Traditional Financial Reporting Historical Cost Principle

Question: Discuss about theTraditional Financial Reportingfor Historical Cost Principle. Answer: Introduction Traditional Financial Reporting by business is a mean by which statements are produced with an aim of disclosing the organization`s financial status to its shareholders or to all the interested parties. However the manner and form in which these financial reporting is done has been subjected to severe criticism by various analyst. In their view which has come to be appreciated, they intimate that the traditional financial reporting system is marred with a number of limitations which makes it inappropriate to give precise insight concerning the performance of the organization and hence cannot be fully relied upon and thus the need to come up with more enhance way of reporting such as cost and management accounting. In addition, companies using traditional financial reporting system have for many years been dwelling on reporting economic status in total disregard of environmental and social effects caused by their operations. Below is analysis of some of the criticism of traditional fi nancial reporting, some of the theories that supports the corporate sustainability reporting and the cost and benefit associated by the same. Criticism of Traditional Reporting Firstly, Historical cost principle has been used widely in financial accounting where transaction is recorded at the cost of transaction at the time the transaction takes place. This information does not tell accurately about day to day cost and expenses and therefore make its difficult to predict about the future status of the firm. Thus the information presented cannot be relied upon by the decision makers and its relevance keeps waning over time. It is therefore argued that the current cost information should be reported parallel with historical cost information.Secondly,impact of non-economic of financial factors are highly disregarded, this are factors which impact on the financial outlook of the firm but they are not included as part of these statements since they are not measurable in monetary terms. Some of these factors are co-operation of the employees, creditworthiness of concern and the reputation of the management. Thirdly, the statements does not give the ultimate pictu re of the business, the data provided in this case is just an approximate and the actual value of the business can only be known when it is liquidated. This makes the financial statements just but an interim reports.Fourthly,the traditional financial reporting do not give the actual position ,here there are certain assets in the balance sheet such as goodwill which, in case the business is wound up will not bring in any monetary effect into the business yet it is included in the balance sheet.This can lead to making wrong inferences because what the statement represent is not the actual position of the fimr or business. Theories of Corporate Sustainability Reporting They are several theories that tries to affirm the importance of corporate sustainability reporting (CSR).Among them are (1)Legitimacy theory -in their interpretation,Deegan and Unerman (2011) intimates that the theory is build on tne idea that there exist a social contract that binds the firm and the society in which that particular firm operates. Thus companies and corporations try to make their companies operation acceptable by the society through involving themselves in CSR reporting and hence ensure the organization`s going concern. Deegan (2002), argues that the contract is mainly composed of the expectation of the society regarding how the firm should conduct itself. O'Donovan (2002) in his view argues that the theory has its genesis from the notion that for the corporation to successfully operate in a society, it must act within the confines of what that particular society considers as socially acceptable and responsible behaviour.I n his word,Waddock et al. (2002) provides t hat depending on the employees attitude regarding how the firm carries out its responsibilities, the employee makes the decision whether or not to work for the particular organization or not. Thus, presentation of non- information (sustainability information) can play a vital role in placing a firm as a preferred employer and hence enhancing the firm`s is able to lure high quality staff. Margolis and Walsh (2003) claim that there is a direct relationship between discretionary disclosure of CSR performance and the financial performance and therefore such disclosure can promote corporate performance. Roberts (1992) provides that it is in pursuit of capital and increasing the shareholders value that the firm find it paramount to make CSR disclosure.Bayoud et al. (2012) in his confirmation states that the disclosure of CRS is indeed tagged to the corporate reputation for stakeholders..(2)Stakeholder theory. This theory states that the firm should not only concentrate on the interest of shareholders but also for the entire stakeholders which are in one way or another affected by the operations and achievements of the organization(Freeman,1984).The stakeholder theory concentrates on the critical analysis on all parties to whom the firm should be responsible. Boatright (2003) stated that firms should be operated in a manner that benefits all of the stakeholders of the firm. Just as shareholders invest their cash in the firm, customers invest their trust and confidence and employees invest their knowledge and time (Graves et al., 2001).As a result, Wicks et al. (2004) it is therefore important for firms to consider the aftermath of their actions on the all the interested stakeholders. Wearing (2005) in his view, the theory emphasis the significance of all the concerned group upon which the operations of the firm impact. According to (Deegan, 2013) stakeholders theory can be explained in terms of ethical and managerial branches. In terms of managerial, its intimates th at the firm or organization will be highly responsive to those stakeholders that will have great economic impact to the firm (O'Dwyer, 2003) or those not actively engaged in the firm`s income generating activities but can influence it in one way or the other (Savage et al., 1991). The ethical facet provides that all stakeholders are entitled to know the effect the firm`s operation have upon the environment and the society as a whole (Deegan, 2013). Cost and Benefit of Corporate Sustainability Reporting However they are cost and benefit associated with corporate sustainability reporting. The cost will highly depend on the industry in which the firm operates, the size of the organization and the time spent by the organization i.e. collection of data, conducting training, writing reports etc.Among the benefits associated with the reporting of corporate sustainability. First and foremost there can be increased trust by being open in non-financial performance hence boosting the image of the company. The competitive advantage of the company over the rest is likely to rise to the confidence the investor will develop towards the company in terms of i.e. negotiating contracts. Conclusion From the above, it is clear that company need to use enhanced ways of reporting their financial information in a manner that will reflect the authentic financial status of their companies. For instance, using historical cost in reporting should be abandoned for a more realistic ways like using current cost information. Reporting of financial information should be more inclusive in that it should include environmental and social aspects. The contribution of the firm to the welfare of the immediate society should be well spelt out in the reporting, this will ensure that the society creates the awareness of its legitimacy and its reason for its continued existence References Boatright, R., 2003. Ethics and the conduct of business. New York:Pearson Education International. Bayoud N. S., Kavanagh M., and Slaughter G., 2012. Factors influencing levels of corporate social responsibility disclosure by Libyan firms: A mixed study. International Journal of Economics and Finance. Deegan, C., and Unerman, J., 2011. Financial accounting theory. Sydney: McGraw-Hill. Freeman, R. Edward.1984. Strategic Management: A Stakeholder Perspective Boston: Pitman Publishing. .O?Dwyer, B., 2003. Conceptions of corporate social responsibility: The nature of managerial Capture. 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