Corporate Governance Mechanisms
Question 2: Fair Value Accounting
What happens to the value of assets and liabilities in and after a global financial crisis? Critics argue that fair value accounting aggravated the brutality of the 2008 financial crisis. Its valuations on properties and assets influence the economy that led to a deep dive. Conversely, advocates of fair value accounting believe that it only played the role to deliver the message and is now taking the blame (Laux & Leuz, 2010 pp. 94). Hardly is there any right or wrong answer; both propositions may be satisfactory, right or wrong. Fair value accounting is barely held accountable for the crisis, nor is it the parameter that measures the assets’ value without influencing any economic effects single-handedly.
Fair value accounting is based upon two underlying concepts: first, commodity assessments should be implemented uniformly across markets to make it easier to evaluate enterprises, and, secondly, where a fair offer for the asset is available, it should be carried out in ordinary conditions at that price on a business balance sheet. These are unusual as general principles, but in reality clash, and in certain situations, they are unworkable. Not all businesses, often within the same sector, adopt the same business strategy. Some retain mature securities, while others exchange assets and liabilities aggressively.
The various business models may lead to substantially different valuations of assets and, in certain situations, comparable valuations for somewhat different business models. This may make it challenging to compare companies in the same field, especially when there is currently no way for investors or analysts to understand the percentage of assets of a business according to each process. Furthermore, market-based fluctuations in asset valuation can depend on the business model of a firm, generate significant uncertainty in balances and earnings results. Finally, if the selling price is not observed, alternative means of assessment may be used and may differ from business to company, which brings into doubt comparability.
Fair value accounting includes the practice of measuring assets and liabilities at their current market value or identifying their fluctuations in value according to gains and losses in the income statement (Laux & Leuz, 2010 pp. 97). It contributes to disproportionate influence in prosperous periods and excessive write-downs in low periods. However, it has been a controversial topic due to supporters’ and critics’ conflicting perspectives in using fair value measurement in financial measurements (Gorgieva-Trajkovska et al., 2016 pp. 1). Even after numerous research and intense discussions, it is impossible to reconcile these supporters’ and critics’ varying opinions. The 2008 financial crisis attracted public criticism and nudged accounting measurement to the front row in policy discussion.
Standard developers have a host of problems to balance with regard to fair value accounting. Standard developers have to combine validity and durability on a conceptual level (Laux and Leuz 2009). A relevant financial statements evaluation is capable of verifying decisions already taken by the stakeholders or of changing prospective decisions by stakeholders, and the regular quoted stock rates are definitely a timely source of confirmatory and unclear information on the operations of the company. However, reliability includes the objectively verifiable, impartial, and reliable presentation of accounting reports on the actual facts of transactions and events. If equal expectations are focused on unbiased consumer pricing, market prices will appear to have appropriate and credible accounting details for stakeholders. However, where equal expectations are focused on factors other than uneven market conditions or where market rates are skewed themselves, there is concern that the facts presented might be less accurate or credible and may even be deceptive (Magnan and Thornton 2010). Hague (2009) maintains that accounting for fair value removes all clarity and honesty, which are valuable to investors.
Other than a mere belief by specific individuals that certain financial assets measured at impartial value contributed to the 2008 economic crisis, no empirical evidence has been available. Instead, research shows that when certain financial assets and business models are withheld, they are likely to affect the systemic (Gorgieva-Trajkovska et al., 2016, pp. 3). Due to prolonged loss acknowledgment on financial assets likely to rise or fall depending on external factors, it is possible. Fair value standards determine the definition of fair value for financial reporting reasons. It is selected to come up with an amount or deal that is fair to both the property owner or prospecting buyer; thus, none is on the losing end. Proper value accounting is functional with the support of other aspects that contribute to attaining accurate property valuation. Independently, oy is impossible to achieve accuracy and the actual income numbers (Ehrlich, 2018 pp. 2).
Fair value accounting measures the actual or estimated value of an asset. It is one of the utmost popular financial accounting approaches due to the array of pros it possesses. First, it provides accurate valuation from assets and liabilities (Campbell, Heinrich, and Schoenmüller, 2015 pp. 80-82). When prices increase or decrease, so does the valuation. In the case of a sale, discrepancies are non-existent when the valuation differs from the transaction. Secondly, it provides accuracy in actual income. The fair value approach limits the possibility of altering accounting data. Rather than utilizing the sale of properties to affect gains or losses, price changes are according to the actual or predicted value. Income change only happens when asset value changes in the eventual net income (Rousseau, 2015, pp. 94). Thirdly, it is the most accepted standard accounting method, unlike the historical method that experiences fluctuations time after time. It is also able to do appraisals across all types of assets. Most people agree on this accounting method compared to the others making it the primary choice for many.
Fourthly, it provides a survival method in a challenging economy when it permits asset reductions within the market, enabling businesses to make it through the crisis. The flexibility in valuation is a plus in controlling market prices that would otherwise be a burden (Raynolds and Bennett, 2015 pp.10). Fifthly, fair value accounting expects the firm to provide wide-ranging information about the procedure used, assumptions made, risk exposure, among other factors that contribute to an extensive financial statement. These financial statements foster the firm’s transparency, making them attractive to different entities such as lenders and investors (Gorgieva-Trajkovska et al., 2016 pp. 2-4). Finally, it provides accurate information relevant to current times. Since it uses specific data to the present time and market, it gives the most pertinent estimates possible. It has instructive value and encourages rapid, helpful actions.
Fair value provides the measure of the expected return from specific investments to the management (Campbell, Heinrich, and Schoenmüller., 2015). Users of this method of accounting enjoy several advantages that are limited when using traditional accounting methods. Although it is controversial to agree on the role of fair value accounting in the current crisis, it is impossible to ignore the likelihood of effects it faces during such a crisis (Hainmueller, Hiscox, and Sequeira, 2015 pp. 247-249). The 2008 economic crisis provides an excellent platform for discussing issues that affect fair value accounting and exploring the imperfections within the system and how best it can work to ensure competence.
Tax planning is the evaluation of financial status or strategy for ensuring that all aspects operate in a pre-planned system in order to realize the liability in potential taxes. A tax efficiency package reduces how much you pay in taxes. Tax must always a basis of planning and an integral aspect of the tax strategy of an individual investor. Reducing the tax burden and maximizing the opportunity to commit to tax-deductible schemes are key to growth.
A practical understanding of tax planning thus has become a necessity to a financial analyst. An expert can, at minimum, have a solid logical grasp of the following while just contemplating a workable tax avoidance plan about the basic necessities. First, exceptions of certain legislation; including the comprehensive list of tax allowed items and practices, and interpretation of basic tax problems, the regulatory framework in place, the possible open loopholes that necessitate tax avoidance as well as understanding the interplay between deferred taxation, existing taxes, and effective tax rates, understanding the effects of cash flow taxes and the best cooperate social responsibilities that fall in play for better tax planning programs in the for financial modeling.
On the other hand, companies want their operations and practices to account for the least fiscal liability possible, environmental and social impacts. Corporate social responsibility (CSR) is the social activities of corporations that exceed or are not subject to legislative limits or statutory standards. The economic goal and obligations of a corporation with regard to shareholders and debtors are a natural starting point for a study of responsibilities. Economic criteria and standards often exist with other stakeholders, such as employees or public bodies as tax collectors. Responsibility in fiscal matters has been given greater focus by a range of stakeholder organizations who actively study the methods taken by firms in their tax policies and tax preparation practices. This essay reviews CSR, in particular in the tax sense. Does CSR have some relevance in the sense of tax law and, in particular, income taxation? Is CSR setting limitations on the tax preparation of firms, or is there a requirement to pay more taxes than the legislation and tax treaties require? Although the definition of CSR is not legal, the approach in this essay is not only legal in these matters. Tax attitudes are also inconsistent. On the one side, taxes are like all other corporate charges, but on the other, they are an economic contribution to the nation where the enterprise is carried out.
The three key goals of income tax planning, first, the income tax policy of a corporation, should be consistent with its corporate plan (Campbell, Heinrich, and Schoenmüller., 2015). In order to optimize earnings, a corporation needs to consider how tax liabilities are incurred and to change its policies accordingly. Secondly, paying for income taxes will enable a corporation to retain financial stability. There are various impacts on the financing of the company’s debt and/or equity activities, and the financial structure of a company may affect its tax liability. The awareness of these results allows the organization to schedule and preserve its financial stability accordingly while holding its options available. Finally, tax accounts enable the corporation to control cash flow and reduce paid cash taxes. Instead of now paying taxes, it is beneficial to delay payment of taxes into the future. An organization would choose to discount tax earlier rather than later in order to increase the money’s time worth.
The key issues in tax plan preparation ensure that you and your tax planning consultant have a thorough look at the tax liability region. Tax preparation allows you to determine how any case is approached. Five primary areas of concern should be considered. Income scheduling, where most people say you can earn the most revenue as quickly as possible. However, it can happen that from a tax preparation standpoint, it makes more sense for you to lower your income than to raise it.
The timing of a big transaction will influence the amount of taxes you pay. This depends on the time of year you shop and the condition you shop with (Hainmueller, Hiscox, and Sequeira., 2015). Tax preparation with a consultant will help you determine how best to make a transaction and pay the lowest rate of tax. If you invest in commodities, bonds, valuable resources, or assets, there are unique tax laws that will provide you opportunities to lower the taxes – in particular, the tax on your capital gains. When you sell stocks or property without considering how it would affect from a tax point of view, you always throw away assets.
There are several approaches to tax preparation, from short-term tax planning, in which towards the close of the fiscal year, tax planning is envisaged and implemented. Investors use this planning to seek opportunities to legally reduce their tax liabilities at the end of the financial year. This approach would not share long-term obligations. However, significant tax cuts will also be promoted. At the outset of the fiscal year, the long-term strategy controls the schedule, and the taxpayer observes the plan over the year. In contrast to short-range tax preparation, you do not have immediate tax gains, but they may be helpful in the long term. The permissive form of tax preparation, on the other side, entails planning according to different requirements of the Indian tax laws. In India, tax preparation provides for a number of provisions, including credits, credits, grants, and bonuses. Section 80C, for example, of the 1961 Revenue Tax Act, provides different kinds of exemptions on various tax-saving instruments.
Purposeful fiscal planning requires the use of tax savers for a particular sight. This means that your savings prosper optimally (Hainmueller, Hiscox, and Sequeira., 2015). It involves choosing the right investments correctly, designing an effective scheme to substitute assets, and diversifying company and income assets depending on your residential position.
There are numerous advantages in implementing the tax planning strategy. The most apparent benefit is that you reduce your total income tax burden, capital gains tax, inheritance tax, and other taxes, where necessary, on your savings, investment, properties, and pensions. If your money and your properties are tax-efficient, shouldn’t you investigate why they could function for you? However, plenty doesn’t do so and wind up spending more than they can unknowingly. This could entail a bank sales tax you don’t really withdraw or a capital benefits tax while going from investment to investment (Hainmueller, Hiscox, and Sequeira., 2015). Many expatriates are often trapped by not examining their abroad plans. Suppose you are no longer a citizen of the UK, such properties, such as ISAs and UK investment bonds, that are taxable back home, which become taxable in your country of residence. In certain circumstances this year, the tax burden could rise, provided that UK assets are no longer eligible for any preferential tax treatment for EU assets.
In search of financial strategies that provide planning platforms, you will even be entitled to reduce your descendants’ inheritance tax responsibility. For e.g., for estate planning purposes, a locally compliant life insurance bond may be extremely tax-efficient. Ideally, you would like to find a compromise that limits heritage taxation, thus providing tax-effective revenue and development in investment across your lifetime. Strategic tax preparation will help make life better while the family is away (Hainmueller, Hiscox and Sequeira., 2015). Many tax-efficient investment schemes often provide greater stability and power of estate planning.
Most UK pensions, for example, are transferable only when you are dead to your spouse; however, whether you are moved to a Qualifying Recognized Overseas Pension Scheme (QROPS) or reinvested to an appropriate tax efficiency arrangement for your country of residence, you can transfer funds to other beneficiaries, who are also not subject to proof.
However, the major drawbacks are that it is more complicated than cash and that income taxes will be due on income before delivery. The accrual basis will, however, produce beneficial tax outcomes for firms with few claims and high current liabilities. In the world economy, firms compete relentlessly to optimize their shareholders’ returns and success. Based on the latest trend of tax planning through corporate social responsibility, this paper recommends the implementation of a modern CSR standard that includes ethical tax practices.
In conclusion, the adoption of a modern standard will be in line with the assumption that companies are already looking and improve society to boost their sales. Because tax is the most fundamental means for companies to invest in the community, anyone with aggressive tax systems to exclude them from paying corporate tax should be branded socially irresponsible.
Campbell, C.L., Heinrich, D. and Schoenmüller, V., 2015. Consumers’ reaction to fair trade motivated price increases. Journal of Retailing and Consumer Services, 24, pp.79-84. https://www.sciencedirect.com/science/article/pii/S0969698915000259
Gorgieva-Trajkovska, O., Temjanovski, R. & Koleva, B., 2016. Fair value accounting – pros and cons. Journal of Economic, 1(2) http://eprints.ugd.edu.mk/16917/
Hainmueller, J., Hiscox, M.J. and Sequeira, S., 2015. Consumer demand for fair trade: Evidence from a multistore field experiment. Review of Economics and Statistics, 97(2), pp.242-256. https://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00467
Ehrlich, S.D., 2018. The politics of fair trade: Moving beyond free trade and protection. Oxford University Press. https://books.google.com/books?hl=en&lr=&id=xhFQDwAAQBAJ&oi=fnd&pg=PP1&dq=Ehrlich,+S.D.,+2018.+The+politics+of+fair+trade:+Moving+beyond+free+trade+and+protection.+Oxford+University+Press.&ots=ctnQSGjKTr&sig=JPI_x4EZB2I2_WnpwQNnr9wyo7Q
Christensen, J. and Murphy, R., 2004. The social irresponsibility of corporate tax avoidance: Taking CSR to the bottom line. Development, 47(3), pp.37-44. https://link.springer.com/article/10.1057/palgrave.development.1100066
Knuutinen, R., 2014. Corporate social responsibility, taxation, and aggressive tax planning. Nordic Tax Journal, 2014(1), pp.36-75. https://cyberleninka.org/article/n/636659.pdf
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