CURRENT ISSUES IN FINANCIAL REPORTING Essay Example | Topics and Well Written Essays - 1500 words - 4

CURRENT ISSUES IN FINANCIAL REPORTING - Essay Example Off-balance-sheet-financing is that debt that is not usually reported on a company’s balance sheet. The formal distinction between off and on-balance sheet items present some complications that are usually subject to some level of judgment by management. However, the primary distinction between the off and on-balance sheet items is based on whether or not a business/company owns or is legally responsible for that debt. Additionally, uncertain liabilities or assets are subject to being grouped as ‘probable’, ‘meaningful’ and ‘measurable’. Some of the examples of the off-balance sheet items include; unconsolidated subsidiaries, operating leases, financial instruments such as hedging contracts and derivatives securities, contingent assets/liabilities among many others (Bauman, 2003). Financial statements need to be adjusted from time to time so that they are able to reflect the economic substance of the information they represent. Companies should, therefore, focus on accounting methods that emphasis on economic substance by considering changes in accounting policies. Economic substance is a transaction that has a purpose besides reducing tax liability. Conversely, Sally and Schreiber states that, â€Å"The economic substance doctrine is a common law judicial doctrine that disallows tax benefits of a transaction if the transaction lacks economic substance or a business purpose.† Therefore, transactions and events should be accounted for in a manner that faithfully represents their true economic substance and not the mere legal form. The off-balance sheet items; thus, provide a reason financial statements often fail to faithfully represent the economic substance. Off-balance sheet activities usually do not represent the true picture of a net worth of a firm. This is because firms do not include market values of their off balance sheet items. Furthermore, the transparency of off balance sheet activities are