Economics and Politics of Accounting Free Essay Example

INTRODUCTION:

International Accounting Standard no. 39 concerns the presentation of financial instruments. This includes lease receivables in terms of derecognition and impairment. It also concerns lease payables in terms of derecognition. Lastly, it affects financial presentation of derivatives that are embedded in leases (www.iasplus.com).

A financial instrument will give rise to a financial asset like cash, an equity instrument of another company, or a new contract to receive or pay cash in the future.

A financial liability is a contract to pay with a financial asset in the future. The new IAS no. 39 supersedes prior accounting standards. The following two articles will discuss lobbying in relation to IAS 39 (Ballwieser 2004, 66).

BODY:

The article entitled The Implications of Fair –Value Accounting: Evidence from the Political Economy of Goodwill Accounting authored by Karthik Ramanna of the Massachusetts Institute of Technology dated Sept 20, 2006 reiterated that fair value accounting makes use of fair value goodwill standards in answer to the major clamor of the business and finance sectors to erase the pooling accounting method from accounting procedures forever.

The author discovers that many political contributions used to lobby for the retaining of the current pooling method of accounting. The same lobby group called for the replacement of the current historical cost basis of accounting to the new fair value accounting procedure in terms of recording equity transactions like goodwill (Gornik-Tomaszewski, and Mccarthy 2003).

Also, some lobby groups emphasized  that the new fair value accounting method will increase the company’s flexibility in complying with generally accepted accounting principles.

 And, it can be manipulated to make the financial statements more realistic. This research concludes that fair value goodwill accounting is a hot issue because the pro –pooling lobby groups spearheaded the implementation of the new fair value accounting standard.

The research showed the FASB’s resolve to eliminate pooling of interest when business organizations combine or merge. Thus, a pro –pooling group backed by political money pushed for the approval of the new accounting method known as fair value accounting (Shoaf, and Zaldivar 2005).

And, another article entitled Lobbying Towards a Global Standard Setter –Do National Characteristics Matter? An Analysis of the Comment Letters Written to the IASB  authored by Ann Jorissen, Nadine Lybaert and Katrien Van de Poel emphasized that different groups of people will exert their best efforts to lobby for or against  a new statute, law or policy.

Some quarters are happy to accept the fact that their views have been heard by policy –making bodies like the International Accounting Standards even though they lost. For, the different users of the financial statements want the income statement, balance sheet and statement of cash flows prepared in an unbiased and more realistic way. Consequently, a new or proposed accounting policy will definitely have its detractors and persuaders (Luciano and Mayes 2005, 99).

Further, the international accounting standards board issues its recommendations on many accounting topics like when to recognize revenue, when to recognize expense, when to recognize goodwill, when to recognize inventory end, when to recognize the value that the company will assign to a property plant and equipment bought.

The same accounting body also conducts surveys and gets the opinions, suggestions and contradictions of as many affected parties concerned before making a final draft of the new international accounting standard that will either reinforce or supersede a current financial accounting standard. The same body submits the final draft to the affected parties for their inputs and complains before the new draft will be finally implemented by all parties without reservation (Bounfour 2003, 45).

In addition, the Downsian voting model research showed that a person will be persuaded to join a lobby group if he or she benefits from such an activity. The benefit he or she will receive could be a change in the heart of the standard setting body. Benefits could also come in the form where the personal cost of attending a lobby is outweighed by the change in the body’s draft or statute to favor the lobbyist. The preparers of the financial statements are often hot on their heels lobbying because many would want to hold on to their old ways (Luciano and Mayes 2005, 99).

This includes the drawing up new accounting standards. The users of the financial statements will lobby against the preparers if they feel that the new financial policies benefit the many users of the financial statement (Wagenhofer 2004, 12). The users of the financial statements include the: customers, suppliers, creditors and banks, stockholders, community, government anti –pollution agencies, employees and labor unions, and the like.

The Sutton research findings here show that lobby letters from the preparers of financial statements represented forty –seven percent of the entire lobby letter count because they stand to lose more from the new accounting policy drafted by the IASB. In terms of country percentage, the UK has the highest with 38 companies representing 29% of all countries lobbying on the front steps of the IASB. This is followed by 28 lobby companies located in Germany. This represents 19% of the world’s lobby groups by country (Colbe 2004, 219).

 CONCLUSION:

A change in accounting policy always attracts many proponents and detractors. Lobby groups generally affected by a change in accounting principle, procedure or policy, like the new IAS 39, will go out of their way to ensure that the new policy will give them more benefits than the prior accounting principle or standard. Likewise, one group like the persuaders would lobby the accounting body, IASB, to continue with their proposed new accounting principle or standard if it benefits them while the detractors will lobby that the either the old system should continue such as the reinstallation of the scrapped pooling method of business combination.

Further, the IASB correctly hears all sides of the different lobby groups before implementing a new accounting principle or standard that will benefit the majority of the financial statement users. Likewise, a lobbyist will join a protest group in order to protect his or her own interests. Conclusively, a new accounting principle or standard that benefits the most number of users especially the lobby groups is the best new accounting principle or standard. For, it takes into consideration the sentiments of all the lobby groups.

 Works Cited

Ballwieser, Wolfgang. 2004. “Chapter 1.3 the Limitations of Financial Reporting”. In The Economics and Politics of Accounting:  International Perspectives on Research Trends, Policy, and Practice, ed. Leuz, Christian, Dieter Pfaff, and Anthony Hopwood:58-78. Oxford: Oxford University Press.

Bounfour, Ahmed. 2003. The Management of Intangibles:  The Organisation’s Most Valuable Assets. London: Routledge.

Colbe, Busse Von Walther. 2004. “Chapter 4.1 New Accounting for Goodwill: Application of American Criteria from a German Perspective”. In The Economics and Politics of Accounting:  International Perspectives on Research Trends, Policy, and Practice, ed. Leuz, Christian, Dieter Pfaff, and Anthony Hopwood:201-238. Oxford: Oxford University Press.

Gornik-Tomaszewski, Sylwia, and Irene N. Mccarthy. 2003. Cooperation between FASB and IASB to Achieve Convergence of Accounting Standards. Review of Business 24, no. 2: 52+.

Luciano, Bernadette and David G Mayes, eds. 2005. New Zealand and Europe:  Connections and Comparisons. Amsterdam: Rodopi.

Shoaf, Victoria, and Ignacio Perez Zaldivar. 2005. Goodwill Impairment: Convergence Not Yet Achieved. Review of Business 26, no. 2: 31+.

Wagenhofer, Alfred. 2004. “Chapter 1.1 Accounting and Economics: What We Learn from Analytical Models in Financial Accounting and Reporting”. In The Economics and Politics of Accounting:  International Perspectives on Research Trends, Policy, and Practice, ed. Leuz, Christian, Dieter Pfaff, and Anthony Hopwood:5-31. Oxford: Oxford University Press.

 Ramanna, K., 2006, The Implications of Fair –Value Accounting: Evidence from the Political

           Economy of Goodwill Accounting authored by Karthik Ramanna of the Massachusetts

           Institute of Technology

Jorissen, A., Lybaert, N., Van de Poel, K., 2001. Lobbying Towards a Global Standard Setter –Do National Characteristics Matter? An Analysis of the Comment Letters Written to the IASB.

IAS Plus, retrieved Aug 25, 2008, http://www.iasplus.com/standard/ias39.htm