FINANCIAL ACCOUNTING ASSIGNMENT
Parts A and B of this assignment are to be completed in pairs and constitute twenty-five marks of the total marks awarded for this subject.
Assessment Criteria:
Student work will generally be assessed in terms of the following criteria:
1. Effectiveness of communication – ie readability, legibility, grammar, spelling, neatness, completeness and presentation will be a minimum threshold requirement for all written work submitted for assessment. Work that is illegible or incomprehensible and does not meet the minimum requirement will be awarded a fail grade.
2. Accuracy – This will be the primary criterion for assessing the computational and procedural tasks.
3. Demonstrated understanding – This will be evidenced by the student’s ability to be dialectical in the discussion of contentious issues. Few, if any, accounting concepts are scientific facts and stereotype answers will demonstrate poor understanding on the part of the student.
4. Evidence of research – This will be evidenced by the references made to the statutes, accounting standards, books, journal articles and inclusion of a bibliography.
Note:
2. For all written work students must ensure that they submit their own original work. Any act of plagiarism will be severely penalised.
PART A.
Below are two extracts concerning the implementation of the private sector for-profit accounting model on not-for-profit government sector organisations. The first, by McGregor, argues the case for sector-neutral accounting standards on the premise of insignificant differences between each. The second, by Barton, suggests there to be significant differences and perhaps the need for unique accounting standards for government.
Required
Prepare an analysis of the corresponding arguments and discuss in terms of the current thinking of the issue in light of the movement to international accounting standards. (12.5 marks) (1500 words)
ARTICLE 1
MCGREGOR: The pivotal role of accounting concepts in the development of public sector accounting standards
Perhaps the most important decision made by the Public Sector Accounting Standards Board was taken soon after it was formed in 1983. That decision was to adopt a conceptual approach to the development of public-sector accounting standards. This paper explores the implications for the reform of public-sector financial reporting practices in Australia.
The Public Sector Accounting Standards Board (PSASB) has developed and issued in conjunction with its private-sector counterpart, the Australian Accounting Standards Board, four Statements of Accounting Concepts. Work is progressing on projects which may lead to the issue of other concepts statements. These projects include Measurement of the Financial Statement Elements, Performance Reporting, Reporting Financial Position and Scope of Financial Reporting.
Together the concepts statements comprise the board’s conceptual framework for general purpose financial reporting. The framework is applied by the board in the development of all new and revised accounting standards.
An important feature of the concepts statements developed by the board is that they are applicable to financial reporting by all types of reporting entity. That is, no distinction is made between entities on the basis of their operating structure (corporate or non-corporate), source of funding (for example, equity and debt capital or public funding), operating motives (profit-seeking or not-for-profit service delivery) or sector location (public or private). This broad applicability is evident at the highest levels of the framework, where the objective of financial reporting is specified as being the provision of information to users to assist them in making decisions about the allocation of resources (Statement of Accounting Concepts SAC 2 Objective of General Purpose Financial Reporting, para. 43). While the precise nature of the decision-making may differ from entity to entity and user to user, in each case the focus of the financial-reporting process is to provide users with the appropriate financial information on which to base their resource allocation decisions. SAC 2 explains:
‘Reporting entities control resources and influence members of the community through providing goods and services, levying prices, charges, rates and taxes, and acquiring and investing resources … Members of the community make resource allocation decisions in respect of reporting entities -that is, they make reasoned choices among alternative uses of scarce resources. For example, investors decide whether to invest in an entity; creditors decide whether to lend resources to an entity; governments and parliaments decide, on behalf of constituents, whether to fund particular programs for delivery by an entity; taxpayers decide who should represent them in government; donors decide whether to donate resources to an entity; individuals decide whether to contribute to a superannuation plan; employees decide whether to sell their services to a particular entity; owners/members of reporting entities decide whether they should contribute resources to the entity and who should manage the entity on their behalf; and ratepayers decide whether they should support the particular programs of their local government and who would represent them on the local government council’ (para. 12).
‘Efficient allocation of scarce resources will be enhanced if those who make resource allocation decisions, such as those groups identified above, have the appropriate financial information on which to base their decisions. General purpose financial reporting aims to provide this information’ (para. 13).
The concepts statements argue that these resource allocation decisions require certain common types of information, irrespective of the nature of the entity being considered. This includes information about financial performance and financial position.
The broad applicability of the concepts statements is also clearly reflected at the more operational levels of the framework. For example, the elements of the financial statements (assets, liabilities, revenues, expenses and equity) are defined from an economic/resource perspective rather than from the perspective of any particular reporting entity. Thus, assets are defined in SAC 4 Definition and Recognition of the Elements of Financial Statements as ‘future economic benefits controlled by the entity as a result of past transactions or other past events’ (para. 14).
This notion applies to both profit-seeking and not-for-profit entities. SAC 4 explains that ‘future economic benefits’ can be described as the scarce capacity to provide benefits to the entities that use them’ (para. 18).
Thus, from the perspective of profit-seeking entities, this scarce capacity is used to provide goods and services for exchange with the objective of generating net cash inflows. From the perspective of a not-for-profit entity, the scarce capacity is also used to provide goods and services in accordance with the entity’s objectives. SAC 4 notes:
‘The fact that not-for-profit entities do not charge, or do not charge fully, their beneficiaries or customers for the goods and services they provide does not deprive those outputs of utility or value; nor does it preclude the entities from benefiting from the assets used to provide the goods and services. For example, assets such as monuments, museums, cathedrals and historical treasures provide needed or desired services to beneficiaries, typically at little or no direct cost to the beneficiaries. These assets benefit the entities by enabling them to meet their objectives of providing needed services to beneficiaries’ (para. 21).
The development of a ‘common’ conceptual framework for financial reporting by entities in the public and private sectors has been a critical factor in the establishment of a common financial reporting framework for all Australian reporting entities. Although there are two sets of accounting standards on issue in Australia (the AASB series for entities reporting under the Corporations Law and the AAS series for other entities), they are constructed using the same basic framework and contain virtually identical requirements. The objective of this philosophical approach to the setting of Australian standards is to produce high-quality and comparable financial reporting across all reporting entities.
The PSASB’s decision to pursue this philosophical approach was a controversial one. Some expressed the view that the public sector required a different set of concepts and standards because it was different from the private sector. They saw the PSASB’s decision as being tantamount to foisting ‘commercial accounting principles’ on the public sector. By addressing, at a conceptual level, circumstances relevant to public-sector entities, particularly those which are not-for-profit entities, the board was able to demonstrate that the underlying concepts and the standards that derive from them are relevant to, and appropriate for, these entities.
One common argument in support of a separate, and different, approach for public-sector entities is the broader notion of accountability that exists in the public sector. Indeed, the board was under pressure in its early days to specify that the provision of information for accountability purposes is the objective of financial reporting by public-sector entities. The board addressed this view and concluded that the broad notion of accountability which exists in the public sector is compatible with an objective of financial reporting which focuses on decision-making about the allocation of scarce resources.
SAC 2 defines accountability as ‘… the responsibility to provide information to enable users to make informed judgments about the performance, financial position, financing and investing, and compliance of the reporting entity’ (para. 5). This is a broad notion of accountability as demonstrated by the following definition of ‘performance’ contained in SAC 2: ‘… the proficiency of a reporting entity in acquiring resources economically and using those resources efficiently and effectively in achieving specified objectives’ (para. 5).
The board concluded that the provision of information for accountability purposes must, rationally, have a decision-making focus – otherwise it becomes an end in itself. The expectation that managements/governing boards should report on their management of an entity’s resources and their performance in meeting the entity’s objectives is driven by the needs of external users for information on which to base resource-allocation decisions in relation to that entity. For example, resource-providers need the information as input when deciding whether they should continue to provide the existing level of resources, or whether they should expand or contract that level. Recipients of goods and services will be interested in assessing whether the entity has been operating in their interests. Their assessments may influence their voting preferences and representations made to parliamentary and other representatives and may lead to the continuation, expansion, contraction or even cessation of the entity’s activities.
The board provided a linkage in SAC 2 between the stated objective of general purpose financial reporting and the notion of accountability. SAC 2 states: ‘Management and governing bodies shall present general purpose financial reports in a manner which assists in discharging their accountability’ (para. 44), and notes:
‘When general purpose financial reports meet this objective [the objective of general purpose financial reports] they will also be the means by which managements and governing bodies discharge their accountability to the users of the reports’ (para. 27).
Source: W. McGregor, ‘The pivotal role of accounting concepts in the development of public sector accounting standards’, Australian Accounting Review, vol. 9 no. 1, 1999, pp. 3-5 (extract).
ARTICLE 2
BARTON: Public and private sector accounting – The non-identical twins
A debate in this journal, spanning several years, over the accounting treatment of public assets has concentrated attention on the appropriateness of the Public Sector Accounting Standards Board’s decision to apply private sector accounting concepts to the development of public sector accounting standards. The case is examined here and it is shown why private sector accounting standards must be appropriately adapted to suit a very different and varied operating environment in the public sector. These differences have been largely ignored, with resulting problems for public sector accounting standards.
In the development of accrual accounting standards, for the public sector, the Public Sector Accounting Standards Board (PSASB) has endeavoured to apply concepts and standards initially developed for commercial activities to the public sector. The major standards are AAS 27 Financial Reporting by Local Governments (1995), AAS 29 Financial Reporting by Government Departments (1996), AAS 31 Financial Reporting by Governments (1996), SAC 1 Definition of the Reporting Entity (1990), SAC 2 Objectives of General Purpose Financial Reports (1990), SAC 3 Qualitative Characteristic of Financial In formation (1990), and SAC 4 Definition and Recognition of Elements of Financial Statements (1992).
The board holds the belief that the two sectors are fundamentally similar in the information needs of users of general purpose financial reports (GPFRs) and in their operating environments; and hence that private sector accounting standards can be readily applied to the public sector with only a few minor modifications. This viewpoint has been explained and justified by Warren McGregor, executive director of AARF in his recent useful and thoughtful article (1999). He states (p. 3): ‘An important feature of the concepts statements developed by the board is that they are applicable to financial reporting by all types of reporting entity. That is, no distinction is made between entities on the basis of … sector location (public or private).’
This universal approach is challenged in this response. Parts of the public sector environment are so different from a business environment that a differentiated approach is required. Moreover, the public sector environment is itself so highly heterogeneous that it cannot be treated as one for accounting purposes, and generalisations cannot be made which embrace the whole of the sector. The public and private sectors of the nation are not identical twins. The fundamental differences between the two must be acknowledged and accounting standards designed, where necessary, to suit the unique characteristics of the public sector. It should also be acknowledged that private sector accounting standards have been designed over a long period to take account of its unique characteristics. Unless accounting standards are designed to suit the fundamentals of the markets in which the entities operate, the resultant accounting information systems cannot provide the information required by users. It cannot be relevant to their needs or be reliable.
The board appears not to have looked at the markets in which public sector goods and private sector goods are provided. Rather, they have concentrated their attention on assets and used them as the fundamental building block for the whole edifice of concepts and standards. They have concluded that assets are much the same in each sector (McGregor 1999, p. 5). This is true – with some exceptions (e.g. Defence equipment) the public sector uses types of assets (financial assets, buildings, land, equipment etc.)—similar to those used in commercial markets. This similarity in the physical characteristics of assets is then used to justify the application of private sector accounting standards to the public sector. But this concentration on the physical characteristics of assets has diverted attention from the real divide between the two sectors – that of markets in which the services are provided. It is here that the two sectors differ. Indeed, if they did not then there may be no case for governments to exist at all. Governments exist because they fulfill functions which are largely complementary to those of the commercial sector in a modern democratic, mixed economy.
SAC 2 defines the fundamental objective of general purpose financial reporting as to …. provide information useful to users for making and evaluating decisions about the allocation of scarce resources’ (para. 43), and states that resource-allocation decisions require information about financial performance, financial position and financing and investment (para. 45). While this may be appropriate for private goods markets, where firms have financial objectives, use resources having financial costs to them and receive financial benefits from their use, a wider objectives statement is required for the non-commercial activities of government covered in categories 1 and 2. Because of the nature of government operations in the supply of public goods, governments must be accountable to their citizens for both the arrangements about taxation and the provision of public goods. Certainly accountability has implications for the use of resources; however, it should be stated as a major objective in its own right for public sector accounting. Some regard it as the major objective. For example, the Government Accounting Standards Board of the US states: ‘Accountability is the cornerstone of all financial reporting in government’ (1987, quoted by Pallot 1992, p. 40).
The need for accountability is written into the US constitution (Granoff 1998, p. 6) and it is the first objective of financial reporting by the US government (Granoff 1998, p. 647). Likewise, the central role of accountability is emphasised by some Australian authorities (MAD 1993, ANAO 1997/98), and it is included in the Australian constitution and the 1901 Audit Act (recently replaced by the Auditor General Act 1997).
Second, allowance in the objectives statement must be made for non-financial objectives. The provision of most community services has social welfare, cultural, heritage and/or environmental objectives. Information must be directed towards the achievement of these non-financial objectives if the information provided in the accounting system is to be relevant for resource management, performance assessment and accountability.
The statement of objectives for the public sector could, for example, be: ‘The fundamental objective of financial reporting in the public sector is the provision of information, both financial and non-financial, to enable accountability for the use of public funds and other resources to stakeholders, and to facilitate the efficient and effective use of those resources in the provision of public goods and services.’
Source: A. Barton, ‘Public and private sector accounting—The non-identical twins’, Australian Accounting Review, vol. 9, no. 2, 1999, pp. 22-3, 28 (extracts).
PART B
Critically discuss and evaluate the following article: (12.5 marks) (1500 words)
The micro-economic reforms and modern management practices that had swept through the business community in the mid 1960’s and the government sector in the 1980’s are now lapping at the feet of third sector organisations. Criticisms of a lack of transparency, accountability and calls for accounting standards directed to the public sector a decade ago are now being directed at third sector organisations.
THE THIRD SECTOR
Laissez-faire Australian market-oriented governments over the past three decades have considered the private sector accounting model of financial reporting as the appropriate vehicle to deliver improved accountability and performance from the public sector. Important within this context is the acceptance of a clearly delineated relationship between accountability and accounting wherein accounting has become the measure of accountability.
Whilst alternative measures such as the triple bottom line and balanced scorecard have sought a broader and more inclusive set of measures, they have for the most part had little impact on shifting the focus from accounting and the single bottom line as the preferred measure. This is not unsurprising given that accounting can quantify and signify the economic much more readily than other organisational inputs and outputs.
By appealing to supposedly less opaque private market values, and promises of greater accountability and increased community knowledge of public sector financial affairs, central government has directed public attention more succinctly towards the subordinate. The calculative consequences which accompanied the private sector accounting model brought with them the potential to create seemingly precise and specific quantitative facts that delineated what is costly, beneficial and of value. In so doing, calculative priority could be given to the economic rather than the social.
With its performance measurement orientation, the private sector accounting model would give a clearer identification of those who are accountable, their agreed goals and means of measuring their performance. Moreover, the use of the private sector accounting model can been used to measure blame particularly where contemporary economic rationalism has demanded the shift towards balanced budgets or surpluses, which are seen to be economically correct and portray sound financial responsibility and accountability.
History reverberates with ideas regenerated from past experiences. Concepts of reform and the processes through which they are achieved are very rarely the construct of a contemporary idea. Rather their outcome is the product of a movement, which encapsulates their beginning and being. Reform of the third sector will be no different while the construct of accountability is narrowly enshrined in, and measured for most part, by accounting numbers. Carlton argues against “the imposition of ill-fitting organisational models derived from the government or business sectors”
In questioning criticisms of a lack of accountability in the third sector, Goodin suggests this is so because it is unclear to third sector organisations who they are accountable to as there is “simply no equivalent to ‘voter’ in the state sector or ‘shareholders’ in the market sector.” Private sector financial reporting is not as limited as represented here. Financial reports must be prepared if there are users dependent upon this information as their only source of financial information and incorporates a far broader accountability than to just shareholders. Concepts of stewardship and accountability have been subjugated to the issue of reporting ‘decision-useful’ information. The issue is not with finding who to be accountable to, for there will be a plethora of economic, social and political stakeholders, rather how accountability will be measured to provide decision-useful information.
Lyons suggests that non-profits are “more trustworthy than for-profits and thereby require lower levels of monitoring.” Aside from the issue of differing levels of monitoring between sectors, perhaps a more pertinent question to ponder is whether reform of the third sector will provide only better monitoring or has accountability been defined too narrowly due to its overwhelming reliance on the accounting system to provide a measurement?
Carlton, J., (2001), Book Review of Third Sector: The Contribution of Nonprofit and Cooperative Enterprises in Australia by Mark Lyons, Policy, The Centre for Independent Studies, Spring, Vol. 17, Issue 3, pp.52-53.
Goodin, R.E., (2003), Democratic Accountability: The Third Sector and All, Research School of Social Sciences, Australian National University, Paper presented to Conference on ‘Crisis of Governance: The Non-Profit/Non-Governmental Sector’ at Harvard University, 3-4 April 2003, p.6.
Lyons, M., (2001), Third Sector: The Contribution of Nonprofit and Cooperative Enterprises in Australia, Allen & Unwin, Sydney.
Lyons, M., (2001), “Why a Third Sector Roundtable”, Retrieved: June 16, 2004 from www.philanthropy.org.au/advocacy/LyonsPaper.doc
Credit:ivythesis.typepad.com
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