the intangible assets which make their accounting hard. The IASB has been able to handle these challenges through proper categorization and analysis of the intangible assets.

The Issues The IASB Had To Address In Its Attempt To Set A Standard For Accounting For Intangibles.

IAS 38 is another product of the IASB. This international Accounting standard is concerned with accounting for intangible assets. As per IASB, intangible assets refer to those assets which do not have physical presence, are not monetary but can be identified. The intangible assets are usually controlled by a business organization for future advantage of the business entity. It is an international accounting standard which was brought about in September of 1998. Its revision was carried out in the month of March the year 2004.

The main objective of this international accounting standard is to give guidance on the way the intangible assets which are not handled by other IFRS should be treated. IAS 38 requires that a business entity makes recognition of any intangible assets only when it meets certain requirements (Wyatt 2005). This standard also gives guidance on how to determine the amount to be recognized for a given intangible asset. This is very important since it gives the required harmonization in the reporting process of intangible assets. Additionally, the IAS38 gives guidance on the best way to disclose various aspects of intangible assets (Gupta 2008). This makes it very easy for people in the accounting profession to know how well to go about the disclosure issue of intangible assets.

It is important to note that IAS 38 requires that intangible assets should be recognized whether bought or created by the entity and only if the benefits of such an asset would end up in the business entity. Moreover, the recognition should be done when the value of the intangible can be determined with a good level of reliability.

To understand better how IAS38 works, it is important to look at the way intangible assets’ treatment has evolved. In the initial days, if an intangible asset was obtained separately from the business, it would be recognized at cost. Secondly, if an intangible asset was acquired as an inclusion to an entity, then the cost of the intangible asset on the date the business was acquired is applied. Regarding exchange of assets, this accounting standard requires that fair value be applied and when it is impossible, then the book value would be used. This accounting standard required that government grants be recognized at fair value.

As this standard went on evolving, two ways of handling intangible assets were discovered. These are based on the days an intangible asset would be used. This is usually finite or indefinite life of an intangible asset. Regarding the finite useful life, there is the revaluation model and the amortized model (Zéghal & Maaloul 2011).Some facts about the indefinite useful life of an asset are that the benefits expected from intangible assets are not expected to be earned for a specific time and secondly, there is no amortization in handling of intangible assets.

It is important to understand that IAS 38 gives directions on the way the useful life of intangible assets should be derived. This international accounting standard requires that the life of an intangible asset be determined through the consideration of the period over which the business organization is planning to use it. For example, an entity may acquire an intangible for the purpose of using it over a period spanning ten years. Then this would be the finite useful life of the intangible asset. Secondly, this standard holds that any reliable information which is available regarding the possible useful lives of specific intangible assets may be relied up on. According to Weil (2012), this means that the information may be obtained from the experts or specialists concerned with the specific intangible assets. Additionally, this accounting standard observes that the expected rate of loss in value of the intangible asset may be considered in the process of determining its useful life. This expected loss of value may be associated with instances such as obsolescence. This standard also observes that the nature of the industry in which a specific intangible asset is being used should be considered. The level of stability should be considered in determining the useful life of an intangible asset. The most stable industries are known to assure assets a longer useful life.

In the process of setting the standards of IAS 38, IASB came across certain challenges. One of the things which had to be handled is the determination of the expected future economic benefits of an intangible asset. Secondly, IASB had to handle the process of identifying the appropriate costs for an intangible asset. Additionally, the process of coming up with the useful life of an intangible asset had to be dealt with.

Conclusion

IAS 38 has also been able to shed light on the way intangible assets should be handled. It has been able to give proper guidance on what should be done. Even though there have also been challenges, the standard has been able to prescribe the way forward. Issues such as categorization of intangibles and determination of useful life emerged as quite important in accounting for intangible assets.

 

 

References

Dyson, J.R 2010, Accounting for non-accounting students. 8th ed. Harlow: Pearson Education.

Gupta, A 2008, Financial Accounting for Management: An Analytical Perspective, Pearson Education India.

Hope, T & Briggs, J 1982, “Accounting policy making: Some lessons from the deferred taxation debate”, Accounting and Business Research, Vol. 12, pp. 83-96.

Langmead, JM & Soroosh, J 2009, “Planning ahead for IFRS 1: Initial adoption of IFRS by U.S. Companies, The CPA Journal, October, pp. 24-29.

Loftus, JA 2003, ‘The CF and accounting standards: The persistence of discrepancies’, ABACUS, Vol. 39, No. 3, pp. 298-309.

Poterba, JM, Rao, SN & Seidman, JK 2011, “Deferred tax positions and incentives for corporate behaviors around corporate tax changes”, National Tax Journal, Vol. 64, No. 1, pp. 27-58.

Schroeder, G, Clark, W & Cathey, M 2011, Financial Accounting Theory and Analysis: Text and Cases, John Wiley & Sons.

Skinner, DJ 2008, “ The rise of deferred tax assets in Japan: The role of deferred tax accounting in the Japanese banking crisis”, Journal of Accounting and Economics, Vol. 46, pp.218-239.

Weil, L 2012, Financial Accounting: An Introduction to Concepts, Methods and Uses, 14^th Ed., Cengage Learning.

Wyatt, A 2005, “Accounting recognition of intangible assets: Theory and evidence on economic determinants”, The Accounting Review, Vol. 80, No. 3, pp. 967-1003.

Young, JJ 1996, “Institutional thinking: The case of financial instruments”, Accounting, Organizations and Society, Vol. 21, pp. 487-512.

Zéghal, D & Maaloul, A 2011, “The accounting treatment of intangibles – A critical review of the literature”, Accounting Forum, Vol. 35, pp. 262-74.

 

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