Free Custom «Thomas’ Opinion» Essay Paper

According to Thomas (1976), the financial accounting theory requires that two kinds of allocations must be performed in the amortization of non-monetary inputs. First, a series of contribution allocations must be made in which the total net revenues of the entity during successive periods are allocated to the various inputs which are deemed to generate them. In return, it yields a pattern of periodic net revenue contributions, which have been attributed to the individual non-monetary input (Bell 1984.) This pattern is then used to determine the amortization allocation of that cost of input to different accounting periods.

Thomas (1976) argued that the present accounting system does not provide a conclusive way to allocate the interaction effects to the individual inputs. There is a similar problem in interaction among the total inputs of different accounting periods, which afflicts the amortization allocation – independently of the difficulties experienced with the contribution allocations (Riahi-Belkaoui 2001). Whittington (2007) posits that the range of ambiguity in the amortization allocation is at least as large as the net revenue of the entity. These are attributed to the input realized during all the accounting periods.

 

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I agree with Thomas’ opinion on the controversial allocation problem that exists in the accounting theory. I think it is the management’s discretionary abilities to ascertain the method which it can use to allocate the amortized non-monetary inputs. Under the framework above, it has been deduced that the efficient way of handling allocation problem is using a mutually satisfactory allocation method by the parties involved (Saraswathi 2010). The framework ensures that there is an understanding between the conflicting parties on serene strategy, or accounting technique that they will have to deploy. The non-monetary nature of the transactions is a challenge, as it is difficult to quantify the transactions with ease. Upon agreement on the quantifiable value of the non-monetary transactions, the parties can report the values on their books of account.

Although Thomas argues against the accounting theory of allocation of amortized non-monetary inputs, some of the researchers support the criterion. For financial accounting purposes, the most important range of ambiguity is that of the amortization charged on an individual input. According Hirsch (2005), amortization charge usually equals the total historical costs of the related input – the basis for charging the allocation costs on the non-monetary inputs.

Weygandt & Kieso (2008) argues that, although some of the inputs may be deemed to have allocation problems, the non-monetary allocations are embodied in laws, regulations, and customs. When an entity is required by an external authority to allocate, the resulting allocation automatically is useful to the entity regardless of how large the allocation’s range of ambiguity may be, merely because it satisfies that requirement (Keller & Zeff 2005). For instance, if tax regulations prescribe that depreciation allocations must be made, such allocations are thereby rendered useful. Similarly, if authoritative custom requires that manufactured inventories must be reported at “cost,” the necessary allocations will be useful even if they are ambiguous. As such, the allocations are useful for institutional purposes (Carmichael & Whittington 2007).

Consequently, Nobes (2008) posits that a totally ambiguous allocation may be useful to an entity if this allocation serves the purposes of that entity. It may also be useful if it serves a common purpose of two or more entities. Whatever the size of the range of ambiguity, if those individuals and groups who are affected by an allocation have a similar purpose to override any conflicts of its separate interests, they may develop mutually useful allocations. Therefore, mutually useful allocations are vital when there is a conflict of interests between transacting parties.

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Thomas (1976) may condemn the issue of allocation in the current day accounting system, it is vital to the government institutions in accounting and allocating the non-monetary transactions of an organization. Though his claim might be true, the allocation problem is necessary, according to most of the researchers.