Free Market Proponents That Oppose Regulation Argue That Even in the Absence of Regulation, Organisation Will Provide Optimal Amounts of Accounting Information

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Value in exchange, according to Chamber define an asset as the individual exchangeability in the possession of an entity. He believes that something that cannot be sold separately such as goodwill which does not help the firm increase its ability to adapt to a changing environment. Therefore, the firm needs to record a loss because of the zero resale value. It takes the viewpoint of an internal manager or creditor who has to make decisions related to the liquidity of the firm and current spending power that is the short-term performance of the firm is more important. This approach is particularly important for firm with liquidity problems (high debt firms) or firms that engaged in tradable goods and which are able to quickly adapt their operations to market conditions (such as mutual funds that invest in tradable bonds or shares).

Question 3

- Discuss the major difference in the roles of MIA and MASB in the Malaysian scenario of the accounting profession. (10 marks)

Roles of MIA in accounting profession is to have an effective and competitive assessment framework in admitting members in to MIA to ensure that the profession is able to meet public expectations where its human capital is concerned. The second role is to meet the education and development needs of members as part of a commitment to help members be knowledgeable and maintain their relevance in today’s markets. The third role is to implement professional standards and practices based on internationally accepted guidelines as standards and by laws for members to comply with in maintaining the integrity of the profession. The fourth is to have in place a robust disciplinary system for those who fail to comply with these standards and by laws.

Role of MASB in accounting profession is to review, revise or adopt as approved accounting standards. The second role is to collaborate with other national and international accounting standards setters and monitor the development of other national and international accounting standards. The third role of MASB is to conduct such public consultation that may be necessary in order to determine the contents of accounting concepts, principles and standards. The fourth role of MASB is to develop a conceptual framework for the purposes of evaluating proposed accounting standards.

- (i) in the context of reporting, explain briefly the technological revolution known as XBRL

The capability of XBRL is to communicate semantic meaning associated with specific data elements, independent of any software application or platform, makes it useful for the transmission of business and financial information to multiple company stakeholders and regulators.

(ii) outline (1) advantage and (1) disadvantage of XBRL

The advantage of XBRL is that XBRL is beneficial for a variety of stakeholders. XBRL has broad appeal because it can be utilized by investors to facilitate analysis of financial results, by companies to eliminate manual input and review of information passed through the financial reporting process, and by governmental entities to efficiently gather information from the business.

The disadvantage of XBRL is that XBRL may increase information abuse. In an information age where dishonest people are electronically enabled, abuse is bound to occur. As more information becomes electronically companies will need to implement appropriate safeguards to protect their information, including XBRL tagged information.

Question 4A

- Comment if there is any creative accounting involved in the scenario above with appropriate explanation to support the answer. (5 marks)

There is creative accounting involve in the scenario above because the manager firmly requested the accountant to ignore the NRV because it could give rise to a lower profit. So that by doing this, it will smooth the income of the company and show the steady growth of income in the company. Thus it will attract the investor to invest in this company. Meaning here, the manager may predict or forecast future year profit thus by ignore the NRV they can manipulate the profit as their prediction or forecast.

- 4 reasons why managers practice creative accounting

- Income smoothing

Report a steady trend of growth in profit rather than to show volatile profit with a series of dramatic rises and falls. This means that the company wants to show steady growth of income to attract potential investors. The company also wants to avoid raising expectations so high in good years that company unable to deliver what is required subsequently.

- Manipulate profit to tie in with forecast

- To maintain share price by reducing apparent level of borrowing and by creating apparent of good profit trend.

- To delay release of information for market if engage with insider dealing.

Question 4 b

Earnings management is the process by which management can pontentially manipulate he financial statement to represent what they wish to have happened during the period rather what actually happened (Scott,2009).

Required:

Discuss the relationship between management discretion in the choice of accounting policies and earnings management. (10 marks)

Earning management is define as the managers use judgement in financial reporting and in structuring transaction to alter financial report to either mislead some stakeholder about the underlying economic performance of the company to influence contractual outcomes that depend on reported accounting number. There is direct relationship between the choice of accounting policies by the management and the earnings management. It can be seen in financial reporting perspectives. The manager can use the creative accounting to create the earning management for example creating the impression of the smooth and growth of profit overtimes. The relationship will affected based on bonus purposes, other contractual motivations, taxation motivation, and changes of CEO. In the bonus purposes, the management will make the performance of the company become low at the current period by using the accounting policy that lead to high expenses in current period for example written off the R&D expenses rather than capitalize it. By doing so, the net income for following year will be increase