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Accounting Standards Updates Paper Sample

Date:  2021-05-25 16:26:33
7 pages  (1767 words)
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Accounting standards are principles which guide financial accounting practices by specifying on how to recognize, measure and display economic events which are set by the International Accounting Standards Board (IASB) and further playing a role in ensuring that financial statements of incomes, assets liabilities, and expenses are prepared well by firms and respective industries. Improvement and updating of accounting standards on the accounting for investments and financial instruments are done jointly by Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). By consulting with other stakeholders and the public, there have been various updates to the accounting standards.

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Recognizing and Measuring Financial Assets including Financial Liabilities

Identifying, measuring and disclosing of financial instruments of entities holding financial assets or owing financial liabilities is addressed by this update. According to FASB (2016) measuring equity investments is done at a fair value and any changes in the fair value are recognized in the net income, while equity investments that do have fair values that can be determined readily, measuring considers adding or subtracting changes occurring from price changes that can be noticed. The financial assets fair value measured for public entities that are expected to be disclosed while for private entities, it is a not a requirement. Useful information for decision-making is provided by improving on how these financial instruments are reported. Analysis of credit losses on financial assets has also been covered by this amendment.

Recognizing Breakage for Specific Stored-Value Products that are prepaid

The entities that sell stored- value products are required to account consistently for liabilities resulting from damage. The breakage guidance provides provisions for recognizing and accounting for these liabilities, but with some exceptions. As stated by FASB (2016), public entities whose yearly financial statements will be issued for fiscal years starting on 16th December 2017 will be affected by this amendment. As stated by FASB (2016), The amendments in this update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

Making the Transition to the Equity Method Simple

The requirement for the investor to adjust the type of investment including the earnings of the investment as a result of having qualified to use the equity method due to the amount of influence or an increase in the interest of ownership has been eliminated by this update. Additionally, to qualify for the equity method, it requires the addition of the cost incurred in acquiring additional interest in the investee to the interest previously by the investor. After qualification for the accounting equity method an entity with equity security requires not to adjust on its investment and further, it should recognize the gain or loss on overall earnings at the date of qualification to use the equity method. FASB states that the amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016; and amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.

Recognizing and Reporting on Gross Revenue

Entities that are involved in contracts of transferring goods or services to their customers and in return receive payments are affected by this update. Identifying the performance obligations of an entitys contract with a client and determining transaction prices leads to the entity recognizing the revenue generated and at the same time depicting the transferring of goods or services promised to customers. The revenues also reflect on the amount that an entity is entitled to in the event of exchanging goods or services. Using this update, an entity is provided with guidance on knowing the level of control it has on a good or service before transfer to the customer. Additionally, an entity can determine the nature of products or services taking into account fragileness and perishability.

Licensing and establishing Performance Obligations

In determining performance requirements, an entity, first of all, identifies the products or services that have been promised in a contract with a customer and further partakes evaluation of whether a good or service is unique. Licenses are granted by an entity to a customer regarding intellectual property with standalone functionality or symbolic functionality. For an independent feature, the license gives a right to use the intellectual property but not include maintaining that property. Conversely, license for nominal feature for example logos, brands and trade names, allows the customer to enjoy the right of using and benefiting from the intellectual property. For the license to be granted to be distinct, the entity should consider that the performance obligation of the promise to a customer is measured progressively to satisfaction over time. Attributes of guaranteed license define the scope of a clients right to use or right to access an entitys intellectual property and, therefore, do not determine whether the entity satisfies its performance obligation at a point in time or over time and do not create an obligation for the entity to transfer any additional rights to use or access its intellectual property. This update further explains that contractual provisions requiring an entity to transfer control of other rights to use or rights to access an intellectual property that the customer does not already control should be distinguished from contractual provisions that define the attributes of a single promised license.

Narrow-Scope Improvements and Practical Expedients

The update focusses on contract validity whether the deal represents an essential transaction and if the customer can make the required payments in the event of an exchange of goods or services to him/her. This allows an entity to recognize revenue received when the entity has transferred control of the products or services to the customer. The amendments in this update also require that date when non-cash considerations are measured should be specified accordingly. All changes to the contract from the inception of the contract are permitted using a practical expedient that enables know performance obligations which are satisfied and those not yet satisfied. If of all revenue of a contract is recognized, then that contract I considered full.

Measuring of Credit Losses allowed on Financial Assets

This update explains that the basis on which financial instruments are measured is the amortized cost, with net investment in leases, loans, and debt securities being also affected by this update. Therefore financial assets whose fair value has been accounted for can be displayed at the net amount expected. The update further specifies that the credit losses being a valuation report that shows the net carrying value of expected number on a financial asset and is deducted from the amortized cost basis of those financial assets. Historical experiences and past events affect the measurement of the expected credit losses. To show this analysis on credit losses preparation of an income statement is necessary. In the case of financial assets that have been purchased, the allowance for credit losses in added on the price at which it was purchased instead of being recorded as credit loss expense. As stated by FASB (2016), all public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; and for all other entities, including not-for-profit entities and employee benefit plans the amendments in this update are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 20.

Classifying Cash Receipts and Cash Payments

A statement of cash flows is required for business entities. Cash outflows are cash payments not made soon after the acquisition date of a business and are used in finance and operations tasks.

Cash inflows include returns on investment using the equity method which is received from settlement of insurance claims to the entity. Therefore an entity is supposed to classify each cash receipt or cash payment depending on the source and their nature regarding finance, investment, and operations of that entity. FASB (2016) states that the amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years; and for all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

Classifying Deferred Taxes using the Balance Sheet

Complaints from stakeholders about separating deferred income tax liabilities and assets into current and noncurrent amounts as per the generally accepted accounting principles (GAAP), since the classification did not align with the period of settling or recovering that amount of deferred tax, and in turn brought about this update. According to this update, it is required that deferred tax liabilities and assets should be classified as noncurrent in a classified statement of financial position hence make it simple to present deferred income taxes.

Fully Benefit-Responsive Investment Contracts

Fully benefit-responsive investment contracts do require a standard which is the contract value which can be used to determine the net assets of an employee benefit plan. If the fair value of fully benefit-responsive investment contracts differs with the contract value, then no useful information for decision making is provided. Therefore the fully benefit-responsive investment contracts can be measured, presented, and disclosed only at contract value.

Measuring of Inventory a Simple way

This update articulates clearly the requirements for the measurement and disclosure of inventory in that an entity should measure inventory at the lower of cost and net realizable value. Additionally, all inventory are estimated at an average cost. The update is expected to reduce costs and enable for more comparison for all stock measured using average cost. Conversely, this update has a likelihood of resulting in transition costs that would not be justified by the benefits for inventory measured using the retail inventory method due to the complexity inherent in those methods.

Disclosing Investments in Certain Entities That Calculate Net Asset Value per Share

This update suggests that there exists fair value hierarchy for all investments whereby the fair value is measured using the net asset value per share. Making certain disclosures for all investments has been removed by this update limiting this disclosure only to investments elected by the entity to measure the fair value using the practical expedient. Disclosing of investments substantially enables users to understand the nature and risks of the investments and whether the investment can be sold at amounts different from net asset value.

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