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Contemporary Accounting Issues

Accounting theories and concepts are essential as they help assess the accounting and financial reporting practices undertaken by the firms. Different types of accounting theories and concepts are there. This report attempts to apply various crucial accounting theories and accounting concepts to analyse the key initiatives and issues in an Australian ASX Top 100-listed company. Commonwealth Bank of Australia is selected for the report because of its listing under the ASX Top 100 companies. The first part discusses contemporary accounting issues through the lens of various accounting theories. The second part discusses the obligations of the conceptual framework and the Commonwealth Bank of Australia's compliance with those obligations. The third part sheds light on the positive and normative accounting theories. The fourth part assesses the implications of capital market research for the bank. The last part discusses the possibilities of earnings management in the bank.

In the contemporary business world, the main issues in accounting can be seen in the areas of measurement, disclosure, corporate governance, and corporate social responsibility (CSR).

The concept of measurement is important in accounting, and it refers to the representation of data in terms of a specific measurement base. The AASB Conceptual Framework for Financial Reporting mentions two measurement bases: historical cost and current value. As mentioned in the 2021 Annual Report of Commonwealth Bank of Australia, the historical measurement base has been used to prepare the financial statements except for certain assets and liabilities like the derivative instruments, which have been measured in fair value, a part of the current value measurement base (2021 Annual Report, 2022). The concept of disclosure in accounting indicates the obligations of the firms to disclose all material and relevant financial information on time. The bank ensures that the relevant material information is released to the users promptly.

Both the agency theory and stewardship theory are associated with corporate governance as they say that the shareholders of Commonwealth Bank of Australia have appointed the directors as the agents to run the business on their behalf, and thus, the directors work as the stewards to maximise the shareholders' wealth by achieving the firms' performance objectives (Glinkowska and Kaczmarek, 2015). As a result, the Board of Directors of the bank has established a corporate governance framework to satisfy the expectations of the shareholders and other stakeholders in a dynamic business environment (Corporate Governance – CommBank, 2022). The stakeholder theory is associated with the CSR or sustainability initiatives of the bank as the bank has separately considered the concerns of its key stakeholders like the employees, customers and others to address their issues.

The AASB Conceptual Framework for Financial Reporting can be an essential text arranging the general purpose of financial reporting's objectives and concepts. Certain vital financial aspects are included in this conceptual framework, like the general purpose financial statements' objectives, qualitative characteristics of financial reporting, definition and measurement requirements of the critical financial elements like assets, liabilities, and others. It puts specific obligations on the management of the Commonwealth Bank of Australia during the preparation and presentation of its financial statements (Conceptual Framework, 2022).

Measurement and Disclosure in Accounting

By complying with the requirements of this conceptual framework, the management of Commonwealth Bank of Australia has prepared its financial statements on a going concern basis using the historical and fair value measurement bases (2021 Annual Report, 2022). The bank has complied with the definitions of the key financial elements such as the assets, liabilities, equity, and others as provided by this conceptual framework while preparing and presenting its financial statements. The recognition and measurement criteria of these key financial elements mentioned by the conceptual framework have been followed by the bank as well. As a result of compelling compliance with these requirements, the bank has been able to maintain the fundamental and enhance qualitative characteristics of accounting information in the financial statements (Conceptual Framework, 2022).   

Two of the most significant accounting theories are the positive accounting theory and normative accounting theory. The positive accounting theory is associated with the practical approach of the accounting profession by considering the business's current state of affairs and facts and statistics. This theory examines real-world business transactions and compares the incoming with the outgoing to identify any inconsistency (Zhou, 2019). Therefore, this theory is relevant to how financial reporting is carried out in the Commonwealth Bank of Australia, as the senior management is responsible for assessing the incoming cash and other resources with outgoing of the same in order to assess how the bank is performing. However, the normative accounting theory cannot be applied in the business context because this theory is based on real-life observations so that advice can be made on what should be done (Schroeder, Clark and Cathey, 2019). Therefore, this theory is relevant to the accounting standard-setters as they develop accounting policies based on real-life observations of financial reporting and accounting issues.

The information perspective of accounting figures is signified by the capital market research. It is held by the capital market research that the accounting data and information are pertinent to the firm's valuation if they can influence the stock price of the firm or if they provide incremental information that influences the perception of the investors about the firm's value (Henry and Leone 2016). As a result, the capital market research makes the financial statements of Commonwealth Bank of Australia more pertinent as they provide the investors with information on how the bank is performing and what the bank's overall financial standing is. This information is significant to evaluate the performance of the bank's stock. The capital market research also mentions that the investors have started putting more weight on the firm's non-financial information in the areas of CSR and sustainability. This might be one reason for which Commonwealth Bank of Australia has disclosed all the information on its CSR and sustainability initiatives in its annual report and on its official website.

In accounting, earnings management can be viewed as a method to manipulate the financial records for improving the appearance of a firm's financial position and performance (Kliestik et al., 2021). There is a possibility that earnings management could take place in the Commonwealth Bank of Australia due to some reason.

Corporate Governance and CSR

The bank has entered into some agreements with its lenders to get the loan capital, and these agreements require the bank to operate within the terms of these agreements (2021 Annual Report, 2022). Now, suppose it is observed by its senior management that there is a major risk that the bank may violate those agreements. In that case, the senior management could manage the bank's earnings manipulatively so that better financial performance and health of the bank is appeared (Cheng, Lee and Shevlin, 2016).

Apart from the fixed remuneration, the bank's directors are entitled to receive short-term variable remunerations (STVR), long-term alignment remuneration (LTAR) and long-term variable remuneration (LTVR) based on their financial and non-financial performance (2021 Annual Report, 2022). Tying remuneration with performance may motivate the directors to show a better financial and non-financial performance of the bank by applying the earnings management techniques (Sohn, 2016).

These situations represent the possibilities that earnings management could occur in the bank. In order to maintain the quality of earnings, an effective internal control mechanism over financial reporting is required in the bank.

Conclusion

It can be seen from the above discussion that the contemporary accounting issues are related to key accounting concepts, such as measurement, disclosure, CSR and corporate governance. The above discussion shows that the Commonwealth Bank of Australia has complied with the requirements and obligations of the AASB conceptual framework to prepare and present its financial statements. The analysis of the normative and positive accounting theories shows that the bank has integrated the positive accounting theory in its financial reporting as the management aims to register profit by ensuring higher inflows of cash and other resources than outflows. The analysis of capital market research shows that the investors have started considering both financial and non-financial information of the companies to assess their overall performance in order to make investment-related decisions. It can also be seen from the above discussion that the senior management may be interested in managing the bank's earnings since their bonuses are linked with the financial and non-financial performance of the bank. The senior management may also be motivated to manage earnings if the bank is on the verge to violate some loan agreements.

References

Aasb.gov.au. 2022. Conceptual Framework. Available at: https://aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19_COMPmar20_07-21.pdf (Accessed: 5 April 2022).

Cheng, Q., Lee, J. and Shevlin, T., 2016. Internal governance and real earnings management. The accounting review, 91(4), pp.1051-1085.

Commbank.com.au. 2022. 2021 Annual Report. Available at: https://www.commbank.com.au/content/dam/commbank-assets/about-us/2021-08/2021-annual-report_spreads.pdf (Accessed: 5 April 2022).

Corporate governance - CommBank 2022. Available at: https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html (Accessed: 5 April 2022).

Glinkowska, B. and Kaczmarek, B., 2015. Classical and modern concepts of corporate governance (Stewardship Theory and Agency Theory). Management, 19(2), p.84.

Henry, E. and Leone, A.J., 2016. Measuring qualitative information in capital markets research: Comparison of alternative methodologies to measure disclosure tone. The Accounting Review, 91(1), pp.153-178.

Kliestik, T., Belas, J., Valaskova, K., Nica, E. and Durana, P., 2021. Earnings management in V4 countries: The evidence of earnings smoothing and inflating. Economic Research-Ekonomska Istraživanja, 34(1), pp.1452-1470.

Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Sohn, B.C., 2016. The effect of accounting comparability on the accrual-based and real earnings management. Journal of Accounting and Public Policy, 35(5), pp.513-539.

Zhou, Y., 2019. A concept tree of accounting theory:(Re) Design for the curriculum development. Education Sciences, 9(2), p.111.

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My Assignment Help. ' Essay On Application Of Accounting Theories And Concepts Using Commonwealth Bank Of Australia As A Case Study' (My Assignment Help, 2022) <https://myassignmenthelp.com/free-samples/aacct3003-contemporary-issues-in-accounting/positive-accounting-theories-file-A1E1A8E.html> accessed 20 July 2024.

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