Although Accrual Based Accounting methods bring with them great benefits like allowing the management to exercise better management of assets, gives a fair description of the financial position of a company at any given point of time and more importantly in today’s times of complex business transactions allows them to be recognized fairly. It had allowed managers the ability to present to shareholders a much better picture of how the company is doing over a long period of time.
The author touches upon how the introduction of “estimates” complicated and increased the problems the industry already faced. Since Lanxin and Anelisa have already touched upon the points pertaining to how estimation can be sometimes misused by corporations to manipulate and misreport earnings and how its is necessary for the investors to be careful and conduct their own research before making any investing decisions.
I would like to elaborate and talk about a topic that the author briefly mentions about “Fair Value Accounting.” I would like to elaborate about this form of accounting and how it has over the last few years been come to blame for one of the biggest economic crises we have seen in our lifetimes.There are proponents who blame fair value accounting for our current economic crisis since it valued a lot of the assets that financial institutions held to pittances. Detractors of this form of accounting suggested that it led to many banking institutions failing and which further led to fall in the value of assets.
However not marking to market would also mean that institutions and corporations were in essence trying to shy away from the problem at hand until it got manageable/ or probably worse and is not often the best approach. The solution to this issue could be a middle way out and an accounting practice that would segregate how assets are valued and carried on books based on their purpose.They could also be categorized based on the possibly predetermined length of investment and purpose of investment. But panning either method of accounting is not a solution to the problem on our hands and the FASB in collaboration with governments and corporations should work towards coming up with the most effective and transparent accounting practices.
I believe Accrual Based Accounting is an inevitable accounting practice in today’s times of complex business arrangements. But addition of Footnotes and specific directions on Assumptions made by management of corporations and increased investor awareness will make the reporting system foolproof and the markets more efficient.
