Accounting Standards: Their Economic and Social Consequences Harvard Case Solution & Analysis

QUESTION 1:           EXPLAIN THE TERM “ECONOMIC CONSEQUENCES” OF ACCOUNTING STANDARDS AND PROVIDE THREE EXAMPLES OF SUCH CONSEQUENCES.

ANSWER:

In the process of setting the accounting standards, the FASB face three potential consequences: Economic, Social and Political. The economic consequences are basically dealing with the economic cost and benefits of the company as well as the industry in which that standard is applicable. And more or less it will affect the whole country. In a broader perspective, it will affect the financial statements of the company. The decision which will be taken after looking at the financial statements of the company, will effect and then some other decision that will be based on previous decision will also be affected and in this way ultimately the country’s economy will be influenced. Financial statements are prepared based on the accounting standards, which have more than one user and every user has its own purpose of utilizing the information present in it, this will also affect the brand image of the company which will directly affect the financial. Following are some examples:

EXAMPLE 1:

When the accrual basis of accounting was introduced in the postretirement health care cost rather than cash basis accounting, the reason behind the disagreement was that it will create higher expenses and liabilities and less profit will be shown in the financial statements even the liability arises.

EXMAPLE 2:

The decisions on the financial statements is not only restricted to borrowing and investment decisions, rather it has a wider range like contractual relationship. Many profit sharing companies, which emerged due to any alliances or joint venture, shares their profit on the basis of profit after tax. Any change in the standards or the introduction of new standards will lead to change in the contractual relationship.

EXAMPLE 3:

Between 1976 and 1977, The FASB was about to amend the standard, which is applicable to oil and gas industry. This idea if implanted, forces the companies for a 50 % reduction in exploration.

QUESTION 2:           DO ACCOUNTING STANDARDS BRING ECONOMIC BENEFITS? IT SO, PROVIDE EXAMPLES.

ANSWER:

The economic consequences are totally based on the economic benefits and economic costs. As not every consequence is certain, so FASB implements only those standards whose economic benefit exceeds the economic costs. Talking about the economic benefit from the financial statements, it's hard to quantify it. But even so, as the current and potential investor mostly gets the information from the financial statements of the company, the standards enhanced the quality of the financial statements. Following are some examples:

EXAMPLE 1:

The financial statements of different companies are presented in the universal way through standards and by this credibility is increased in the financial markets. This leads to more investment.

EXAMPLE 2:

As financial statements are prepared in the universal way and credibility is enhanced so the borrowings can do easily at lower capital costs.

EXAMPLE 3:

The management in the organization enhanced their ability which ultimately increased the profitability of the organization, and the shareholders can perform more accurate evaluations.

QUESTION 3:           WHAT CHALLENGES DOES THE “FASB” FACE WITH REGARD TO IDENTIFYING AND MEASURING ECONOMIC CONSEQUENCES?

ANSWER:

When FASB starts making a new standard, the process involves the identification and measurement of the economic consequences. In this step they face the challenges like, as the future is uncertain, so it’s totally impossible to forecast the accurate future consequences. The forecast can only be done with making a range of possibilities, and in that range, anything can happen in future. The worst challenge is the anticipation of the effect of consequences. The economic consequences are not sure that whether they will be right or not, so to identify and quantify the effect, is useless. The reason behind the uncertainty is to be working in the complex and dynamic environment which means that the environment is continually changing so the FASB faces new challenges on a daily basis. Still, the FASB is looking for answer to calculate the accurate economic consequences.

QUESTION 4:           DO YOU AGREE WITH THE FOLLOWING STATEMENT? “CONCEPTUAL AND TECHNICAL ACCOUNTING CONSIDERATIONS ALONE SHOULD DRIVE ACCOUNTING STANDARD SETTING?” EXPLAIN.

ANSWER:

From the range of standards should be based on consequences or should be based on conceptual and technical accounting, the FASB should lie between these two. If an accounting setting only consequences would be briefer than the forecasting must be accurate and the person who is forecasting must have competent abilities to accurately forecast the consequences, and no such person exists who can predict future accurately. Besides the person of strong political background will dominate the standard setting and business will create. In addition to this if accounting setting is totally based on the consequences, then it may be on continual change because of changing different politics personnel. This will decrease the quality and credibility of financial statements..................................

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