Acfi3009 Contemporary Accounting Issues : Assessment Answers
Part 1
reserves of the bank.
Conversely, it was argued by many at the time of the sub-prime banking crisis that when markets for financial assets are in free-fall (as they were at times during the crisis) fair value accounting exacerbates a downward spiral of asset prices and bank lending that is equally unreflective of (and significantly overstates) decreases in real underlying economic values (Laux and Leuz, 2009)’
Deegan, Financial Accounting Theory 4e, 2014, p.197
Consulting Report 1
Part 2
Sustainability reporting, as promoted by the GRI Standards, is an organization’s practice of reporting publicly on its economic, environmental, and/or social impacts, and hence its contributions – positive or negative – towards the goal of sustainable development.
The GRI Standards create a common language for organizations and stakeholders, with which the economic, environmental, and social impacts of organizations can be communicated and understood. The Standards are designed to enhance the global comparability and quality of information on these impacts, thereby enabling greater transparency and accountability of organizations.
Consulting Report 2
Part 1 Introduction:
Mark-to-market accounting refers to the process of determining the fair value of the company’s assets and liabilities based on the market price of those similar assets and liabilities. On a more specific note, mark-to-market is the reasonable value of an asset or liability that varies over the period depends on the market value of that assets and liability (Ball, Jayaraman and Shivakumar 2012). Most of the business organizations all over the world use mark-to-market accounting as an accounting tool in the process of recording the value of an assets or liability in respect to the current market prices of that asset or liability. Thus, based on the above discussion, it can be seen that there are some major advantages of mark-to-market accounting. It also needs to be mentioned that there are also some disadvantages of mark-to-market accounting. All these aspects are discussed below.
Benefits of Mark-to-Market Accounting
It can be seen that most of the companies all over the world have adopted the mark-to-market accounting process for the valuation of their assets and liabilities. The major reason of the adoption of mark-to-market accounting is that the companies get many benefits from the adoption of mark-to-market accounting. The major benefit of mark-to-market accounting for the business organizations is that it helps in the process to keep the financial statements of the companies more realistic. This is done by measuring the values of the assets and liabilities of the companies on the fair value basis. For this reason, the financial statements of the companies are able to reflect the true financial position of the companies’ and the stakeholders and investors can actually judge whether the financial position of the company is in danger or not. Another major benefit of mark-to-market accounting is that it helps the companies from over-extending their financial leverage. Thus, the companies can gain control over their borrowings against their total liabilities (Ellul et al. 2014).
As a result, debt position of the companies becomes stronger. Without the restriction over the process of borrowing against the assets, the companies might misinterpret the value of the assets in order to disguise a falling business. In this regard, it needs to be mentioned that the adoption of mark-to-market accounting injects major disciplines in the financial service organizations like banks and various other financial institutions (Ashton, Maguire and Spilsbury 2016). Most of the accountants all over the world consider mark-to-market accounting as a self-correcting mechanism that helps in the reduction of companies risk profile at the time of market decline and financial crisis. On the contrary, at the time of the rise of the company’s market value of assets, the use of mark-to-market accounting helps the companies to increase their financial leverage. Another major benefit of the adoption of mark-to-market accounting is the effective treatment of business losses for the companies. Under the use of mark-to-market accounting, companies get the opportunity for capital gains from the losses (Amel?Zadeh and Meeks 2013). Thus, based on the above discussion, it can be seen that the companies can get major benefits from the use of mark-to-market accounting.
Risks in Mark-to-Market Accounting
In the earlier discussion, it has been mentioned that apart from the benefits, business organizations have to take certain risks in the process of mark-to-market accounting and these are some major risks. A large number of controversies are related with the mark-to-market accounting as this accounting process demands the companies to mark their assets and securities in the market value or market price. For the financial institutes like banks, it is difficult for them to mark all their loans, as it does not always reflect the true value of their loans. When this type of risk occurs, either the financial institutes forced to sell some portion of their portfolio or they have to retain money for reserve. In both of the cases, the companies have to face risk. Most of the famous accountants all over the world consider the fact that the adoption of mark-to-market accounting increased the financial crisis of 2008 (Magnan, Menini and Parbonetti 2015).
It can be seen that there are some major negative aspects in the organizations as a result of the adoption of mark-to-market accounting. Sometimes, mark-to-market accounting creates a vicious circle in the financial system of the companies that lead to a huge amount of papers losses for the companies. Some of the other financial risks associated with the adoption of mark-to-market accounting are the reduction in the security holdings, decline in credit worthiness, decline in credit ratings, limit in the borrowing capacity of the companies and others. It needs to be mentioned that all these aspects together can lead the financial organizations towards insolvency. Thus, based on the above discussion, it can be seen that there are some major risks involved in the adoption of mark-to-market accounting. Hence, all the companies need to consider these aspects at the time of adopting the mark-to-market accounting (Palea 2014).
Usefulness of Mark-to-Market Accounting in Asset Valuation
There is major usefulness of mark-to-market accounting for the reporting of value of the assets in general purpose corporate financial statement. It is a fact that financial institutes have mostly higher proportionate of assets and liabilities in their balance sheet. With the help of mark-to-market accounting, the business organizations can report the value of their assets and liabilities with the help of various accounting concept (Bowen and Khan 2014). The value of the financial assets are recognized based on fair value accounting and thus, they reflect the true value of them in the financial statements. In addition, any changes in the value of the assets and liabilities are reported in the profit and loss account. This same principle is also available for the measurement of liabilities in the organizations. Under the regulation of mark-to-market accounting, business organizations are required to prepare and report the annual reports of the companies on a yearly basis. Moreover, all these documents need to be presented as per the regulations of International Financial Regulatory Standard (IFRS). As per the regulations of IFRS, all the assets and liabilities need to be measured by using fair value (Flannery 2014).
Conclusion:
Based on the above discussion, it can be seen that mark-to-market accounting has its own benefits and it has risk involved. The major benefit of mark-to-market accounting is that it helps to reflect the true financial position of the company by valuing their assets and liabilities in the fair value basis. However, the major risk in the adoption of mark-to-market accounting is that this process is not always applicable for the accounting of various financial institutes like banks and others. As per the above discussion, mark-to-market accounting helps the companies to report their assets and liabilities in the true manner.
References:
Amel?Zadeh, A. and Meeks, G., 2013. Bank failure, mark?to?market and the financial crisis. Abacus, 49(3), pp.308-339.
Ashton, D., Maguire, M. and Spilsbury, M., 2016. Restructuring the labour market: The implications for youth. Springer.
Ball, R., Jayaraman, S. and Shivakumar, L., 2012. Mark-to-market accounting and information asymmetry in banks.
Bowen, R.M. and Khan, U., 2014. Market reactions to policy deliberations on fair value accounting and impairment rules during the financial crisis of 2008–2009. Journal of Accounting and Public Policy, 33(3), pp.233-259.
Ellul, A., Jotikasthira, C., Lundblad, C.T. and Wang, Y., 2014. Mark-to-market accounting and systemic risk: evidence from the insurance industry. Economic Policy, 29(78), pp.297-341.
Flannery, M.J., 2014. Contingent capital instruments for large financial institutions: A review of the literature. Annu. Rev. Financ. Econ., 6(1), pp.225-240.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement users. Journal of Financial Reporting and Accounting, 12(2), pp.102-116.
Part 2 Introduction:
Twenty-first centuries is known for the development of businesses all over the world. It has been seen that the businesses are progressing in a fast pace. In this regard, it needs to be mentioned that the business operations of the companies are affecting the environment, community and people of community for a large manner. This became one of the major concerns for the people all over the world. Out of this concern, there was the development of the concept of sustainable reporting (Milne and Gray 2013). As per this concept, the business organizations to make positive as well as negative contribution towards the achievements of sustainable goals and objectives. In the process of sustainable development, Global Reporting Initiative Standards play an integral part. As per GRI standard, every business organizations need to disclose their different practices against the impact of their business operations on economic, environmental and social aspects.
Benefits of Global Reporting Initiative (GRI) Standards
The aspect of sustainability reporting under Global Reporting Initiative Standards is one of the major steps for the achievement of sustainable global economy. With the help of Global Reporting Initiative Standards, the accountability of the companies regarding the impact of their business operations can be enhanced and this process leads to the development of trust among the stakeholders of the company. This is a major process towards the development of a cohesive society. Global Reporting Initiative Standards helps in the availability of sustainability related information of the companies so that the government can access them in order to assess the impact and contribution of the companies regarding sustainable initiatives. Thus, it can be observed that in the business organizations, there are some major benefits of sustainability reporting under Global Reporting Initiative Standards. Some of the major advantages are discussed below:
Building of Trust: With the help of Global Reporting Initiative Standards, business organizations can publish the details of their non-financial performances like the performance of the companies in sustainability reporting. This total process helps to create a positive image of the company in the community and as a result, reduction in reputational risk can be seen. In addition, with the help of Global Reporting Initiative Standards, the business organizations can open up dialogues with different stakeholders of the company like shareholders, investors, customers, people of the community and others. This whole process helps to increase the transparency of the business organizations regarding sustainable reporting and as a result, development of trust can be seen between the stakeholders and the companies (globalreporting.org 2017).
Improvement in Process and System: With the help of Global Reporting Initiative Standards, the business organizations have the option to improve the internal management of the organizations. In addition, the decision-making process of the companies can be examined and improved with the help of Global Reporting Initiative Standards. In addition, the business organizations can reduce the overall cost of the organization by measuring and monitoring various organizational issues related with energy consumption, use of material, waste management and others (Tschopp and Nastanski 2014).
Progressive Vision and Strategy: Some of the major aspects of sustainability reporting of the companies are analysis of strengths and weaknesses; level of engagement with the stakeholders and others. Global Reporting Initiative Standards helps the companies in the development t of sustainability reporting strategies. As a result, sustainability becomes one of the major parts of the organizational strategies (Junior, Best and Cotter 2014).
Reduction of Compliance Cost: At the time of the business operations, the business organizations have to comply with different kinds of regulations and legislatives. With the help of the measurement of performance in sustainability, the business organizations become able to meet the regulatory requirements on an effective way. This aspect leads to the reduction of various compliance costs of the companies. On the other hand, the companies can gather various data in a most cost effective way (Abeysekera 2013).
Competitive Advantage: It can be seen that the business organizations can earn goodwill to their customers as well as people of community with the help of adopting Global Reporting Initiative Standards. This process differentiates the companies with the non-sustainable companies. Thus, it can be said that the adoption of Global Reporting Initiative Standards helps the business organizations to gain necessary competitive advantage for their businesses. These are the major benefits of Global Reporting Initiative Standards in the companies.
Cost o the Adoption of Global Reporting Initiative Standards
As per the regulations of Global Reporting Initiative Standards, the business organizations have to bear the cost of the adaptation of Global Reporting Initiative Standards. However, based on the nature, type and size of the organizations, the cost for the adoption of Global Reporting Initiative Standards varies (globalreporting.org 2017). In this regard, it needs to be mentioned that there are certain factors in the reporting of Global Reporting Initiative Standards that incur huge costs for the companies. Some of them are mentioned below:
- Time needed for the management and other senior level officers for the discussion of sustainable report content
- The development and implementation of data gathering system
- Time needed to input the required data
- Implementation of sustainability reporting related processes that includes the staff training
- Time needed for the checking of data and information
- Preparation of sustainability reporting
- Verification of external factors that includes auditing (globalreporting.org 2017)
These major processes in the organizations incur huge amount of costs for the companies. In addition, it needs to be mentioned that the amount of investment needed for the implementation of Global Reporting Initiative Standards largely depends on the size of the companies. Thus, for different kinds and sizes of organization, the cost of the implementation of Global Reporting Initiative Standards varies from €2000 to €100000 (globalreporting.org 2017). However, this cost is not significant for the companies that have not adopted the principle of Global Reporting Initiative Standards for sustainability reporting. However, it is important for the business organizations to give importance of this cost regarding sustainability. Thus, based on the above discussion, it can be said that the cost of Global Reporting Initiative Standards depends on the size and nature of the business organizations.
Conclusion:
Based on the above discussion, it can be seen that it is important for the business organizations to adopt the strategy of Global Reporting Initiative Standards regarding sustainable development. From the above discussion, it can be seen that there are some major benefits of the adoption of Global Reporting Initiative Standards. The major benefits are to get competitive advantage, the reduction in compliance costs, to bring transparency, the development of trusts and many others. As per the above discussion, it can be seen that the cost of the implementation of Global Reporting Initiative Standards largely depends on the nature, type and size of the organizations. The cost can be from €2000 to €100000 for the organizations.
References:
Abeysekera, I., 2013. A template for integrated reporting. Journal of Intellectual Capital, 14(2), pp.227-245.
globalreporting.org. (2017). Cost and burden of reporting. [online] Available at: https://www.globalreporting.org/resourcelibrary/Cost-and-burden-of-reporting.pdf [Accessed 7 Sep. 2017].
Globalreporting.org. (2017). GRI Standards Download Homepage. [online] Available at: https://www.globalreporting.org/standards [Accessed 7 Sep. 2017].
Globalreporting.org. (2017). GRI Standards. [online] Available at: https://www.globalreporting.org/standards/?g=e298dddc-e26e-4195-8da5-64b5c48be5b6 [Accessed 7 Sep. 2017].
globalreporting.org. (2017). The benefits of sustainability reporting. [online] Available at: https://www.globalreporting.org/resourcelibrary/The-benefits-of-sustainability-reporting.pdf [Accessed 7 Sep. 2017].
Junior, R.M., Best, P.J. and Cotter, J., 2014. Sustainability reporting and assurance: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), pp.1-11.
Milne, M.J. and Gray, R., 2013. W (h) ither ecology? The triple bottom line, the global reporting initiative, and corporate sustainability reporting. Journal of business ethics, 118(1), pp.13-29.
Tschopp, D. and Nastanski, M., 2014. The harmonization and convergence of corporate social responsibility reporting standards. Journal of Business Ethics, 125(1), pp.147-162.
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