Question

Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

1. Business reporting should exclude information outside of management’s expertise or for which management is not the best source, such as information about competitors.

2. Management should not be required to report information that would significantly harm the company’s competitive position.

3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company’s financial future.

4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

Short answer

1. In this case, the cost is probably greater than the advantages received.

2. Here, the costs are going to higher than the benefit.

3. In this case, the cost is presumed to exceed the benefit.

4. Here, the cost is assumed to be greater than the advantage.

5. In this case, the cost probably exceeds the benefit.

6. Here, the advantage is likely to be higher than the cost.

Step-by-step solution

Meaning of Financial Reporting

Financial reporting is the method of registering and conveying commercial activities and performance over particular time periods, basically on a yearly or quarterly basis.

Explanation for statement ‘a’

Competitor’s information might be beneficial for standardizing the firm’s outcome but if the management is not skilled in facilitating the information, it could be greatly subjective. Moreover, it is probably expensive for the management to assemble adequately confirmable information of this nature.

Explanation for statement ‘b’

Users of accounting statements might get advantage from obtaining internal information like firm’s plans and budgets, side by side, competitors might also be able to use this information to acquire a competitive benefit associated with the disclosing company.

Explanation for statement ‘c’

For the purpose of providing forecasted accounting statements, management would have to prepare various assumptions and estimates, which would be expensive in the basis of time and data assembled. Due to the involvement of subjectivity, the forecasted statements would not be true presentations, thus lessening from any possible advantages. Additionally, while management’s forecasts of future possibility or amounts of balance sheet could be of advantage, firms could be liable to shareholder lawsuits, if the amounts in the forecasted statements are not obtained.

Explanation for statement ‘d’

It would be highly expensive for firms to assemble and report information that is not beneficial in managing the business.

Explanation for statement ‘e’

Adjustable reporting grants firms to adjust their financial reporting to meet the information needs of its diverse users. Therefore, they can evade the cost of supplying information that is not desired by its users.

Explanation for statement ‘f’

With regard to forecasted financial statements, if managers report forward-looking information, the firm could be prone to liability if investors unduly depend on the information in preparing investment decisions. Therefore, if firms get security from unwarranted lawsuits, then they might be eager to supply reasonably beneficial forward-looking information.