Question

discuss important financial reporting issues; accounting estimations and valuations for various operating activities. For example, they discuss in-depth implication of revenue recognition, sales allowances, deferred revenue (unearned revenue we learned from previous modules), foreign currency exchange fluctuations on the revenues, and account receivables, etc. These topics have direct impacts on our income statements, and have significant implications for earnings management. Please discuss the main topics and focus on how each item would affect financial reporting in general.

Answer 1

1. Foreign currency exchange fluctuation:
   1. The Values measured and calculated based on fair value accounting are expressed in terms of value of current transaction
   2. The financial statements are created based on the currency rates prevalent at the measurement date;

2. Assumptions
   1. All the judgments incorporated depends upon the assumption made by experts employed or engaged by the entity or the auditor
   2. The assumptions are depended on the measurement, expectation and analysis of experts only
   3. The process of developing the overall audit strategy helps the auditor to ascertain the nature, timing and extent of resources necessary to perform the engagement.

3. Reliability of Information:
   1. The availability (or lack thereof) of information or evidence and its reliability decides the fairness of accounting
   2. In case of inactive markets, market price information becomes unavailable because of which unreliable information from other sources are used for estimates
   3. The degree of estimation uncertainty therefore increases and affects, in turn, the risks of material misstatement
   4. The reliability is often influenced by its source and nature.
      1. For example, A brokers quote may be used to support a fair value measurement;
      2. But when the quote is obtained from the institution that initially sold the instrument, this evidence may be less objective and may need to be supplemented with evidence from one or more other brokers or information from a pricing service.

4. Depreciations and Amortization
   1. The values of Assets are calculated and depreciation on them depends upon the method of depreciation employed by the auditors
   2. Life expectancy of the Assets varies from asset to asset and it is calculated mostly on an average basis
   3. The breadth of assets and liabilities to which fair value accounting

5. Valuation
   1. The fair value of accounting depends upon the choice and sophistication of acceptable valuation techniques and models;
   2. Value of Real estate keeps on changing depending upon the markets expectation so these needs to be revalued again and again
   3. Return on funds are not fixed
   4. Changes in markets may require changes in valuation approaches.
   5. an illustration of changed circumstances leading to a move from valuation by model to valuation by market price
   6. Unless management pitches in and supports the auditor, the valuation will not be accurate

6. Good will and Intangibles
   1. Value of Good will, patents and other intangibles things are calculated on markets expectation and individual assumption
   2. The accuracy and correctness of this information is less
   3. Market sentiments impacts the good will

7. Account receivables
   1. If accounts receivable increased from one year to the next, the implication is that more people paid on credit during the year, which represents a drain on cash for the company, as some of the revenues that came in during the year increased the accounts receivable balance instead of cash
      1. Your sales on credit may have gone up during the month. Chances are that is a good thing since generally speaking higher sales would be good.
      2. It is possible that some customers are late in paying invoices they owe you. That would be a bad thing. And it would mean you have some work to do to fix the problem so customers are paying you on time. You should look at your accounts receivable aging to make sure that is not happening.
   2. It also causes bad debts and Provisions of bad debts needs to be done
   3. The doubtful debt reserve holds a sum of money to allow a reduction in the accounts receivable ledger due to non-collection of debts.
   4. Accuracy for calculating these provisions depends upon the probability chart which itself causes in accuracy

8. Deferred values
   1. Payments are received in advance in case of deferred values
   2. Such payments are kept as liability but it may help company to generate revenue if invested in funds
   3. These being liability may require company to return them

9. Assessment of Risks
   1. There are multiple risks involved which are sometimes ignored like credit risk, default risk, market risk, management risk while creating estimates and provisions

10. Illiquid Assets:
    1. Management may not have the expertise internally to value illiquid or complex financial instruments, and there may be limited sources of information available to establish their values
    2. It may be necessary for management to make assumptions, including assumptions relied upon by management based upon the work of an expert, to develop fair value measurements for illiquid assets
    3. The need for appropriate disclosure in the financial statements about measurement methods and uncertainty, especially when relevant markets are illiquid.