Essay: Evaluation Of Commonwealth Bank’s Accounting Strategies

Discuss About The Accounting Financial Report Public Policy?

The business corporations around the world need to develop and publish their annual disclosures that enclose the information regarding their financial performance. The full disclosure principle requires a business entity to provide all the necessary information to support the decision-making process of the end-users. The accounting disclosures are developed by the business entities as per the accounting policies and rules developed by the accounting standard-setting bodies such as IASB. The IASB (International Accounting Standards Board) holds the responsibility of providing standard guidelines to the business entities around the world regarding the development of the financial reports. The IASB has developed the conceptual accounting framework that needs to be adopted by the businesses globally for preparing the financial reports and meeting the stakeholder expectations. The AASB has developed the accounting standards that need to be followed by all the business entities operating in Australia as per the IASB accounting rules. However, the accounting disclosures of various business entities are largely influenced by the political forces that impact the accounting choices of a particular entity (Bazley, Hancock and Robinson, 2014). In this context, the present report aims to present an evaluation of the accounting strategies and choices of an ASX listed corporation. The company selected for the purpose is Commonwealth Bank, a world-recognized Australian bank involved in providing financial services to the population of the country. The annual report of the bank for the last two financial years, 2016 and 2017, are analyzed and examined for assessing its compliance with conceptual framework principles.

The accounting policies of Commonwealth Bank of Australia are decided by the board of directors and they have the power to change the same at any time. Commonwealth Bank of Australia is a leading provider of integrated financial services and is based in Australia. The company is a profit earning entity and is operating globally. The company deals in various kinds of products, they provide services in retail, institutional and business banking and wealth management products (Commonwealth Bank of Australia, 2017). The accounting policies of the company are made quite effective. The accounting policies of the firm are based on historical cost convention. There are certain assets and liabilities which are measured at fair value.  The losses that have been occurred due to the damage of asset are being reversed. The accounting policies are having remained consistent with the standards provided by the AASB. Apart from this the operations and other accounting policies are based on the principle of IFRS. Securities sold under the repurchased agreement on the guidelines provided by the AASB (Ordelheide, 2016).

Assess Accounting Flexibility

The interest expenses of the cost are settled on the basis of amortized cost. Interest expenses include cost of issue that was initially identified as the part of carrying cost. The income received from the interest is brought into accounting by using effective interest method (Commonwealth Bank of Australia, 2017). It calculates amortized cost of a financial instrument. The equities are classified as available for sale financial assets. The financial statement of the company provides a consolidated data of the business of the company in an effective way.  In addition to this the assets of the company are classified on the basis of fair value and are divided into three categories, trading, insurance and other. The firm also uses derivative financial instruments, this aspect includes various things such as forward rate agreements, future options, credit swaps etc (Commonwealth Bank of Australia, 2017).

The firm Commonwealth Bank of Australia is following its accounting policies based on the guidelines of the AASB. The AASB has made it mandatory for all the firms to comply with the rules and guidelines prescribed by AASB (Walton, 2011).  The financial statements and the accounting policies of the Commonwealth Bank of Australia are prepared by the board of directors (Commonwealth Bank of Australia, 2017). The bank is operating in various countries and hence it a global firm. Apart from this, the company is the parent firm for all its subsidiaries. The board of directors is not only responsible for preparing the accounts of the main company but also of its subsidiaries. The principle accounting policies are adopted on the basis of the guidelines prescribed by the AASB. The financial report of the firm is presented in Australian dollars. The general purpose financial report is prepared in accordance to the norms provided by the AASB (Bazley, Hancock and Robinson, 2014).

The accounting principles and policies comply with the International Financial Reporting Standards. In addition to this the interpretations are issued by the International Accounting Standards Board (IASB) and IFRS interpretations committee. The amount presented in the financial statements is rounded up to remain in accordance with the ASIC Corporations Instrument 2016/191 (Commonwealth Bank of Australia, 2017). The firm has made amendments in its accounting policies so that it can align closely with the economic substances. The operations of the subsidiaries are also maintained on the guidelines presented by the AASB. The accounts of the subsidiaries are presented in consolidated form. All the transactions between the segments are conducted on an arm’s length basis. All these practices by the Commonwealth Bank of Australia prove that the company follows the accounting principles as prescribed by the AASB.  The top level management of the firm is engaged in making accounting policies, they do not adopt the path of flexibility, and they have adopted the accounting principles and policies as prescribed by the ASSB (Dagwell, Wines, and Lambert, 2015).

Evaluate Accounting Strategy

The Commonwealth bank is attributed to be leading provider of financial services in Australia and has diversified its business operations in many countries around the world, that is, New Zeeland, Asia, the United Sates and the United Kingdom. As such, the banking corporation accounting strategy is to select the most appropriate accounting policies and choices that enable it to meet its corporate objectives of global expansion (Knight, 2004). The bank has determined its selection of accounting policies that enables it to remain competitive in the in the banking industry of Australia. The corporate, institutional and government clients of the Commonwealth Group incorporate the use of relationship management model that is based on industry expertise and insights. The services offered by the clients include debt raising, financial and commodities risk management, transactional banking capabilities for stretching the Group’s competitive position in the market. The annual disclosure has also provided a description of the accounting policies adopted for identifying and measuring the material risks such as credit risk, material risk and funding risk. The banking corporations has also implemented an Internal Control Capital Adequacy Assessment Process (ICAAP) as per the industry norms in order to develop an understanding  and quantifying the material risks to develop strategic ensures for overcoming the risk identified (Commonwealth Bank of Australia, 2017). The banking corporation has also implemented laws, regulations, legislation, rules and codes of conducts as per the industry norms. Also, the Group has adopted accounting policies regarding its audit as per the accounting process and controls of the industry. The Group has ensured that its audit team has adequate skills and competencies required for auditing a complex banking institution (Kenny, 2009).

The major competitor of the bank is regarded to be Westpac, an Australia bank holding a prominent position in the ‘big four’ banks of Australia. As such, both the banks are operating in Australia and therefore need to comply with the AASB standards and Corporations Act 2001 (2016 Westpac Group Annual Report, 2016). The basic accounting policies adopted for the development of general purpose financial reports is provided under notes to financial statements section by both the banks.  However, there exists some difference between the accounting policies ad estimates of Commonwealth bank as compared to Westpac as pre their nature of business operations. The Banking Corporation has disclosed in its financial report regarding the changed accounting policies in relation to the recognition of Global Asset management of long-term incentives offered to some employees in wealth management. As per the new accounting policy, the long-term incentives of the managers are recognized as expenditure when they are actually given rather than vesting them over the period as per the previous accounting policy (Commonwealth Bank of Australia, 2017)

This change has been introduced in order to aligning the accounting policy as per the economic environment in which the Group operates. The change introduced has resulted in reducing its net profit after tax, retained earnings, decreasing its total assets and enhancing its total liabilities. This change in the accounting policy has been done as per the positive theory of accounting (PAT) as per which managers tend to adopt a particular accounting approach in order to achieve a defined set of objectives and goals. The change in the incentive policies for managers has been done as per the external economic conditions. The accounting transactions relating to long-term incentives of the managers are structured as per its new strategic goals of linking the accounting policies with the economic substance of the arrangements (Henderson et al., 2015).

The Group has also disclosed its accounting strategy in relation to the incentives offered to the managers for managing its earnings. The superannuation plans provided by the banking corporation are calculated by independent fund actuaries. Also, the benefits offered to the employees are recognized in the income statements and the unpaid contributions are included under liability section in the balance sheet (Sheridan, 2016). This is done to ensure that incentives offered to the managers for earning management is not related to the equity position and therefore ensuring that managers does not involve in any fraudulent activities for maximizing their personal benefits (Hussey and Ong, 2017).

The financial statement of Commonwealth Bank of Australia has covered various aspects.  The report has provided enough information about the purpose and vision of the company. In addition to this the report has also provided the idea about the core function of the firm. The firm, Commonwealth Bank of Australia is a global bank situated in Australia. It is operating in various countries and the same information is provided in the report. The bank deals in various services such as retail, institutional etc. all this information has been provided subsequently (Commonwealth Bank of Australia, 2017). The footnotes in the report has provided information about the accounting policies that is been followed by the firm. In addition to this, the footnotes also discussed that the accounting policies implemented by the firm is in accordance with the AASB (Hussey and Ong, 2005).  It is evident from the report that the foreign currency transactions are translated into functional currency using the exchange rates which changes every day. There is no flexibility in the management of accounting policies. The firm works in pure compliance with the AASB (Horngren et al., 2012).

The disclosure provided by the firm is adequate as it has covered wide range of information. It has provided information about the accounting policies that has been used by the firm and the changes made by it in its policies. The accounting policies are followed consistently and are in accordance with the guidelines prescribed by the AASB. The company has framed its policies in accordance with the IFRS because it is a global unit and cannot follow the regulations prescribed by its country only (Commonwealth Bank of Australia, 2017).  The implementation of IFRS principle has certainly proved beneficial for the firm as it has helped them in making their financial statements clearly with proper divisions in accounting sections. The company regularly keeps a check on the accounting policies and makes amendments in the same as prescribed by the AASB. The disclosure by the firm was sufficient as it has provided a wide spectrum of data which is quite beneficial for the general public, investors other parties. This will help them in deciding their future course of action (Commonwealth Bank of Australia, 2017).

The footnotes have provided information about the accounting policies that has been used by the firm. It has also provided information about the policies that has been amended. The footnotes have covered information about the accounting principles and the procedure through which the financial statement has been prepared (Commonwealth Bank of Australia, 2017). The footnotes were quite adequate to analyze the performance and the accounting policies being followed by the firm. The notes have explained various aspects in a proper manner; they have covered all the areas quite effectively and hence were sufficient enough to analyze the performance and operations of the firm.

The firm is working in accordance with the policies and procedures as prescribed by the AASB. In addition to this the policies are framed in compliance with the IFRS (Commonwealth Bank of Australia, 2017).  The report has not provided any information about its compliance with GAAP. The firm is a global unit, apart from AASB it is also following the norms prescribed by IFRS which is accepted internationally. This practice has proved beneficial for the firm as it has made accounting quite easy and effective (Commonwealth Bank of Australia, 2017).

The segment reporting is done on the basis of group’s organizational and management structures. The top level management of the firm review the group’s internal reporting, in order to assess the performance and allocation of resources (Australia, 2011).

The financial report of the banking Corporation has provided all the relevant information related to the accounting policies adopted for preparing its general purpose financial statements. However, there exists some accounting changes in the financial reports of the banking corporation that requires more disclosure identified as red flags as follows:

Unexplained Accounting Policy Changes: The comparison of the financial reports of the banking corporation over the last tow years have indicted that there is reduction in its retained earnings and total assets in the financial year 2017 as compared to that that of the year 2015. The net profit after tax has been decline to $5 million as compared to $10 million from 2016 to 2017. The retained earnings has decreased from $192 million to $188 million and reported a reduction of 477 million in its total assets and increase in its overall liabilities to $115 million (Commonwealth Bank of Australia, 2017). This has resulted from the change in accounting policy of the banking group for recognizing its long-term incentives. As such, the group has not adequately explained the change in its accounting results with the adoption of the significant accounting policy (Marley and Pedersen, 2015).

Increase in Receivables: The Group has also reported an increase in its loans, bills discounted and other receivables in the year 2017 to $ 731,762 from $695,398 in the year 2016 (Commonwealth Bank of Australia, 2017). There is no proper disclosure reading the increase in its receivable by the banking corporation that is an issue of major concern for the bank (Walton, 2011).

Large Asset Write-offs: There are large write-offs of the intangible assets of the group as evaluated from its annual reports (Commonwealth Bank of Australia, 2017). This is also an issue of major concern for the group as large asset write-offs represent a reduction in the recognized value of an asset and lead to a large decrease in the taxable income of the banking corporation. The large asset-write offs of the intangible assets of the group represents a reduction in the goodwill of the banking corporation (Mirza and Ankarath, 2012).

It is quite important for a firm to remain competitive in the market, however various factors affects its competitiveness. The political factors play an important role in accounting standard setting environment (Marley and Pedersen, 2015). The firm is operating in various countries and is a globally functioning entity. Various countries have different political environment, some boots the firm while others restricts its operations. Thus it plays a major role in setting standard for accounting. Commonwealth Bank of Australia has tried its best to remain in compliance with the political factors of every country in which it is operating (Commonwealth Bank of Australia, 2017). Every firm which is operating in a particular political setting has to follow the regulations prescribed by the political factors. In some countries it is quite essential to make the financial disclosures keeping in mind the impact on the economic environment. thus to remain competitive in the international market, Commonwealth Bank of Australia has made policies so that it can remain in compliance with the political factors of the countries in which it is operating (Pietra, McLeay and Ronen, 2013).

The AASB has made it mandatory for the profit earning firms to follow the rules which are prescribed by the AASB itself (Marley and Pedersen, 2015). The firm has not adopted any other flexible route for their accounting policies. In addition to this, ASSB has also made it mandatory to work in accordance with the norms delegated by IFRS so that the firm can remain viable internationally as well. The disclosures made by the firm is quite essential and effective as it helps the general public, investors other to decide their future course of action as to invest in the firm or not (Hoffman, 2016). In addition to this, the disclosures made by the firm helps in gaining information about the performance and productivity of the firm in the global market. The disclosures about the accounting policies and other aspects help in building goodwill of the organization (Commonwealth Bank of Australia, 2017).

Conclusion

It can be inferred from the overall discussion held in the report that development and publishing of proper annul disclosures is essential for business entities in order to promote their sustainable growth and development. The business corporations operating in Australia need to prepare their financial reports as per the AASB standards and the Corporations Act 2001. The AASB has directed all the business entities of Australia to comply with the conceptual accounting framework principles as per the IASB accounting rules and conventions. The analysis of the annual disclosure of the Commonwealth bank has revealed that it has effectively adopted the conceptual accounting framework principles by providing all the relevant, reliable, comparable and understandable information in its annual disclosure statements. The accounting disclosure is prepared as per the industry norms in order to remain competitive and also there is change in some accounting policies as per the mangers decision to achieve certain desired set of objectives. The bank operates its business corporation globally and therefore need to adopt some changes in its annual disclosures as per the political environment of different countries. The potential area of concern for the banking corporation is reduction in net worth over the subsequent years from 2015to 2017 and increase of its receivables and large write-offs of its intangible assets. The banking group is recommended to develop and implement proper strategies for overcoming these existing red flags identified in its annual report disclosure.

References

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