Accounting Theory: Joint Venture Essay

Question:

Discuss about the Accounting Theory for Joint Venture.

Answer:

Overview:

Joint Venture is basically an arrangement under which there are two or more parties agree for pooling their resources and have the purpose of accomplishing a task that is specific. The task under the joint venture can be any kind of business activity or new project. Under the joint venture the parties enter in to joint agreement of undertaking a transaction for a mutual profit. Under the joint venture each party contributes for sharing risks and contributing towards the assets. The Joint ventures are used at a wide range by the companies so that they can gain entrance in to the foreign markets. There are basically new technologies brought up by the foreign companies and various other business practices in to the joint ventures.

Rationale for Undertaking the Joint Ventures

There shall be involvement of the companies in one or more companies in the case of the Joint Ventures. These days’ international Joint ventures are becoming very popular especially in the industries that are capital intensive that includes the mineral extraction, oil exploration and metal processing. The basic reason for entering in to the joint ventures is to save the money. There has been a great expand in the joint ventures since the past few decades the main reason for such an expansion was the continuation of the operations of the capital intensive industries. There are various international organizations that are fostering the international joint ventures these organizations include: the World Bank, the international monetary fund, and the World Trade Organization. The joint ventures have proven out to be extraordinary helpful for many companies as they help in gaining the foreign market access to the companies there are various reasons as to why the companies enter in to the joint ventures. Some of the reasons for the companies for undertaking the joint ventures include:

  • Helps in access of greater resources that includes the staff and the technology
  • Helps in sharing of risks with the partner
  • Helps the company for gaining an opportunity so that they can gain expertise and capacity
  • The company are able to enter new technological requirements and geographic markets
  • These are the creative ways in which the companies can exit themselves from the non-core businesses.(Cornell University Law School, 2014)
  • The companies are free to separate there business from the remaining part of the organization.

Financial Statement Presentation

It has been set by the International Accounting Standard Board that all the companies shall present the financial statement. The IASB and the FASB (Financial Accounting Standards Board) sets up the common standards about how the information shall be organized and presented in the financial statements. The main objective of this standard is to prescribe a general purpose statement so that comparability is ensured with the financial statements of the previous years of the entity along with the financial statements of the other entities. All the requirements in connection with the presentation of the financial statements that includes the guidelines for the structure and the requirements of the content of the financial statements are all included in this standard. (Howes & Tah, 2003)

Scope:

The presentation of the Financial Statement is included in the Accounting Standard one of the IASB and the FASB. Basically financial statements are nothing but the structured representation of t he financial performance and the financial position of an entity. This financial position has proven out to be very useful for the wide range of users for making the economic decisions. (Fredlob, 2006)The stewardship of the management is also shown by the financial statements. The following are the information that are provided by the financial statements of the entity:

  • The information about the assets
  • Details of the liabilities
  • The equity of the entity
  • The income and expenses of the entity that includes the losses and gains
  • The contributions and the distributions by the owners
  • The cash flows of the entity

All this information and the information that is included in the notes of the financial statements helps in predicting the future cash flows of the entity and the certainty and the timing of the entity. (Lombard, 2010)

  • The complete set of Financial Statement of the entity comprises of the following:
  • The income statement of the comprehensive end of the period
  • The statement of the financial position of the end of the period
  • The statement of the cash flow of a particular period
  • The statement of the various changes taking place in the equity of the organization
  • The statement of the financial position at the beginning of the comparative period of the organization(Weil & Stichkey, 2009)

The financial statement presents the fair value of the financial position of the entity, along with the financial performance and the cash flows of the company. The fair presentation of the financial position needs that there shall be faithful representation of the various effects on the transactions. The entity that is bound to comply there financial statements according to the IFRS are required to make an unreserved and explicit statement of that compliance in there notes. (EC Staff, 2011)

The management of the company is required to make a statement of their assessment as their ability of the going concern. Both the assets and the liabilities are reported separately by the entity along with the income and the expenses. The financial statements and the notes shall be clearly identified by the entity.

IFRS for Public Authorities

There are various business entities that do not include stewardship and accountability under the IFRS. For understanding the reason behind this the meaning of both the terms need to be cleared. Stewardship has been derived from the world Steward which literally means a person who is responsible for managing the affairs of the state on his employer’s behalf, or the person who manages the property, affairs or the finance of the others. There are different contexts under which the term Steward ha has been used interchangeably. It has been many times that the word has been used for the functioning of the management and the functioning of the entity. For ascertaining the consistent rules it is required that the IFRS shall provide radical disclosures. (Wayment, 2009)The three areas that are of the utmost important in the IFRS are the lease accounting, derivative treatment and the PFI schemes. For accessing the PFI schemes the entity is required to examine the contract that is original. Under the IFRS it us the duty if the government agencies to look for the embedded derivates and then deciding further weather they are required to be accounted separately or not that depends on the fair value of the embedded derivative.

It has been observed that the IFRS are not appropriate for the use of the local authorities. The reason for the same is that the main purpose for which IFRS has been designed is the production of the IASB decision useful information. The basic facts for the IFRS not being used by the local authorities is that the no one invests in the local authority and these are not meant for the purpose of sale. Moreover, no investment return is provided by them. (Shah, 2007) The public sector authorities and units are basically the nonprofit making companies and they are not concerned with the higher valuation of their goodwill and investment. The main aim of these authorities is social benefits. Thus it can be said that there will not be 100% requirement of the introduction of the IFRS systems in the public sector authorities. (“Public sector focus: IFRS delay, 2008)There is a creation of set standards that are set by the IFRS system but there are few issues that are not acceptable or applicable to the various public authorities though the allocation of the resources is very much important for the IFRS system and greater financial stewardship. Though the public authorities do not get direct benefits from the IFRS system but this system shall not be redundant on to them all together. This system is applicable to the greater extent on the public authorities as well. The adoption of the IFRS is a time consuming process hence the public authorities have been allocated more time for its adoption. (“UK GAAP: The Move to IFRS | Tax | Deloitte UK.” Deloitte , 2012)

Here the statement, Some authors suggest: “IFRS will not require accounting for stewardship of public funds entrusted, or for the supply of services, both of which are core to the management of local authorities. And we know that a failure to measure almost always means a failure to deliver in management terms. This means we have a potential disaster on our hands comes out to be true. The IFRS do not act in the public interest rather they are a private cartel that are basically designed and promoted for the benefit of their sponsors. The second reason is those firms have various answers to be given for. These firms have made the various fortunes from the transition of the IFRS and are selling similar services. This has further persuaded the local bodies to move the IASB to the local authorities that can give team work for few more years. (Murphy, 2008)

IFRS and Public Interest

Some authors claim that the IASB does not act in the public interest. They are a private cartel designed and promoted for the benefit of their biggest sponsors – the Big 4 firms of accountants.

It is claimed by Murphy that the IASB does not act in the interest of the public rather than they are designed for the promotion of their sponsors. This statement claimed by Murphy is not true because the main purpose for which the IASB were designed was the formulation of ensuring accounting standards and proper disclosers that are in the interest of the public. The IASB formulated the IFRS so that stricter controls and regulations can be ensured so that the organizations are not able to mislead the stakeholders. There is higher degree of responsibility ensured by the disclosure system and the financial reporting of the IFRS system. (Young, 2011)

There has been various public commitments that have been highlighted by the commission services that are working on the development of the governance in the IASF (International Accounting Standards Committee Foundation) and the IASB (International Accounting Standard Board). This meeting was held on 11th July and at the end of the meeting the various authorities ensured that the structure of the governance will be strengthened so that the main concentration of the body is on the issues of the public interest as well as the issues of financial stability. The various stakeholders were consulted by the IASB before the introduction of the IFRS system. (Working, Paper., 2006)Thus it can be said that the claim of Murphy of the existence of cartel is not correct because there were certain efforts that were taken by the stakeholders so that the protection of the stakeholders can be ensured. The big four firms that include Deloitte Touche Tohmatsu, PricewaterhouseCoopers, KPMG and Ernst and Young have representation in IASB but this fact can also not be ignored that rules have basically been laid for the compliance and the financial disclosures. There shall be some control exercised by these firms but the cartel system is nonexistent as these are the firms who are the major competitors of each other all over the globe. (Epstien, 2009)

The system adoption by the various countries varies according to its regulatory authorities. The countries where the regulatory authorities are stricter the companies there would be willing less to depart from the strict construction of the IFRS system. There are certain objections raised by the disclosures in the financial reporting system. (A. Zeff, 2007)

Adaption of the IFRS System by the Australian Local Authorities

Before deciding on the fact that weather the IFRS system shall be adopted by the local authorities of Australia or not we need to understand what the advantages of the IFRS system are since its adoption by various other countries. It has been ensured by the various researches and the empirical studies that greater degree of transparency is ensured by the IFRS system. It has further been seen that the IFRS adaptors have a great effect on the cost of capital and the liquidity of the organizations. (Cummins, 2009) Further it has also been proved that there has been great improvement t in the financial disclosures since the introduction of the IFRS system. All the above mentioned things have been proved analytically and statistically. It has been ensured by the IFRS system that the value relevance has increased and the earnings of the company have also increased. There are many who have adopted the IFRS voluntarily while there are other who has been imposed the IFRS system by various regulators but the empirical studies shows that the IFRS has been proven out to be very successful. There are various advantages of the IFRS system as has been proved by the various researches and the empirical studies conducted. (Godfray & Tarca, 2010)

However it cannot be ignored that the adoption of the IFRS and its enforcement varies from the country to country that depends upon the strength of the regulators. The countries like the India and the China have strict regulators and hence these would be hesitant for the adoption of the IFRS system. But the IFRS system has been very well adopted by the European Union, UK and US. The IFRS system has become universally acceptable due to the adoption of it by the various big countries.

There are most of the government bodies and the businesses that deal with the various organizations globally so it is important to have a universally acceptable accounting system. There are easy dealings ensured by the universally acceptable accounting systems. Thus, it can be concluded that the Australian Firms shall also adapt the IFRS system so that the compatibility with the global government can be ensured along with the compatibility with the private company operators. The IFRS system will prove out to be very beneficial for the Australian firms as well as it has proven out to be various other countries firms. Its adaption by various other countries shows its advantages itself. And moreover nowadays there are different companies who prefer to deal globally which makes it itself important to have a universally acceptable standards that can be followed by all the countries simultaneously so that there can be avoidance of the confusions by the companies dealing globally at the later stage.

Bibliography

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