BUSM 4154 Case Study: Financial Accounting, Regulations & Capital

This case study delves into the necessity of regulating financial accounting, considering the perspectives of various stakeholders and the potential consequences of inadequate regulation, referencing the Enron scandal as a prime example. It also discusses whether human capital and intellectual property should be included in the balance sheet, analyzing the challenges and implications of valuing and accounting for these intangible assets. The analysis encompasses the difficulties in depreciating human capital, the fluctuating nature of employee expertise, and the complexities of valuing internally developed intellectual property, ultimately advocating for a balanced approach that recognizes the significance of these assets while acknowledging the practical limitations of their inclusion in financial statements. Desklib provides a platform for students to access similar case studies and solved assignments.

Q1: Why do you think financial accounting should be regulated? Would your
answer be different if the company were not a public company but the
corner news agency?
Solution: It is very much necessary to control the financial accounting
because there are vast users to the financial reporting which may include
investors, public, company employee, government, advisory group and the
other shareholders. Different users to the financial statements will interpret
in a different manner and if these users prepare financial report it will be
prepared in a diverse way which could meet up their requirement. If this will
be scenario than different users will interpret the financial statements
accordingly. There are also international differences in financial accounting
and vary from country to country ,as different accounting policies are
followed in every country and also the difference between public and private
domain. (Anon., n.d.)
There is an urgent need for financial accounting regulation as different
country follow different accounting standards and policies which lead to
preparation of different financial reports. The main objective of regulation of
accounts is to provide accurate records, clear identification of assets and
liabilities of the company, clearly analysis of investment of the company and
to provide a transparency to the shareholders.
Further, regulation of financial accounting reduces chances of cooking up of
accounts, accounting frauds, Tax evasion, enhancing transparency,
streamlining of global accounts, safeguard of public interests, increases
credibility and reliability of management estimates and auditors opinion. The
leading example of lack of regulation or insufficient regulation is Enron Scam
which lead to great accounting reforms. (Anon., n.d.)
However, financial accounting regulation has some drawbacks in the form of
time burden, documentation, cost bearing which are passed on to ultimate

consumer. However, one cannot negate the positive on the basis of a little
cost. So, a strong financial regulation is must for a company managing public
resources in order to avoid a fraud, ensure transparency and corporate
goodwill.
In case if the company is not a public company, the regulations and
requirement would be less stricter than those required for public limited
company since no substantial sums are involved and the general public
money is not invested but there can be cases wherein it should be regulated
like when the company is a foreign company or a company which is limited
by guarantee. Thus, even in case of a small company there should be
regulations but the cost of such regulations should not outweigh the benefits
and thus the cost benefit analysis should always hold good for any
regulation.
Q2: 'Human capital' and 'Intellectual property' are of significant value in
many organizations. Do you think they should be included in the balance
sheet?
Solution: A real opportunity to acknowledge ‘human capital’ as a company
investment, not just in words, but also put into practise by Jan E.G.Koster.
Human Capital is regarded as the most important capital of the company but
when it comes to put the Human capital in financial balance sheet than the
question becomes irrelevant and the it is said that human resource is
considered as the cost to the company .This write up supports an idea that
Human capital and intellectual property should be considered as a part of the
balance sheet item because it should get the value and position which it
deserves just like other capital investment. (Anon., 2017)
Human capital is defined as an employee of a company and their knowledge,
skill and experience is considered as part of the asset of the company.

Including Human Capital as a part of fixed or current(intangible) assets is a
big question as the assets like (machine, building ) is depreciated over a
period of life but no depreciation is provided on Land and the ‘human capital’
also changes annually as there are some inexperienced new employees and
some highly experienced employees leave the company for new job and the
company can also be sold off which results in decrease in balance sheet
value and another company may also be taken over which lead to increase in
human capital.
Intellectual property is intangible assets like patents, trademarks,
copyrights.All the intellectual property are not recorded in the balance sheet
item but few are recorded and it is very difficult to determine the current
market value of the property. Internally developed intellectual property like
trade secrets, new innovation are not considered as a part of the balance
sheet item as so no cost was involved to get those innovative ideas but this
leads to the engagement of human capital and it should be treated as part f
balance sheet item and form part of an assets. (Anon., n.d.)
Bibliography
Anon., 2017. ‘Human Capital’ as a part of the Financial Balance Sheet. [Online]
Available at: https://www.eapm.org/human-capital-part-financial-balance-sheet/
[Accessed 26 july 2018].
Anon., n.d. Is intellectual property considered a form of capital asset within a company?.
[Online]
Available at: https://www.investopedia.com/ask/answers/061715/intellectual-property-
considered-form-capital-asset-within-company.asp
[Accessed 26 july 2018].
Anon., n.d. Need for Regulation in Financial Reporting. [Online]
Available at: http://www.markedbyteachers.com/gcse/business-studies/discuss-the-need-for-
regulation-in-financial-reporting-1.html
[Accessed 26 july 2018].
Anon., n.d. Regulation in Financial Accounting. In: Accounting Technicians Ireland. s.l.:s.n., p. 18.