Nowadays, people would like to be aware of the changes applied by non-governmental entities. An Accounting Standard Update is the document that identifies the Accounting Standards Codification amendment and summarizes the main points of the project that was updated. The paper examines the expected benefits of Accounting Standard Update for financial statement preparers and its impact on earnings quality of income from continuing operations.
Summarizing key points of Accounting Standard Update (ASU), the main attention should be paid to improving and establishing the financial reporting and accounting standards the aim of which is to foster financial reports prepared by non-governmental organizations. The duty of these legal entities is based on decision-useful information that is provided to the users of financial reports and investors. Being confident in the Financial Accounting Standards Board (FASB), ASU is issued as a part of initiative in reducing complexity in accounting standards. As a result, generally accepted accounting principles (GAAP) are properly evaluated and identified. Both public and non-public companies feel the positive effect of using ASU. The main aim of ASU is to properly define the measurement of credit losses (“Simplifying Income” 7). Any error can cause incorrect measurement that might negatively affect the financial situation of the entities. The planned guidance meets the needs of the entities. The update makes them aware of short-duration insurance contracts’ modeling that is structured within the Taxonomy. The modeling is based upon the principle of credit of monetary item or type-debit which is quite understandable and available to legal persons (“Simplifying Income” 7). The guidance explains the entities how to properly use discontinuing operations, disclosure of credit risks, segment reporting, and Basis of Accounting Liquidation. According to FASB guidance, the requirements based on financial statements of a restate prior period are eliminated. All the changes made by FASB are implemented by the entities as well as public and non-public companies’ functions.
The main reason of FASB’s issuing Accounting Standard Update is the positive impact of ASU on FASB’s operation. ASU is a part of FASB implementation progress that is defined in reducing inconsistencies in accounting standards. With the help of ASU, the accounts are accurately evaluated and identified; extraordinary items’ concept is eliminated. Any transactions or events of the entity are properly identified taking into account the place where the legal person operates. All the required information received from ASU is clear, and there is no need for additional verification. Any issues that occurred with the entities are properly resolved according to the basic information of their activity that is checked according to ASU. Finance accounting is clearly defined without any uncertainties that is beneficial to FASB. All the items are carefully checked. Using ASU allows avoiding inconsistencies in unusual and infrequent transactions, items, or events. The extraordinary items are properly classified to identify some transactions or events. During the transaction process, all the requirements are followed during extraordinary items’ presentation. The amendments of this update have a positive effect on financial statements. Any amendments in Accounting Standard Update fulfil the information, eliminate the requirements, and control the activities of legal persons (“Simplifying Income” 7). The main aim of the FASB issuing ASU is to communicate the changes to the Codification of the FASB including non-authoritative SEC content changes.
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Based on the generally accepted accounting principles, the main areas are improved in effective changes of background information and method of transition. The users of Accounting Standard Update are aware of financial statements that help them to control the overall process of their financial activity. ASU requires the entity to disclose applicable income taxes, reduce costs, and save time according to the concept of extraordinary item elimination.
The effectiveness of ASU is defined in financial statement of the preparers’ report. All the amendments presented in the financial statement may be applied by a reporting entity. New ASU improvements benefit the financial preparers. The expected benefits of ASU for financial statement preparers refer to the fact that transparency increases claim liabilities determining only short-term insurance contracts. The main attention is paid to the basic information of incurred or paid claims of accident year (“Simplifying Income” 7). All paid or incurred claims of adjustments expenses are clearly displayed in the balance report. Each report concerns unpaid claims; the expenses of claim adjustment are accompanied by reserving methodologies’ description. The average annual percentage of incurred claims by age is paid out except for the claims of health insurance. All the information of the entire company is properly defined. The users are aware of the company’s insurance ability. The information regarding the development of the company by the accident year helps the statements preparers to be consistent with a proper analysis of the management. With the help of ASU, they properly analyze insurance abilities of the company and accurately calculate the average severity of declared losses and reported claims (“Simplifying Income” 7). A properly developed financial information makes the statement preparers more familiar with the reporting of the organization, financial performance and position, and future cash flows. Necessary information allows financial statement preparers to make right choices, be aware of all financial transaction, and avoid unexpected error.
According to the international standards, there should be provided minimum information of the statement of income. All the expenses are classified by nature description or function. Non-operating and operating income, the bottom line of which can be defined as a profit or loss, relates to earnings quality. Despite the bottom line of operating income, there is a good opportunity to predict future earning of the company. Being a fundament of operating and non-operating income, earnings quality is able to provide a detailed information about the company’s financial process. During this process, an income statement reports the occurred events while earnings quality has the function of predicting the financial situation of the organization. To implement correct predictions, there should be separated permanent earnings of the company and effects of transitory earnings (Spiceland 177). Permanent earnings are reflected by continuing operations. One mistake in the manipulation of a company’s income made by the manager of the company can lead to the reduced income. Manipulating income provides a variety of options to increase earnings quality. Predicting every step in financial process, including taxes, profits and losses of the company, the undesirable consequences can be easily removed.
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Accounting Standard Update will positively impact earnings quality of income from continuing operations. Being aware of the financial situation of the company, the manager is able to make proper decisions. All of them will concern the quality of earnings. Properly envisioning every situation will help to predict the future of the company. All the reports regarding the financial process should be clearly checked and controlled. Any error can occur, and the only way to predict it is to use reported income or accounting. Earnings quality should be implemented into the company’s process as it reflects the situation concerning cash flows and economic effects. With the help of an accurate information, the earnings’ manipulation of financial statement can be increased (Spiceland 177). The permanent earnings are not masked by manipulating income. Proper actions in manipulating income raise earnings quality. With the help of reported earnings, various issues can be resolved immediately. Predicting the financial situation of the company enables the efficient control of the financial process, incomes, and cash flows.
Summing up, the entities should be aware of the entire situation of the company including financial transactions, cash flows, incomes, and losses. To cover the difficulties in the financial accounting, the legal person should use Accounting Standard Update the main aim of which is to improve, evaluate, and properly identify areas in accounting principles. With the help of accurate information, the entities can compare the operation of their company to that of another and find the proper decision in addressing a low level of accounting standards.