Introduction to the Accounting News
Currently, a lot of accountants are undergoing issues regarding their licenses after the new licensing regime was implemented. It has affected accountants in not only Australia but also in other countries across the world. The Australian Securities and Investments Commission (ASIC) decided to conduct surveillance on the accountants to determine how this new regime had affected them and also the impacts on their organization (Cortese, 2013).
Some of the issues discussed in this topic are as follows. The ASIC aimed at ensuring that all accountants would have an easy time adjusting to the new licensing laws. This is because they realized that many accountants were having a hard time adjusting to the new laws. For this surveillance, the ASIC chose accountants that were not registered under Australian Financial Service (AFS) and those who provided financial product advice despite the new licensing regime. They also took into account the accountants that established themselves as providing SMSF (self-managed superannuation fund)
The targets that the ASIC eventually ended up using consisted of those that had the following issues:
Licensing data of ASIC regarding accountants whose applications were rejected or withdrawn
Reports of accountants that were involved in misconduct
Information obtained from another SMSF project
Accountants referred to the Australian Taxation Office (ATO) (Draft, 2015).
Positive accounting theory
In this accounting theory, a person tries to make predictions in an accounting practice and also explain the predictions made. The issue in the article that relates to this is when before the survey the ASIC had the prediction that many accountants were unlicensed. However, after the project, they found that this was not the case. Thus this relates to the positive accounting theory because the ASIC thought that many accountants were unlicensed and even tried to explain it (Godfrey et al., 2010).
This theory has the following assumptions
It assumes that one can predict the outcome of accounting practices. For example, when the ASIC at first assumed that after their surveillance they will find many accountants that were non-compliance but still providing SMSFs advice. Second is when the accountants assume that their customers will know that they offer licensed advice without including the licensing details on their websites. It is correct to say that the positive accounting theory is not 100% effective (Hines, 1989). It also assumes that as long as there is a reasonable explanation for the prediction, then it is efficient.
Explanation of the Accounting Issue and ASIC Surveillance
Agency theory
In the agency theory, only two relationships are considered in any accounting practice. The two relationships are the principal and agents of business. In this case, the principal is the accountant while the agent is the ASIC. This theory aims to solve any issues that may arise between these two parties which at most times is because they have different interests and goals. The issue in the article that this theory relates to is the relationship between the ASIC and the accountant. In the case that the ASIC sends a notice to the accountant regarding specific information they want, the accountant needs to comply. Tension results when the accountant fails to provide the information required which can result in consequences
Some of the assumptions in this theory are
It assumes the risks present in any given relationship. The theory does not consider the risks that might arise between two parties. The principal faces more inherent risk than the agent. For example, in this case, if the accountant does not comply with the standards set by the ASIC, then their license might be revoked.
It also assumes relationships that involve more than two parties. For example, it only relates to the relationship between the accountant and the ASIC. In cases where there is a third party involved, then the theory does not cater to it.
Normative accounting theory
The normative accounting theory states that in an accounting practice a person will choose an accounting system that is most appropriate in ensuring their end goals are met. The issue in the article that it relates to is when the accountant needs to choose an accounting system that will ensure they keep all the information on FAR and SMSFs services on the sites up to date. They need to come up with a system that will ensure every year they update this information.
The theory has the following assumptions
It assumes that all the accounting theories have different levels regarding effectiveness. It states that one accounting system can be more appropriate than another. This is false since all the accounting systems each have their uniqueness. What one accounting system can achieve is not what the other can achieve and vice versa. In the article, for example, the system that the accountant will use to increase their client base is not the same they will use to ensure their information is up to date. It also assumes that the results are scientific.
Analysis of the Accounting Theories Applied to the Issue
Application of the issues to the theories
The ASIC found out that accountants providing SMSF’s and financial product advice and they were not licensed were not as widespread as was initially perceived. This issue applies to the positive accounting theory as the ASIC made predictions even before conducting the surveillance. This resulted in their clientele to assume that they were providing unlicensed financial advice
Second, some of the accountants had not updated their website content about the SMSF services they provided before 1st July 2016. The ASIC thus found statements of services that were no longer offered by the accountant. This causes confusion among the clientele and is not effective for business
For the accountants that had not updated their financial information on their websites, the ASIC sent them letters to update their information. This applies to the agency theory in that the ASIC maintains a good relationship with the accountants by providing guidance on what to do so that they can meet the compliance requirements
For the accountants that did not specify the services that they offered on their websites, they were also sent ASIC letters asking them to clarify. This also applies to the agency theory. By clarifying the services they offer the clientele is not confused and know what exactly the accountant offers
For those accountants that had misconduct the ASIC reported them to ensure that all the accountants met the needs for compliance. This applies to the normative theory in that the accountants will have to choose a system that is deprived of malpractice
Conclusion
The ASIC will continue monitoring their targets to ensure that they are maintaining their standards in regards to their licensing. The ASIC also wants accountants to ensure that their websites are up to date and that whatever information that is provided on these sites is adequate and dependable. They encourage the accountants not to get involved in any misconduct and malpractice because it might result in penalties. For example, they might be stripped of their licenses.
The ASIC believes that if accountants comply, then it will lead to the overall success of their organizations. Also, they ask accountants to always reply to the notices sent to them by the ASIC. The notices at times do not mean that they have done any wrong and thus should not be worried. They need to give whatever information is asked of them by the ASIC to maintain a good relationship with them and also maintain their standards.
Implications of the Accounting Theories on ASIC Surveillance
FASB Exposure Draft. (2018). Proposed Accounting Standards Update: Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40). Retrieved from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176170115612&acceptedDisclaimer=true
Figure 1: Exposure Draft (FASB, 2018)
Exposure Draft
Proposed accounting standards: Customer’s accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements (a consensus of the FASB Emerging)
The above exposure draft has been issued by the Financial Accounting Standards Board as an update of the proposed accounting standards from the previous draft. This update was provided so that it can assist organizations in some situations. The Board hopes that with the new amendments companies will be able to work efficiently and effective in the future. (FASB, 2018) Some of the areas that have been addressed in the proposed updates are the following
In the previous standards, the issue regarding the costs for implementation and set up was not looked at in detail. In the new updates, the board offered a guide on how companies can account for the costs that are required for implementation and set up in any arrangement. Also, it gives instructions as to when a license is included in a cloud computing arrangement and that the license is recognized as an intangible asset. Liability is also recognized for the license to the extent in which the payments are made. In the proposed amendments it states that a customer is the one that will cover the implementation and set up costs if the arrangement includes a software license. When the arrangement does not include a software license, then the company will cover the costs of setting up and implementation.
In the previously proposed standards, most of the comment letters suggested that the Board should provide more information on the accounting for costs for setting up and implementation. They believed that the previous information was not sufficient. In the draft, the Board proposed that the costs for implementation and set up will be covered by the customer in any cloud computing arrangement. This, however, will only apply to institutions that capitalize their implementation costs according to the guidance in the proposed amendments. The proposed changes also provide information on how to capitalize the setup and implementation costs that are incurred in a service contract. It also includes those that are incurred when obtaining and developing software.
The proposed updates require a customer to follow the guidance in Subtopic 350-40 to be aware of which costs for implementation will be capitalized as an asset and the costs required to cover this. It also gives guidelines on which costs cannot be capitalized such as data conversion costs in a hosting arrangement. A customer is therefore supposed to determine which project stage in a hosting arrangement a service relates. The costs for capitalizing implementation and set up costs are accounted for by the customer as shown in the amendments over the term of the contract. This is to be presented in the same line as the costs associated with the hosting service in an arrangement. The amendments state that the term of an arrangement includes a non-cancelable period of the arrangement and periods covered by the extension of the arrangement if the customer is satisfied and an option to terminate the arrangement if the customer is certain as well. Lastly, the proposed amendments require an institution to disclose specific qualitative and quantitative information about implementation and set up costs to its customers in an arrangement. The Board believes that this information will be useful to the users in for financial statements on the costs incurred for implementation. The draft aims at improving the current generally accepted accounting Principles (GAAP) by aligning the accounting for set up costs and clarifying accounting.
Recommendations to Accounting Firms and Professionals
Is it introduced to the public interest?
This exposure draft serves the interest of the public in the following ways. First, it provides guidance on the costs that are required to capitalize implementation and set up costs and how much is required to cover it. This is of benefit to the customer since they will have a better understanding of what is needed in a hosting arrangement. Second, it requires an institution to offer disclosure of the qualitative and quantitative information for implementation costs. This will provide the user with useful information for their financial statements. Third, it establishes clearly what cloud computing arrangements require a license and which one do not. Lastly, the draft allows the software license for capitalization of implementation costs to qualify as an asset. This is of benefit to the customer.
Comment letters
One
Figure 2: Comment letter 1
By The virgin Society of CPA’s
The following views are expressed
The company has a lot of individuals working with public collaborations such as the government and education sector. Because of this, they believe it is essential for entities to provide disclosure documents as it will both assist them and their collaborations. Therefore the company supports the board’s decision for disclosures.
It also believes that the guidance on capitalization of the setup and implementation costs is effective and will help the company in an arrangement. The company disagrees with the Board in the application of the impairment model because it will not provide any necessary information and might confuse the customers.
The company does not entirely agree with the regulation in that they believe the impairment model will not help but also is for the regulation. This is seen with their support on the proposed standards update and thinks it will be of future help to the company. An example is ‘we would prefer to see a minor hosting exception based on the dollar amount of the implementation costs and a period, such as 12 months or less.’
Two
Figure 3: Comment letter 2
By MindtheGAAP
The following views are expressed
The company fully supports the proposed amendments in the draft and believes that allowing customers to account for the costs of setting up and implementation will significantly benefit the company. The GAAP did not include the diversity in practice but the FASB draft has, and this eliminates any issues related to this. The company is for the regulation since they agree with the proposed amendments to let the customer account for capitalizing of the implementation and set up costs. For example the comment ‘we support the proposed amendments and believe they will be of great assistance.’
Three
Figure 4: Comment letter three
By American Bankers Association
The following views are expressed
The company agrees to the proposed standards updates. It supports the guidance given on the accounting for the setup and implementation costs in an arrangement and believes that including a software license is appropriate. Also, it supports the ability to be able to know the fee for capitalizing implementation costs. However, they would like the FASB board to make some inclusions in the draft such as minor hosting elements.
The letter is against the regulation because they believe that the company needs to make some changes to the current amendments. For example ‘the company asks the board to consider provisions such as determination of life.’
Four
Figure 5: comment letter four
By Apple Inc
The organization in overall supports the proposed accounting standards and acknowledges that providing a guide for the setup and implementation costs incurred in an arrangement will be efficient to the company in the future.
The organization, however, does not support the disclosures because they do not see the need for it and want to maintain their contracts to relevant information. The letter is against the regulation because they believe that the set up costs only focus on one type that will be incurred in an arrangement. An example is ‘We do not, however, support the added disclosures in Proposed Subtopic 350-40-50-2 as we do not believe they will provide decision-useful information to investors. We encourage the Board to maintain, unchanged, the current disclosure guidance in Subtopic 350-40-50-1.’
Application to the theories
Public theory
In this theory when a company is formed it mainly caters to its customers and regards them as their priority. Most of the comment letters have applied this theory and this is the most effective in explaining the comments. The first and second letters have utilized this theory since they put the interests of their customers first. Both companies support the Board in providing disclosures for implementation and set up costs in an arrangement. This they believe will provide their customers with adequate information for their financial statements (Hoogervor et al, 2015).
Private theory
In this theory, an organization acts in the best interest of itself. The company ensures that whatever policies or goals that are set are in favor of the company. Some of the comment letters have utilized this theory for example comment letter four. They do not support the disclosures because they do not want their information in public hands (Deegan 2013).
Capture theory
From its name, it means to be captured. For example when the government is set up to ensure that a company is of public interest, but the company can convince the government to allow them to act in their self-interest. Then the government has been captured. It is the least effective theory in explaining these comments since none have utilized this theory (Gans & Ryall, 2017).
References
Cortese, C. L. (2013). Politicisation of the international accounting standard setting process: evidence from the extractive industries.
Deegan, C. (2014). Financial accounting theory. McGraw-Hill Education Australia.
Draft, I. E. (2015). Conceptual Framework for Financial Reporting. 2015-05-01)[2015-07-20]. https://kjs. mof. gov. cn/zhengwuxinxi/gongzuotongzhi/201506 P.
Godfrey, J., Hodgson, A., Tarca, A., Hamilton, J., & Holmes, S. (2010). Measurement theory. In Accounting theory (7th ed.)(pp. 133-160). Milton, Qld. : John Wiley.
Hines, R. D. (1989). Financial accounting knowledge, conceptual framework projects and the social construction of the accounting profession. Accounting, Auditing & Accountability Journal, 2(2).
Hoogervorst, H. A. N. S., & Prada, M. I. C. H. E. L. (2015). Working in the public interest: The IFRS foundation and the IASB.
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