Karishma Singh0808461

1. In the presence of serious creative accounting worldwide, discuss whether accounting standard setters should continue to grant discretion and flexibility to companies in making accounting choices

Creative accounting is the exploitation of loopholes in financial legislation in order to gain advantage or present figures in a misleading way (Hoop, 2008).As long as its ethical and shows the true and fair manner (ethical) the companies should be given the full grant of discretion and flexibility towards accounting choices. There is a justified reason to creative accounting as there maybe one off event which so distort the figures that the underlying the health of the company is obscured hence accounting techniques would be used to produce meaningful figures. According to Mathews and Perera, 1996 companies use creative accounting is that accounting standards and legislation are so vague and flexible therefore they allow individual reporting entities some discretion in deciding which accounting method best suits their organizational needs as they have the pressure placed on the management to show favorable returns on their investor’s money based on agency theory.

On the other hand Creative accounting is generally associated with misrepresentation of the true income and assets of coporations,it is the root of numerous accounting scandals. The media stated that the stock market downturn in 2002 was precipated by reports of accounting irregularities at Enron, Worldcon and number of financial companies in New Zealand and around the world.

The negative treatment of creative accounting does not exclude the positive one, being considered as an innovation that leads to engineering capable of responding the question: How can we administrate the resources in the most efficient way in order to build performance. Therefore choosing the best accounting alternative to reflect accurately the reality and company’s interest depends on the creative accounting and since the accounting standards are so vague it should allow companies to exercise discretion and flexibility to suit their company requirements but in a ethical manner stated in Code of ethics (NZICA).But the standard should also consider to be more precise to restrict companies from abusing creative accounts as the past trends of misrepresentation of income and asset has been very costly for investors which puts potential investors in jeopardy of whether to invest to companies or not.

Conclusion: Discretion and flexibility should be granted to companies but also to strengthen the regulation to decrease the chances of fraud and misrepresentation of accounts.

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2.Explain how a fair value hedge works. In your explanation include a description of the recognition and measurement requirements for fair value hedges as contained in NZIAS 32 and NZIAS 39. (264 words)

Fair value hedge would be used to hedge the value of particular assets or liabilities-for example to

hedge the value of a share portfolio might be hedged by acquiring NZX15 Index future as hedging

instrument (Deegan &Samkin (2009).

NZIAS 39 shows the recognition and measurement and disclosure if financial asset and liability in

terms of fair value hedging. NZIAS 39 requires recognition of a financial asset or a financial liability

when, and only when, the entity becomes a party to the contractual provisions of the instrument,

subject to the following provisions in respect of regular way purchases[IAS 39.14] . And it can be

measured as initially, financial assets and liabilities should be measured at fair value (including

transaction costs, for assets and liabilities not measured at fair value through profit or loss). [NZIAS

39.43].

For a fair value hedge, NZIAS39 Para 89 requires both the hedged item and the hedging instrument

to be valued at the fair value with any gains or losses owing the fair value adjustments to be

treated as part of the periods profit of loss. If the gains or losses on the hedged item are ‘perfectly

hedged’ the gains and losses on the hedged instrument will offset the gains or losses on the hedged

item so that the net effect on the periods profit or loss could be nil ($0) (Deegan &Samkin (2009).

Fair value adjustments are made directly to the assets and not to the other comprehensive income

holding account. This is because this type of hedge is more concerned with the fair value of the asset

or liability (in this case the account payable).Examples of fair value hedge area hedge against

changes in fair value resulting from changes in market interest rates, the hedge stocks against price

risks and as well as floating rate financial instrument against market value when market value

fluctuates

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Reference List

1. Amat,O.,Blake,J.and Dowds,J.(1999) The ethics if creative accounting,Journal of Economic Literature,December

2. Anonymous (1999) OSC chief broadens scope of attack on creative accounting,Accountant,24th September,pp.1-2

3. Deegan, C. & Samkin, G. (2009). New Zealand Financial Accounting. 4th edition. Auckland: McGraw-Hill

4. Gaffikin, M. (2008). Accounting Theory: Research, regulation and accounting practice. NSW: Pearson

5. Hooper, K., Davey, H., Liyanarachchi, G. & Prescott, S. (2008). Conceptual Issues in Accounting: A New Zealand Perspective. Melbourne: Cengage

6. Mathews,M.R. and Perera,M.H.B. (1996) Accounting Theory and Development,Melbourne,Thomas Nelson

7. New Zealand Institute of Chartered Accountants 32 (2008).Financial Instruments: Presentation. New Zealand Codified Auditing Standards and Audit Guidance Statements, Wellington

8. New Zealand Institute of Chartered Accountants 39 (2008). Financial Instruments: Recognition and Measurement . New Zealand Codified Auditing Standards and Audit Guidance Statements, Wellington

9. New Zealand Institute of Chartered Accountants (2006). Code of Ethics. New Zealand Codified Auditing Standards and Audit Guidance Statements, Wellington

10. Retrieved from http://www.iasb.org/NR/rdonlyres/1D9CBD62-F0A8-4401-A90D-483C63800CAA/0/IAS39.pdf on 10th April,2011

11. Retrieved from http://www.kawaller.com/fas_qual_fairval.shtml on 10th April,2011

12. Retrieved from http://www.iasplus.com/standard/ias39.htm on 10th April,2011

13. Retrieved from http://writeideasmarketing.wordpress.com/2007/09/14/what-happens-to-creative-accountants/ on 10th April,2011

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Appendix for question 2 TABLE EXAMPLEFair Value Hedge Example

12/1/Y1 Inventory $20,000.00 to record purchase and A/P of 20000C

A/P $20,000.00

12/31/Y1Foreign Exchange Loss

$1,000.00 to adjust value for S.R of $1.05

A/P $1,000.00

Forward Contract $1,176.36 to record forward contract at fair value

Gain on Forward Contract $1,176.36

3/1/Y2Foreign Exchange Loss

$1,400.00 to adjust value for S.R. of $1.12

A/P $1,400.00

Forward Contract $423.64 to adjust the fwd. contract to its FV

Gain on Forward Contract $423.64

Foreign Currency $22,400.00 to record the settlement of the fwd. cont.

Forward Contract $1,600.00

Cash $20,800.00

A/P $22,400.00 to record the payment of the A/P

Foreign Currency $22,400.00

The amounts paid are the same as in the cash flow hedge. The big difference here is that the adjustments are made directly to

the assets and not to the other comprehensive income holding account. This is because this type of hedge is more concerned

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with the fair value of the asset or liability (in this case the account payable) than it is with the profit and loss position of the

entity.