Impact of Recognition Versus Disclosure †MyAssignmenthelp.com

Question: Discuss about the Impact of Recognition Versus Disclosure. Answer: Introduction: The liability is defined as the obligation or financial debt of an organization that creates during the operation course of business. Liabilities are paid-off through the economic benefits like cash, services or goods. It is shown under the liability side of the balance sheet and includes mortgages, accounts payable, accrued expenses and deferred revenue. Liabilities are crucial part of the business operation as they are used for paying the big expansions and finance the operations. They also assist in carrying out the business transactions more efficiently. Apart from fulfilling the liability definition, the conceptual framework also suggested that the recognition criteria for liability shall be met before showing the liability under the balance sheet. The recognition criteria are as follows The value or the cost of the obligation must be able to be measured reliable The outflow of the resources generating economic benefits like cash from the organization must be probable (Michels 2017). The 1st test assures that only the liabilities that are able to be measured objectively are identified under the financial statement. If the 2nd test is taken into consideration, it is rational to identify the liability only if it is probable that the organization will be obliged to settle it. If the obligation fulfils the definition criteria of a liability, however, fails to fulfil the recognition criteria, it will be classified as the contingent liability. A contingent liability is not shown as liability under the financial statement rather it is disclosed under the notes. If the liability is recognized at lower amount than the actual, then it will definitely overstate the profits as it will enhance the artificial earning. Further, liabilities can be recognised on various basis like progressively or full recognition at once. If the full amount for liabilities is not recognized in the balance sheet, it will enhance the profit by that amount that is not recognized. Generally, a part of the profit is kept aside to pay-off the liabilities (Cornaggia, Franzen and Simin, 2013). Therefore, if the liability is recognized at lower amount, it will definitely enhance the amount of profit. Consequences if accounting fails to capture the information As per the International Accounting Standard Board (IASB) the transactions must be recognized at fair values. Here, fair values have been defined as the amount at which the asset could be exchanged among the willing parties or liabilities can be paid off to the creditor. If the liabilities are not recognized properly in the balance sheet, apart from misstating the financial statement, it will also have an impact on the decision making approach of the users of financial statement like creditors, shareholders, clients and potential investors (Bratten, Choudhary and Schipper 2013). Further, if the liability is shown at the higher or lower value, it will decrease or increase the current ratio of the company which in turn will have a impact on the liquidity ratio of the company. If the liquidity ratio is not shown as actual, it will be no use comparing the companys ratio with the competitors. Further, the management will be in wrong impression will not be able to make the necessary arrang ement within the required timeframe (Clor?proell and Maines 2014). Liability could be any obligation that is required to be paid-off through sacrificing the economic benefits. For instance, bank loan, that obligates the company to pay the instalments in the fixed duration along with some interest. On the contrary, or may be trade payable created from purchase of any goods on credit (Mller, Riedl and Sellhorn 2015). Further, liabilities are classified into current liability, that is to be settled within 12 months period and non-current liability that is to be settled beyond 12 months period. However, if the non-current liability is recognized as current liability it will reduce the current profits. Therefore, it is identified that the recognition of liabilities has big impact on the financial statement and profits of the company. It will also mislead the external as well as the internal users of the financial statement. Reference Bratten, B., Choudhary, P. and Schipper, K., 2013. Evidence that market participants assess recognized and disclosed items similarly when reliability is not an issue.The Accounting Review,88(4), pp.1179-1210. CLOR?PROELL, S.M. and Maines, L.A., 2014. The impact of recognition versus disclosure on financial information: A preparer's perspective.Journal of Accounting Research,52(3), pp.671-701. Cornaggia, K.J., Franzen, L.A. and Simin, T.T., 2013. Bringing leased assets onto the balance sheet.Journal of Corporate Finance,22, pp.345-360. Michels, J., 2017. Disclosure versus recognition: Inferences from subsequent events.Journal of Accounting Research,55(1), pp.3-34. Mller, M.A., Riedl, E.J. and Sellhorn, T., 2015. Recognition versus disclosure of fair values.The Accounting Review,90(6), pp.2411-2447.