Question

The Senior Partner of the firm you work for has appointed you to a new role. It is now your responsibility to review upcoming accounting standards and provide a report to the partners on the proposed standard and the opinions of other industry players on the changes. Firstly, you are required to find a current exposure draft or proposal for a new accounting standard which has been opened for public comments. (These can be found on the websites of most standard-setting organisations, such as the IASB, AASB and FASB. Hint: These websites can be quite difficult to navigate, so as a first step try typing “IASB exposure draft and comment letters”/”FASB exposure draft and comment letters” into Google or other search engine of your choice). Read a sample of the comments from a range of respondents. Select four respondents, ideally from different types of organisations for example, from accounting bodies, industry, companies or corporate bodies. If you are having a problem finding suitable comments letters then contact your subject coordinator. In your own words, supporting your evaluation with appropriate citations, appropriately referenced in APA 6 style, you are required to include the following information in the report. An outline of what the exposure draft is introducing or changing. An assessment as to whether the exposure draft is being introduced in the ‘public interest’. An outline of the views presented in the comments letters which highlights the areas of agreement and disagreement with the exposure draft and/or other comments letters. An assessment (with relevant examples) as to whether the comments letters utilise any of the arguments 'for' or 'against' regulation. An application of each of the theories of regulation (public interest, private interest and capture) to the comments letters and a justification as to which theory(ies) is most effective at explaining the comments and which theory(ies) is least effective at explaining the comments.

Answer 1

1. The exposure draft mainly talks about whether to treat short term bank borrowings as a part of financing activity or as a part of cash and cash equivalents at the time of preparation of cash flow for the entity i.e. the IAS 7 deals with classification of short term loans and credit facilities offered by the Bank.

2. The committee has decided not to include the discussion to it's standard setting agenda. Such an action on part of the committee is in public interest. The issue to include the short term borrowings and credit facilities extended by the bank are clearly defined in the IFRS. As per Para 8 of of the IAS 7, in any general scenario, the short term borrowings and credit facilities have to classified under financing activity. However, it can be classified as a cash or cash equivalent provided, two conditions are met with. Conditions being, the banking arrangement is repayable on demand and forms intergral part of company's cash management.

Whether the borrowing is forming part of company's cash management is matter of facts and circumstances. Since there is no ambiguity in classification of such short term borrowings no additional modifications are required. We agree with the Interpretations Committee’s decision not to add this item onto its agenda.

3.Requirement of IAS 7 clearly stipulate that an entity is required to disclose the;

a) Opening balance of cash & cash equivalents

b) Adjustements (additions / deletions) to cash & cash equivalents

c) Closing balance of cash & cash equivalents

there by creating a reconciliation and highlighting the changes to the cash & cash equivalants. Also, the policy adopted by an entity in determining the composition of cash and cash equivalents has to be disclosed.

Paragraph 8 of IAS 7 clearly stipulates the requirements of classification of bank borrowings and short term credit facilities. The above mentioned clauses are in agreement to the exposure draft.

4. The comment letter utilizes the arguments 'for' the regulation. The IFRS provides a detailed guideline on the classification of short term borrowing as a financing activity and also provides clear cut conditions to be met for classification of the same as cash or cash equivalant. The basis for the conclusion provided by the committee is given as short-term arrangements are not repayable on demand and the balance does not often fluctuate from being negative to positive indicates that the short-term arrangements are a form of financing rather than an integral part of the entity’s cash management.

5. The public interest theory is the most effictive at explaining the comments. It provides adequate justification on the changes required in the accounting standards. that is, the changes should bring about a more clear picture of the organization in the public eyes.

The capture theory is the least effective at explaining the comments as it does not provide any justification for the changes to be introduced in the accounting standard there by reducing the chances of a healthy debate on the changes to the AS.