The Controversy Over Equity Method

Despite those enormous advantages, it has been argued that IFRSS adoption lead to significant costs. The main argument is that IFRSs do not consider local needs and priorities as every country has their own ‘business environment, legal systems, cultures, language and political environment’ (Henderson and Peirson, 2000 cited from Malthus, S., 2004). However, to overcome this problem, IASB can accommodate flexible reporting standards that enable companies to choose alternatives that are more suitable for their external condition. It is opinion of some opponents of IFRS adoption that IAS is ‘insufficiently detailed’ (Uddin,M.S., 2005, p.4) that require accountants’ and auditor’ professional judgment. However, overly detail might be contra productive and not flexible in anticipating every changes and differences.

UK’s IFRSs are designed to make it easier to compare the performance of organizations in different countries, rather than each country maintaining its own GAAP, which makes such comparisons difficult. All listed EU companies have been required to use IFRSs since 2005. The adoption of IFRSs by the private sector is expected to have various benefits for both companies and investors; including (1) UK’s IFRSs will remove the need for companies with foreign subsidiaries to translate the accounts for consolidation with the parent company accounts. Also (2) it will be easier for investors to make informed decisions about the performance of companies in different countries because of the increased transparency and a better understanding of financial statements.

Major changes have occurred for financial reporting for business combinations beginning in 2009. These changes are documented FASB ASC Topic 805, “Business Combinations” and Topic 810, “Consolidation.” These standards require the acquisition method which emphasizes acquisition-date fair values for recording all combinations.

68). It is necessary to eliminate intercorporate investment income from consolidated subsidiaries included in Greene’s net income by utilizing either the cost or equity method as to avoid double-counting. Proper use of the equity method will result in consolidated net income equal to Greene’s net income which satisfies the requirement of ASC

FASB updates standards regularly to adapt to changes in the different industries. Landry’s management does not see any material impact from changes in the accounting standards. Two recent pronouncements to consider are FIN 46 and SFAS No. 144. FIN46, “Consolidations of Variable Interest Entities” discusses the financial reporting of

The study documented financial statement differences when joint ventures are accounted for by the proportionate consolidation and equity methods of accounting. It presents a collection of various data and disclosures of Canadian firms with proportionately consolidated joint ventures and it also documented the types of venturers that report ownership in joint ventures. Venturers are found in most industries but are most common in the extraction and utilities industries where companies share in exploration and development projects. Proportionate consolidation is used to account for joint ventures in Canada and continental Europe and is preferred by International Accounting Standards while the equity method is used in the United States, England, Japan and Australia which uses US GAAP as their main standard. The results of the study suggest there is some predictive value to the proportionate consolidation method over the equity method when joint ventures are defined. The analysis indicates stronger relations

Furthermore, the consolidation of financial information is said to be one of the most complex procedures in all of accounting; however, the accounting principles that are applied in the preparation of both separate-company financial statements and consolidated financial statements are the same. When corporations are related, consolidated financial statements are typically considered to be extra beneficial than the separate financial statements of the individual corporation. Moreover, unconsolidated subsidiary(s) are reported as an intercorporate investment when consolidation is not appropriate. According to MD. Zaber Tauhd Abir, there are various different alternative theories of consolidation that exist being that they might serve as a basis for preparing consolidated financial statements. Additionally, on the consolidated financial statements where the parent company owns less than 100% of the subsidiary’s common stock the choice of which consolidation theory to use can have a significant impact. There are alternative theories of consolidation that include the proprietary theory, the parent company theory, and the entity theory.

Main focus of IASB for introducing new standard for business combinations was that financial statements of companies became more realistic and to represent real economic position and value of a company. Therefore restriction to acquisition method as the only option for business combination is the advantage of new standard since using this method, companies do not have a choice whether to recognize goodwill arising from business combinations. Amortization was changed with impairment because amortization of goodwill can lead to arbitrary accounting according to IASB (Shinhan Financial Group n.d., p. 4). Problem arising is that impairment test and determination of recoverable amount require an active market with homogenies assets and available prices which is hard to determine as far as intangibles are concerned. Consequently, this leads to more subjective decisions regarding measurement and leaves a lot of space for management impact on goodwill. Therefore aim of IASB for transparency and full fair value model is not realized.

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

Two firms planning to consolidate their operations must both use one of the two accounting standards i.e. either U.S.GAAP or IFRS in the execution of consolidation.

The test results were also well document throughout the study. It found that deficits due to investment were financed with long- term and short- term in addition to equity. Market timing cannot totally explain equity issuance as profit deficits were often financed with equity. The study found that companies use equity to fund internal investments such as advertising and Research and Development.

With complete notion and awareness of how each country has their set of rules, “the goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements” (Rouse, 2011). This view is meant to provide general guidelines, as well as international comparisons through conventional and edifying means. To bring broader and vivid objectives, IFRS replaced IAS, the older standards, in order to bring a more comprehensive and simplified accounting procedures.

Nowadays, in order to avoid such dangerous consequences, the organizational structure has undergone through remarkable changes. As no investor wants to bear unlimited liability if it can be avoided, then an alternative solution for the general partner’s unlimited liability had to be found, even maintaining and using the flexible KS structure. With this aim, the structure itself has been modified: the General Partner is no longer a person (physical or legal) having assets or activities unrelated to the KS investment. Now, the general partner is a single purpose company with limited liability capitalized enough to meet the minimum legal requirement of a contribution of least 10% (Sandberg, 1985).

Management accounting is one important area which is widely used in many industries and areas. The application of management accounting theories, methods, tools and principles could influence one company’s decision making process, evaluation process, performance estimation and investment management. This report will emphasize two important areas which are investment appraisal and variance analysis which are used to make the decision and estimation. For investment appraisal methods, the internal variables and external variables will have the specific influenced on the capital investment appraisal methods, especially the CIAM methods. However, the investment appraisal process has faced difficulties when the company needs to examine the investment related with the IS services and IT system. The application of variance analysis in the companies and agencies and the connection between risks and incentives. The using of variance analysis could provide some extra information post-contract and pre-decision. The old assumptions used in the variance analysis are not available again today because they have test the previous model and find the new evidences to reduce the errors in the calculation and improve the model. There are many limitations connected with both the variance analysis and investment appraisal. With the development of the accounting research and innovation in the business, it is certain that in the future, more and more new methods, models and

The IAS 38, provides international standards that should be used in accounting for assets and, in particular, intangible assets that are assumed to be non-monetary and with no physical identification (Lev, 2008). The primary objectives of the IAS 38 standards, are to provide clear guidelines on how intangible assets should be treated during accounting processes. Further, IAS 38 provide specifications on how an individual business should reorganize and measure their intangible assets using certain disclosures as started in IAS 38.1. Such recognition process should meet certain minimum criteria as the same standard outlines. Additionally, this standard provide specific rules on the use of particular financial instruments and presentation of such assets (Stark, 2008).Intangible assets include but not limited to the following; expenditure on development, expenditure on mineral extraction, assets arising from insurance contracts, intangible assets held for sale, incomes, Taxes, goodwill and employees benefits. This paper will outline how the requirements of IAS 38 on research and development expenditure are theoretically dubious and practically unnecessary. All such expenditure should be treated as an expense in the Income Statement and its amount disclosed in notes to the accounts.