Balance Sheet and Accounting Essay

Open, View, and/or
Download this Document

Total Length: 1232 words ( 4 double-spaced pages)

Total Sources: 4

Page 1 of 4

financial crisis was abusive off-balance sheet accounting. Abusive off-balance sheet accounting led to a daisy chain of ineffective and dysfunctional decision-making because it removed transparency from regulators, investors, and markets. Spread of derivative transactions, bad loans, and securitizations brought a once stable financial system to the edge of ruin. While improvements have been made, the FASB's guidelines suffer from two main flaws. The first is lack of congressional mandate. With no clear congressional mandate, FASB and SEC guidelines remain subject to the same type of interpretation that led to the growth of 'regulatory arbitrage' or what others may pen as financial engineering, meaning shifting debts off-balance sheets. This means a company must consolidate a VIE only when it possesses 'control' and has the right to receive benefits and access to VIE's 'most pertinent activities' making the design of the guidelines qualitative in nature (Stickney, 2010).

The guidelines then require assumptions and judgments and can lead to exclusion of liabilities by companies regarding their financial statements with the only necessary action being description of assumptions and judgments. Actions such as these leads to the unlikelihood of generating transparent financial reporting. This leads to the second fatal flaw; major liabilities will continue to remain off-balance sheet. Therefore, Congress must mandate chances related to VIE transactions. For example, companies when financing assets should remain along with the associated liabilities, on the balance sheet, irrespective of the form used to build these financings.

Off balance sheet financing inflates a company's earnings, misrepresenting their financial positions. However, it permits the company to maintain needed ratios that satisfy debt covenants, allowing the amount of debt to be distorted. Therefore, managers aim to perform off-balance sheet financing because it has its advantages. One of which is financial leverage, meaning offering a better-looking balance sheet that demonstrates a lesser described debt to equity ratio, creating a higher stock price (Stickney, 2010).

Stuck Writing Your "Balance Sheet and Accounting" Essay?

View All Our Example Balance Sheet and Accounting Essay

Have A Custom Example Essay Written

Nonetheless, the down side is destruction of credibility and shareholder confidence. Recommendation would be to reduce anything that inflates stock prices in favor of building a trust-based relationship with shareholders.

2.

The main differences when it comes to impairment method for long-lived assets is clear. For U.S. GAAP, when an asset's carrying quantity becomes unrecoverable, that is when an impairment is recorded. Additionally, an asset becomes unrecoverable when carrying amount surpasses expected future cash flows derivative of an asset on an undiscounted source. For IFRSs the impairment is recorded in the following scenario: an asset's carrying quantity surpasses the higher of the asset's worth in use as well as fair value expenses are less to sell.

Another key difference is the lowest degree of discernable cash flows. For U.S. GAPP it is termed 'asset group'. For IFRSs it is 'cash-generating unit'. While the difference lays in the terminology, the method remains the same. Furthermore, under U.S. GAAP, some situations may require no record of impairment that would otherwise under IFRSs such as asset group appears less than what s labeled as the carrying amount.

Assets purchased go one of two ways, they either capitalize or expense the purchase. Long-lived assets give the appearance of higher profits for a balance sheet because expenses are allocated throughout a set time like five years or ten. Even though the cash flows remain the same, it gives the illusion of higher profits. Depreciation allows a company to see the 'true' amount needed to allocate each year to maintain and/or replace the company's fixed asset base (Larkin & Ditommaso, 2016). This is a means of seeing the real numbers rather than inflated ones.….....

Show More ⇣

     Open the full completed essay and source list


OR

     Order a one-of-a-kind custom essay on this topic


sample essay writing service

Cite This Resource:

Latest APA Format (6th edition)

Copy Reference
"Balance Sheet And Accounting" (2016, October 29) Retrieved May 17, 2024, from
https://www.aceyourpaper.com/essays/balance-sheet-accounting-2162457

Latest MLA Format (8th edition)

Copy Reference
"Balance Sheet And Accounting" 29 October 2016. Web.17 May. 2024. <
https://www.aceyourpaper.com/essays/balance-sheet-accounting-2162457>

Latest Chicago Format (16th edition)

Copy Reference
"Balance Sheet And Accounting", 29 October 2016, Accessed.17 May. 2024,
https://www.aceyourpaper.com/essays/balance-sheet-accounting-2162457
   

Open, View, and/or
Download this Document
order custom essay example