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Finance Assignment Question
“Fair Value vs. Conservatism? Aspects of the History of Accounting, Auditing, Business and Finance from Ancient Mesopotamia to Modern China” by Richard H. Macve, in 2013 London School of Economics & Political Science (LSE)- Department of Accounting and Finance , November 20, 2013. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2389305 British Accounting Review, Forthcoming.
Refer to the above journal article and develop a critical review report on following aspects:
- Compare and contrast the two mainstream histories identified by Macve, i.e.
– ‘FAT is rationally derived from a basically coherent conceptual framework’
– ‘Conservative, historical cost based accounting …provide an anchor on which to base appraisal of firms and managers’ performance
- Are both these histories merely a myth? Provide your own opinion here but justify with examples and with references.
Finance Assignment Solution
The concept of financial reporting has been changing with respect to the different modifications that happen while doing a business. It has been termed that Financial Accounting Theory (FAT ) which has derived from a basically coherent conceptual framework had come into the picture only at the emergence of the various joint-stock companies, huge businesses which involve separate ownership of the company.
The fact that many companies have gone international and play an important role in the international stock markets has made the importance of an international financial accounting standardization vital. (Zeff, 2013)However, the accounting standards will always have the concept of historical cost as an important parameter which looks into the performance of the company in the past and provides a better overview of the company to its investors.
The balance sheet concept with respect to FAT has its fair share of conflicts with the earlier earnings and profit concept that is associated with the historically based cost accounting.
Major Disputes of FAT
I would now be looking at some of the major disputes that have arisen because of FAT and its area of conflict with the historically based accounting. The following three are the major disputes that have been discussed.
Employee Stock Options:
In the FAT, it is said that the ESOs would have to be considered as expenses. However, the fact that it can provide a long-term benefit is not considered. It has not been considered to be a part of the asset and liability concept pertinent to FAT and is considered only as costs.
One of the major issues with respect to this is that the intangible benefit associated with the grant of ESOs which is also accepted by the stock markets has been ignored in this case. However, one of the reasons to adopt such an issue was the historical past which has overseen many famous debacles of various major organizations.
Companies like Enron which had falsified their financial statements had caused a huge debacle in the stock markets (David Gwilliam, 2008). Hence, in order to provide a better idea of the reported earnings of the companies to the various investors, such a step with respect to ESOs was taken. Hence, in this case, the debate of earnings management with respect to historical cost based accounting was being compared to as being better than the asset liability model associated with the conceptual framework with respect to FAT.