Task A
Financial Accounting, which is commonly known as accounting, is the basic branch of business dealing with the records, analysis, transactions and all other data of a particular business firm during a particular span of time. Financial accounting is the base of every business and it was practised since olden days, the difference being now is the change of method and types. Financial accounting is basically the day to day record of the flow of economy. In a similar way advance financial accounting includes the process of partnership, consolidation and merging of a firm with other foreign firms for growth and better establishment is known as advance financial accounting.
Market to market accounting approach is a way in which the fair value is taken into a broad account. This is also called fair value accounting. It actually aims to provide for a realistic approach to accounting. This approach involves regarding the value of a particular asset to find out a market condition. It actually calculates that how much will a company be profited if a particular asset is sold in a day or that particular day in a given time period (Buchman et al. 2016).
It works in a very simple way, if the stocks are held in a brokerage, then they are subjected to market to market approach for the ease of convenience. At the time of closing which is known as closing bell in marketing language, the price assigned to each of the stocks of that company is actually the price that the sellers or particularly the buyers decided that would be at the end of a day.This marketing approach is widely used now and it is also used for pricing the future contracts by estimating its value. It is very necessary for those who trade with items rather commodities with marginal accounts. Market to market accounting approach reflects the true value of an asset but sometimes it can also be problematic because the value of assets can change from seconds to days with the change in the taste and preferences. It is also difficult for a market to market accounting to take place for assets which are not liquid. It such a case the value depends on how likely a buyer will estimate. This approach is also dangerous when a country is experiencing financial deficit or rather a fiscal deficit as the asset value can decline and it will result in the declining of net profit (Hoyle et al. 2015).
Market to Market Accounting Approach
Founded in 1985, Enron Corporation was a well-known American company which was a merger between Houston natural gas and Internorth. It was basically an energy company. Unfortunately this company liquidated in 201 because of several reasons and it is referred to as Fall of Enron and it was a disaster. The reasons for the fall is widespread and basically it was due to the complicated and unethical market system and accounting which was misunderstood, ethically speaking, was impossible for shareholders to understand and because of the complexity of the business model, the firm failed and it was pushed towards bankruptcy in 2001. One of the so called experienced board members who had less knowledge about market fluctuations, focussed on meeting the Wall Street expectations and forced on the market to market accounting which eventually led to crisis. He sought means to hide his debt by certain unethical means which proved fatal. In the initial years the revenue was extremely high and then the directors thought of applying the market to market accounting for extracting the actual values of the assets and this company was probably the first to employ and make use of this technique.The market to market accounting as it is stated earlier requires a long term signing of contract where the income had to be calculated or rather estimated at the present value of the net cash flow for future. In such case the viability of such long term contracts and the ones associated with them are difficult to calculate (Miller and Shawver, 2016).
The result was that large number of discrepancies happened and unethical methods were used to match profits and cash flows and the investors were deliberately given false reports. Through this technique, the income from certain projects could be assessed although they might not receive money. But the lack of strategical and technical intelligence made it difficult to estimate profits for future years and additional income had to be included which led to bankruptcy and thus insolvency. Enron used SPVs which were off balance sheet, special purpose vehicles which were used to hide the excessive debts of the company through this market to market accounting technique. There were many other accounting problems along with serious technical disorders, which caused the downfall of this multinational company leaving thousands and thousands, people unemployed and it became a lesson for future companies to be aware of (Robson et al. 2017)
Fall of Enron
This scheme is nothing but a kind of non-standard contract with employers to attract and retain them where the employer is given a liability of delivering a particular share of the employer stock. The main objective of this scheme is to give the employees incentives so that it will boost a company’s stock price. If there is arise in the stock prices above the call prices then the employee could make use of this option and pay the price and it would be issued with that ordinary share in the company. There would be a straight and direct financial benefit and utilisation. But there shall always be restrictions on options with reference to vesting and non-transferring. The stock option compensation plans are extremely useful and it helps in solving certain critical problems and it is being used widespread by investors and shareholders. With the use of executive and effective stock actions managers get a closer hint of interest towards the employers and stockholders and they can work accordingly in achieving the target. Thus these were the ways in which stock option compensation can solve the agency problem (Beatty and Liao, 2014).
Wesfarmer Company of Australia under which many international companies make reports uses IFRS (International Financial Reporting Standard). IFRS is spread all over which sees that how different industries prepare their financial reports. The company use IFRS because it works more accurately and it provides appropriate information to national standards. It becomes easy for the investor to understand the financial report made by the company as it is more précised and understandable and the investors does not take any other help for understanding the financial statement. IFRS is also beneficial for both the investors as well as lenders and stakeholders as it recognize the los immediately. IFRS also become essential during the time of comparability. The companies who submits their financial report to IFRS gets better result, which is again profitable for both the investors as well as the stakeholders. Like the advantages, there are also disadvantages of using IFRS. Wesfarmers noticed that in the new IFRS some losses and profits are not taken as consideration. The IFRS is not globally accepted and it is very costly to adopt IFRS. The Wesfarmer Company however use IFRS but sometimes it face major difficulties as the rules of IFRS are very strict and manipulative. The IFRS comes with its set of rules, which the company has to follow, but sometimes it becomes very difficult for the company, as the IFRS demands the company to train their staff in a professional way or to hire new and experienced accountants. With disadvantages, the company also enjoys the advantages of IFRS. The company by submitting the Annual report to IFRS is beneficial because it makes the report more presentable and understandable for the investors and this helps the company to have more investors. However, many companies do not accept IFRS but Wesfarmers gets fruitful results by using IFRS (Weygandt et al. 2015).
Reasons for Having Stock Option Compensation Schemes
By using IFRS the Wesfarmer Company is dealing in a proper way. IFRS is beneficial for the company because using IFRS means the financial report is formed in a precise way. It provides depth analysis of the report. The company with the help of IFRS gets a better result because it provides sufficient knowledge to the company. The comparability of IFRS is way much better than others. The comparability of IFRS is beneficial for the company as the investors gets to know by the report of IFRS that where they should invest their investments. The Wesfarmer with the help of IFRS becomes more flexible and flexibility helps the company to achieve their goal. Using IFRS the Wesfarmer Company now understand their flaws in their financial report. The IFRS acts as a guide to the company as it helps the company to identify and rectify its errors (Libby, 2017)
The IFRS also recognizes the company’s loss immediately, which helps the company to control their issues. The IFRS standardized the company’s financial report standard, which gives access to the company to financial marketing. This is a huge opportunity for the company. Comparability of IFRS helps the company to compare their financial report with other companies financial report. This comparability helps to understand the company about its mistakes and also to formulate new changes for the future betterment. Wesfarmer by using IFRS gets many benefits and enjoys all the opportunities provided by IFRS. The IFRS acts as a guide for the company, which helps in shaping the company and formulate new hypothesis. By using the IFRS the company has improved a lot as it was before, now the financial report of the company is much more understandable and with the help of IFRS, the investors are ready to invest for the company (Siekkinen et al. 2016)
The Wesfarmer use IFRS format because it provide depth analysis and provides a more understandable report format. Like limitations, there are also advantage that is provided by IFRS. If the company had used different format then it would have not been so proficient like IFRS. For instance, if the company would have selected GAAP (Generally Accepted Accounting Principle) then the company would not have not get a better comparability like the IFSC. Though it cannot be denied that even GAAP provide flexibility but it has many disadvantages (Abdallah, 2016). The biggest disadvantage of GAAP is that it does not provide a better comparability. There are many other companies, which follow the principles of GAAP rather than IFRS, but using GAAP would have not been so beneficial for the company. The GAAP does not create a link between investors and stakeholders. The IFRS creates a link between the stakeholders and investors and it also helps the investors to earn more profit as compared to GAAP. On the other hand, GAAP is very useful because it also provide a standardized reporting format. Both the concept is accepted, but in case of IFRS it is not globally accepted (Hong et al. 2018)
Conclusion
In this assignment, it has been concluded that the Wesfarmers Company uses IFRS. By using this format, the company gained much experience and profit. There are also the advantages and disadvantages of IFRS, which has been mentioned in the above. From this assignment it has been concluded that IFRS is not widely accepted because it is very costly and other companies use different formats. Wesfarmer follow the IFRS and submit their financial annual reports. The IFRS helps in shaping the Wesfarmer Company. In the above there is also a distinction has been made between GAAP and IFRS on the basis of Wesfarmers.
References
Abdallah, W.M., 2016. The Conversion from US-GAAP to IFRS and Transfer Pricing: Irreconcilable Differences. The Journal of Accounting and Management, 6(1).
Beatty, A., and Liao, S. 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), 339-383.
Buchman, T., Harris, P. and Liu, M., 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.
Hong, P.K., Paik, D.G. and SMITH, J.V.D.L., 2018. A STUDY OF LONG-LIVED ASSET IMPAIRMENT UNDER US GAAP AND IFRS WITHIN THE US INSTITUTIONAL ENVIRONMENT. Journal of International Accounting, Auditing and Taxation.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Libby, R., 2017. Accounting and human information processing. In The Routledge Companion to Behavioural Accounting Research (pp. 42-54). Routledge.
Miller, W. F., and Shawver, T. J. 2016. The potential impact of education on whistleblowing behavior: benefits of an intervention in advanced financial accounting. Journal of Business Ethics Education, 13, 67-90.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social and organizational practice: exploring the work of financial reporting. Accounting, Organizations and Society, 56, pp.35-37.
Siekkinen, J., Nielsen, C., Roslender, R., Schaper, S., Dedoulis, E., Agrizzi, D., Agyemang, G. and Jaafaripooyan, E., 2016. This study examines the extent to which the change from UK GAAP to IFRS has affected companies listed on the Alternative Investment Market (AIM) in the UK. The results suggest that, on average, profit reported under IFRS is higher than that reported under UK GAAP; however, the difference is much smaller for AIM listed companies as compared to what existing literature suggests for firms listed on main… In Accounting Forum (Vol. 40, No. 1, pp. 45-62).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
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