Limited Liability Essay -- Business Finance

The term â€Å"Limited liability† is generally used to describe a situation where a person is excused entirely or in part from incurring a debt after taking an action which would have required under the prevailing rules of the legal system that they pay money. The doctrine of limited liability as it relates to corporate law is central to the principle that a company upon incorporation assumes a corporate personality independent of its members. This means that a new legal person is created at law and accordingly has its own assets, liabilities and rights, inter alia, to enter into and be bound by its own contracts. In some respects, the name, â€Å"Limited liability† Company is greatly misunderstood. It is a common faux pas to think that the liability of the company for its various debts is limited and that the doctrine was created as a loophole by which the company can get out of its contractual obligations. This is however not the case as on the occasion of insolvency, a company must liquidate all its assets to meet the demands of the creditors. Where the value of these assets is insufficient, the company will call on the unpaid share capital of its members or the amount which they have agreed to contribute to the assets of the company in an event of it being wound up . It is the liability of these members that is limited and not that of the company. There are also exceptional circumstances where courts will allow creditors pierce the â€Å"corporate veil† making it mandatory for shareholders to satisfy creditors’ claims. Hence for the shareholder, limited liability mea ns participation in a company with limited risk. For the creditor however, it means the very real risk that in the event of bankruptcy he could remain unpaid for g... ...panies and subsidiaries- The corporate veil [1991] company Lawyer 12(1) pp 16-17 Ireland P (2010), â€Å" Limited liability, shareholder rights and the problem of corporate irresponsibility†, Cambridge journal of Economics, vol 34, pp837-856 Ibid Hatfield was one of a long series of fatal rail accidents in which Rail track’s working practices and safety record was implicated. Blankenburg,S and Plesch, D (2007) â€Å"Corporate rights and responsibilities: restoring legal accountability† Retrieved on 12th of February 2012 from http://www.stwr.org/multinational-corporations/corporate-rights and responsibilities- restoring-legal-accountability-html Ireland P (2010), â€Å" Limited liability, shareholder rights and the problem of corporate irresponsibility†, Cambridge journal of Economics, vol 34, pp837-856 ibid ibid

Generally Accepted Accounting Principles (U.S. GAAP) Essay

The United States Generally Accepted Accounting Principles (U.S. GAAP) and the International Financial Reporting Standards (IFRS) are both effective ways to report financially account for one’s business assets but they have several differences. in this paper I will attempt to outline a few of the more significant differences and allow you to make up your mind as to which of these two systems is the better one. The first difference that is widely accepted between the two methods is that U.S. GAAP is rules based and IFRS is principle based. This means that IFRS allows more for adaption of the circumstances and allows for professional judgment while U.S. GAAP is more stringent and less forgiving. The argument back and forth is that the rules for U.S. GAPP are too large and broad stroked which doesn’t allow for different odd situations, while it is argued that the IFRS is too biased which can allow for too much manipulation. A primary difference between the U.S. GAAP and the IFRS is the way the business financial statements report the value of the company’s property and holdings. The U.S. GAAP method utilizes the Historic Cost Principle (HCP) while the IFRS uses the Fair Market Value (FMV). Under the HCP the asset owned by the company if forever recorded at the price for which it was initially purchased while the FMV approach allows for a periodic re-assessment of the current value of the asset. This has both positive and negative effects based on the economy and the housing market. Over time you would expect that the value of property to rise, for example if a company had bought my parents 2 bedroom home for the listed price of $19,500 in 1980 knowing that the same house is now appraised at $105,000 then it would be beneficial to re appraise the house under the FMV as the asset is worth a lot more than the original $19,500. The down side for using the FMV would have been in 2009 when the housing market collapsed. At that point the house was appraised at $87,000. If the year prior the company recorded its asset at $105,000 then it would have taken a loss when the house was reappraised. So you can see that utilizing the FMV in this case is a gamble based on the fluctuation of the outside market and also raises the question of how often should the re-appraisals be done to be the most advantageous to the company. The next difference I want to highlight is the Last In, First Out (LIFO) method. This is a method commonly used in the United States under the U.S GAAP primarily because it helps with tax purposes. Utilizing LIFO the company applies the latest cost of providing the goods to the entire supply inventory regardless of what the company paid for the good already in stock. This shows a decrease in the gross profit margin therefore lowering the taxes at the end of the year. For example if a company manufactures 1,000 tubes of toothpaste a month at $1 a tube and sells them for $2 each then they would make a profit of $1,000 a month or $12,000 a year. If the price of manufacturing the toothpaste went up to $1.50, 6 months into the year then using the LIFO method the company would record that there profit is only .50 a tube or $6,000 a year and would only pay taxes on that $6,000 vice the $12,000 even though they made the full dollar profit on the toothpaste for the first 6 months. This is a p ractice that is used primarily in the U.S. because of our tax laws and not endorsed by other countries or under the IFRS. Another difference between the two programs falls under the category of Liabilities. A liability as defined in the text is â€Å"An economic obligation (a debt) payable to an individual or organization outside of the business†. This difference between the two programs is slight and goes back to my first paragraph dealing with rules versus principle based assessments. Both IFRS and U.S. GAPP accept the that the future event will probably take place but the IFRS defines the word probable as anything greater than 50% while the U.S. GAAP with its more stringent rules defines probable as 75-80%. This means that more liabilities would be recognized with IFRS then U.S. GAAP. The last difference that I will go over is that of brand names and patents. Under the stringent rules of U.S. GAAP, the only time a company can account for the capitalization or equity of a patent or brand is if the company purchased the patent from an outside source. If it was thought up or created by the company internally the company would have to record the expenses of the development on the income statement. Under IFRS the company would be allowed to count the potential equity based on the probable future benefits. Most of the world has already adopted the IFRS and the Financial Accounting Standards Board is working on a world wide solution in bridging the gap between these two programs. In closing the U.S. GAAP program is more stringent while the IFRS allows for more flexibility. Although this flexibility associated with the IFRS program seems like it would be more beneficial to more companies, the argument would still be is flexibility better or just a lack of integrity. References: Harrison, Horngren, & Thomas 9th Edition St Joseph’s University (http://www.sju.edu/int/academics/hsb/accounting/IFRS.html) Bass, Solomon & Dowell (http://www.bsd-cpa.com/index.php/comparing-and-contrasting-international-financial-reporting-standards-ifrs-and-generally-accepted-accounting-principles-gaap)

Literature Questions and Answers - 619 Words

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