Analysis Of Australian Companies' Compliance With Relevant Accounting Standards Essay.

You are then to obtain copies of those companies’ latest annual reports and investigate three areas if there are three members in your group, otherwise four of the following areas:

1.Review the most recent financial statements of two Australian firms from different industries. Analyse, compare and discuss both firms’ disclosure of leasing to explore both firms’ compliances with relevant accounting standard and support your arguments using relevant research literature.

2.Review the most recent financial statements of two Australian companies from different industries. Analyse, compare and discuss both firms’ disclosure of earnings per share to explore both firms’ compliances with relevant accounting standard and support your arguments using relevant research literature.

3.Review the most recent financial statements of two Australian companies from different industries. Analyse, compare and discuss both firms’ disclosure of liabilities including provisions and contingent liabilities (excluding lease liabilities) to explore both firms’ compliances with relevant accounting standard and support your arguments using relevant research literature.

4.Review the most recent financial statements of two Australian companies from different industries. Analyse, compare and discuss both firms’ disclosure of intangible assets to explore both firms’ compliances with relevant accounting standard and support your arguments using relevant research literature.

5.Review the most recent financial statements of two Australian companies from different industries. Analyse, compare and discuss both firms’ disclosure of income tax expense, benefits and obligations to explore both firms’ compliances with relevant accounting standard and support your arguments using relevant research literature.

The report is prepared to explain and demonstrate the compliance of the companies listed on Australian stock exchange concerning various particular areas. Selected company for illustrating the compliance disclosure are companies from energy sectors that is Acacia Coal limited and Abilene Oil and Gas limited. Explanation of disclosure is done in several areas such as leasing, liabilities that includes contingent liabilities and provisions and earning per shares. Report is prepared to explore the comparison of both the chosen organizations in areas of lease, liabilities and intangible assets. Evaluation of the compliance disclosure in the selected areas is done by conducting analysis of annual report of these companies. Acacia coal limited is a public listed company on Australian stock exchange that is engaged in development and exploration of coal and mine. It is based in West Perth in Australia. On other hand, Abilene Oil and Gas limited is an oil exploration, production and development company having interest in oil operating assets based in South Melbourne in Australia. For the evaluation of the disclosure of accounting, standard requirement in respect of three selected areas, which is leasing, liabilities and earnings per share is done by analyzing their respective financial reports.

The accounting treatment for lease is currently treated under the standard AASB 117 where the liability pertaining to lease relating to future payments is measured at present value and it is discounted at the rate that is implicit in the lease. Lease incorporate the payment such as fixed payment, amount that is payable under a residual value guarantee and lease incentives that are deducted from payments. Two types of expenses are recognized over the lease terms and this involves depreciation on the right to use assets and the interest on lease liabilities. For the operating lease, recognition of lease payment by lessor should be recognized as income on any systematic basis and on a straight-line basis. Costs of assets shall be recognized by lessor including the depreciation that is incurred on the earning of lease as an expense (aasb.gov.au, 2018). The determination of whether the underlying assets should be recognized as operating lease for impairment and accounting for any impairment loss should be done in accordance with IAS 136. Any considerable changes in carrying amount of the net investment of operating leases should be provided with a qualitative and quantitative explanation (Carlon et al., 2015). A maturity analysis of all the receivable concerning lease payments should be recognized by organization. Disclosure requirements leading to assets that are subjected to operating leases shall be done in accordance with the other applicable standards.

Analyzing the annual report of Acacia coal limited relating to lease disclosure

Under the existing lease accounting standard, classification of lease is done to the extent of rewards and risks that is incidental to leased assets ownership with the lessee or lessor. Classification of lease as finance lease is done if the rewards and risks incidental to ownership is transferred substantially (Hoggett et al., 2015). On other hand, if there is no substantial transfer of all rewards and risks to the assets ownership, then lease is regarded as operating lease.

It has been ascertained from the annual report of the companies that is Acacia coal limited and Abilene Oil and Gas limited that they currently comply with existing leasing standard that is AASB 117. While evaluating the annual report of Acacia Coal limited, the information about leases is mentioned in the notes to financial statements. Acacia coal group is required to comply with the minimum obligations concerning expenditures as specified by Queensland state government for maintaining the current rights of tenure to exploration tenements (acaciacoal.com.au, 2018). 

Exploitation of group related to lease forms the basis of future evaluation of expenditure and capitalized exploration. Currently the group is undergoing the assessment of the adoption of new leasing standard IFRS 16 and its influencing their operating lease. On the implementation of the standard, there will be capitalization of right to use assets in the statement of financial position that is measured at unavoidable future lease payments present value to be made over the lease term (acaciacoal.com.au, 2018). 

Annual report of Acacia limited does not make a detailed disclosure of the lease in the notes to financial statements. Company has employed the existing lease standard AASB 117, they are seeking adaption of the new lease standard that is AASB 116, and this will lead to elimination of classifications of finance and operating lease. There will be capitalization of right to use assets in the financial statements that are subjected to exceptions and the measurement is done using the present value of unavoidable payment relating to future lease over the term of lease. Adoption of new lease standard will be providing several benefits to company relating to lease recognition (Narayanaswamy, 2017).

Abilene has fifty percent net working interest in leases that covers approximately 15000 acres of Wherry Oil fields and Welch Bornholdt. Company has announced it in financial year 2015 about its agreement to fund exercise across the final and third option of acquiring leases in some project. On other hand, the application of new lease standard by Abilene Oil and Gas limited, some of the expectations concerning the organization is related to short-term lease or lease hat are less than 12 months and leases of low value assets (abilene.com.au, 2018). There will be depreciation charge of leased assets and recognition of leased liabilities as interest expenses. However, the expenses under the new standard will be higher as against expenses recorded under the AASB 117. There will be separation of components of principal and interest under the new standard. Company regarding the new standard assesses changes and it is expected that there will not be any material impact on the financial statements. However, from the analysis of the annual reports of both the companies, it can be seen that there was not much information was provided regarding lease and the obligations to lease standard. Additional information was not made in the annual reports relating to leasing standard. 

Analyzing the annual report of Abilene Oil and gas limited relating to lease disclosure

There was no detailed disclosure about leases agreement and currently, organization does not have any lease contracts as depicted from the statement of financial position. However, they make the implementation of the existing lease standard. 

Abilene Oil and Gas limited will be replacing existing lease standard by the new standard IFRS 116 that will lead to elimination of lease classification. Under the new standard, expenses incurred on organization relating to lease contracts will be more under the new standard compared to existing standard. There will be replacement in operating expenses by depreciation of profit and loss along with interest expenses that will lead to improved operating expenses. Moreover, there will be separation of lease payments into both principal and interests and there will not be any substantial change in lessor amount of lease.

Now, on comparing the disclosure requirement concerning leases of both the companies, it can be inferred that there is no detailed presentation of lease arrangement of organization. Nonetheless, users will be able to make the identification of compliance with the existing lease standard that is AASB 117. Abilene Oil and Gas limited as well as Acacia coal limited does not have lease contracts in the current year as well as previous financial year. This was clearly identified from the balance sheets and there was no mention about leases in the notes to financial statement.  Both the organizations are intending to replace the existing standard of lease with new lease standard that leads to better accounting treatment of lease and more transparent and faithful representation of lease agreements. The introduction of new lease standard will help in bringing much needed transparency and faithful representation of contracts relating to lease, as there will be better-balanced lease versus buy decisions by management (Hoggett et al., 2014). Elimination of lease classification and its disclosure on balance sheet will end up making rough estimates and arrive at accurate lease commitments.

An entity is required to disclose the carrying amount at the beginning of each financial period. Any amount of additional provisions that is made by reporting entity and any increase in provision will also mentioned in the financial statement. Any unused amounts that will be received during the period are to be mentioned. For each class of provisions, entity should make the disclosure of expected timings and nature of obligations, amount of any expected reimbursement in the financial statements. Any indications leading to uncertainties should also be disclosed in the report. In relation to contingent liabilities, an entity is required to make disclosure about the description of contingent liabilities along with the nature of descriptions. An entity should make disclosure about the link between contingent liabilities and provisions when the contingent liability and provisions are arising from the same set of circumstances. Recognition of contingent liabilities are done when the entity has present obligations and when there is probability of outflow of economic benefits for settling the obligations (Jouber et al., 2017).

For accounting for provision and contingent liabilities, it is required by entities to comply with IAS 137. Provisions are required to be recognized by entities when there are present obligations and there is a reliable that can be made for the obligations. Measurement of provisions is done for the settlement of present obligations and at the best estimate of expenditures. This incorporates time value of money, uncertainties and risk considerations and future events in the evidence of sufficient objectives. Recognition of contingent liabilities is prohibited by organization as per IAS 137 when the recognition criteria is not met under present obligations and existence of other possible obligations as confirmation is required for reporting entity present obligations leading to resources outflow.

The financial report of Abilene Oil and Gas limited is prepared on a going concern by contemplating realization of assets and settlement of liabilities in the ordinary course of business. Financial report does not incorporate any adjustments relating to recoverability and classification of liabilities that might be incurred should the consolidated entity does not continue as going concern. Total amount of liabilities of the group is divided into current liabilities and noncurrent liabilities. Amount of net current liabilities stood at $ 4268528 as depicted in the consolidated financial statement (abilene.com.au, 2018).

Abilene Oil and gas limited does not have any amount of contingent liabilities for the year ending 31^st December, 2016. Consolidated entity derecognizes the total amount of liabilities if it loses control over as subsidiary. Liabilities are recognized at fair value and the liabilities that are disclosed on the statement of financial position are based on noncurrent and current classification. It is required by the standard for financial liabilities to relate the portion of alterations in the fair value by relating it to the credit risks of own entity. Judgement and estimates is continually evaluated by the management of group in relation to liabilities, provisions and contingent liabilities (abilene.com.au, 2018). Equity method of accounting is used to incorporate the liabilities of joint venture or associates in the consolidated financial statements. 

The maturity profiles of financial liabilities are matched for managing the liquidity risks associated with the company. Disclosure of consolidated entity’s liabilities is done at fair value using fair value hierarchy and this helps in reflecting the input significance used in making measurements (abilene.com.au, 2018). Provisions are one of the components of noncurrent liabilities. 

Abilene Oil records total amount of provisions and Gas limited for the financial year 2017 and 2016 stood at $ 259809 and $ 189934 respectively (abilene.com.au, 2018).

From the analysis of annual report, it can be seen that Acacia does not have any noncurrent liabilities attributable to it in the recent financial years. The financial statement of organization is prepared on an ongoing basis by making the settlement of all liabilities that is incurred in the ordinary course of business. There should be classification of liabilities should the organization does not continue as a going concern (acaciacoal.com.au 2018). It has been ascertained that the financial report has been prepared in conformation with the requirements of AASB by affecting the accounting policies and reported amount of liabilities. Measurement of non contingent liabilities are done by group by discounting the expected future cash flow that would reflect the current assessment of market relating to the time value of money at the pre tax rate. Liabilities of subsidiary is derecognized by the group upon the loss of control and the liabilities that are denominated in the foreign currencies are translated into functional currency at the reporting date at the given exchange rate. Moreover, liabilities denominated at fair values are retranslated into foreign currency if they are measured at fair value. Only when the organization ahs the intention of realising liabilities and assets simultaneously, then there is offsetting of financial assets and liabilities (Callen, 2015). Recognition of non-derivative financial liabilities is done at fair value and it is done at the trade date when the company becomes party to contractual instruments provisions. Measurement of such financial assets is done at amortised cost subsequent to this recognition by using method of effective interest rate (acaciacoal.com.au 2018). Other liabilities relating to employee benefits are done at the reporting date and at the amounts that are expected to be paid during the liabilities settlement. Organization has not recorded any contingent liabilities and no disclosure has been made for the same. 

In relation to contingent liabilities, measurement of contingent liabilities is done by discounting the expected future cash flow at the pre tax rate that reflects the market assessment in the current scenario. Any contingent considerations are incorporated in the finance cost. There were no contingent liabilities that are recorded in the financial year ending 30^th June 2017. Recognition of provisions on other hand is done if the group has constructive or present legal obligations that can be reliably estimated. For the settlement of obligations, there will be probability of economic outflow. Determination of provisions are done by ascertaining the future cash outflow using a discounted rate at a pre tax rate reflecting the assessment of risks specific to liability and to  time value of money. Recognition of discount unwinding is done as finance cost. In line with the accounting requirements, provisions have been raised over 100% of balance resulting from uncertainty over the amount recoverability (Warren & Jones, 2018).  A provision for fully impairing all the loan accounts was raised by company in advance for the year ending 30^th July 2017.  

Now, comparing the disclosure requirement of both the companies, it can be inferred that Acacia Coal limited and Abilene Oil and Gas limited that they have adopted new and any amended standards and interpretations that are issued by Australia accounting standard board in relation to the liabilities disclosure. When comparing the disclosure requirements of both the companies, it can be seen that they have complied with the applicable accounting standard relating to provisions, contingent liabilities and liabilities (Aye et al., 2016). However, both the organization has not recorded any amount of contingent liabilities pertaining to parent entity and therefore they have not disclosed any information relating to the disclosure requirement of the standard.

Reporting entities adopting the IASB standard or AASB standard are not prohibit them from disclosing immaterial information as it is perceived by them that such requirement is not operational. Improvement should be made in terms of effectiveness of communication of financial information in the conventional formats. The focus on regulators and standard setters is presentation of financial statement in conventional formats. Moreover, specific guidance should be provided on clarifying the materiality of requirements of individual disclosures.

AASB 133 deals with the disclosure about earning per shares and the objective of the standard is to prescribe the principles for presentation and determination of earning per share. This is done with the intention for improving the comparison of performance between different reporting periods for different entities. Reporting entity disclosing the earning per share is required to disclose and calculate earnings per share as per the standard (aasb.gov.au, 2018).

The calculation of basic earnings per share that is attributable to ordinary equity holders of parent entity should be calculated by reporting entity when loss or profits arising from continuing operations is attributable to such equity holders. Computation of basic earnings per share should be done by dividing loss or profit that is attributable to ordinary equity holders of parent entity by the weighted average number of ordinary shares that are outstanding during the period. The purpose of information generated from basic earnings per share is proving a measure of interest of ordinary shares of parent entity concerning entity performance over the reporting period (Carey et al., 2014).

Amount that is attributable to equity holders of parent entity for the purpose of computation of basic is in respect of loss or profit attributable to the parent entity and loss and profit that arise from continuing operations of parent entity. All the expenses and income items attributable to parent entity equity holders are recognized by including expenses and dividends on preferences shares. On other hand, diluted earnings per shares are calculated for the loss and profits that is attributable to parent entity ordinary equity holders. AASB 2 share based payments is applicable for share options and arrangement for other share based payments (Gupta, 2016). It involves supplying of fair value for any goods and services for the share options and arrangement of share based payment in future.

For the ordinary shares, group presents the diluted and basic earnings per share. It has been ascertained that the computation of basic earnings per share by group is done by dividing the loss or profits that are attributable to ordinary equity holders by the outstanding number of weighted average number ordinary shares during that period. Group does computation of diluted earnings per share by dividing the loss or profit attributable to ordinary shareholders of company by weighted average number of ordinary shares during the particular period. This total numbers of ordinary shares are adjusted for the impact of all diluted potentially ordinary shares comprising of share options that are granted to employees (acaciacoal.com.au, 2018). 

Acacia coal limited has potential ordinary shares that are anti dilutive and therefore they are not included in the number of ordinary shares. 

Recognition of share based payment reserve is done at fair value and the measurement of equity settled transactions relating to key management personnel, directors and service providers is done with reference to options fair value at the date they are granted (acaciacoal.com.au, 2018).

The accounting policy that is used by Abilene Oil and Gas limited meets some of criteria or principles of the accounting standard. Group does computation of basic earnings per share by dividing profits that does not include any cost of servicing equity other than ordinary shares and are attributable to the owners of Abilene Oil and Gas limited by the outstanding number of weighted average number of ordinary shares. The amount of weighted average number of ordinary shares is adjusted for elements pertaining to bonus in ordinary shares that are issued in any particular financial year (abilene.com.au, 2018). On other hand, computation of diluted earnings per shares requires adjustment of financing cost and income tax effect that is associated with weighted number of ordinary shares and dilutive potential ordinary shares.  Figures used in the determination of earning per shares is adjusted in relation to potential ordinary shares for income tax and financing costs along with the assumptions of issuing of shares that are not issued for consideration in relation to dilutive potential ordinary shares (Macve, 2015). Hence, the earnings per share is adjusted for the expenses and income tax and from the discussion it can be said that group has complied with the disclosure and measurement requirement of the AASB 113.

Weighted average number of ordinary shares incorporates the options that are held by option holders and this is used for the purpose of computation of diluted earnings per share. This inclusion of options in the computation of diluted EPS as the requirement of criteria for inclusion is not met in AASB 133 earnings per share (Williams, 2014). It be seen that options that are on dilutive has generated loss for the year. 

Remuneration of executives and directors is not associated with performance and share price earnings of reporting entity. 

Abilene Oil and Gas limited has generated negative basic earnings per share and diluted earnings per shares for the two consecutive financial years (abilene.com.au, 2018).

Recognition of equity settled transactions are done as an expense and this will be lead to corresponding increase in equity. Grant date fair value of award is used for the computation of cumulative charge to loss and profits. Cumulative charge to profit and loss during the vesting period is done at the fair value multiplied by expiry period.

Now, comparing the annual report of two companies, it can be seen that Abilene Oil and gas limited does mention about the reporting standard related to earnings per share. On other hand, analysis of annual report of Acacia Coal limited depicts that there are no mentioning about the disclosure and meeting the requirement of accounting standard relating to earning per share. However, in some area, group is not meeting the requirement as per the standard in relation to inclusion of share options granted to employees in the computation of diluted earnings per share. Comparing the annual report, users will be able to evaluate that areas of earnings per share in which Abilene oil and gas limited is complying with the requirement of AASB 133. This is in relation to exclusion of options in the weighted number of ordinary shares. Acacia coal limited does the computation of its earning per shares and diluted earnings per shares by partially meeting the requirement or measurement criteria of the accounting standard (Waegenaere et al., 2015).

For enhancing the transparency of information related to EPS and enhancing decision usefulness, it is required by company to adopt proper valuation process. This will help them in faithfully representing the profits figure required for the computation of earnings generated by company. There should be avoidance of disclosure of inappropriate information that leads to materiality and affecting the financial statements.  

Conclusion:

The report has provided with the detailed analysis of annual reports of two chosen companies that is Abilene Oil and Gas limited and Acacia coal limited in regard to their disclosure of the applicable accounting standards. Evaluation of the standard has been done in relation to leasing, liabilities and earnings per share. It was ascertained from conducting analysis of financial report that both the organizations have adopted existing leasing standard that is AASB 117, however, there was no detailed disclosure about the leasing contracts in the notes to financial statements. Abilene as well as Acacia limited intends to adopt the new leasing standard that is IFRS 16 that will help in bringing considerable changes to accounting treatment concerning leases. When evaluating the disclosure requirement in relation to liabilities including contingent liabilities and provisions, it has been ascertained that the selected companies comply with the measurement and recognition requirement to the applicable accounting standards. In the last recognition area, Abilene Oil and Gas limited and Acacia limited has complied with the accounting standard for measuring and recognizing earning per share. However, Acacia limited has not met standard requirements in relation to measurement of diluted earnings per shares.

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