A Little- Known Accounting Change Could Have a Big Impact

"An Article Review"

Standards and rules are created and developed by governing bodies of the accountancy
profession. The objective of developing and issuing accounting standards is to provide a common
set of accounting policies or rules in preparing and reporting the financial statements of a
company. With the help of these standards, the comparability, transparency and reliability of
financial statements are enhanced. Moreover, the stakeholders will be guided and informed as
they create their decisions that are primarily based on these financial statements.

According to Cohan (2017), The Financial Accounting Standards Board implemented a

new accounting rule about the recognition and measurement and of financial assets and liabilities.
In line with this, every company must adapt to the new accounting policy by applying the new
valuation for their equity investments. Moreover, many companies only have insignificant number
of investments in other companies and the costs for following the rules are excessive. With this,
most of the companies would have a tough time for following the standard since they regarded
these investments as not part of their core business. The standard involves recognizing these
investments at original cost. If the value of the investment decreases, there should be write down
value and it could still be recorded at cost when it increases. On the other hand, the new standard
needs the equity investments to be assessed quarterly as to whether they have in increased or
decreased in value.

Furthermore, the new rule has given a dilemma to the executives for they need to choose
between two options on how they would account for the said investments. First, they can value it
themselves by hiring an accounting or valuation firm. Secondly, they can wait for valuation of the
market that will lead to the mark up of the value of the investment. Following either of the approach
would be challenging for the companies since there are no ascertained fair values available to
them. Moreover, complying with this standard would also require companies to exert more effort
as they develop new policies and control. So, the author believed that the accounting standard
setting board has a reasonable explanation or purpose for setting a new accounting rule upon the
implementation of which, confusion and struggles on the part of companies and their stakeholders
appears.
 In this scenario, we have seen the importance of accounting standards for it helped not just
the people who creates and report the financial statements but also the significant individuals who
would create their decisions based on it. These standards did not only provided guidance but it
also helped companies to have transparency and comparability. Based on the article, the
Financial Accounting Standards Board has implemented a new accounting rule which is focused
with the measurement or valuation of investments. I agree that there is a good intention or purpose
for this certain action. Moreover, they even provided a document that thoroughly describes the
new disclosure and how important it is to understand such in order to increase transparency. In
addition, we know that these standards are not created and implemented in a day, meaning these
standards have followed a due process. Also, the standard setting process also involves the
participation of companies and other relevant organizations which clearly implies that standards
are carefully planned and discussed before it is issued to the public.

However, implementing a new accounting standard would certainly lead to consequences,

whether positive or negative. Truly, this accounting change would really result to a huge impact.
The article mainly describes how things would change and the challenges that would be faced by
companies upon complying with the said standard. It was mentioned that companies regard their
investments as not part of their core business and it is costly to comply with the new policy. With
this, I agree that a company must focus on its core activities which is more significant. But that
does not mean that they would disregard their investments even if it only represents a small
portion of their financial assets. On the other hand, the positive aspects of the new standard were
not expressly stated perhaps it is due to the fact that the standard is still new and everyone is
really having a difficult time adapting to it. But it mentioned a promising notion that this new
accounting policy would lead to improved transparency for companies. Such circumstances made
me ponder if there was really a need for a new standard and would it lead to something meaningful
or will it only result to unnecessary complications.
 Moreover, the author said that if there is nothing wrong or broken in the first place, we
must not trouble ourselves in fixing it. The author’s last statement somewhat has a good point but
I disagree with it. This is because I remembered what my doctor told me. He said that pain is the
indication that something is wrong with our body but there are instances that there would be
emerging illnesses that we were not able to determine since we did not feel any pain in our body.
With this, I believe that even if there are no indications, prevention would always be better than
cure. So, it is essential for us to keep ourselves healthy and on track. It is somewhat related to
the setting of the new standard. If it would be good for us in the long-run, then we must follow it
for surely our labor would not be in vain when we see the results. In conclusion, any action
concludes a positive or negative consequence and I hope that the despite all the confusions and
difficulty in complying with the new standard, may the good intention and purpose of such prevail.
We may not realize the great value or significance of the new rule but I hope that it would soon
manifest.

Based on what I learned from my intermediate accounting class, equity investments signify
ownership shares of a company to another entity. The share capital of another entity are
purchased by the business venture for many reasons which include temporarily placing their
excess cash in order to earn additional income, achieve a long-term customer and supplier
relationship and to exercise influence of control over the operating policies of another company.
Based on these given reasons, it can be clearly inferred that the equity securities of an enterprise
are not the part of the major business operations. Moreover, a company simply desires to earn
additional income from their excess cash and establish a better relationship with the other players
in the market. With this, I can clearly understand why the companies are having a hard time
complying with the new standard which involves their equity investments. Furthermore, these
investments could be measured at fair value through profit or loss and through other
comprehensive income based on the IFRS9. If the investor has significant influence, the equity
method is used to record the investment in associates or joint venture based on the IAS 28. IN
addition, the IFRS 10 governs the measurement of the investment in subsidiaries. With this, it can
be observed that there are many standards that are applied when it comes to the recognition and
measurement of equity investments. So, such changes in the accounting standards would
probably lead to confusion and difficulty since the most companies are already used to what they
have been complying with for years. Since there are no readily available fair values provided to
companies, they are given two options on how to account for the said investments.
 Based on the information that I have learned, I can somewhat grasp the idea what these
financial assets are for and how the changes in valuation applied to it makes everything different
from what companies are used to. I can also remember that before standards are issued, they
undergo a standard setting process which is termed as “due process.” This clearly shows that
standards are not issued for no apparent reason or purpose and many relevant companies and
organizations have given their active participation before such standard is released to the public.
The knowledge I have gained from my class are very helpful for it greatly contributed on how I
perceive and understand such articles that are relevant to my program. Moreover, I could also
apply the knowledge I have gained when I read news articles and watch news in the television.
Furthermore, I could share my knowledge to people who are not that aware of such. My brother,
as a new investor, would be interested in such topics that are related to his investments.

Even though applying the new standard might be confusing, costly and burdensome, I
think that it would actually benefit the companies and its stakeholders in the long-run. Equity
investments are commonly measured fair value which means the valuation of these securities
does not stay at its original cost. So, I think that it is appropriate to account for the increase or
decrease in the value of these investments. It was stated that the new accounting policy is created
in order to have improved transparency. Moreover, the full-disclosure principle would apply in this
kind of situation. A company must disclose all the necessary information in their financial
statements so that the stakeholders will be able to make significant decisions based on it. In
addition, the financial statements of a company must be supported with the notes to financial
statements wherein they can include the accounting policies or standards and valuation methods
that they have applied in accounting for the company’s financial assets and liabilities. With this,
they could include the details about the new accounting policy that they are complying with and
how it affects the company as a whole. Furthermore, the objectivity principle should also be
applied by means of providing unbiased evidence as support for the information stated in the
financial statements. Through this, the company will be able to achieve better reliability and
relevance in preparing their financial statements. Also, investors and creditors would really
appreciate such and would regard the financial statements as a reliable and useful tool for them
to create meaningful decisions.