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Even accounting’s most fundamental concepts and practices, such as income measurement and asset valuation, are based on uncertainties. Accountants still cannot agree on how to define income, the measu

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Even accounting’s most fundamental concepts and practices, such as income measurement and asset valuation, are based on uncertainties. Accountants still cannot agree on how to define income, the measurement of which remains one of the intractable problems in financial accounting theory and practice. The valuation of assets only becomes more complex and more fiercely debated as modern global corporate structures and financial instruments become increasingly labyrinthine, and income measurement, the key to determining profits and therefore dividends, is inextricably linked to this conte...

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Question Preview:

Even accounting’s most fundamental concepts and practices, such as income measurement and asset valuation, are based on uncertainties. Accountants still cannot agree on how to define income, the measurement of which remains one of the intractable problems in financial accounting theory and practice. The valuation of assets only becomes more complex and more fiercely debated as modern global corporate structures and financial instruments become increasingly labyrinthine, and income measurement, the key to determining profits and therefore dividends, is inextricably linked to this contentious, chimerical practice of asset valuation. Nor is the crucial measurement of costs an objective process: costs are also highly contestable figures and may result as much from the collusion or rivalries of firms as from any other actuality. Accrual (or corporate accounting) - the need to allocate revenues and expenses between accounting periods and to value assets and liabilities at the end of an accounting period - raises the problem which have never been solved and are probably incapable of solution. Numbers can be negotiated to make management look good. In effect. ‘accounts are used to justify decisions and to excuse mistakes’ (Gleeson-White, 2011, p.218).

Gleeson-White, J. (2011). Double Entry. How the Merchants of Venice Created Modern Finance. Allen & Unwin. Sydney.

Instructions:

Download a 2015 annual report for a listed company (in the top one hundred) on the Australian Securities Exchange (ASX) website. Groups are not allowed to do the same company and should discuss their selection with their tutor prior to commencing their research assignment (Banks are not allowed as they have particular reporting requirements).

Refer to the marking guide (attached) for additional information and requirements.

Required:

  1. With reference to the above statement describe what you understand by the accounting concepts mentioned and provide examples from your selected annual report.
  1. Discuss the problems of measurement in the context of the present AASB / IASB standards and conceptual framework using your selected annual report to provide examples.
  1. Comment on the relevance and representational faithfulness of using ‘processes’ of measurement to achieve estimates of assets and liabilities.  Provide examples from your selected annual report.

 

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Solution preview

We can trace the concept of accounting to about thousands of year back. It’s not something new. It consisted of recording, writing and counting of money. However, in the past century when the businesses became sophisticated, complex and varied it was essential to have some common standards and concepts. This was to create harmony and professionalism in accounting of businesses. Thus came the concept of accrual accounting, prudence, revenue recognition, matching concept

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