Category: Accountancy

Introduction

Local and federal governments require financial resources to run their operations and provide essential services to the public. One of the approaches that these administrations use to raise funds is taxation. Adam, Kammas, and Lapatinas (2015) define tax as a mandatory monetary charge or other forms of tariffs that a state imposes on its people or organizations. Individuals or institutions that default in tax remittance may be prosecuted. The majority of nations have tax systems that target both corporate and personal income. Some administrative units also impose gift tariffs, sales, estate, payroll, and property taxes. This paper will focus on the concept of tax, its purpose, and its impacts on society.

Concept of Tax

Taxation refers to a strategy that a government uses to collect money from its citizens and businesses to aid in the provision of vital services like security, health care, and education. Altshuler and Goodspeed (2015) identify two forms of taxes, which are indirect and direct. As per Bratten, Gleason, Larocque, and Mills (2017), direct taxation refers to a state where an individual (employee or business person) remits levies to the government without engaging a third party.

Examples of direct tax include real property, income, corporate, and personal asset levies. On the other hand, indirect taxation refers to a condition where taxpayers do not remit their levies to the government in person. Instead, an administration breaks down a tariff into multiple rates and shares them amid numerous units of society, including professionals, employers, manufacturers, and consumers (Altshuler & Goodspeed, 2015).

There are multiple taxation systems, among them income-based, progressive, consumption-oriented, proportional, and regressive. Income-based taxation refers to a circumstance where a government deducts levies from a person’s or business’ revenue. Consumption-based tariff is enforced depending on the cost of products and services. A progressive levy refers to a system where an entity’s or person’s tax rate swells according to the rise in total taxable revenue. Conversely, a regressive system is a scheme where poor people are overtaxed relative to the rich. It treats all taxpayers evenly regardless of their level of income. A proportional system assigns a constant tax rate to all people without considering their income brackets.

Purpose of Tax

The key goal of taxation is to raise the fund needed for social and economic development. It is imperative to acknowledge that most governments use tax as the main source of money for their various projects. Adam et al. (2015) argue that a country’s economic growth is pegged on capital formation. Consequently, local and federal administrations use taxation as an avenue for capital accumulation. They achieve this objective by increasing existing tax rates or introducing additional levies. Another purpose of taxation is to preserve price stability, albeit on a short-term basis. Hennighausen and Heinemann (2015) assert that a levy is an efficient approach to managing inflation. Governments regulate private spending by increasing the rate of direct taxes.

This move is useful in alleviating strain on commodity markets. Supporters of the chartalist theory of money creation argue, “Taxes are not needed for government revenue, as long as an administration in question is able to issue fiat currency” (Bratten et al., 2017, p. 12). They maintain that the primary reason for tax collection is to aid in support of specific industries and provision of essential services like social security. Imposing high tax rates on affluent individuals helps governments to bridge the gap between the rich and the poor.

Types of Taxes

The Organization for Economic Co-operation and Development (OECD) has established numerous categories of taxes, among them, income, property, wealth, and value-added. A majority of the administrations deduct levies from individuals’ and company’s revenues. Property tax is also known as millage tax and represents the tariffs imposed on assets that a person owns. Some countries order their people to disclose information regarding their assets and liabilities (balance sheet). The government uses this data to determine the amount of tax that an individual should pay. Generally, wealth tax is computed as a proportion of a person’s net worth.

Value Added Tax

Other terms that are used to refer to this form of duty are turnover tax, single business tax, and Goods and services tax. It is a type of levy that is imposed on manufactured products or services. Hennighausen and Heinemann (2015) maintain that the rate of value-added tax is determined incrementally. This means that it varies as the worth of a good or service grows in subsequent phases of manufacture or distribution.

Nevertheless, it is imperative to note that value-added tax is remitted at the final stage of the supply chain (Adam et al., 2015). In the case of merchandise, manufacturers do not pay this levy. Instead, it is deducted at the retail point, which marks the last phase of product distribution. The Money collected through this system is used in infrastructure development. It is necessary to mention that not all products are subjected to value-added tax. Some countries do not impose tariffs on goods and services that are meant for export.

Principles of a Sound Taxation System

Three essential principles of a sound taxation system are fiscal adequacy, theoretical justice, and administrative feasibility. The theory of fiscal adequacy argues that an administration should make sure that the amount of money collected from the public and business entities is sufficient to meet all its expenses. Governments have a duty to provide fundamental services to the public, hence the need to guarantee that it does not run out of finances.

The principle of theoretical justice maintains that a taxation system should not be oppressive to a certain group of people. Instead, countries ought to have different modes of levy collection that are conscious of the economic status of their citizens. In the United States, people remit duties based on their abilities. The American government has set various income brackets which it uses for taxation purposes. Individuals who earn over $500,000 pay 37% of their earnings as levies (Adam et al., 2015).

The theory of administrative feasibility states that a taxation system should be easy to implement. The laws that govern tax reduction should not be oppressive to taxpayers. Additionally, there should be various modes of payment to eliminate potential inconveniences.

Impacts of Taxation on Society

Governments use tax money to fund projects that are meant to benefit citizens. One of the impacts of the tax on society is that it assists in the provision of critical services like health care. A study of the Nordic countries (with high taxation) reveals that they enjoy quality medical services, which has contributed to low mortality rates (Altshuler & Goodspeed, 2015). Altshuler and Goodspeed (2015) argue that tax is paramount to improving the level of literacy in a country.

Governments use tariff money to build schools and subsidize the cost of education. This initiative ensures that children from poor backgrounds have access to quality learning. Although levy helps to strike a balance in wealth distribution, it may discourage some people from securing jobs. For instance, progressive tax may result in individuals turning down promotions due to fear of being heavily taxed.

Conclusion

Tax refers to statutory deductions that employees, employers, and companies make to the government to facilitate the delivery of essential services and infrastructure development. State and federal administrations use levies to accumulate capital and regulate commodity markets. An effective taxation system should not be a burden to the public and must be sustainable. Proponents of tax payment argue that this fund has many benefits to society, among them the improvement of health care and literacy levels. Nonetheless, some forms of duties, such as progressive levies, may prevent people from accepting job promotions.

References

Adam, A., Kammas, P., & Lapatinas, A. (2015). Income inequality and the tax structure: Evidence from developed and developing countries. Journal of Comparative Economics, 43(1), 138-154.

Altshuler, R., & Goodspeed, T. J. (2015). Follow the leader? Evidence on European and US tax competition. Public Finance Review, 43(4), 485-504.

Bratten, B., Gleason, C. A., Larocque, S. A., & Mills, L. F. (2017). Forecasting taxes: New evidence from analysts. The Accounting Review, 92(3), 1-29.

Hennighausen, T., & Heinemann, F. (2015). Don’t tax me? Determinants of individual’s attitude towards progressive taxation. German Economic Review, 16(3), 255-289.

Introduction

Certified Public Accountants are independent professionals are comparable to attorney or physicians, who offer accounting services to clients for a fee. CPA Firms vary in size from one-person practices to large, international organizations with several thousand professional accountants.

The CPA certificate is a licence to practice granted by the state granted on the basis of a rigorous examination and evidence of practical experience. All states require that candidates pass an examination prepared by the American Institute of Certified Public Accountants. For professional accountants, education doesn’t end at graduation time. CPAs are required to participate in continuing professional education programs throughout their careers. This commitment to staying proficient and to professional growth enables CPAs to advice their clients in a rapidly changing business environment. Public opinion polls indicate that most people have a high level of trust in Certified Public Accountants. This attitude of trust reflects widespread public confidence in the competence, skills, and ethical standards of the accounting profession.

The principal function of CPAs is auditing. How do people outside the business entity-owners, creditors, govt. officials and other interested parties-know that the financial statements prepared by the company’s management are reliable and complete? In large part, these outsiders rely upon audits performed by a CPA firm which is independent of company issuing the financial statements.

In contrast to the CPA in public practice who serves many clients, an accountant in private enterprise is employed by a single enterprise. The chief accountant officer of a medium size or large business is usually called the controller, in recognition of the accounting data to control business operations. The controller manages the work o the accounting staff. He or she is also a part of the top management team charged with the task of running the business, setting the objectives, and seeing that these objectives are met (Meigs n Meigs, p. 8).

Public and private similarities and differeneces

The public sector is as affected by managerial trends as the private sector. There is a consequent need for strategic accountability. As in a group of companies, strategy is not something which exists within one single business, but is also concerned with the relationship between the business and the canter. The language of strategy in general and financial management in particular is there fore necessary and is developing.

Consequently, the decisions support techniques used in the private sector are largely also applicable in the public sector. Given the trend towards generalisn and the reputation of the service at colleges for generalise it might see an opportunity to mount a course for private sector delegates. But what outlays would be involved, and would they be matched by income? The colleges are known to research and develop relevant management techniques: – again, cost and benefits need to be matched. Its report stresses that its greatest assets are ones- the knowledge and commitment of its staff-not shown on its balance sheet. It is important that such assets are recognised; cost effectively enhanced, employed to deliver good value for tax payers, money and suitably monitored. In corporate strategy terms, it is possible to quantify the cash flows from the rest of the public sector to the college, obtain its net present value, and then compare with the cost of the next best alternative example, using a private-sector provider(or, possibly to compare with the price which could be obtained on disposal).

So, subject only to a willingness by those in authority to quantify there judgement, financial management is, on the whole, equally applicable to the not for profit sector generally and the public sector in particular. It is worth stressing perhaps, that in common with the private sector it is never possible to say whether or not value has been maximized. We do not know what we do not know: specifically, we do not know what opportunity have been missed. This is not a problem for those familiar with devolved authority, as it is the only approach compatible with the improvement: you can not tell an explorer what to find, or identify what/ she has not found! Some bridge is usually required, from the unknown to the unknown example to relate the value of a unit to the cost of its tangible assets and to consider what ‘intangibles’ explain the difference. This will often act as a very good attention – directing tool, but recognise as holding up a mirror: in reality, value is not a function of cost.

Taking hospital as example, investments in medical equipment represent decision to trade in purchasing power now in the expectation of benefits later. These benefits may take the form of increased throughput (and hence reduced waiting list) or the meeting of the needs which would otherwise go unsatisfied. These benefits are not measurable, because it is not possible to measure something which has not yet happened; they are judgemental. But this does not mean that they are not quantifiable and hence capable of evaluation. The main obstacle is usually unwillingness on the part of those in authority (e.g. politicians) to express value judgements, perhaps because they fear such judgement being taken down and used in evidence against them.

For the avoidance of doubt, it is worth stressing that values are equally subjective in the private sector. No one trends that they can measure the effectiveness of a proposed investment in advertising; they forecast the improvement after assessing the likely reactions of competitors, direct customer and ultimate consumers. The management accountant fulfils a vital role in being able to synthesise these judgements together with others (e.g. the volume – cost relationship and the cost of capital) to identify the optimum level of investment they imply. The forecast outcome is logged, so as to provide a benchmark by which to measure progress.

Of course, there are differing degrees of difficulty – discomfort, even – in making value judgements in the public sector currently and forcibly. Thanks to results of research in pharmaceuticals, for example, previously incurable illnesses are being dealt with, and people are living longer. Demand for dugs, etc, is correlated with age so demand continues to increase with a progressively smaller proportion of a population in employment, the financial pressures are substantial. How does one make an informed choice as to the transfer of funds between the well and the unwell? What value does one put on curing an illness, or saving a life? These are societal matters, the discomfort being one of the reasons they are placed firmly in the public sector, rather than being left to the ‘survival of the fittest’ philosophy associated with the competitive struggle for existence that we call the market economy (Financial Strategy, p. 7).

The main feature is the separation of purchasers (representing a particular geographical area) from the providers (hospitals and other health care facilities) the providers are competing among themselves for the purchasers; funds, the idea being those offering the best value for money will gain an increasing of the available funds.

In the early days, at least various ‘rules of the game’ have been laid down, most notably (from a strategic financial management point of view) in the area of pricing. The rules are very simple; price must equal cost, and the cost must equal total cost, including a target return on capital employed. Those who framed the rules seem to have been thinking in terms of their being one objectively verifiable cost of an activity (which is valid only when looking backwards) but prices have to be established in advance. The demand for sophisticated yet pragmatic costing systems will, consequently, be hive for some considerable time to come, as providers see cost which signal good value for money for the business they seek to attract and pour value for those they wish to repel (Financial Strategy, p. 8).

Peroformance measurement

Measuring performance is required to know which area you heading to and what are the gap that are faced by the organization. Traditionally, managers have focused on financial measures of performance and progress. Increasingly, organizations in both the private and public sectors are using non – financial indicators to asses’ success across a range of criteria, which need to be chosen to help an organization meet its objectives. Some common financial and non – financial indicators are below.

Financial Performance Indicators

Poor Liquidity is a greater threat to the survival to the survival of an enterprise than is poor profitability. Unless the organization is prepared to fund growth with high levels of debt, cash generation is vital to ensure cash generation in future profitable opportunities. In private sector the alterative to cash via retained earnings is debt. In the public sector this choice has not been made available in the past, and all growth has generally been funded by the government. However in the face of government imposed cash limits, local authorities and other public sector institutions are beginning to raise debt on the capital markets, and are therefore beginning to be faced with the same choice as private companies.

Value Added This is primarily a measure of performance. It is usually defined as sales value less the cost of purchased materials and services. It represents the value added to a company’s products by its own effort. A problem here is compatibility with other industries – or even with other companies in the same industries. It is less common in the public sector, although the situation is changing and many public sector organizations are now publishing value on their own value added.

Profitability May be defined as the rate at which profit is generated. It is often expressed as profit per unit of input. However, profitability limits an organizations focus to one output measure – profit. It overlooks quality, and this limitation must be kept in mind while using profitability as a measure of success. Although the concept of profit in its true sense is absent from most of the public sector, profitability may be used to relate inputs to outputs if a different measure is to be used (Financial Strategy, p. 9).

Non – Financial Performance Indicators

Market Share A performance indicator that could conceivably be included in the list of financial measures, market share is often seen as an objective for a company in its own right. However, it must be judged in the context of other measures, can take quality into account – it must be assumed that if customers do not get the quality they want or expect then the company will lose market share. It is a measure that is becoming increasingly relevant to the public sector.

Customers Satisfaction this can be linked to the market share. If customers are not satisfied they will take their business elsewhere and the company will loose market share and go into liquidation. Measuring customer satisfaction is difficult to do formally, as the inputs and outputs are not readily defined or measurable.

Competitive Position The performance of a business must be compared with that of its competitors to establish a strategic perspective. A number of models and framework have been suggested by organizational theorists as to how competitive position may be determined and improved. An array of measure is needed to establish competitive position. The most difficult problem to overcome in using competitive position as a success factor is in collecting and acquiring data from competitors. The public sector is increasingly in competition with other providers of similar services both in private and public sectors. Advantage is that it is easier to gain access to data from such competitor than it is in private sector.

Risk Exposure Risk can be measured according to finance theory. Some risk for example, exchange rate risk and interest rate risk can be managed by the use of hedging mechanisms. Shareholders and the companies can therefore choose how much risk they wish to be exposed to for a given level of return. However risk can take many forms and the theory does not deal with risk exposure to matters such as recruitment of senior personnel or competitor activity. Public sector organization tend to be risk averse because of the political repercussion of failure and the fact of tax payers, unlike shareholders, do not have the option to invest their money in less or more risky ventures (Financial Strategy, p. 10).

Conclusion

Financial strategy is applicable to, and equally important in, organization which does not seek distributable profits, emphasizing that the key factor is the assessment of the value of the output of an entity and especially the excess of that value over the cost of inputs, whether or it be in the private sector or the public sector.

Dividend payments have been shown to be irrelevant to shareholders wealth in perfect capital markets. When market imperfections – such as taxes, transaction costs and imperfect information – are considered, the situation is less clear. Companies tend to adopt stable and consistent dividend policies, in order to attract a clientele of investors whose personal taxation position suits that particular policy. Unexpected fluctuations in the dividend payment tend to be avoided because of the informational content of the dividend which is being signalled to the market.

References

1. Bernistein, P.l. Against the goals: The remarkable story of Risk, Wiley, 1996
2. C Parkinson and J Ogilvie. Management Accounting Financial Strategy, 2003 Edition Elsevier, pages 7-10
3. Edvinsson, L., ‘Developing intellectual capital’ Long range planning, pg 366-377 vol 20, 1997.
4. Knight, J.A., Value Based Management, McGraw Hill, 1998
5. Meigs and Meigs Accounting; the basis for business decisions Eighth Edition 1990 Mc –Graw Hill, pg 8
6. Mills, R.w., The dynamics of Shareholders value, mars Business Associate 1998.
7. Roger Mills, Sean Rowbotham and John Robertson, Management Accounting, 1998
8. Tony Jackson, Financial Times, 1999

Introduction

Colombia is one of the countries of the developing world that is located in the continent of South America. It is a free market economy with major economic relations with the United States. The economy of the Republic of Colombia could be described as considerably steady up till the year 1997. Subsequently, GDP growth slowed to a mere 0.6% after which the country experienced depression at 4.5% per year (Martin 2008). Unemployment rose to around 20% which required major reform to bring it back on track. This led to a depreciation in the value of the Colombian Peso in the international markets, eventually prompting the country to draw on emergency funds from the IMF which was accompanied by enforcement of strict disciplinary measures. This aided recovery to a great extent however as the growth rate climbed to a healthy 3.1% by the year 2000 and international reserves reached above the $8 billion mark. Following the election of a new government in 2002, economic reforms were introduced again aimed at reducing the public-sector deficit (Dow Jones-Irwin 2006). This led to Colombia rising high among the developing nations of Latin America, reaching a considerable growth rate of nearly 8% according to nominal estimates by the year 2007.

Rules and Regulations

The legal and regulatory requirement in Colombia, accompanied with the requirement of the International Accounting Standards has led to issuing conflicting standards. The legal requirements on accounting are primarily expressed in the Code of Commerce which provides a guideline for the general accounting needs that companies must adhere to in terms of keeping books and creating financial statements. This is supplemented by the 1990 Law 43 that gives a more general legal framework that authorizes the Colombian government to issue Colombian auditing and accounting standards and to perform regulation of the profession in the country (Accounting Standards Update by Jurisdiction 2007). Lastly, the “Decree 2649” gives way to the Colombian generally accepted accounting principles. In addition, accounting and other rules regarding financial statement representation are also issued and overseen by the Superintendent of Corporations (corporate regulator), the Superintendent of Securities (securities market regulator), and the Superintendent of Banking (Colombia: Financial Statement Requirements In Colombia 1997).

Table 1. Exchange Listing (Global Reports 2009)

* Sizes have been determined in terms of asset size of the relative companies and industry categorizations have been obtained from the World Stock Exchange Factbook. Source: (Meridian Securities Market 2008)

Compared to the previous years, the size of the companies in the stock exchange appeared to have improved. The number of companies listed on the Bogota Stock Exchange has increased and revenue figures seem to be improving as well as evidenced by the number of “large” companies (Boliviarez 2008). This is in tune with the improvement in Colombia’s economy that been experiencing rapid growth recently and has recovered from the effects of depression and IMF disciplinary measures.

A Sample Company

Looking at the financial statements of Ecopetrol SA which is listed on the Bogota Stock Exchange, we see that the financial reporting within the company is relatively strong. One is the listing of important data in the notes of the financial statements that appear to be in detail (Global Reports 2008). This hints at a strong explanation of transactions and steps taken during the year which aids more transparent representation. A second strength is the auditor review. The statements come attached with auditor confirmed that the statements have been reviewed and according to the standards and these are confirmed by the certificate the external auditors provide (Financial Statements 2008). However, the company does not adequately list the frequency of the board of directors meeting which needs to be known as the board oversees the top management which needs to be done to prevent abuse, especially since Colombia is a third-world country. Another is the lack of transparency regarding the transactions that may require shareholders’ resolutions and a clear listing of the obligations to shareholders that the company holds. The organizational structure is mainly based on departmental levels and allows for a degree of non centralization, crucial for the oil industry.

The annual report shows that the level of environmental accounting is significant as the company is involved in oil and gas exploration. It is not as high as it should be but considering Colombia is a third World Company, the mere mention of environmental responsibility and commitment to a safer one points to some measure of responsibility being accepted. Human resource and social accounting are not strong, however (Business New America 2008). The company makes very small mentions of the size of the workforce and a little level of advertisement regarding human resource programs that have been initiated but a detailed one is not provided, although the company does claim to adhere to the standards of corporate social responsibility.

The International Accounting Standards Board could initiate strong requirements for reporting regarding good corporate governance. This would require companies to givea transparent representation of the board of directors, the frequency of their meetings and make sure that they are independent (Financial Standards Foundation 2009). There could be some level of cooperation involved with the regulatory and rules issuing authorities in Colombia to aid them in implementing the IFRS and to regulate them well. This could further be supplemented by a strong and vociferous support of independent audit and remuneration as well as nomination committees which will make management oversight as independent as possible and lead to soaring investor confidence and a rise in financial sector development. There is also the potential opportunity in terms of following the model used by the United States in communicating with the International Accounting Standards Board to form joint committees to phase out the indigenous GAAP and move to a more widely used international standards. There is however the other option of following closely the trends spurred by the Cadburry report and the Sarbanes Oxley Act in the US and aiming to make legislation in accordance with in (Objectives 1998).

Thus it appears that Colombia is at the typical stage most developing countries are in at the present juncture in terms of their financial representation and legislation regarding it. The country sees ever changing economic fortunes but has room for considerable growth and use of its vast resources. Development of better accountancy and hence corporate governance may aid development a great deal but policies need to be in tune with this so as to encourage investment and bring more money to the market.

References

1. “Business News Americas.” 2008. Web.
2. Objectives, B. “Countering International Financial Crime.” 1998.
3. “Global Reports.”
4. “Accounting Standards Update by Jurisdiction.” 2007.
5. “Colombia: Financial Statement Requirements In Colombia.” 1997. Web.
6. Dow Jones-Irwin, The Dow Jones-Irwin business almanac. Ann Arbor, Michigan: Dow Jones-Irwin, 2006.
7. Martin, Randy. “Colombia Goldfields Provides Fourth Quarter 2008 Exploration and Corporate Updates.”2009.
8. Meridian Securities Markets, World Stock Exchange Fact Book. 2 ed. Los Angeles: Electronic Commerce, Inc, 2008.
9. “Financial Statements.” 2008.
10. “Financial Standards Foundation.” 2009.
11. “Accountancy Requirement S.A.” 1997.
12. “Colombia BVC.”
13. “Boliviarez de Colombia.” 2009.

Introduction

It is important to appreciate the role played by revenue recognition in the preparation of financial statements. Considering the wide use of financial statements in the decision-making process, it is important to have a universally recognized mechanism in order to ensure consistency. Efforts have therefore been directed towards replacing the existing generally accepted accounting principles (GAAP) with a new accounting approach. The move is aimed at creating consistency in the preparations of financial statements regardless of the industry the business operates in. In addition, the new approach will significantly seek to reduce the many standards involved in the GAAP. This paper seeks to analyze contract revenue recognitions.

The GAAP principles limitations

The current GAAP principle is accused of vagueness in the standards descriptions. As a result, there have been a lot of variations in the financial records preparations. The variations are mainly attributed to different interpretations from the various industries, which have limited the external users of the financial statements in making-up their decisions. The critics also claim that the current GAAP principles have many standards which burden the users. The various principles also seem to have some similarities which further complicate the financial interpretations. The new approach therefore seeks to reduce this number to a considerable level and also maintain their clarity in order to ensure consistency and ease comparability between firms (FASB S2&S3).

The board wishes to make some vital amendments to standards relating to non-financial contracts, insurance contracts and, lease contracts. This amendment will aim at ensuring similar revenue recognition models are used in every industry, thus improving their financial reporting. Similar firms will therefore use similar revenue recognition techniques in accounting for their contractual obligations. Such undertaking will also enhance comparability between different firms’ statements. It will also improve the decision usefulness of the information contained in the firms’ financial statements. In addition, the move will boost the decision usefulness of the financial information in the industry (FASB S11). The current GAAP principles are more complex, a quality that leads to interpretation variations. The board, therefore, seeks to simplify these principles which will, in turn, lead to quality financial reports. Therefore, people who depend on the financial statements in the decision-making will be at ease since the format, language and techniques used will be understandable (FASB 1.20).

The proposed version emphasizes revenue recognition on an increased basis of net wealth emanating from the contract. All the transactions that add up the total revenue from the contract should therefore be recognized in the books of account. The board has also interpreted the contract further to comprise not only written but also implied agreement between parties. This move seeks to delimit the legal contractual obligation between parties, and also between firms. Indeed, the rights and obligations of the parties to contract should be well outlined in order to ensure conformity (FASB 2.27&2.28).

Potential benefits of the new practice

The revenue recognition principles of many contracts will still remain as outlined in the GAAP. This is because the new practice does not aim at replacing the principles, but instead it targets improving them in order to ensure efficiency and effectiveness of the financial statements. However, the retail transactions together with the long-term contracts will not be affected by the new practice (FASB 6.2&6.3). According to the board, revenue should be recognized after the goods have been successfully delivered to the customer. This move aims at ensuring that all the performance obligations are accounted for in the books of accounts (FASB 6.7). In order to cater for the deficiency caused by the cash-based revenue recognition, the board intends to use the collectability of payment criteria in determining the amount which increases the contract net wealth. In case after the delivery of goods and services to the customer, there stands a high possibility of losing the amount, the amount should not be considered as revenue. This move will ensure that bad debt are not recognized as revenues in the financial statements (FASB 6.13).

The new approach requires the parties engaged in construction work that they should recognize revenue after the ownership rights of the inventories passed to the customer; otherwise, the inventory should still be accounted as inventories. This aims at ensuring no double counting occurs during the financial statements preparations (FASB 6.21). The board clearly defines the performance obligations to prevent different interpretations in the industry. The definitions will thus enhance similar accountability between firms which allows comparability in the industry.

All the post-depost-delivery should be accounted for as revenue if and only if the customer provides a warrant or a promise to the contracting party. This is according to the performance obligations new definitions. The board views that the financial statements will have a true reflection of the actual performance of the business. In addition the financial statement users will effectively decide well (FASB 6.28). The sales incentives together with other promotional promises will also be treated as performance obligations since it results to transfer of ownership (FASB 6.33).

The new approach seeks to ensure that estimates of the delivered goods are accounted for as revenue even without specific objective evidence on them. The main reason why the vendor should recognize the amount will solely depend on the reliability of the customer. Incase the vendors’ objective on the sold amount has reliable evidence the amount should be recognized as revenue. However, where the evidence seems unreliable, the vendor should not recognize the sales revenue using an estimated standalone selling price (FASB 6.38 & 6.39). The newly adopted residual method requires the vendor to use the total transaction price in accounting for the undelivered goods since it will assist in capturing the true entity performance in the contract. On the capitalization of cost, the board intends to recognize them as expenses in the financial statements. The costs must however be in accordance with the other accounting standards (FASB 6.44).

Conclusion

All the US firms, both the profit making and the non-profit making ones, have been following the GAAP principles in their financial statements preparations. The principles have nevertheless resulted to inconsistencies since firms have differently interpreted the standards. Partial changes of the principles are underway as the board seeks to ensure efficiency and consistency in the financial statements preparations. Consequently, the board also aims at simplifying the standards in order to increase their usability. The new approach intends to reduce the many standards that are currently used by the firms thus making them more user-friendly. It is also important to understand that some of the principles will continue been used as they are in the current GAAP. The new approach therefore aims at reinforcing the current principles and not replacing them.

Work cited

Financial Accounting Standards Board. Preliminary Views on Revenue Recognition in Contracts with Customers. 2008.

Introduction

In an economy, financial transactions are inherent. Companies and other entities need to communicate to the employees, the public and statutory administrative bodies about the transactions they perform which have financial implications. This need is precisely addressed by a language called accounting. (Horngren, et al., 2008).

The ‘True and Fair View’

Accounting could be highly subjective because of the many assumptions that are made in arriving at the figures that are presented in the financial statements. The debates in accounting are centered on the accounting images and ideologies.

One of the images accounting portrays is the ‘true and fair’ view. Accounting calculations rely upon theories and they make assumptions about the social world. Thus different people will prefer different methods of accounting for transactions, depending mostly on their interests. These theories are debatable and mostly influenced by those in power, either in the political scene or big corporations, who might have vested interests in the way financial statements are presented.

Accounting calculations also place emphasis on ‘finance capital’ and ignore the ‘human’ and ‘social capital’ which is necessary for wealth creation and it is therefore considered to be divisive. There is also the issue of whether transactions should be measured using historical values, fair values or market values. All these values will lead to a different profit and therefore the truth and fairness of the accounts can be disputed.

Stewardship

Stewardship might also raise issues as the owners and the managers of corporate entities are usually different. Shareholders who are the owners of a particular entity may have a long-term focus on the business and might therefore want a true and fair presentation of the financial statements to enable them make decisions as to whether to sell their stake in a company or hold it, depending on the presented performance. Their concern might be increasing their share prices whereas the managers might have a short-term focus of increasing profits in the current period so that they can get their bonuses and other benefits. This however might be to the disadvantage of the shareholders.

International Reporting Standards

Entities are usually governed by accounting standards, both at the national and international levels. Most countries are moving toward private entities being in charge of formulating standards instead of this very important role being left to public bodies and elected governments entities (Sikka, 2007). An example is the International Accounting Standards Board (IASB) based in London which is funded by the four major accounting firms’ and other big companies.

This means that the private sector has been left to advance its agenda and therefore they do not represent the interests of the ordinary people. The collapse of the giant company Enron happened under the watchful eye of IASB. These raised very many questions as to the suitability and integrity of IASB as a regulatory body and also the issue of integrity in carrying out its mandate. IASB has also included some clauses in its document that exempt it form liability to the public. It sates for example, that it does not owe a ‘duty of care’ to individuals. Thus any affected party cannot lodge a claim against them for non-performance. This leaves major loopholes in the way financial reporting is done and ends up making accounting highly subjective.

Furthermore, IASB requires that all major businesses follow its standards regardless of whether these standards are relevant to these businesses or not. These standards are also imposed on developing countries as conditions for granting aid and in turn the developing countries end up being controlled by the west. They follow their ideologies regardless of whether they are meeting their local needs or not. These standards are already failing in the west and there is no guarantee that they will work in developing countries.

Foreign currency reporting

Another issue is the way of dealing with foreign currency issues in financial reporting. Most large companies deal with foreign currency or have subsidiaries overseas and therefore the foreign currency issues in financial reporting needs to be addressed. Furthermore, exchange rates fluctuate and this poses a serious problem. Fluctuations in currency rates can affect all business and consumers directly or indirectly.

Direct effects occur where companies trade abroad or have subsidiaries overseas. Indirect effects can occur, for instance, if there is a change in the US dollar: £ sterling exchange rate which will affect the price of oil in the UK (since oil is priced in US dollars). There are objectives of foreign currency translation that are guided by SSAP 20 (para.2) which states that ‘the translation of foreign currency transactions and financial statements should produce results which are generally compatible with the effects of rate changes on a company’s cash flows and its equity and should ensure that the financial statements present a true and fair view of the results of management actions.

Consolidated statements should reflect the financial results of and relationships as measured in the foreign currency financial statements prior to translation’. The problem here is that there is the use of historic cost accounting and therefore there has to be a choice between a system that translates historic exchange rates and a system that uses the current exchange rate. As Demirag (1987, p.83) states ‘‘translated accounting information will not provide useful information until it is based on current value accounting’.

Another issue is how to account for future receipts and payments. A number of arguments have been put forward in favour of the closing rate; since the future rate is unknown, then the current rate is considered the best estimate. Others argue that forward rates, appertaining to date of settlement, be used. The gain/loss which results is post balance sheet, but under the prudence concept accounts are supposed to provide for foreseeable losses.

An argument here is that where forward rates differ from current rates this implies differential interest rates, and the gain/loss on say a loan arising from the change in exchange rate between balance sheet date and date of payment is the counterpart of the higher/lower interest which would be payable if the debt were denominated in the parent company currency. In other words, there is a problem in deciding whether differences are exchange rate differences or related to different interest rates.

With the profit and loss account, transactions are translated at rates ruling when the transaction was first recognised. So sales are translated at delivery. In principle each transaction should be translated separately, but in practice an average rate for the period is used. This might be weighted in the case say of a seasonal business. There are 2 exceptions: depreciation is calculated at the historic rate of the fixed asset while cost of sales is valued at the historic rate when required.

Off-balance sheet items

Off-balance sheet financing is a term used to describe the different methods used by companies when they want to exclude assets and liabilities from the balance sheets. This is sometimes known as ‘window dressing’ or ‘creative accounting’. Various factors are responsible for reporting on off-balance sheet items. One of the factors is the effect on gearing ratio. Doing away with debt from the balance sheet will make investors view the company as less risky and will therefore want to invest in such a company. Highly geared companies are perceived to be risky since any returns that are received will first go to pay the debtors and this might reduce the earnings to investors.

The off-balance sheet items could also affect the profit figure and especially where director’s salaries are tied to the profits, off-balance sheet schemes could increase their pay. Some off-balance sheet financial arrangements may also have beneficial effects from a tax viewpoint. Depending on the type of off-balance sheet financial arrangement, all or some of the effects mentioned above could be important.

Usually changes are generally cosmetic and will not change shareholder wealth immediately. An exception would be if management salaries were related to reported profits, such that the effect of artificially increasing reported profits would lead to a larger cash outflow to managers. However, an off-balance sheet financial arrangement which leads to a reduction in the tax charge will have a direct impact on cash flows and, therefore, shareholder wealth. There could be an indirect or delayed effect on shareholder wealth, if, for example, investors are fooled by purely accounting changes and buy or sell shares as a result.

Conceptual framework

There is also the debate on whether the conceptual framework is necessary in accounting or not. A conceptual framework (CF) is a coherent system of interrelated objectives and fundamental principles, a framework which prescribes the nature, function and limits of financial accounting and financial statements (ACCA, paper F7 INT, 2008/09).They suggest that Accounting theories are a tactic to buttress ideas put forward by interest groups.

Each will adopt theories to justify its own special pleading, and there cannot be a consensus on a CF. Diverse groups prevail in different circumstances or in the adoption of particular accounting treatments therefore there is no CF that will “fit” all the standards. There is also an argument that a CF would lead to rigidity and kill off initiative and innovation. There are also public choice problems and therefore in practice a decision would have to be made that the interests of one group of users, for a particular purpose, was paramount.

Conclusion

The foregoing arguments show the subjectivity of accounting, and especially because there is no one way of performing transactions. The same transactions can be reported in different ways and therefore end up giving conflicting results which might lead to issues of reliance on such statements. However, despite accounting subjective it remains the language used in business and thus we cannot do without some form of accounting, the benefits outweigh the costs.

References

ACCA, 2008. Paper F7-Financial Reporting (FR). Berkshire: Kaplan Publishing.

Demirag, I.S. 1987. A Review of the Objectives of Foreign Currency Translation. International Journal of Accounting, Education and Research, 22(2), pp.69-85.

Horngren, T., Sundem, L., Elliot, A. & Philbrick, R., 2008. Introduction to Financial Accounting. 3^rd ed. New Delhi: Pearson Education.

Sikka, P., 2007. There’s no accounting for accountants: the Guardian. Web.

Sikka, P., 2007. Unaccontable: the Guardian. Web.

Y-Budget Limited

Production Budget in Units

Raw materials Purchase Budget in Kilos and Value

Introduction

Budgeting has certain definite objectives to achieve, as it represents a blueprint of the anticipated plan of action or operation. Budgets express plans covering the entire organization and all its functions like purchase, production, marketing and the like. Budget is considered as an official declaration of the organizational policies defining the organizational objectives for the understanding of the organizational members at all levels. Ensuring coordination of the business as a whole is another objective of budgeting. The process of budgeting takes into account factors like probable production capacities and marketing potential and coordinates them towards achieving the overall organizational objectives. In such coordination, it becomes important that budgeting considers the availability of all other resources like materials and labor so that it can balance the objectives and make them achievable. Budgeting encourages team spirit and it involves different people to solve a common problem. Budgeting is to be regarded as a better means of communication, as it is expected to pass on complex plans laid down by the top management through various functional departments to ensure prompt action.

Benefits of Budgets

The budgetary control is defined to include the processes of planning, controlling, coordinating, and motivation through monetary expression of organizational objectives communicated to different departments within the organization. Budgeting usually takes the form of quantitative and monetary plans drafted for a period of one year. The budgetary control is the organizational planning process translated into monetary objectives. The essence of the budgetary control process is the influencing of the management behavior by establishing set performance standards and monitoring the achievement of the standards established.

For most of the organizations, the budgetary control process is considered as the main integrative control tool from the overall control perspectives of the organization (Otley, 2001). The assumption behind such a view can be seen from the fact that the budget is the easiest and effective way of representing the organization’s overall business plan and in addition, the budget can be used as the controlling and monitoring tool for mitigating the complex issues of the business plan. From this viewpoint, budgeting can be seen as the link for the overall attainment of the organizational performance standards. As Campbell (1985) states, it is essential that every budgeting system is customized and the success of such budgeting is measured by the extent to which it can motivate the individuals to offer their maximum contribution in achieving the organizational objectives. Past research has focused on the shortcomings and challenges of using budgeting as a process for management control (Hansen et al., 2003; Lukka, 1988)

Traditionally, centralized control has been identified to be one of the important objectives of budgeting. Budgeting is expected to exercise centralized control through delegated authority and responsibility. Since budgets are drawn and grouped based on the responsibilities of different functional departmental and divisional heads, they are expected to aid decentralization. Budgets are considered as the means of exercising managerial control and enable the management to measure performance of every business unit or division of organization. The managers can take corrective action, as and when they observe any deviation in the actual performance as compared to budgets.

Institute of Cost and Management Accountants defines budgetary control as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy and the continuous comparison of actual with budget results, either to secure by individual action the objective of that policy or to provide a basis for its revision.” (FAO Corporate Documentary Depository, 2001) When the contributions from budgeting process to the organizational performance are considered budgets represent the control mechanism in most firms. Therefore, it can be argued that eliminating budgeting process would mean loosening the control on business processes. In the traditional budgeting process, a top-down (hierarchical) approach is used for where the principle of “command and control” takes the central focus. In this process, decisions, resources, and rewards flow down. On the other hand, information, which is mostly exceptions, flows upwards. “The role of line management is simply to operate the established facilities, systems, and personnel according to senior management’s rules, regulations and pre-determined targets. Valued rewards then follow from doing so,” (Murray, 2003). According to Wallander, (1999), budgets that create vertical command-and-control and responsibility centre-focused budgetary controls are incompatible with organizational designs, which are flat or value chain-based. Such controls act against empowering the employees from making the decisions.

Profit planning and controlling are the two important objectives of the traditional budgeting system. Achievement of these objectives results in certain distinct advantages. By effective planning and controlling of the revenues and expenditure, budgetary control focuses on the maximization of the earnings of the organization. Budgeting ensures that capital and resources are allocated to the best and most profitable opportunities. Budgeting enables employees at all levels to understand the objectives and policies of the company and acts as a tool for evaluating the effectiveness of these policies on a periodic basis. By adopting well-designed budgets, the companies are able to plan their expenditure and financing of the business. This ensures better and economical utilization of the funds at the disposal of the company. Budgeting apart from functioning as a control measure enables the organization to coordinate the functions and performance of various branches and divisions of the organization closely. This enhances the cooperation among the organizational members.

Problems with budgets

Budgets can be considered as a ‘fixed performance contract’. Committing to and meeting the budget targets by supervisors and employees represents accepting a “performance contract” entered into between an employee and a manager. Budgeting by the very nature implies that there will be reward and recognition for the employee for his/her performance, only when the budgeted targets are met. Either this implication is made in an implicit way or it is made explicit. Those employees who perform to meet the targets can expect a better evaluation of their performance and rewards and recognition in return from the organization. Employees can also feel motivated intrinsically with the sense of satisfaction of having achieved the set targets.

However, the use of budgeting as fixed performance contract results in certain deficiencies in the functioning at the organizational level. This can make the organization inherit certain disadvantages of budgetary gaming. The sales manager may deliberately make a lower estimate for the sales and with a view to meet, the sales budget may overstate or understate sales towards the end of the budget period by manipulating the delivery of orders. In order to meet the expense budget target, the divisional managers may present a fat budget for expenses. There may also be a tendency to spend the total budgeted amount within the budget period, so that they may be able to get the same budget allotment of expenses for the next period. In their pressure to meet the budget targets, the managers may lose focus of organizational goals. For instance, the divisional manager may decide to spend more on revenue items like traveling at the cost of research and development, which is detrimental to the progress and growth of the organization. There may be undue influences on the distributors and dealers to order and take delivery of merchandise before the current budget period expires and they may be offered large discounts so that the sales budget can be met. The divisional or functional managers tend to manipulate the profits for the period by booking next year’s expenses within the current budget period when the divisional head is not confident of meeting the next year’s budgeted profits. Divisional managers may also defer the next year’s revenue by requesting customers to delay delivery. The divisional manager may hold back the profits when he/she does not anticipate meeting the target for the year so that he/she can get reduced targets for the next budget period.

Jensen (2001, 2003) offers an explanation that the managers resort to budgeting games because of the traditional link between the budgets and the performance bonuses. Normally in a pay-for performance bonus system the managers will be rewarded only for attaining the minimum targets. This also will be capped after reaching the maximum levels fixed. Hence the managers in this case would involve themselves in budget gaming and diversions to maximize their performance incentive. Therefore, in this system the managers will be motivated to reach the minimum budgetary standards by adopting any necessary means and would try to keep their performance under the maximum levels as far as possible (Jensen, 2001). The solution to mitigate this problem is to follow a linear pay-for-performance system in which the managers are rewarded based on actual performance instead of the considering the budget targets (Jensen, 2003).

“The problems with fixed budget targets at the individual level seem to translate to the organizational level as well.” (Murray, 2003) With the result that the organizational efficiency is diminished over time as the performance is mostly stuck to meeting the budgeted targets. The approved budget targets become the foundation on which the divisional managers commit to perform. “With the penalty for falling to meet the numbers playing out in the newspapers almost every day, and generous incentive compensation to fuel the fire, all too often these ambitious goals lead to corporations “managing” earnings in ways that destroy long term corporate value,” (Murray, 2003). This behavior among the managers would probably lead to outright accounting and financial frauds as were witnessed in the case of Enron and WorldCom debacles. The temperament of senior management is transferred down the line with the subordinates picking up the culture of making the numbers. The budgeting game thus becomes the usual practice and accepted as the norm as the way of doing the business.

Behavioral Aspects of Budgeting

When the individuals and their behavior have started increasingly affecting the budgetary control process, there are circumstances in which the changing budgetary control and performance expectations affect the employee behaviors (Simons, 1995). However, it so happens that many organizations adopt somewhat a mechanistic approach to the budgetary control process without the requisite consideration of the behavioral aspects of the human beings involved in the whole process. It is often forgotten that the goals and objectives of the organization have to be accomplished with the help and support of the human beings associated with the organization concerned. Therefore, it becomes vitally important that the effect of individual behavior on budget and the effect of budgets on the individuals’ course of action have to be perceived carefully to attain the objectives of the organization without much pressure on employees and executives at any level of the organization. However, the pressure on individuals that is being exerted by the budgetary process for meeting the performance standards affect the performance of the individual employees, which is one of the major limitation of the traditional budgeting. Such pressure itself becomes detrimental in maximizing the contribution by the individual employees. The norms and standards of performance are fixed at a level that the employees find it difficult to attain them without extra efforts. Any unattainable standards fixed by the budgetary process will lead only to frustration among the employees.

In the early research by Lowe and Shaw (1968), the process of budgetary control was considered as elements of behavioral theory in which the budgets pose as enablers executing the resolutions of the coalitions and conflicts of the management. Because of the fact that there are certain human factors involved in the budgetary control process, the budgets are often developed in many organizations through a complicated and complex process. The social scientists have made an extensive study into the behavioral aspects involved in budgeting. Based on these studies budgeting has been construed as a method of communicating the goals of the organization to the employees at the appropriate levels. The objective of such communication is to achieve the desired goals of the organization by facilitating, coordinating, and controlling the different sections of the organization. In order to carry out this process effectively it is vitally important for managers to develop suitable attitudes and ideal strategies, which will have the effect of cultivating and maintaining supportive and cooperative relationships with the employees at all levels of the organization. It is important that the budgets be not considered mere computational tools for effectively controlling the expenses of an organization. However, in practice this has been the case in that budgeting has been considered more as a ritual than a control mechanism for improving the organizational performance.

Conclusion

Despite the criticisms leveled against budgeting, there are tangible advantages resulting from a budgeting exercise. The discussion contained in the preceding paragraphs of this note more than evidences this. This makes budgeting an important issue in the area of management accounting. In the absence of a performance and control measure, organizations may find it difficult to assess the contribution of the managers in achieving the desired organizational performance levels.

Reference List

Campbell, I.J., 1985. Budgeting : is it a Technical or Behavioural process. Management Accounting, pp.66 – 70.

FAOCorporateDocumentaryDepository, 2001. Chapter 4 – Budgetary Control. Web.

Hansen, S.C., Otely, D.T. & VanderStede, W.A., 2003. Practice Developments in Budgeting: An Overview and Research Perspective.. Journal of Management Accounting Research, 15, pp.95-116.

Jensen, C.M., 2001. Corporae budgeting is broken-let’s Fix it’. Havard Business review Boston, 79(10), pp.94 – 101.

Jensen, C.M., 2003. Paying People to Lie: The Truth about Budgeting Process. European Financial Management, 9(3), pp.379-466.

Lowe, E.A. & Shaw, R.W., 1968. An analysis of managerial biasing: evidence from a Company’s Budgeting Process. Journal of Management Studies, pp.304-15.

Lukka, K., 1988. Budgetary Biasing in Organizatios: Theoretical Framework and Empirical Evidence. Accounting Organisations and Society, 13(3), pp.281-301.

Murray, L.R., 2003. Budgeting–an action unnecessary evil. Web.

Otley, D., 2001. Extending the boundaries of management accounting research. Developing systems for performance management British accounting research.

Simons, R., 1995. Control in sge of empowerment. Havard Business Review.

Wallander, J., 1999. Budgeting – an unnecessary evil.. Scandinavian Journal of Management, 15, pp.405-21.

FAS 143: Accounting for Asset Retirement Obligations addresses financial accounting and reporting is used for the retirement of tangible long-lived assets’ obligation and the related assets retirement costs. According to the statement, Auto World’s decision (on April 15, 2007) to close its 30 freestanding Pit stop centers is an asset retirement obligation in which the determination of the existence of a legal obligation is unambiguous. In this case where no statute, contract, law or ordinance exists, but the entity (Auto World) made a promise to a third party (customers and the public) about the closure of the stores, careful consideration of circumstances and facts should be conducted to determine whether the promise had imposed a legal obligation upon Auto World under the doctrine of Promissory estoppels. Therefore, even without any party taking a formal action, a legal obligation might still exist. The work of determining the actual existence of an obligation is left to the legal advisors and the preparers.

Unlike the current practice, this statement requires that as long as the fair value estimate of the asset retirement obligation can be computed, it should be recognized during the period that it occurred. Consequently, the costs associated with the asset retirement should be consolidated under the carrying amount of the asset. But according to recent practice, the cost accumulation measurement approach is used to recognize an amount for an asset retirement obligation; measured as fair value by this statement. Under this statement, the basis for accretion and discounting is the prevailing rate of interest during the time the asset was slated for recognition. On the contrary, lack of discounting of the retirement obligations implies that no accretion was reported under the current practice. Unlike the current practice, this statement adopted the date the liability was incurred as the appropriate for using the useful life of the asset in recognizing the retirement obligation. In order to determine the depreciation and amortization rates for valuing assets, calculations using the assets obligation dismantlement and restoration costs.

Further, the statement outlines certain disclosures that the entity will be required to provide. The disclosures include information about the asset retirement obligations. First, is the overall description of the asset retirement obligation and resulting long-lived assets. Secondly, the fair values of the specific assets considered as legally setting the asset retirement obligations. Thirdly, the consolidation of the initial and final total carrying value of the asset retirement obligations affecting the incurred liabilities, settled liabilities, accretion expense, and estimated cash flows revisions.

However, on the disclosures to appear in the notes of the financial statements covering the period over which the long-lived asset has or is classified for sale, include the circumstances and factual reasons that led to the retirement of the asset obligation. Alternatively, the carrying amounts of primary classes of liabilities and assets be consolidated in the disposal group, in case the facts of the retirement are not separately presented on the face of the financial statement. Similarly, paragraph 37 requires the disclosure in the income statement of resulting losses or gains or alternatively captioned at the gains or losses activities. Lastly, if applicable, the disclosure of the revenue amounts and pretax margins or losses for the discontinued operations.

On the contrary, FAS144 categorizes the retirement of asset obligation differently. The entity, Auto World, has Pit stop centers which are the lowest level at which the operations and cash slows can be distinguished, both operationally and for financial reporting reasons, from the rest of the entity. Hence the Pit stop centers are components of Auto World. Because the entity desires to serves the customers from one stop shop, the entity decided to exit its pit stop stores. Therefore, the pit stop stores are considered as held for sale at the date of closure. As a result of the closure transaction, the cash flows of the division will be eliminated from the normal operations of Auto World. Consequently, the entity will saver any involvement in the operations of the pit stop store; hence conditions necessary for discontinued operations as well as classification for sale will have bee met, in accordance to paragraph 42.

In other circumstances, in spite of discontinued operations classification in allowing the stakeholders to determine the impact of the disposal, reports of continuing cash flows may be recorded in the period following the discontinuation. The cash flows can either be direct or indirect, by precluding or not precluding the presentation of discontinued operations, consecutively.

Factually, direct cash flows are expected to be generated from continuation or migration of activities that are significant to the entity. It is only compulsory for the significance of the generation to be determined if the continued cash flows are being generated from the continued operation of the entity. However, if the continuing cash flows are not generated from migration or continuation of activities, evaluation of significance will not be necessary.

Introduction

Comparing and contrasting the objectives of general purpose financial reporting (GPFR) of the AASB Framework with that of IASB Exposure Draft will decide whether the latter improve the former. Determining whether the objectives of each framework are appropriate will also be evaluated in this paper.

Discussion

The two frameworks as compared and contrasted

Both frameworks from AASB (2008) and IASB (2008) do exhibit similarities in various ways. The first and most obvious similarity lies in catering to users with general or common purposes as the reports generated by both will not address the special needs of their intended users.

The second similarity of the two is found in a greater number of users that will be served by both compared with special purpose reports. Both frameworks practically serve the users of financial reports in general which may include stockholders, prospective investors, short term and long-term lenders and creditors, receivers of goods or services or the customers and government agencies that include the taxing authorities and the regulators.

AASB and IASB frameworks on the other hand differ in several ways. The first distinction is evident in the extent of users covered. Although both cater to general users, the AASB framework covers the private and public alike while IASB proposed framework excludes the public sectors as a user since it is exclusively designed for public listed private companies (IASB, 2008). The second difference may be seen in the territorial coverage of the standard with the AASB sounding to be applicable only in Australia but that of IASB is international in character.

The third distinction lies also in the absence of a conclusion regarding the qualities of information in relation to the objective of the reports under AASB (2008) while IASB (2008) statement provides the qualitative characteristics of information that are connected to objectives of financial reporting. Some of these qualitative characteristics consist of understandability, reliability, relevance and timeliness (IASB, 2008).

The fourth distinction may be appreciated in the group of users encompassed under the general-purpose users served particularly on the primary users. The AASB framework’s primary users are exclusive to the resource providers, recipients of goods and services and the government agencies performing an oversight function (AASB, 2008). IASB’s primary users, on the contrary, are exclusive to the providers of capital, which pertain only to stockholders or equity-capital providers and creditors or debt-capital providers.

The fact that the AASB framework does not exclude the government is consistent with its coverage and purpose as earlier presented while IASB could not be expected to include the government entities in providing accounting standards for the same except if the government entity is a capital provider either as stockholder or creditor to a publicly listed company.

The AASB framer puts the accountability of management and government bodies as one of its primary objectives (AASB, 2008). The attitude of the framework is to consider the financial reports as a way to demand explanation which may be considered as looking more at what happened in the past. IASB framework, in contrast, gives more emphasis to the expected increased wealth of capital providers and the stability of the business (IASB, 2008) as a result of putting their capital in the business under risks of losing the values thereof.

AASB framework’s demand for accountability from decisions made by management and government regulators include those of the right of the general public to demand the same accountability. As a result, there could be a conflict of expectations under AASB. While stockholders are expecting increased wealth, the expectation of the public for cheaper products may run counter since profit maximization need not be contained in cheaper products. As to how the AASB address the conflict under general-purpose reports may be lost in what kind of balance must make on which party should receive the more favourable interpretation of the accounting standard, whether the stockholders or the general public. Since AASB would address both public and private users, there could really be conflict on how standards would be applied.

On other hand, the primary concern of the IASB proposed framework is making sure that capital providers get their due in terms of return of capital. The latter framework may appear therefore to be more specific and responsive to the needs of business compared when only one standard addresses simultaneously the concern of government and private sectors. The philosophy behind the IASB framework appears to be more consistent with the principles of economics which give due consideration to the cost of capital or opportunity cost.

Is AASB improved by IASB?

Based on comparison and contrast made between the two frameworks, it is evident that the IASB proposed framework makes a big improvement of the AASB framework on GPFR especially on the kind of users addressed. Since AASB may be encountering conflicts between the interest of the capital providers and the general public and the government taxing authorities, IASB provides a way to do away with the possible conflict of standards within the standard.

By giving its focus to capital providers, the IASB has in effect prioritized what should enjoy as a matter of right as to who should have greater control and responsibility to the business organization by exclusively making the general-purpose reports address the needs of capital providers. Theoretically, it is not sound for government to engage in business (Slesinger and Isaacs, 1968) since its focus must be regulation. Thus it could not be that general-purpose reports address government and private entities at the same time. Private entities are mainly established for profits; hence it cannot be expected government entities will behave similarly under the same standards.

If AASB will continue to address both public and private users, it could amount to have not provided a standard at all for the failure of the framework to prioritize which stakeholder should have the preferred right in organizations.

Are the objectives of each framework appropriate?

As to whether the objectives of each framework are appropriate is generally evaluated on whether the objectives could accomplish what purpose each seeks to accomplish. However, the statement of objectives could have a conflict with each other. In the case of the AASB, its objectives include providing general purpose reports to both private and public but there are no qualitative characteristics to describe the objectives such as relevance and reliability which the IASB framework has. It may thus be argued the AASB framework’s objectives under GPFR are inappropriate by the failure of the framework to define how the quality of information should be had.

The inappropriateness therefore lies in its apparent failure to meet its purpose. Another thing that may provide support for inappropriateness may come from its lack of focus to address which stakeholder should be given priority. IASB objectives in contrast are appropriate because of the presence of the qualitative characteristic of information that would have to be provided under the GPFR and its having a focus on which stakeholder should have the priority.

Conclusion

In can be concluded that the AASB framework on objectives under GPFR lacks things which may be improved upon by the IASB proposed framework. Improvements can therefore be derived in providing a focus as which stakeholder should be addressed first as matter of priority in consonance with sound economic principles. Objectives of AASB frameworks also become inappropriate for lack of the necessary qualitative characteristics as those possessed by IASB framework.

IASB objectives are appropriate for they may attain their designed purpose as may be supported in the consistency of providing qualitative characteristics to information and prioritizing capital providers to be addressed first by the reports under GPFR. AASB standard may after all stand to benefit after from its commitment to follow IFRS starting January 1, 2005 (Previts, et. al 2007).

References

AASB (2008) Statement of Accounting Concepts SAC 2 (8/90) Objective of General Purpose Financial Reporting. Web.

IASB (2008) EXPOSURE DRAFT OF An improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information. Web.

Previts, et. al (2007), Research in Accounting Regulation, Elsevier.

Slesinger and Isaacs (1968),Business, Government, and Public Policy, Van Nostrand.

Introduction

The role of accounting and various accounting systems in neoliberalism has been extensively studied since a free-market economy cannot successfully exist without proper financial sector management. The concept of neoliberalism encompasses deconstructing governmental ownership and control of businesses in various spheres of the state and society (Gilbert, 2021). Furthermore, it involves “privatization, deregulation, the dismantling of social welfare apparatus, and tax cuts” to regulate the economy and make goods and services available to all (Gilbert, 2021, p. 3). Although accounting primarily focuses on controlling and establishing accounts, fund transfers, and analyzing other monetary operations, its goal in a larger neoliberal sense is to create a cohort of financially responsible citizens (Gilbert, 2021). However, this area is poorly explored; hence more research should be performed to find effective accounting systems and develop technologies to build a neoliberal society. Implementing novel accounting systems and software to store essential data and regulate various business processes will help generate an ethical and fair neoliberal society.

Accounting and Accounting Systems

Accounting systems are widely believed to help operationalize social structures and institutions. Indeed, accounting is a tool used for calculating, tracking, and managing various processes within organizations and contemporary society, in general, since many operations have become monetized (Chow & Bracci, 2020). Even social care and aid programs for vulnerable population groups involve financial transfers (Chow & Bracci, 2020). These automated methods allow accountants to control purchases, sales, income, expenses, cash flow, and other money transfers (Ginting, 2022). The two main advantages of accounting systems are the facilitation of all business and non-business financial processes as well as the minimization of errors that may frequently occur with manual calculations (Ginting, 2022). It appears that the modern world cannot operate properly without the knowledge, skills, and technologies relevant to accounting.

The accounting system simplified and automated many financial processes and procedures. The main features of these systems include an interactive dashboard, cash flow monitor, financial report generator, automated bank reconciliation program, e-invoicing, and budget management (Ginting, 2022). These programs and software allowed to increase the speed and accuracy of transactions and other monetary operations, eliminating the need for unnecessary paperwork and the possibility of human error.

What Is a Neoliberal Society?

Most modern countries have established neoliberalism, which has a wide range of meanings but primarily involves market relations in society. Indeed, according to Alexander and Fernandez (2021), this concept, which incorporates politics and economics, translates market metrics and dimensions to all aspects of people’s lives. Furthermore, neoliberalism states that individual freedoms are guaranteed through “the freedom of the market and trade” (Alexander & Fernandez, 2021, p. 370). The latter explains the political part of this term because these guarantees are often ensured by the state. Aside from the practice of privatization and decentralization, neoliberalism can also be described in terms of individual and business freedom. Indeed, it is “a theory of political, economic practices that proposes that human wellbeing can be best advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework” (Alawattage & Wickramasinghe, 2018, p. 102). The latter is characterized by free trade, free market, and private property rights (Alawattage & Wickramasinghe, 2018). Market relations play an essential role in neoliberal society, but it does not suggest that it is the only defining feature of it.

Neoliberal groups support democracy, but they believe that it should be limited for the benefit of economic prosperity and freedom. Indeed, the plurality of ideas in such a regime leads to decisions that will likely benefit the majority (Alexander & Fernandez, 2021). However, in some societies, opinions that play a role in producing policies primarily stem from the elite groups and organizations that do not always consider the interests of their citizens (Alexander & Fernandez, 2021). The antidote to that is supporting non-governmental organizations (NGOs) that want to solve various societal and environmental problems (Alexander & Fernandez, 2021). In fact, NGOs are essential components of neoliberal societies because they strive to generate or preserve non-tangible values.

One of the essential features of neoliberalism is a free market. In fact, the latter is attained not by the complete elimination of governmental control. Neoliberalists do not want state control but the facilitation of the market by the government (Alawattage & Wickramasinghe, 2018). The outcome is that politicians interfere more with the economy, but it is not a conventional control as during other regimes (Alawattage & Wickramasinghe, 2018). It means that a country becomes market-focused rather than government-centered, creating more business and entrepreneurship opportunities in that society.

As compelling as it seems, neoliberalism possesses one substantial disadvantage: the significant difference in income and wealth distribution in society. The wealthy minority has more power and influence than ordinary people (Alexander & Fernandez, 2021). Nevertheless, many affluent people and groups are involved in charity, which is a powerful way to mitigate the abovementioned drawback of neoliberalism. For example, Bill Gates has donated $3 billion to public education since 1990, and Mark Zuckerberg gave $100 million in donations to primary educational institutions in New Jersey (Alexander & Fernandez, 2021, p. 381). Moreover, if the groups that can lobby the state laws to improve social benefits, this disadvantage will become hardly be noticed by the majority.

The Role of Accounting in Neoliberalism

As the earlier examples show, almost any interaction in a neoliberal society involves financial processes. Indeed, donations, as well as social aid, require controlling monetary transactions to organizations and individuals (Alexander & Fernandez, 2021). Furthermore, citizens of any country are often obliged to pay taxes to the state. Thanks to automated accounting, this process has become more straightforward and comfortable both for taxpayers and governments (Alexander & Fernandez, 2021). Well-functioning neoliberalism appears to demand advanced accounting systems and technologies to maintain the accuracy and transparency of these interactions and exchanges.

The Logic Behind Neoliberal Market

The idea that neoliberalists promote a completely uncontrolled economy is a myth because market relations require continuous intervention and regulation of the state. After all, businesses and industries depend on such external forces as politics. A government cannot leave markets without attention because the country has legislative requirements for the type of products that can be sold, their quality and standards, prices, taxes, and advertisements (Alawattage & Wickramasinghe, 2018). Still, it cannot be viewed as a control per se but a centralization of political decisions around the economy.

Institutions That Play a Role in Neoliberal Society

Various organizations, from for-profit companies to research institutions, participate in building a neoliberal society. Such regulatory bodies as the New York Stock Exchange and National Association of Security Dealers Automated Quotation System or funding agencies like IMF and the World Bank are essential to market regulators (Alawattage & Wickramasinghe, 2018). Furthermore, corporations such as Google, Apple, Amazon, and Facebook contribute to maintaining neoliberal ideology by constantly creating goods, services, and financial gain (Alawattage & Wickramasinghe, 2018). Moreover, nonprofit organizations and NGOs play a critical role in the market economy since they serve as the inspiring force for profit generation to resolve a wide range of existing societal issues. These problems include corruption, poverty, unemployment, hunger, unsustainability, discrimination, and many others (Alawattage & Wickramasinghe, 2018). The importance of market relations and the finances they constantly produce can be seen in the fact that many of these issues cannot be solved without monetary investments.

Neoliberalism Is Not Only About Profit

Although many believe that the only focus of neoliberalism is economic profit, its true goal can be seen in the concept’s title. It is often claimed that “neoliberalism diffuses, infuses, and confuses the conventional boundaries between the economy, policy, and society” because “everything is seen as operating in a market” (Wickramasinghe et al., 2021, p. 494). Nevertheless, liberalism part signifies individual and collective freedom, which is impossible without financial prosperity in modern times (Vallier, 2021). Hence, neoliberalists place much emphasis on economic growth and development because no society can be prosperous without being able to pay for various goods and services essential nowadays.

Since neoliberals are often against excessive government control of the business sector, it is believed that adequate support of public goods and corporate social responsibility is impossible in such a state. Nevertheless, neoliberalism ensures that the vulnerable population is protected and social insurance is available to the citizens (Vallier, 2021). Moreover, neoliberals were perceived to only value market relations, consumerism, and competition (Vallier, 2021). However, neoliberals do not dictate how people live, what ethical values to hold on to, and what religion to practice because it is the goal of other schools of thought and philosophical teachings. Therefore, it is almost unfair to state that it promotes a pure financial attitude to life because neoliberalism focuses on building a prosperous economy.

Ethics of Accounting and Neoliberalism

The question of the ethics of neoliberalism and accounting systems arises, especially in the context of poor counties. The problem is that this ideology seems to force low-income economies to practice open-door policies and minimal governmental control (Bakre et al., 2021). It appears to demand significant expenses on technologies that are not a primary necessity for those states (Bakre et al., 2021). It may not be ethical to impose neoliberal values and accounting standards of wealthy nations on emerging countries (Bakre et al., 2021). However, the ultimate goal of modern accounting systems and neoliberal society is to build a prosperous economy and hence ensure that citizens’ quality of life is high. Additionally, these technologies offer transparency and increased efficiency in all financial operations (Bakre et al., 2021). Therefore, it is moral to propose this approach in the economy to developing economies to reduce the rate of corruption that often prevents these countries from improving and growing.

Another ethical question to consider in accounting is fraudulent action. Indeed, the risk of fraud increases when it comes to financial operations and money transactions (Cooper et al., 2013). The main problem of fraudulent conduct in the accounting of the market economy is that it primarily affects vulnerable population groups and rarely harms corporations’ profit (Cooper et al., 2013). The possible solution to this problem is the implementation of accounting technologies in this field to diminish the chances of deception since modern software eliminates the need for human intervention in most processes and calculations.

Applying Accounting Technologies to Build a Neoliberal Society

It is evident from above that the goal of neoliberalism is not to show people how to live in a correct and moral way. Instead, its main function is to ensure that the standards of people’s lives are high enough to give individuals opportunities to focus on education, spiritual growth, and personal development (Vallier, 2021). A prosperous market economy is an essential element of all advanced nations with good education, health care, and innovative development since all these spheres require significant finances. Thus, accounting systems can become effective technologies for regulating and improving the quality of economic relations in a neoliberal society.

Technological advancements made it possible for accounting and market relations to magnify their effectiveness. Innovations such as artificial intelligence (AI), cloud computing, quantum computing, 5G networks, autonomous robots, and blockchains made a tremendous contribution to accounting and businesses (Marr, 2020). Indeed, AI and robots not only allow us to make quick calculations but also predict customer behavior and changes in the economy (Marr, 2020). Furthermore, cloud and quantum computing increased the possibilities of managing big data, which is essential for accounting in the modern world (Marr, 2020). Blockchain, which is a system of digital transactions in public and private networks as well as for cryptocurrencies, made financial operations more transparent, facilitating trustful relationships between companies (Fogden, 2021). When businesses have open and candid interactions and processes, the public, which is very much dependent on the economic and political relations within the country, may be transformed into a more humane society.

Problems with Accounting Technologies and How to Overcome Them

Even though the advancement of technologies, especially AI, quantum computing, and robots, has made accounting faster and more transparent, some issues still exist. For instance, according to Van den Bussche and Dambrin (2020), such popular accounting management platforms as Airbnb, TripAdvisor, and even Amazon have service and product reviews not written by customers. Such practices elicit significant doubt and concern about the quality of the offered items. Although this example does not involve financial operations, it results in purchases that may be disappointing for consumers. It puts the whole notion of the free market at risk, showing that the lack of control is dangerous.

When introducing new prices or controlling changes in market values, people can intervene, increasing the risk of human bias and fraud. The latter is defined in accounting as the creation of false financial statements or cash and inventory theft (Jones, 2010). For example, it was revealed that the annual cost of fraud in the United States is approximately $400 billion, which primarily affects small businesses (Jones, 2010, p. 8). Furthermore, according to the 2004 KPMG survey in Australia and New Zealand, more than 27,000 instances of fraudulent acts were determined (Jones, 2010, p. 8). Thus, the incidence of such situations can be achieved by minimizing human intervention in accounting processes in business. It can be achieved by further advancing the technologies through continuous training of neural networks and AI. For now, it is crucial to ensure regular governmental inspection of pricing strategies in companies with a large impact on people’s lives.

The Importance of Flexibility in Neoliberal Accounting

As it can be deduced from the above, accounting systems used for building a neoliberal society should simultaneously possess freedom and some degree of control. Indeed, according to Jones (2010), working within the regulatory framework is critical to ensure that accounting processes are fair, ethical, and valuable. If financial processes are excessively controlled, it eliminates flexibility and freedom of choice essential in the market economy (Jones, 2010). In contrast, if control is completely removed, the risk of fraud rises, eventually ruining neoliberalism’s primary purpose of building profitable businesses and robust economies to improve people’s lives (Jones, 2010). Hence, a balanced approach to regulating accounting systems is required to create a prosperous neoliberal state.

Conclusion

Accounting systems are essential for building a robust neoliberal society. The speed and automation that these technologies offer made it possible to reduce human intervention in financial processes. The main goal of neoliberalism is a free-market economy that generates profit due to minimal governmental control. Thus, the accounting management systems that implement artificial intelligence and quantum computing can help succeed in this goal. However, it is critical to resolve fraud issues at the stages where people still participate in making decisions about finances. Otherwise, losses associated with deception and falsification will negatively impact true neoliberal ideology. Notably, the latter’s idea is not to teach people about moral conduct but to improve the quality of citizens’ lives so there will be no need for corruption and illegal actions. Overall, the combination of advanced accounting technologies and neoliberal values can produce a prosperous economy.

References

Alawattage, C., & Wickramasinghe, D. (2018). Strategizing management accounting: Liberal origins and neoliberal trends. Routledge.

Alexander, J., & Fernandez, K. (2021). The impact of neoliberalism on civil society and nonprofit advocacy.Nonprofit Policy Forum, 12(2), 367-394.

Bakre, O. M., McCartney, S., & Fayemi, S. O. (2021). Accounting as a technology of neoliberalism: The accountability role of IPSAS in Nigeria.Critical Perspectives on Accounting, 1-15.

Chow, D., & Bracci, E. (2020). Neoliberalism, accounting, and the transformation of subjectivities in social work: A study on the implementation of personal budgets.Financial Accountability & Management, 36(2), 151-170.

Cooper, D. J., Dacin, T., & Palmer, D. (2013). Fraud in accounting, organizations and society: Extending the boundaries of research. Accounting, Organizations & Society, 38(6-7), 440-457.

Fogden, T. (2021). Top four accounting trends for 2022 and beyond. Tech.Co.

Gilbert, C. (2021). Debt, accounting, and the transformation of individuals into financially responsible neoliberal subjects.Critical Perspectives on Accounting, 77, 1-21.

Ginting, A. (2022). Accounting system – Definition, element, benefits, characteristic, and feature. BusinessTech Hashmicro.

Jones, M. J. (2010). Creative accounting, fraud and international accounting scandals. John Wiley & Sons.

Marr, B. (2020). The 6 biggest technology trends in accounting and finance.Forbes.

Vallier, K. (2021). Neoliberalism. In E. N. Zalta (Ed.) The Stanford Encyclopedia of philosophy. Metaphysics Research Lab.

Van den Bussche, P., & Dambrin, C. (2020). Peer-to-peer evaluations as narcissistic devices: Fabricating an entrepreneurial community. Accounting, Auditing & Accountability Journal, 34(3), 505-530.

Wickramasinghe, D., Cooper, C., & Alawattage, C. (2021). Neoliberalism and management accounting: Reconfiguring governmentality and extending territories. Accounting, Auditing & Accountability Journal, 34(3). 489-504.

Introduction

Objectives of the Study

Research initiatives are meant to provide solutions to the problem statement. To this end, objectives help to guide the trajectory of a given study. A study by Learner, Hardymon, and Leamon (2012, p. 67) established that research initiatives are required to outline the main and specific objectives of studies in order to respond to the questions sought after in the problem statement. The main objective of this study is to establish the underlying motives that prompt investors to engage in different stocks within the Hong Kong Stock Market and the influence of the stock returns.

Specifically, the study carries out a review of the relationship between stock returns and the relevant accounting ratios. In this regard, the researcher will evaluate how price earnings ratio contributes towards specific stock returns (McCrank 2013, p. 4). A survey carried out by McCrank (2013, p. 4) found that an understanding of stock returns is dependent on the dividend price ratio. The ratio is essential when it comes to the evaluation of the profits realised by a given organisation. Finally, the current study will evaluate the payout ratio and how it reflects to the stock return within the Hong Kong Stock Market.

The relationship between accounting ratios and stock returns is an integral aspect of evaluating investment opportunities in a given area. According to Melicher and Norton (2011, p. 88), the relationship may reveal the actual reasons behind investment decisions among the companies trading in a given stock market. The findings of this study will allow investors to have a better understanding of the Hong Kong Stock Market.

Background Information

Businesses engage in the activities they do for profit. To this end, managers and other stakeholders come up with strategies aimed at enhancing their earnings and return on investment. Such undertakings include marketing, promotion of products, and research and development. To ascertain the level of success, performance appraisal is conducted on a regular basis. The performance of a company can best be realised through evaluating the financial aspects. Stock returns, for instance, illustrate the performance of a publicly traded company. An evaluation of the financial performance can be realised by the use of ration analysis. The concept of ratio analysis is essential in the evaluation of the financial performance of an organisation or a company. With respect to financial matters, there are a number of ratios that can be used to analyse business performance (Advani 2011, p. 67). According to DePamphilis (2013, p. 34), the common ratios in stock return analysis include the following:

1. Profitability ratio.
2. Liquidity ratio.
3. Investment ratio.

The relationship between accounting ratios and stock returns is crucial in evaluating the financial standing of a company. To this effect, there are a number of research initiatives that have been carried out to focus on the relationship between stock returns and accounting ratios as primary variables. According to Carvalho, Klagge, and Moench (2011, p. 67), most of the studies have focused on the Western stock market. Such a situation is worrying given the fact that there are emerging economies in the numerous markets worldwide. For instance, the countries in the Eastern part of the globe are proving to be a force to reckon with. Carvalho et al. (2011, p. 68) support this perspective based on the brilliance associated with the HongKong Securities Exchange (Finkel & Greising 2009, p. 90). In light of this, the proposed study will focus on the relationship between returns in stock within the Hong Kong Stock Market and the accounting ratio variables. The variables to be evaluated include price earnings ratio, dividend price ratio, and payout ratio.

Accounting ratio and return in stock are elements that require comprehensive analysis within a company setting (Guy 2011, p. 77). To this end, the current study evaluates stocks of companies within the following industries in Hong Kong:

1. Banking and finance
2. Trading and logistics
3. Real estate
4. Tourism and retail

Research Questions

Addressing the objectives of a study requires a step-by-step approach. Creswell (2009, p. 55) is of the opinion that structured research questions are essential in realising the objectives of a given research undertaking. In line with these sentiments, the following are the research questions that will guide the proposed research initiative:

1. What is the relationship between stock returns and price earnings ratio for the three sectors of the study?
2. What is the relationship between stock returns and dividend price ratio for the three sectors of the study?
3. What is the relationship between stock returns and the payout ratio for the three sectors of the study?

Significance of the Research

The findings of the research project will be beneficial to investors operating within the Hong Kong Stock Market. They will help them in making investment decisions based on stock returns over a period of time (Kwok 2010, p. 401). Besides, the recommendations made will enable the companies trading in the Hong Kong Stock Market to adopt the most sustainable financial models to win the confidence of investors.

Research Methodology

Research Approach

Research undertakings are carried out based on the provisions of a given study approach. Creswell (2009, p. 13) points out that determining an ideal research approach is dependent on several variables and how they relate to the thesis statement. For example, a study by Ran, Ole‐Kristian, Myring, and Wayne (2011, p. 1015) evaluated accounting ratios and incorporated a descriptive research approach. A researcher can give consideration to the precision of the research questions proposed for a given study (Chen & Chen 2011, p. 1041; Omran 2012, p. 229). In addition, they can mull over the amount of data at their disposal to determine how the said information relates to the topic.

The proposed research will adopt both a qualitative and quantitative approach. Use of the qualitative research strategy will enhance understanding of the dynamics surrounding ratios and stock returns (Malik, Liu, Kyriacou 2011, p. 229; Sunil & Piyadasa 2011, p. 408). The quantitative aspect of the study will improve its relevance. The approach will create room for further analysis using different and divergent tools to check the degree of error and assumption limits.

Based on the variables highlighted, research approaches are sub-divided into three main categories. The first strategy is called the exploratory approach. Secondly, there is the descriptive approach and, finally, the hypothesis method (Kothari, Xu & Short 2011, p. 1639; Pazarskis, Lyroudi, Pantelidis & Petros 2011, p. 159). The current study will adopt a blend of the exploratory and descriptive approaches.

In the previous section, it was established that the study seeks to shed light on accounting ratios in emerging markets. The selection of Hong Kong implies that the findings of the study will add to the existing literature on the subject. The exploratory research design helps a researcher to contribute to the existing information on a particular subject (McInnis 2011, p. 315; Laitinen 2006a, p. 253). The approach evaluates all the existing aspects of a given problem. To this end, extensive data collection techniques and skills are necessary. Secondary and primary sources of data are a key aspect of an exploratory research design.

A descriptive approach, on its part, is used to collect relevant information touching on a given subject. According to Creswell (2009, p. 30), such an approach is essential in cases where there is scarcity of information. To this end, the researcher takes a keen interest in the vast and fundamental aspects of a subject matter. As earlier mentioned, the third research approach involves testing a hypothesis. In this case, the objective is to help the researcher come up with new theories in their area of study. Similar to the case of exploratory studies, hypothesis testing is done in a field that has infinite amount of literature.

With regards to the current study, it is important to note that it relies on the descriptive research approach. That notwithstanding, some aspects of the exploratory design will be employed (Maggina 2008a, p. 167). In this study, the researcher will collect quantitative data in form of financial information with regards to accounting ratios in relation to stock returns. The information is extensive enough to provide information on the economic situation in Hong Kong and the Asian stock markets (Maggina 2008b, p. 170).

Literature Review

Overview

Literature review is used to provide the preliminary information to a study. To this effect, an evaluation of previous studies on accounting ratio is carried out. A number of research undertakings completed in the past will be reviewed to establish the relationship between stock returns and accounting ratio variables. Such variables include price earnings ratio, dividend price ratio, and payout ratio within different stock markets across the world (Agorastos, Pazarskis & Theofanis 2011, p. 329; Distinguin, Iftekhar, Amine 2010, p. 333; Uyar & Merve 2012, p. 138). As previously mentioned, there are few studies carried on this subject to establish this relationship within the Hong Kong Stock Market. The current study is an avenue of bridging the gap.

Sources and Authenticity

The literature review acts as the secondary source of data. In this regard, the information will be sourced from previous case studies, financial journals, and academic publications. According to Creswell (2009, p. 16), the credibility of a study is determined by the authenticity of the sources of information used. To this end, the information will be sourced from reputable databases like Google Scholar. Data obtained from such sources is authentic since most of the materials there have been subjected to peer reviews.

The journals to be used in this research paper will be selected from academic and authentic financial sites. The sites include ProQuest, Harvard Business Review, Emerald, ABI, Google.com, and BNU e-database. The sources to be used in the paper will be eighty. To this end, 70 will be sourced from academic journals and the remaining 10 from other sources, such as books, pamphlets, past reports, and authentic websites.

Principles of a descriptive research undertaking require a researcher to establish the flow of the problem statement. The information found in the selected publications and journal articles reflect the opinions of scholars and other stakeholders in this field. Essentially, the researcher will enhance their awareness regarding the whole concept of stock markets and related features. Consequently, the study will evaluate the essentials of the stock market to include details like accounting ratios and stock returns

The research approaches outlined are essential in the analysis of the thesis statement. According to Creswell (2009, p. 73), descriptive and explorative strategies provide a variety of perspectives touching on the study problem. To this end, the current study makes use of a descriptive research approach based on the existing secondary material at the disposal of the researcher, as previously mentioned. Such an approach will prove beneficial as the information available to the researcher is sufficient for this study.

Research Perspective

In this thesis, the researcher will make use of a positivistic research perspective. Creswell (2009, p. 18) supports the use of such a perspective since it relies on factual information. Factual information makes it possible for a study to arrive at a logical conclusion. The basis of such an approach revolves around the need to be rational. Moreover, such a perspective relies on the implication that “knowledge is only of benefit as long as researchers collect it by way of a thorough process of analysis” (Creswell 2009, p. 18). Consequently, in this kind of an approach, the researcher does not make any assumptions. Rather, they are bound by the facts surrounding the subject matter. By so doing, the loopholes associated with a study that has assumptions are sealed.

Design of the Study

Research undertakings are ideal opportunities to carry out theory development with respect to a given subject. Creswell (2009, p. 110) argues that in such cases, a study can be conducted through induction, adduction, or deduction. Induction is the design used by a researcher whenever they are carrying out empirical studies (Jira, Sadhir & Siriyama 2006, p. 182; Cordazzo 2013, p. 324; Ping, Sanjian & Giayan 2014, p. 146). In that kind of design, an investigator makes observations and eventually develops their own theories. On the other hand, deduction is all about the application of existing information with the intention of coming up with logical truths.

In the current research undertaking, the researcher will gather all the relevant information that responds to the research questions. The study design will make use of induction and deduction to effectively respond to the research questions (Rihab 2014, p. 218; Otley 2001, p. 246; Basheikh 2012, p. 196; Javier, Pedro & Labra 2012, p. 23). A large chunk of the information will be collected from published articles, both in print and in electronic format, as aforementioned.

Search Strategy

Overview

In the current study, the researcher will rely on print and electronic sources of secondary data. In the case of the electronic sources, the data collection process will make use of search terms and key words to access the various secondary materials that contain information relating to the thesis statement (Allen, Singh & Powell 2013, p. 89; Cormier, Andre & Emanuelle 2004, p. 165; Nuradli, Hamdi & Suhalia 2010, p. 144, Gattoufi, Saeed & Ghanim 2014, p. 360; Cohen & Vlismas 2013. P. 234). Such secondary material will include journal articles and books from the library, as well as web pages, past case studies, and newspaper reports.

In light of the background information provided above, the thesis of the current study will thoroughly examine the various stock trading companies in Hong Kong financial market (Senteney, Bazaz & Ahmapour 2006, p. 435; Syed 2011, p. 101). In addition, the researcher will come up with the formulae relevant to the determination of the respective accounting ratios. To this extent, it is important to conduct a review of literature to ensure that there is a wide range of information touching on the subject matter. Various search terms and key words will be entered into search engines and browsers. The search engines and data bases will be used to retrieve the articles, books, as well as other sources needed for the paper. To this end, it is expected that an immense and varied amount of material touching on the topic will be retrieved.

Some of the material gathered will be relevant to the topic. Conversely, other material will not have any relevance at all. As such, the researcher will adopt inclusion and exclusion criteria in order to remain only with the material that would be beneficial in terms of relevance to the literature review. At the end of the search, a manageable figure of sources will be selected.

Search terms and key words

In order to obtain the required materials, the following are the search terms and key words that the researcher will use:

1. Accounting
2. Accounting + ratios
3. Hong Kong + Financial + Market
4. Stock
5. Stock + Returns

Search engines and data bases

The table below illustrates the search engines and databases that will be used to access the materials, together with the number of sources that will be used from each. The search engines will be accessed from the university’s library. In addition to the electronic databases, the researcher will use data from the university’s catalogue.

Table 1: Search engines, data bases, and number of sources

Scope of the study

The current study will specifically focus on accounting ratios and stock return. To be more precise, the researcher will focus on the Hong Kong financial market. The implication is that the study will carry out a survey on companies that are publicly listed in the Hong Kong Stock Market (Antonella 2008, p. 192). The research will be carried out in the context of the financial performance of several publicly listed companies. To this end, the researcher will evaluate the relationship between accounting ratios and stock returns.

The relationship between accounting ratios and stock returns, as previously mentioned, is essential in determining the potential of a given financial market. In this case, the study compares opinions from students and stakeholders in the Hong Kong financial market (Karkinen 2010, p. 277; Simona 2010). The objective will be achieved by carrying out interviews and reviewing existing information on the subject. The data analysis will be an integral part of this research and will explore the various ways through which accounting ratios contribute towards stock returns.

Inclusion and exclusion criteria

Most of the resources accessed are expected to be relevant to the topic of accounting ratios in relation to stock returns. The reason is the specific nature of the key words and search terms used. Some of the sources initially accessed will make reference to accounting ratios as applied to stock returns (Allen & Elena 2013, p. 29). However, there are sources that may not make any reference to the key search terms relating to the topic. As an inclusion and exclusion criteria, the researcher will also use the source’s year of publication.

Priority will be given to sources that were published after 2000. However, it is expected that some sources published earlier than 2000 may have some relevance to the study. In such cases, an exception will be made and such sources included (Creswell 2009, p. 54). Another criterion to be used is the credibility of the author. The researcher will use sources published by reputable authors who are knowledgeable in the field. Given this, authors of most of the sources used are affiliated to reputable organisations, such as universities. After the sources are subjected to the inclusion and exclusion criteria, they will be reduced to a manageable.

Data Analysis

The collected data will be coded and manipulated using Statistical Package for Social Sciences (SPSS) version seventeen. Cross tabulation will be used to compare and contrast the relationship between the ratios and stock returns (Hall & Darrol 2012, p. 44). The relationship between the independent and dependent variables is best quantified by use of a regression analysis. Creswell (2009, p. 71) argues that such an evaluation supplements figures, charts, and tabular representation of the data. The regression analysis is aided by such software as Google Docs, Excel, and SPSS. In the process, the following assumptions will be made:

1. Regression line must be fitted to data (R²=>60%).
2. Individual significance of the variable (most of the independent variables should be individually significant) uses T-test and set the reject level for p-value at 5%
3. Independent variables can jointly explain dependent variable. The reject level for p-value is at 5%.
4. The sign of the coefficients should follow economic theory or experiences of others (literature review) or intuition.
5. No serial or auto-correlation in the residual. Serial correlation is a statistical term used to describe the situation when the residual is correlated with lagged values of itself.
6. The variance of the residual is constant. Bruesch-Pegan-Godfrey test will be employed here.
7. Residuals should be normally distributed. The distribution will be verified by use of Jarque Bera Statistic. If the p-value is less than 5%, the researcher will reject the null hypothesis and accept the alternative hypothesis.

Expected Results

It is expected that the ratios have direct but differing relationships to stock returns within the Hong Kong Stock Market. Siqi (2011, p. 607) argues that evaluating the stock market requires the use of a regression model. The model introduces the specifics of accounting ratios. To this end, the expected results will be dependent on the various factors highlighted below:

Regression Model

To review the correlation between stock returns and ratio variables, ordinary least square regression will be used. Below is the formula:

Y = α + β₁X₁ + β₂X₂ + β₃X₃

Where,

• Y = Stock Return (dependent variable).
• Α =Value of Y at the point where explanatory variables’ values are zero.
• Β =Parameter indicating average alteration in Y; associated with each unit alternation in variable X.
• X= Independent Variable.

In relation to the Hong Kong Stock Market, X₁ will represent the dividend price ratio, X₂ will represent the price earnings ratio, and X₃ will represent the payout ratio.

Formulae

Formulae for calculating stock return, price earnings ratio, dividend price ratio, and payout ratio are summarised below:

Dividend price ratio

To calculate this ratio, the researcher will obtain prices of sample firms on a monthly basis for a period of 12 months running concurrently. Data will be obtained from the Hong Kong Stock Market’s website. The formula for calculating this ratio is:

• Dividend Price Ratio = Dividend per Share / Price per Equity Share

Payout ratio

Payout ratio is a reflection of the annual earnings that companies pay to shareholders. Low ratio may mean that a company is retaining the earnings for expansionary motives. On the other hand, high ratio means that a company is consistently paying out earnings to shareholders (Laitinen 2006b, p. 259). Data will be obtained from the Hong Kong Stock Market’s website. The formula for calculating this ratio is:

• Payout Ratio = Dividends per Share / Earnings per Share

Stock return

Stock return represents the return on each unit of investment. In the case of this paper, calculation of investment ratio will be done through the dividend adjusted approach. Similarly, data will be obtained from Hong Kong Stock Market’s website. The formula for calculating this ratio is:

Price earnings ratio

High price earnings ratio is an indication of growth in the expected earning in future. On its part, low price earnings ratio indicates the opposite. Data will be obtained from Hong Kong Stock Market’s website. The formula for calculating this ratio is:

• Price Earnings Ratio = Market Value per Share / Earning Per Share

Research Timeline

Month 1: Research Commencement

The stage will involve reviewing the research topic and rationale for the proposed hypothesis. It will take one month. The reason is that choosing the topic will be dependent on available literature.

Month 2: Choosing the Case Study

Choosing the case study will be a challenge as research papers adopt different approaches. Specifically, the researcher will have to choose the most convincing research variables from different articles. The author will focus on articles that adopt a diverse approach to the research questions.

Month 3: Background Research

Since materials are available for the topic, the researcher will have an easy time merging the relevant material to the research question. The process will take two months.

Month 5: Conducting the Literature Review

The process is expected to be demanding. The reason is that different sources of information will be used. The secondary sources are obtained largely from the internet. However, actual texts available in the library will also be relied upon. The researcher will concentrate on scholarly papers, conference proceedings, and books.

Month 6: Collecting and Analysing Data

It will be the most difficult stage in the research study. The researcher will have to strike a balance between various methods of research to present information about the topic. Data collected from financial statements will be scrutinised in detail. Each model and approach will have to be comprehensive enough to ensure that the researcher establishes relevant answers, which provide an insight into the research problem to solve through the use of Google docs software.

Month 7: Research Conclusion

Emerging themes will be identified and the findings interpreted and related to the research question. The researcher will manage the data findings and interpretation within the scope of the research topic in spite of any research dynamics that may arise in the process (Hull 2011, p. 55). The final study will be reviewed to enhance its comprehensiveness in answering the research question before submission.

The above timeline is summarised below:

Sample Selection and Sample Size

The researcher will use convenience sampling to select 100 firms within the three sectors. The main reason behind the use of this technique is that it saves time (Stulz 2010, p. 75). To generate the sample size for this study population, the researcher will adopt the formula created in 1972, which is illustrated below:

n=N/ (1+N (e²))

Where:

• n = sample size.
• N= Target population.
• e= Degree of freedom.
• n=100/ (1+100*0.05²).
• n=100/1.25.
• n= 80.

According to the Central Limit Theorem (CLT), if the sample size is larger than 30, as will be the case in this study, X-bar is approximately normally distributed. The distribution is regardless of the shape of the population (Brunnermeier 2009, p. 77). As such, the suggested sample population is suitable for the study.

Interaction with Human Subjects

Sources of Potential Participants

Participants will be included in the study if they are employees or interns who completed an accounting course and work for a stock brokerage firm in Hong Kong. As for the student demographic, it is anticipated that most of them, together with faculty, will fall under the undergraduate and graduate population age range of 18-45 years (Crotty 2009, p. 563). The mean for the responses of each of the participants will be determined.

Recruiting the Respondents

Respondents will be recruited online and within campuses. The selection criteria will be based on a general understanding of the Hong Kong financial market. To this end, the participants will be invited through a public notice (Creswell 2009, p. 67). The volunteers will then be informed of the nature of the study so that those willing to take part are given a chance.

Informed Consent

The researcher will strive to uphold ethics in the study. To this end, participants will be requested to fill out a consent form before taking part in the study.

Research Protocol

A number of procedures will be followed in conducting the study. The surveys will be completed anonymously. The participants will not be required to provide any personal information (Lane 2012, p. 50).

Potential Risks

A number of risks are identified. However, loss of confidentiality is non-existent. The unique codes will be substitutes for the names. In addition, data will be held in a secure place. The aim is to enhance confidentiality.

Potential Benefits

The research will provide a better understanding of the relationship between accounting ratios and stock returns. Furthermore, the study will expand on the existing knowledge of how companies can benefit from the relationship (Brown & Davis 2008, p. 5616). The findings will also bring to light the various benefits of accounting ratios. The results will help analysts in the field to decode developments in the future (Brown & Davis 2008, p. 5616).

Financial Information and Decision-Making

In the financial market, one of the most imperative things in choice making procedure is presence of value data. A critical mass of this data originates from bookkeeping data frameworks and from money related explanations. A number of organisations make use of budgetary explanations to give sensible and target picture of practical business condition (Charlene, Kobelsky, Vernon & Rodney 2011, p. 40). In an association, if money related articulations are reasonable, in which precision is guaranteed. Budgetary proclamations are constantly made and translated as a premise of examinations.

Budgetary articulations as a fundamental capacity of choice making, it is reasonable that distinctive clients must know how to “peruse” those announcements. “Perusing”, the substance of budgetary proclamations provides an entire number of distinctive instruments and investigations strategies for comprehension business (Dhaliwal, Zhen,Tsang & Yong 2011). After that, the technique of examining bookkeeping degrees brings about the premise of the money related proclamations and monetary data so as to assess of an organisation’s profit margins.

Monetary and political foundations around the globe are not the same among governments. Such a situation prompts national bookkeeping benchmarks to be distinctive among nations. Choice No. 15/2006 twentieth March 2006 of the Minister of Finance of Vietnam managed monetary reporting arrangement of business containing both yearly money related proclamations and break budgetary articulations (Alastair, Miguel & Ping 2011, p. 260). With respect to the development industry, the Decision No.48/2006 fourteenth September 2006 of the Minister of Finance of Vietnam supports a similar perspective. Vietnam is one of the countries that adhere to strict standards of practice.

The accounting report of an organisation is one of the amazingly fundamental and central money related explanations that is led yearly or monetary time period to present the organisation’s budgetary position (Gordon & Amanda 2012, p. 2027; Keval & Jagan 2014, p. 87; Beatty & Liao 2014). This announcement comprises of fundamental components are: resources, liabilities, and holder value. This structure is imperative that mirrors the connection and association of advantages, liabilities and capital. By perusing and comprehension this monetary articulation, clients including speculators can analyse and measure the future scenes.

Income Explanation

Pay articulation or benefit and misfortune record speaks to business’ execution for a specific snippet of time period. Essential components of an association’s salary articulation are: incomes, costs and the distinction in the middle of incomes and costs that can be benefit or misfortune (Clive, Jere & Zitian 2011, p. 590). In some settings, the salary proclamation is the loveliest articulation that draws in financial specialists in settling on the venture choice.

By examining and comprehension bookkeeping information originates from this announcement, financial specialists can get the budgetary data about income (Callahan, Rodney & Wheeler 2012, p. 1106; Bushman 2014). To this end information to do with the expense of merchandise sold, investment, costs, gross profit, net profit, and so forth that are utilised to compute the accounting ratios.

Cash Stream Explanation

Income proclamation presents money into or out of an organisation. “Money” is utilised here as a part of the term of trade in for cold hard currency hand as well as money exchanges of bank stores or money equivalents. This change of money sum is typically measured amid a predetermined, limited time of time (Jagan, Chan & Qian 2013; Naughton, Reining, Weber, 2015). By directing of income articulation, speculators can utilise this information for figuring different territories that give data on the business’ worth and circumstance. In Vietnam, income explanation is directed under Vietnamese Accounting Standards called No. 24 (Eshleman & Peng 2014; Kravet 2014). Cash stream proclamation incorporates bookkeeping information identified with three principle exercises. They include working exercises money streams, monetary exercises money streams, and contributing exercises income.

Statement of Changes in Holders’ Value (SOE)

The announcement of changes in managers’ value (SOE) can be alluded to in the announcement of changes in held income, or the announcement of changes in capital stock. The monetary articulation has some essential angles in the same way as the benefit and misfortune account (Ryan & Grenier 2014; Demerjian 2011). The salary explanation in light of the fact that it demonstrates all exchange which alludes to benefit or misfortune for specific time period. The announcement comprises of two principle parts clarified by paid-in capital and held profit.

Value-Importance Literature

A budgetary degree or bookkeeping proportion is an estimation that shows state of a business. An example can be seen in the case of the proportion between the annual income and stock (Weygandt, Kimmel & Kieso 2012; Bhat, Frankel & Xiumin 2011). Another example is seen in the case of a company’s net deals and its normal aggregate resources.

The core aspect of these ratios emerge from the organisation’s benefit and misfortune record or salary explanation and accounting report that contain a wide range of bookkeeping information having a place with that business (Anwer & Duellman 2007; Chen & Zhang 2007). These bookkeeping degrees truly help to convey those points of interest to light and recognise the budgetary qualities and shortcomings of the organisation to check up business’ methods later on.

The procedure of looking at bookkeeping degrees will demonstrate the huge association with full importance among individual values in the monetary articulations of business. From the examining of proportions, speculators will know how to hope to measure up these degrees. The result is that such investors tend to evaluate the after-effects of business exercises (Mishkin FS, Eakins 2012). Consequently, an organisation becomes capable of improving the speculation in connection to the whole economy, industry segment, the primary rivals in scope of the business, and the past execution of the business they are taking into (Crawford 2011). Notice to this exploration; let concern to 4 bookkeeping degrees, for example, liquidity proportions, benefit degrees, action proportions, and obligation proportions.

Liquidity degrees

Liquidity proportions are bookkeeping or budgetary degrees that reflect state of a company’s capacity to satisfy its transient advances, monetary obligations or liabilities (current liabilities). The extending interval credit to the firm is keen on liquidity proportion especially. Two normal degrees in liquidity proportions that the undertaking need to impart are present degree (or working capital proportion) and the risk proportion.

Benefit proportions

In the monetary proclamation of an organisation, productivity proportions are nearly connected with pay degrees, which concentrate on the general nature of administration and control identifying with the profits created on incomes and speculation. These estimations show the achievement of a business in making benefit (Mishkin & Eakins 2012).

Profit edge and net sales proportion

This proportion can be called with distinctive names like terrible benefit degree or horrible edge. Horrible net revenue can be talked as the first estimation for a business. Without doing admirably at this benchmark, there is no point taking a gander at whatever other aspect that presents itself (Mishkin & Eakins 2012, p. 475). It is a critical and vital degree in light of the fact that it assesses both the proficiency and valuing approach of a business. In addition, it provides information on the benefits of the last destination of procedures and choices in an organisation.

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