Financial Accounting - Analysis of Stakeholder Theory and Leasing

This financial accounting assignment addresses two key questions. The first analyzes stakeholder and legitimacy theories in the context of corporate environmental and social disclosure. It examines how organizations use these theories to manage their relationships with stakeholders and main...Read More

FINANCIAL ACCOUNTING

Financial accounting
Answer to 1
Both stakeholder and legitimacy theory have been implemented in order to investigate corporate
environmental and social disclosure practices in the developed countries. On one hand, the
legitimacy theory primarily depends on the ideology of social contract wherein the organizations
seek a positive interconnection with the society in order to make sure that resources are readily
available to them. It can be regarded as a common assumption that the activities of an
organization are proper, desirable, or effective within some socially established system of
beliefs, values, definitions, and values. Furthermore, organizational legitimacy cannot be
considered a steady state but instead it is a variable one. Besides, such variability is not
temporary in nature but also spatial across cultural and stakeholder groups. Thus, relying on the
perception of an organization of their level of legitimacy, an organization can adopt legitimation
measures (Richardson & Eberlein, 2012). Nevertheless, such organizational legitimacy can be
enhanced by the utilization of symbolic measures communicating a public image that is aligned
with the primary objectives of an organization. On the other hand, the stakeholder theory
primarily implies that the organization’s prime objective is to establish stakeholder value. The
enhancement of the stakeholder value is the major concern of the organization. It is primarily
engaged in finding the real stakeholders of the organization and the ways by which they interact
and coordinate in order to leave an impact upon the organization (Richardson & Eberlein, 2012).
In short, it can be commented as a method that will drive the organization and seek betterment of
the entire organization. Furthermore, organizations operate with the prior assistance of social
contracts that make the stakeholders accessible and eligible to several rights and responsibilities.
Besides, it must be taken into consideration that the organizations that are capable in designing
an efficient and adequate link with its stakeholders are more likely to succeed in the competitive
market than the others must.
Both the theories idealize an organization as a part of a wider social system wherein such
organization influences, and is in turn affected by other groups prevailing within the society.
While on one hand, the legitimacy theory explains about the anticipations of a society in general,
the stakeholder theory on the other hand offers a wider resolution by referring to a specific group
in a society (stakeholders). Therefore, the reliance is on a specific group and not the community
at large that raise question on the validity of the theory. Moreover, the stakeholder theory accepts
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Financial accounting
the ideology that because distinct groups of stakeholders will have varied perspectives about how
an organization must conduct its affairs, there must be several social contracts that are negotiated
with such varied groups of stakeholders instead of one single contract with the society in general.
Besides, like the stakeholder theory, the legitimacy theory also takes into account the widespread
and competing stakeholder groups. The only difference in this scenario is that the stakeholders
implied within the legitimacy theory do not have direct links with an organization but are a
relevant part of the larger society within which such organization operates (Kruger, 2015).
Even though both theories are helpful to the society, yet they possess various deficiencies when
it comes to social and environmental practices. The results based on legitimacy theory are often
difficult to be quantified and be expressed in monetary terms. Hence, expressing the theory
results is a tedious task and leads to complexity. In simple words, such theory generally relies
upon indirect aspects. As a result, accounting for such affairs seeks to account for enhancement
or prevalence of specific symptoms associated with the performance of particular activities
undertaken to maximize the legitimacy of an organization. Such accounting also includes social
and environment (sustainability) practices. Similarly, stakeholder theory has more of theoretical
particularities that have not been utilized in the explanation of social and environmental
accounting. In other words, stakeholder theory is simply inter-related, a multifaceted perspective
that embodies the presumptions that are acknowledged from the aspect of a political economy.
This means that the foundation of the theory resides on various theoretical impact and not on a
practical one leading to complexity.
Answer to 2
a. Organizations often opt to lease long-term assets instead of buying them. Therefore, the
decision to lease relies upon various factors like efficient financial terms, keeping assets
off the balance sheet, etc. Operating lease offers various advantages that make it the first
choice of companies. Firstly, the lesser can retain the ownership of property during and
after the term of the lease. Secondly, operating lease minimizes administration for the
end-user and allows them to hand the asset back at the end, whilst paying off one single
monthly installment (Kwok et. al, 2005). Thirdly, since operating leases are treated as an
expense, they remain off the balance sheet, thereby giving the right to lesser to terminate
the lease even at shorter notice.
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Financial accounting
b. The revision of accounting standards can easily have an influence on computations of
financial covenants in lending arrangements and other economic transactions. In debt
contracts, operating leases are not considered as debt but during the revision of
accounting standards, such operating leases may shift into the definition of debt. As a
result, the amount of debt will be increased that will possess a ripple influence throughout
the debt contract (Brown, 2011). Therefore, if revision in accounting standards may cause
debt to be enhanced by a larger amount, organizations are more likely to breach
covenants that are included in the debt contracts (Gordon et. al, 2012).
c. Organizations that have a potential management and can gain considerably from the
potential tax reduction from the accounting method are most likely to lobby against the
accounting standard. The management of such organization lobby for accounting method
as it leads to higher level of income. Further, if the firm’s security prices are most likely
to be influenced from the accounting numbers then they are most likely to lobby (Daske
et. al, 2008). The current scenario of big firms clearly indicates that the accounting
numbers are majorly responsible for the security prices and hence, management needs to
take adequate consideration for the same (Georgiou, 2004).
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Financial accounting
References
Brown, P 2011, International Financial Reporting Standards: How real are the benefits?
Accounting and Business Research, pp. 269-285.
Daske, H, Hail, L. Leuz, C & Verdi, R. S 2008, ‘Mandatory IFRS reporting around the world:
Early evidence on the economic consequences’, Journal of Accounting Research, Vol. 46, No.
5, pp. 1085-1142.
Georgiou, G. 2004, ‘Corporate lobbying on accounting standard methods, timing and perceived
effectiveness’, Abacus, 40 (2), pp. 219–237.
Gordon, L. A, Loeb, M. P & Zhu, W 2012, ‘The impact of IFRS adoption on foreign direct
investment’, Journal of Accounting and Public Policy, vol.31, no. 4, pp. 374-398.
Kwok, W. C. C. and Sharp, D. 2005, Power and international accounting standard setting –
evidence from segment reporting and intangible asset projects, Accounting, Auditing and
Accountability Journal, vol.18, no. 1, pp. 74–99.
Richardson, A. J. and Eberlein, B. 2011, ‘Legitimating transnational standard-setting: the case of
the International Accounting Standards Board’, Journal of Business Ethics, vol. 5, no. 3, pp.
217–245.
Kruger, P 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics,
pp. 304-329
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