ACC 291 Brief Discussions

    1. IFRS 10-2: Explain how IFRS defines a contingent liability and provide an example.
    2. IFRS 10-3: Briefly describe some similarities and differences between GAAP and IFRS with respect to the accounting for liabilities.
    1. What is the difference of a stock split and a stock dividend?  Why would a company use either of these and what is the effect of them on the financial statements?
    2. 98% of companies utilize the big four accounting firms for their audits.  Why do you think that is so and what are some advantages or disadvantages you see that the big four accounting firms have over the smaller ones?
    1. Is there such a thing as a reverse stock split and if so why would a company do one?
    2. What is the difference between a stock dividend and a cash dividend and which would you prefer if you are an investor?
    1. Can anyone tell me why a company would want to do a reverse stock split since it is considered usually as not a good thing compared to a forward stock split that is?
    2. Brief discussion on “Cost Method”.
    3. Brief discussion on “Fair Value”.
    4. Brief discussion “Long-Term Investments”.

Sample Answer

Accounting Brief Discussions

IFRS outlines contingent liability as to the situation that arises when a set of circumstances or uncertain conditions is resolved with or without the occurrence of a future event that could result in an impairment of the asset or a liability (Picker et al., 2019). A good example is the collectability of receivables.

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Both IFRS and GAAP obligate entities to incorporate information about fair value measurement practices while preparing financial statements. Both systems require the firms to report and project assets at either fair value or book value. However, one of the primary differences between the two systems is that IFRS is principles-based, whereas GAAP is rules-based. In IFRS, companies need to disclose contingent liability and should not recognize it. However, they can be recognized if economic resource outflow is probable (Picker et al., 2019). GAAP, on the other hand, requires reporting contingent liability on the income statement as unspecified expenses. One must disclose all contingencies that might alter the firm’s estimated earnings (Shaked & Orelowitz, 2015).

The stock dividend implies the dividends that are distributed and paid in the form of additional shares. On the other hand, the stock split involves the division issues shares following the ratio proposed by the organization. The additional shares in stock dividends are given to shareholders, whereas, in a stock split, there is an agreed ratio of dividing the already issued shares. In this regard, there are no additional shares allocated or shared. A company will use stock dividends if it does not have enough cash to pay dividends (He et al., 2016). In the financial statement, it increases the Liquidity of Cash. The company uses the stock split when there is overprice of share in the market and is used to increase the liquidity of shares.

One of the reasons why more than 98% of companies use the big four accounting firms when conducting their audit is because they promise and provide high-quality audits. They are more stringent in monitoring, and when it comes to high-quality work, they offer more substantial incentives. They do not have delaying fillings and documents immediately, increasing audit quality. One of the advantages that big accounting firms have over small ones is that they attract better and competent personnel. One disadvantage that big firm has over small ones is the price competition. Small firms tend to have flexible prices. Additionally, large organizations are less nimble than smaller ones.

A reverse stock split is an action taken by a company that helps to consolidate the numbers of existing shares, helping increase the value and make them few. The primary reason why a firm opts for reverse stock splits is per-share price bumping. The cash dividend is where the company’s profit is paid out rather than reinvesting back in the firm. However, in stock dividends, the firm does not utilize or tap into the profit made but rather issues its own stock. As an investor, I would prefer stock dividends since, unlike cash dividends, they will offer me an opportunity of choosing to keep my profit or turn it into cash. One of the reasons a company would want to do a reverse stock split is because it boosts its stock price. Another reason organizations pursue this strategy is to avoid being delisted, hence remaining relevant in the market. It also boosts the organization’s image.

Cost Method is among the conservatives accounting method for investments whereby an investment retains its original cost in the balance shit.  Fair value, on the other hand, is a broad measure of the value of an asset. It is a reference that indicates the estimations of the firm’s liabilities and assets projected in the firm’s financial statement. Long-term investments can be denoted as an account that a firm or entity plans to keep for a given period of time, usually not less than one year. This can be in the form of cash, real estate, bonds, or stocks. Long-term investments are aimed at taking risks for higher rewards.

 

 

References

He, X., Li, M., Shi, J., & Twite, G. (2016). Why do firms pay stock dividends: Is it just a stock split?. Australian Journal of Management41(3), 508-537.

Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J., & Van der Tas, L. (2019). Applying IFRS standards. John Wiley & Sons.

Shaked, I., & Orelowitz, B. (2015). Contingent Liabilities: GAAP vs. Valuation Perspective. American Bankruptcy Institute Journal34(8), 34.

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