Accounting for Private versus Public Companies
Explanation of factors
FASB is responsible for reviewing major standards from the post-implementation review (PIR). Their main mission is to review revenue recognition and credit losses. They play a key role in determining the type of assets included in the financial statement as contributing to revenue. The main aim is to ensure that reporting of the financial information is done most effectively and appropriately (FASB, n.p). A key factor is recognizing the credit losses of the organization so that they don’t affect the books of account. Proper recognition of a financial statement’s elements effectively reduces fraud and misappropriation of funds. A key consideration is the dynamics of risk management. There is a protocol that organizations are supposed to use while reporting their financial statements.
Five different factors can be used to distinguish between private and public companies. Only two have been selected and described in the assignment. One of the factors is the number of primary users and their ability to access the management. The financial statements for private companies’ users are less compared to those that public companies use. Also, the statements’ users are in a position to influence the decision of the preparers (Financial Accounting Standards Board, n.p). The other factor is ownership and Capital Structure. Several private companies are created similarly to pass-through entities, and they are not subjected to any income tax. The companies that are owned publicly assure the employees and the investors of continuity in their operations. That is not the same situation for privately-owned companies.
Explanation of the Factors in my Own Words
The variation between a public and private company is the nature of the information they require to prepare their financial statements. In a public company, they are subjected to taxes, and the nature of information required in fiscal statements will be different from that of the private company, which may or may not be subjected to tax.
Accounting Risks
One of the accounting risks is the errors made in the preparation of the financial statements. The risk can be that of omission where a figure is written in the wrong way. For instance, instead of recording $1000 in a balance sheet, it might be recorded as $100. Another error can be that of transposition. That is where the accounting figure is misplaced or interchanged. For instance, instead of recording $23 in a balance sheet, it might be $32.
Minimization of the Risks
The most effective and efficient way of minimizing the risk is through an auditor. The auditor’s role will be to go through the financial statements of either the private or the public company and identify all the risks that are in the figures. In a public company, the risk can be minimized through having an internal auditor (Committee of Sponsoring Organizations of the Treadway Commission, n.p). The internal auditor will go through the financial statements before the external auditor is invited for an investigation. The prominent role of the external auditor is to identify threats that might be an indication of non-compliance of the company to the tax regulations (Warren, 2014). It is possible to decrease the risk through the provision of a fair and accurate representation of the information which has been acquired. That is because the information is one way of assuring continuity and transparency in the operations taking place in the company.
Components of the Balance Sheet
One of the components that can be impacted by the factor identified is profit and loss. The two factors affect the profit and loss in the balance sheet in a similar way. Determination of the organizational capital is effective in establishing the solvency of the business. Financial solvency will show the financing of the organization. The issue identified to affect the financial reports’ production since there is no disclosure of the not-for-profits entities, which largely contribute to the non-financial assets. The approach has resulted in a new way of reporting on the information. There is the provision of new presentations and the disclosure of requirements for the non-for-profits. Therefore, the production of the financial reports for FASB has changed such that it is possible to make a comparison. The evaluation can be done between different entities in the organization or with other organizations in the same production line.
There are two approaches that FASB tends to use while handling the components of the balance sheet. One is through the assertion of the profits, and the other strategy is through disclosure of the information. In the long-run, there will be an enhancement of the global performance declaration by creating a useful plan that can be used to measure the level of performance. The main priority will be on the disaggregation of the total level of performance.
Positive and Negative Potential Impacts
The significant positive impact is that the capital structure and stock price are done based on the investors’ expectations. That implies that the ease of decision-making in the risks arises and can be easily corrected, and the value is likely to increase (Warren, 2014). One of the potential negative impacts is that the focus is on the profit and loss of the entity. There is a need to focus on how the factor might affect other books of accounts, such as the income statement.
References
Committee of Sponsoring Organizations of the Treadway Commission (COSO). (n.d.). ERM Integrated Framework Update. Retrieved from Welcome to COSO. Accessed 23 April 2021.
Financial Accounting Standards Board (FASB). (n.d.) Technical Agenda. Retrieved from Technical Agenda (fasb.org). Accessed 23 April 2021.
Warren, C. (2014). ACP Accounting – AC499, 2nd Edition. [VitalSource Bookshelf Online]. Retrieved from https://kaplan.vitalsource.com/#/books/978130. Accessed 30 May 2021.
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