2nd SEM 2013/2014

Question 1.A.

Descriptive theory aims to illustrate what actually occurs ("may") in practice. It will consist of coding and explain financial practice. An example would be research in positive accounting theory or capital market research. While prescriptive theory in accounting is theory which dictates what "should " occur in accounting practice. An example would be the accounting standards.

Systematic and coherent information can be deliver to user when the IASB advocates a theoretical and non-arbitrary framework. Although it is true that the profession has survived so far without the formality constructed theory, and could probably continue to do so, numerous problems has arisen because of lack in general theory. For example, without a coherent framework,, it permits accounting practice to be applied to similar circumstances. The inconsistency of practice also has seen as a problem. That is why the number of cases of conflict between the framework and IASs is arise until today due to the inconsistency that still exist. However, it will be reduced through the developed and guided by Framework.

i) Provide legitimacy to standard-setting board.According to Ruth D. Hines (F. Accounting knowledge, conceptual framework projects and the social construction of the accounting profession), the conceptual framework project are important to provide the legitimacy to standard setting board and the accounting profession during periods of competition or threatened government intervention. That is why CF projects continue to be undertaken even there is an apparent technical failure.

ii) To providing more complete Framework.The IASBs current consideration for restarting the project with the intention to extend the Framework for example with additional chapters for presentation and disclosures, and on the reporting entity. It also indicates the approach of the IASB to broaden the conceptual basis, thus providing a more complete Framework.

iii) To reduce the conflicts and the inconsistency of IASB and Framework.The Framework should enhance and ensure the consistency of requirements in IFRS and the continuity of agreed objectives, assumptions, and concepts for financial reporting, despite changes in IASB members and staff.

iv) Improve financial reporting.In 2006, IASB & FASB joint work on CF Project. The objective of thisproject is to improve financial reporting by providing the IASB with a complete and updated set of concepts to use when it develops or revises standards. From 2012, IASB had taken over the project, because FASB had decided it would concentrate on priority areas other than CF.

Interests in political struggles as illustrated above assume the role of rhetorical strategy, in that they are not only the outcome of actors' own assessments but assume a role in rhetoric which is the art of persuading others. Individuals and groups seek to enrol other actors through interest talk. By acting in the name of, and appealing to the interests of others, actors form alliances in the furtherance of their interests, as socially and historically constructed. Particular groups tried to transform the interests of others. For example, state agents were encouraged to see commercial interests as consistent with their own and to act accordingly. The study has taken the view that interests are conceptions resulting from social and historical processes rather than pre-given, immutable effects of social structures. The many shifts identified illustrate the mutability of arguments used to influence standard setting in Malaysia as the role of the profession underwent changes that paralleled those occurring within the socio-political and economic sphere.

Question 2.

(A) What is the difference between accuracy and reliability in measurement theory?Accuracy measurement refer to how close the measurement to the true value of the attribute measure. The true value may not be known and the consistency of results, precision and reliability may not lead to accuracy. While the reliable measurement refers to the proven consistency of either an operation to produce satisfactory results or the result themselves for a particular use. A measure is said to have a high reliability if it produces similar results under consistent conditions also known as repeatable. For example, measurements of peoples height and weight are often extremely reliable. It involve two aspect which are the accuracy and certainty, and representational faithfulness which means disclosed transaction should reflect economic transactions.

(B) Current Value Accounting System is normally being used to value Accounts Receivable (amount owing less allowance for uncollectible accounts). Explain whether or not this will violate the historical cost basis of accounting.There are many studies that indicate current cost accounting is value-relevant. The market value of current cost accounting better presents the economic reality of transactions and therefore tends to provide more useful and relevant information than does historical cost financial reporting. As business environments are changing rapidly and becoming increasingly volatile, the financial statements of firms should portray the underlying economic reality of the firms rather than the summary of past transactions. The market value of financial reporting may be less reliable due to the subjectivity of certain measurements, but it can provide much more relevant and meaningful information to the users despite the subjectivity involved in the measurement. New Zealand company directors indicate that current cost accounting provides more relevant information which was perceived to be just as reliable and possibly more reliable than historical cost statements.

(C) Why is splitting costs for recognition of expenses and assets, very important to the costs attached principle which underlines the historical cost system?The historical cost is based on actual, not merely possible, transactions. It is the acquisition price of the assets. The managers only have to record all the assets and liabilities at their acquisition price. Hence they are measured and reported objectively. Historical cost is therefore basically verifiable. Thus, this minimizes the risk of manipulation of figures by the managers. In term of recognition of expenses, the matching principle states that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs. However, historical cost is directly related to past decisions. Also, in the decision-making process, a forecast of future prices must be made, and past prices (historical cost) serve as the basis for such a forecast. Historical cost provides input to the satisficing notion.

(D) Briefly define what measurement is, and explain the THREE (3) essential components in the measurement process?Measurement is a significant part of scientific inquiry. Measurement is made because quantitative data can impart greater information than qualitative data. Measurement of attributes reported in accounting report such as an assets, income and liabilities is an important function in accounting, therefore we should examine the measurement theory. Campbell also defined measurement as the assignment of numerals to represent properties of material system other than numbers, in virtue of the laws governing these properties. The three essential components in the measurement process are fundamental, derived, and directive. In fundamental measurement, numbers are assigned by reference to natural laws. The fundamental properties are additive such as length, number and volume. In accounting there is considerable debate over the nature of fundamental value. Second is derived measurement, it is depends on the measurement of two or more other quantities. Depends on known relationships to fundamental properties such as the measurement of density depends on the measurement of both mass and volume and the measurement of profit depends on the measurement of both income and expenses. Third is directive measurement, it is based on arbitrary definitions such as profit. Numerous ways in which scales can be constructed and may lead to poor levels of confidence in the scale for example if there are hundreds of ways to measure profit.

Question 3(a) What could have been the possible pressures that had led Alan to cook the books of Nick Harriet? Describe at least TWO (2) pressure. (6 Marks)(i)Pressure from bossPressure from the boss may lead Alan to cook the books of Nick Harriet. Alan worries that if he did not follow what order make by his boss, he may be losing his work. If he loses his work, he may not get a salary and to cover his life.(ii)Self-interestAlan may want to fulfill his own self-interest. He may get the benefit from doing so. He wants to make his life easier. So he finds a way to get what he dream of. He did this is for his own self-interest.(b) Establish an instance of creative accounting in this case and state at least FOUR (4) economic consequences of Alans activities of creative accounting in the case? (6 Marks)In this case, Alan change the amount on the balance sheet so that it has met the expectation by his boss. The four economic con economic consequences of Alans activities of creative accounting in the case:(i)Investors viewIf an investor knows that there is creative accounting in this company, they may lose their interest to invest in this company. This company may not get investment from its investor, it may cant continue to survive. It may face to bankrupt.(ii)Share price decreasingThe public knows the company makes creative accounting in it, they will lose their trust toward this company. The share price will drop in Bursa Saham. Public will sell out their share in this company. The share is not supported by the publics, it may cause the companys get lost in the Bursa Saham. There will be nobody want to buy the share.

(iii)Competitors viewIf the companys competitor knows the company is involved in creative accounting, they may use this opportunity to take over the company.(iv)Employees viewThe company is involved in creative accounting, the company may be close. This will lead to employee lost their job. The employee will feel disappointed with this company. The disputation of the company will be broken.(c) Do you agree with the concluding statement made by Alans lawyer, He had a responsibility, even if it meant losing his job? Justify your answer. (6 Marks)No, I disagree with the concluding statement made by Alans lawyer. It is because it is an unethical thing, so I do not want to do. And this is not a responsibility for a professional accountant. Yes, we have our responsibility to the company and do everything that ordered by the boss. But, it is not the correct thing to do when we are ordered to cooking the book in the company just because of the company want the amount on the balance sheet to meet the expectation. This action will disobey my principle, so I wont accept it. If still forced to do so, I will choose to quit from the job.

(d) If you are Alan Tone, how do you react when you are asked to Cook the books? (7 Marks)If I am Alan Tone, I will reject to do so when I have been asked to Cook the books. I will reject it because I cannot accept to do thing which are unethical. A professional accountant must have our ethic and follow the rules and regulation that set by MASB. All MFRS must be followed by all accountants. The rules in MFRS must obey. As a professional accountant, we must clearly understand all the rules that stated in the MFRS. Besides, I feel that is not worth to do so, because the consequence to do so is very wide. I could not bear the consequence. It is not easy to be a professional accountant. If because of this matter, ruin up all my effort, and lose future in my career pathway. Furthermore, if I involved in this kind of matter, all my reputation, my family reputation will ruin because of my attitude. I do not want because my one small wrong, linked to my family. They will feel disappointed with my action.Question 4(a) How do you link the issues in the case, to the relevant accounting theory? (8 Marks)The deforestation for palm oil plantation has created has brought a serious social and environmental disaster for local communities, biodiversity, and climate change. Sustainable palm oil producers should have disclosed the information about the social and environmental performance which can be explained in two accounting theories.

We would start with discussion on Stakeholders theory in which the sustainable palm oil producers we believed have accountability towards various stakeholders. For palm oil producers, they should have taken account the view and needs of all stakeholders upon whom their operation might potentially impact. Organization whose corporate social responsibility and social and environmental reporting are motivated by a desire to minimize the negative social and environmental impact of its operations will prioritize stakeholders needs according to the extent of the impacts which the organizations operations are likely to have on any stakeholders life, in this case would be the local communities as well as biodiversity in South-East Asia area. In determining the policies and practices, the organization will seek to minimize its negative impacts on as many of these stakeholders as possible.

On the other hand, the organization might use social and environmental reporting to win or maintain the approval of economically powerful stakeholders like in this case would be the customers from Western countries. Boycott to go against the consumption of palm oil by Western was resulted from the poor environmental accountability as portrayed by the palm oil producers in Borneo and Sumatra.Next, we would link this issue to Legitimacy theory. Along this perspective, we could argue that an entity would undertake certain social activities if management perceive that particular activities were expected by the communities in which it operates. The worsening of Air Pollutant Index (API) resulting from the deforestation for palm oil plantation have arose health issue among local communities and it would risk the palm oil producers to lose their license to operate as well as losing support from local communities in terms of human resource provision and etc. if they continue ignore the concerns of local communities.

(b) How could government overcome the sustainability issues in the palm oil industry, to ensure that the deliberation process and clear guidelines have been undertaken by the corporations in protecting the environment position? (7 Marks)Corporate social responsibility (CSR) is corporation use social information to present themselves with a prosperous image and to show that they exhibit the same social norms and values as those of their society. Purpose of CSR is to show to the society about the social activity of the corporation and its impact. The impact is to what extent the environment, employees, consumer, local communities, and others are affected from this business activity.

Triple bottom line reporting is reporting that provides information about economic, social and environmental performance of the organization. Its tied to the concept and goals of sustainable development. This is developed to meet the needs of the present world without compromising the ability of future generations to meet their own needs. If properly implemented, it should provide information to enable others to assess how sustainable an organizations operations are. For an organization to be sustainable, it must be financially secure (profitability). Second, is it must minimize negative environmental impacts. Third, is it must act in conformity with societal expectations.

(c) Explain FOUR (4) reasons why traditional financial accounting may not be able to reflect the social and environmental impact of organizations, effectively. (10 Marks)Traditional accounting and social reporting are not mutually exclusive, but rather complementary when social responsibility consists of meeting social needs, creating jobs, ensuring efficient production, making a profit and thereby contributing to prosperity in society.

(i) Financial accounting focus on the information needs of those parties involved in resource allocation decisions. It focus tends to be restricted to stakeholders with financial interests, thus the information is financial in nature.

(ii) The notion of materiality has precluded the reporting of social and environment information. Difficult to quantify social and environmental costs. Assume that if something cannot quantify, it is not material and does not need to be disclosed in the financial report. Assume that its omission or non-disclosure will not adversely affect the decisions of the users.

(iii) Financial accounting adopts the entity assumption where an organization is treated as an entity distinct from its owners. If transactions or events do not impact directly on an entity, it will be ignored for accounting purposes. Externalities caused by reporting entities are ignored, causing performance measures to be incomplete from a broader societal perspective.

(iv) Issue of measurability. For an item to be included for financial accounting purpose, it must be measurable with reasonable accuracy.