THE SIGNIFICANCE OF ACCOUNTING STANDARD (SAS) IN THE PREPARATION OF FINANCIAL STATEMENT OF AN ORGANIZATION
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THE
SIGNIFICANCE OF ACCOUNTING STANDARD (SAS) IN THE PREPARATION OF FINANCIAL
STATEMENT OF AN ORGANIZATION
ABSTRACT
Research
project examined the significance of accounting standard (SAS) in the
preparation of financial statement with special reference to Guinness Nig Plc,
Lagos. The most common report from external use are the financial statement
included in the annual report to shareholders (owners) and potential investors.
These
financial statement are prepared to confirm with generally accepted accounting
principles such principles have evolved over time or have been made acceptable
by decree from rule making body.
Accounting
principles result from an essentially political process.
The
government through the Securities and Exchange Commission (SEC) prescribes the
methods of accounting profession through its board, Nigeria accounting
standards boards also issue statements of accounting standards as guide for
preparing financial statements.
In
explanation of the above, the researcher examined the significance of -the
statement produced by the accounting profession's organ (NASB) and how they are
being complied with, its achievements and problems, hypotheses was also
conducted. However, form the findings of the study, it was discovered form the
findings that accounting; standard application in preparing financial statement
have come to conclusion that it contributes numerously not to the company
Guinness Nig PIc, also on the nation's economy as a whole.
CHAPTER ONE
INRODUCTION
1.1
Background to the Study
The basic
purpose of accounting standards is to facilitate the provision of financial
information about entities to enable investors, analysts, creditors and the
entities themselves to make informed decisions about the allocation of
resources. Accounting standards are essentially about disclosure and, in many
respects, are at the heart of market efficiency. Clearly, while accounting
standards assist preparers of financial statements by providing' a framework
within which to construct the statements, their prime importance is to assist
users of the statements to make meaningful assessments about the financial
position of an entity. Users of financial statements range from directors to investors,
through to credit rating agencies.
Effective
financial reporting, which is essential to investor confidence, can only be
achieved if it is underpinned by relevant and well-designed accounting
standards. As the detail of financial reporting requirements is increasingly
being left by legislation to be filled in by accounting standards, the
importance of accounting standards is becoming accentuated.
Accounting
standards facilitate both the efficient day-to-day operations of individual
business entities and contribute to the efficient operation of capital markets.
At the firm
level, accounting standards improve the accountability of individual business
enterprises and their managements to investors and creditors. By promoting
accurate reporting, accounting standards assist the management of a business
entity to maximize the wealth of the entity Find to put in place effective and
efficient corporate governance arrangements. At a broader level, accounting
standards are central to the provision of accurate, transparent and reliable
information to the market as a whole. In this regard, a well-informed market
will generally be an efficient one.
Accounting
standards that result in the provision of accurate and comparable information
about the true financial performance and position of business entities promote
investor confidence and market integrity, thereby ultimately reducing the costs
of capital throughout the economy. Public confidence m the integrity of the
financial reporting framework is central to maintaining and expanding a
sophisticated domestic capital market.
1.2
Historical Background of the Study
Historically,
the debate over International Accounting
Standard
Commission standards has centered on qualitative issues. International
accounting standards commission have been perceived at times to be:
inferior in
terms of underlying accounting policies;
incomplete
and incapable of adoption without substantial support from national standards
and national regulatory bodies;
incapable of achieving the same level of
investor protection that currently exists in Australia;
Relaxed in
terms of allowing alternative accounting methods to be used thereby reducing
the comparability of financial information; and have allowed the use of too
many options in the preparation of financial reports; are incomplete there are
gaps in the standards.
In light of
the above, the International Accounting Standard Commission agreed with in 1995
to a new work program designed to address the criticisms of international
standards particularly regarding gaps in their coverage. The work program aims
to produce a complete core set of standards by March 1998, and to re-examine a
substantial number of existing standards. The core set of standards being developed
are primarily for cross-border offerings and listings.
International
has indicated that its endorsement or International Accounting Standard
Commission standards will be withheld until such time as a core set of
acceptable standards are in place.
International
has given the International Accounting Standard Commission a deadline of the
end of 1998 in this regard.
In the US
context, it is interesting to note that the US Congress recently passed the
National Capital Efficiency Act 1996, which draws attention specifically to the
accounting problems facing issuers seeking to raise capital across
international borders. The US Securities and Exchange Commission (SEC) is to
report back to Congress later this year on the progress of the development of
accounting standard.
The
development of accounting standards that enhance efficiency, Expansion and
international competitiveness of Australian business while at the same time
maintaining investor confidence;
The
composition and funding of the Australian Accounting Standard Board (AASB) and
the need for greater industry and user participation;
The
relevance and usefulness of existing accounting standards to contemporary
conditions.
The extent
to which accounting standards should be strictly prescribed and whether there
is scope for individual companies to be permitted or required to determine the
level and type of disclosure which is appropriate for those companies; and
whether Australia should continue to develop its own set of standards or
whether international standards should be used as a basis and adapted to
Australian conditions where necessary.
This paper
proposes an accounting standard setting framework for Australia which requires
the involvement and support of all stakeholders in financial reporting. The
restructuring of the existing regime gives rise to a range of associated issues
including consideration of the role of accounting standards, the institutional
arrangements tor standard setting in Australia, the funding of the accounting
standard setting process, compliance with accounting standards, the separation
of the setting of accounting standards for public and private sector entities
and future developments.
Effective
financial reporting, which is essential to investor confidence, can only be achieved
if it is underpinned by relevant and Whilst Australian accounting standards
have sometimes been criticized as being too detailed and complex, this does not
necessarily mean that they are fundamentally flawed. Feedback to the Government
from business and international standard setters suggests that the form arid
content of Australian accounting standards are broadly consistent with those
existing in other countries with sophisticated capital markets.
Accordingly,
it would be inappropriate to consider a wholesale or fundamental change in the
way standards are written. However, there may be scope for better targeting and
design of particular standards. Just as financial reporting must be dynamic and
responsive to the needs of users, so must be the accounting standards upon
which the financial reporting framework is based. The question, therefore,
arises as to how to ensure that accounting standards are meeting the needs of
users who are increasingly demanding a higher level of sophistication and
reliability of financial reports.
The
legislation that establishes the Australian Accounting Standard Board, the
Australian Securities Commission Act 1989, does not provide any indication to
the Australian Accounting Standard Board as to the purposes of or the objectives
to be achieved by, the accounting standards it is required to prepare. In this
regard, it is desirable that the standard setter be given greater guidance as
to what accounting standards should be designed to achieve. Whilst
clarification of the objectives of accounting standards would not guarantee the
production of high quality and relevant standards, it could go a fair way down
that track. In light of the above, and to ensure that the standard setter has
regard to the objectives of accounting standards, it should be specifically
stated, either in the charter of the standard setter or in the legislation
under which it is established, that in designing accounting standards, the
standard setter should seek to ensure that compliance with accounting standards
leads to the production of relevant, reliable, neutral and comparable financial
information for users of financial statements.
Accounting
standards are becoming more prescriptive, partly because of the tendency for
them to be interpreted from a. strictly legal perspective rather than a
commercial one. It seems that a vicious circle is being created in this regard
because preparers of financial statements are increasingly relying on adherence
to the black letter of the standard s to protect themselves legally, rather
than following the spirit of the standards.
A way of
addressing this issue could be to explicitly provide in legislation that
accounting standards should be interpreted from a commercial-perspective and
not just a purely literal 0" legal one. By a commercial perspective, it is
intended that more weight should be given to the objectives of the standards
and what is generally considered in the relevant market to be good commercial
practice. This may give comfort to the preparers of financial statements who
might then more willingly follow more principled-based standards. The standard
setter may also be more inclined to set less prescriptive standards if it does
not feel the pressure of having to foresee every eventuality or address every possible
evil when developing a standard.
1.3
Statement of Problem
Having
identified the background to the research study, it is considered necessary to
get the problem stated:
(1) The problem of the significance of
accounting standard on organization corporate reputation.
(2) The problem of the significance of
accounting standard contribution toward the organization growth and
development.
(3) The problem of the effect of significance of
accounting standard on the creation of competitive advantages.
1.4
Objective of the Study
The purpose
of the study IS to carryout findings on the analyzed problems with a view of
recommending a progressive course of actions
(1) To determine the effect of significance of
accounting standard on the creation of competitive advantages.
(2) To determine the effect of significance of
accounting standard on the creation of competitive advantage.
(3) To ascertain the effect of significance of
accounting standard on the profitability level of an organization.
(4) To evaluate the extent to which corporate
reputation of the organization is being improved by significance of accounting
standard.
1.5
Significance of the Study
The various importance
of this study is outlined below:
It should be
specifically stated, either in the charter of the standard setter or in the
legislation under which it is established that, in designing accounting
standards, the standard setter should seek to ensure that the standards lead to
the production of:
relevant;
reliable;
neutral; and
comparable
Financial
information for the users of financial statements.
A
cost/benefit analysis should be undertaken by the standard setter in the
development of each accounting standard. In undertaking the cost/benefit
analysis, consideration should be given to whether the proposed standard is
suitable for all entities required by legislation to prepare financial
statements in accordance with accounting standards, or whether the proposed
standard should only apply to a specific class of entity.
It should be
made clear in legislation that accounting standards should be interpreted from
a commercial perspective to promote compliance by preparers of accounts, not
only with the black letter of the standard, but also its overall purpose.
1.6 Research
Questions
The
fundamental research questions include the following:
(i) To what extent has significance of
accounting standard improved the profitability level in the organization?
(ii) What effect does significance of accounting
standard have on the corporate reputation of the organization?
(iii) What
are the significances of accounting standard in creation of competitive
advantages in the organization?
1.7 Research
Hypotheses
The research
hypothesis includes the following:
Hypothesis
One
Ho:' Accounting standard does not improve the
profitability level of the organization.
Hi: Accounting standard Improves the
profitability level of the organization.
Hypothesis
Two
Ho:Accounting
standard does not improve the corporate reputation of the organization.
Hi: Accounting standard improves the corporate
reputation of the organization.
Hypothesis
Three
Ho: Accounting standard does not create
competitive advantages in the organization.
Hi: Accounting standard create competitive
advantages in the organization.
1.8 Scope
and Limitation of Study
This
research work will be limited in depth and coverage to the bank in view,
Guinness Nigeria plc operating in Lagos area. The business environment in this
case shall include the employees, customers or clients, competitors and vendors
while such other variable like economic, social and political environment will
not be considered in the study area regarded as fixed.
The research
work shall Endeavour to make both the descriptive and empirical analysis of the
efficient and effective significance of accounting standard in the organization
with special emphasis being placed of Guinness Nigeria plc.
The
limitation of the study shall be time constraint, inability of customers to
provide relevance information.
1.9 Definition
of Terms
This part of
the chapter will be focused on bringing out a better understanding of the term
which has been used in the process of the writer up of these chapter.
Accounting:
is the art of recording transactions in the best manner possible, so as to
enable the reader to arrive at judgments / come to conclusions, and in this
regard it utmost necessary that there are set guidelines. These guidelines are
generally called accounting policies. The intricacies of accounting policies
permitted Companies to alter their accounting principles for their benefit.
This made it impossible to make comparisons. In order to avoid the above and to
have a harmonized accounting principle, Standards needed to be set by
recognized accounting bodies. This paved the way for Accounting Standards to
come into existence.
Disclosure
of Accounting Policies: Accounting Policies refer to specific accounting
principles and the method of applying those principles adopted by the
enterprises in preparation and presentation of the financial statements.
Valuation of
Inventories: The objective of this standard is to formulate the method of
computation of cost of inventories / stock, determine the value of closing
stock / inventory at which the inventory is to be shown in balance sheet till
it is not sold and recognized as revenue.
Cash Flow
Statements: Cash flow statement is additional information to user of financial
statement. This statement exhibits the flow of incoming and outgoing cash. This
statement assesses the ability of the enterprise to generate cash and to
utilize the cash. This statement is one of the tools for assessing the
liquidity and solvency of the enterprise.
Net Profit
or Loss for the Period, Prior Period Items and change in Accounting Policies:
The objective of this accounting standard is to prescribe the criteria for
certain items in the profit and loss account so that comparability of the
financial statement can be enhanced.
Depreciation
Accounting: It is a measure of wearing out, consumption or other loss of value
of a depreciable asset arising from use, passage of time. Depreciation is
nothing but distribution of total cost of asset over its useful life.
Construction
Contracts: Accounting for long term construction contracts involves question as
to when revenue should be recognized and how to measure the revenue in the
books of contract of construction starts in one year and is completed in
another year or after 4-5 years or so. Therefore question arises how the profit
or loss of construction contract by contractor should be determined.
Revenue
Recognition: The standard explains as to when the revenue should be recognized
in profit and loss account and also states the circumstances in which revenue
recognition can be postponed. Revenue means gross resources by other yielding
interest, dividend and royalties. In other words, revenue is a charge made to
customers / clients for goods supplied
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