Accounting treatment of financial instruments in case company X: Practice and challenges
Nieminen, Suvi (2024)
Nieminen, Suvi
2024
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2024052013416
https://urn.fi/URN:NBN:fi:amk-2024052013416
Tiivistelmä
This thesis is a qualitative research that investigates the accounting treatment of financial instruments and its challenges through a case study. The commissioning company is a Finnish investment firm that practices security trading as their main business activity. The topic is current since financial instruments are not much discussed in education or the Finnish legislation, and accountants seem to consider the topic difficult. The research is delimited to only focus on one case company and the financial instruments relevant for them.
The theoretical framework consists of the legislation, instructions from authorised organisations, relevant literature and publications from specialists in the relevant field. The theoretical part discusses the general principles of accounting, the accounting treatment and differences of the asset categories as well as each financial instrument, their accounting treatment and exceptions separately. Lastly, the significance of accounting software is discussed.
The research was conducted as a qualitative, cross-sectional research with descriptive and evaluative characteristics. The research was conducted in two phases and by utilising two data collection activities. The primary data was collected from interviews and the secondary data was collected through observations. The data was analysed using a thematic analysis.
The research found that the case company classifies financial instruments in all three categories including fixed assets, trade assets and financial assets according to general rules. Exceptions are justified with general principles. The recording of transactions is done with an entry form through FA Solutions which creates journal entries to the main ledger based on transaction type and form of the instrument. The journal entries are automated differently between asset categories as required. Transactions update the share amount, fair value, acquisition cost and remaining commitment from which the software calculates closing values and value reductions. Valuation is done by the lower value principle applying the general rules and considering exceptions. Challenges in classification derived from contradicting or insufficient instructions. Challenges with recording and valuation derived from unclear reporting from foreign issuers and insufficiency of transactions in FA, which do not consider differences between natures of the same transaction type and instruments of the same form. These result in incorrect share amounts, fair values and acquisition values which create inaccurate reports and manual work.
The author recommends the company to consult the software provider on the possibility to update the available transaction types for each instrument type to gain efficiency, accuracy and reliability of the accounting process. It is advised to maintain another database for valuation purposes until the software can be relied on. The relevant organisations should improve their instructions on certain financial instruments.
The theoretical framework consists of the legislation, instructions from authorised organisations, relevant literature and publications from specialists in the relevant field. The theoretical part discusses the general principles of accounting, the accounting treatment and differences of the asset categories as well as each financial instrument, their accounting treatment and exceptions separately. Lastly, the significance of accounting software is discussed.
The research was conducted as a qualitative, cross-sectional research with descriptive and evaluative characteristics. The research was conducted in two phases and by utilising two data collection activities. The primary data was collected from interviews and the secondary data was collected through observations. The data was analysed using a thematic analysis.
The research found that the case company classifies financial instruments in all three categories including fixed assets, trade assets and financial assets according to general rules. Exceptions are justified with general principles. The recording of transactions is done with an entry form through FA Solutions which creates journal entries to the main ledger based on transaction type and form of the instrument. The journal entries are automated differently between asset categories as required. Transactions update the share amount, fair value, acquisition cost and remaining commitment from which the software calculates closing values and value reductions. Valuation is done by the lower value principle applying the general rules and considering exceptions. Challenges in classification derived from contradicting or insufficient instructions. Challenges with recording and valuation derived from unclear reporting from foreign issuers and insufficiency of transactions in FA, which do not consider differences between natures of the same transaction type and instruments of the same form. These result in incorrect share amounts, fair values and acquisition values which create inaccurate reports and manual work.
The author recommends the company to consult the software provider on the possibility to update the available transaction types for each instrument type to gain efficiency, accuracy and reliability of the accounting process. It is advised to maintain another database for valuation purposes until the software can be relied on. The relevant organisations should improve their instructions on certain financial instruments.