The main purpose of this report is to analyze the accounting standard setting process which are followed by AASB in order to introduce a new accounting standard which can help the business to further improve the reporting framework of the business. The report also shows the process through which discussions are carried on for the purpose of introducing a particular accounting standard. In addition to this, the first part also contains an explanation as to what role is played by AASB in assisting IASB in formulating new accounting standards. In the second part of the assessment, four companies are to be considered for the purpose of identifying different items which are shown in the financial statements of the four companies. The companies which are considered for this assessment are Rio Tinto ltd, Ausdrill Ltd, Adelaide Brighton ltd and Boral ltd. All the companies which are considered belong the same industry which is minerals and mining business (Riotinto.com. 2018). The financial statements are considered for a period of four years. The requirement of the report is to analyze the owner’s equity of the companies and also comment on the changes which have taken place on the debt equity situation of the companies.
The Australian Accounting Standard Board (AASB) follows policies and procedures for the purpose of formulating b standards which are to be followed by the organizations. The first step is to identifying the technical issues which the organizations are facing while carrying out the reporting framework. In the second step, detail analysis is to be conducted for the issues which are faced by the corporations and the board also needs to consider and long-term impacts which are applicable on a business (Sinclair and Bolt 2013). The next step will involve the board developing a proposal for the standard and the same is to be sent for discussion. In such discussion, the board will discuss whether the project is worthwhile for consideration and including the same in the agenda of the business (Allen and Ramanna 2013). The discussion process will be allowing analysis of the topic and also discussion for the same with the other accounting boards such as IASB and also discuss the same with the stakeholders of the business (Teixeira 2014). If all the requirements of the accounting standards are satisfactory and it is established that the standard will be beneficial to organizations than the accounting standard is issued.
Reason as to Why IFRS is not Compulsory for Member Countries
International Financial Reporting Standard (IFRS) are standards of accounting which are issued by International Accounting Standard Board (IASB) for the purpose of bring about universality in treatments in accounting over the world. The reporting structure of a business heavily depends on the standards which are adopted by the business for the purpose of reporting the financial information relating to the business. The reason due to which reporting under IFRS framework is not mandatory for the member countries of IASB is because full implementation of the accounting standard leads to a fall in the quality of reporting. An example can be given of USA as the IFRS system is not favorable for some of the businesses which are operating in US. Another reason which can be identified is that the costs which are associated with the adoption of IFRS framework is much more than the benefits which are related with the same.
Analysis of Owner’s Equity
The owner’s equity section is shown in the balance sheet of the company and forms part of the equities and liabilities head which is shown in the annual report of the company (De Franco et al. 2013). The four companies which are selected for this assessment shows that the items which are included in the owner’s equity of the business as shown in the financial statement prepared by the business. The items are discussed below in details:
- Issued Capital: The issued capital of a business refers to the capital which is collected by businesses with the help of shares which is issued by businesses. The share capital of the business reflects the owner’s capital which can be used in any productive manner and in return for the investments, the owners receive a share of profits of the business for the period.
- Reserves: This refers to a part of the profits of the business are kept aside by the business for emergency use or for a specific purpose such as payment of interest or purchase of assets (Bayoumi and Saborowski 2014). Similarly, there are other types of reserves as well which the business needs to maintain.
- Retained Earnings:The retained earnings of a business represent a part of the profit which is kept aside by the management which can be used for reinvesting in the business (Weil, Schipper and Francis 2013). The retained earnings of the business which is shown in the owner’s equity of the business can be used by the business for financing activities of the business and also for dividend payments.
Analysis of Owner’s Equity of Rio Tinto Ltd
The share capital of the business which is shown for the year 2014 is shown to be $ 4,535 million and the same has reduced to around $ 3,950 million which is for the year 2015. This shows that the business has buy back some number of shares of the business. The share capital for the year 2017 is shown to be $ 4,140 million which has improved from the year 2016 which signifies that the business issues new shares during the year. The reserves and retained earnings of the business which is shown in the year 2015 has decreased in comparison to previous year analysis. The reserve balance and retained earnings which is shown in 2017 is $ 12,284 million and $ 23,761 million respectively which is a positive sign for the business of Rio Tinto ltd.
Analysis of Owner’s Equity of Adelaide Brighton Ltd
The owner’s equity balances which is shown in the annual report of the company in which the share capital balance which is shown in the financial statement for the year 2015 is shown to be $ 729.2 million which has reduced slightly in comparison to figures which are shown for previous year. The share capital balance which is shown for the year 2017 is $ 733.1 million which has increased from 2016 figures (Annualreports.com. 2018). The retained earnings of the business also show tremendous increase in the figures from 2016 estimates which signifies that the management is able to generate appropriate savings from the profits which is generated by the business. The retained earnings in 2015 is shown to be $ 474.3 million and the same is shown to be $ 483.3 million in 2016 and the same has further increased in 2017 which shows a growing trend. The reserves of the business is shown to have fluctuating results.
Analysis of Owner’s Equity of Ausdrill Ltd
The owner’s equity of the business for the year shows that the contributed equity of the business which refers to share capital which is utilized by the business for the year. The contributed equity of the business for the four years period is shown to be $ 526,447,000. The management of the company has not changed and has remained the same throughout the four years which is considered for this assessment. The reserves of the business for the year 2014 is shown to be positive and then the same is shown to be negative for the year 2015. This suggest that the business has accumulated losses which are shown in the reserves of the business. The balances of reserves are used by businesses for the purpose of setting off losses of the business and until the losses are set off, the same will be showed in reserves of the business. The losses of the business is seems to be on a rise as the value of reserves which is in negative increases year by year from 2016 to 2017 (Ausdrill.com.au. 2018). The retained earnings of the business which is shown to be highest in 2014 for $ 223,016,000 and the same falls significantly in 2015 which is shown to be $ 38,027,000. The retained earnings of the business are shown to be $ 121,444,000 which shows improvements from previous year which is a positive sign for the business.
Analysis of Owner’s Equity of Boral Ltd
The owner’s equity for Boral ltd shows that issued capital of the business for the year 2018 is shown to be $ 4265.1 million and the same have almost doubled itself from previous year estimate. This suggest that the management of the company has issued shares to the public during the year. The share capital of the business for the year 2015 and 2014 also shows estimates that are similar to 2016 estimate (Boral.com. 2018). This means that the management of Boral limited required significant amount of capital in 2017. The retained earnings of the business for the year 2017 is shown to have significantly improved during the year 2017. This shows that the business is performing extremely well (Cazier et al. 2015).
Debt Equity Position Analysis
The debt equity position of the business shows the capital structure which is sued by the business for the purpose of financing the activities of the business (Coleman, Cotei and Farhat 2016). The annual report of 2017 for Rio Tinto Ltd shows that the management of the company relies more on debt capital of the business as the balance of debt capital is shown to be $ 15,148 million which has reduced from $ 17,470 million which is shown for 2016 analysis. This shows that the management has repaid a part of loan of the business. In the case of Adelaide Brighton ltd, the share capital is more often used by firm and the business also has debt capital. The borrowings of the business has increased significantly while there is minimal changes in equity capital of the business.
The management of Ausdrill ltd uses a significant low portion of debt capital and has more of equity capital in the capital structure mix of the business. This shows that the business wants to reduce the risks which comes along with debt capital and utilize more of equity capital. As per the annual report of Boral ltd, the management relies more on equity-based capital rather than debt capital of the business.
The above discussion shows the accounting standard setting process of an accounting body which is AASB and the discussion also reveals that AASB can also provide assistance to IASB in formulating strategies by considering the implications and also how the same can improve the reporting framework. The assessment was also shows comparative analysis of four companies which belong to same industry and also show what items are incorporated in Owner’s Equity of the business. The assessment also considers debt and equity analysis of all four companies.
Allen, A. and Ramanna, K., 2013. Towards an understanding of the role of standard setters in standard setting. Journal of Accounting and Economics, 55(1), pp.66-90.
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Ausdrill.com.au. 2018. [online] Available at: https://www.ausdrill.com.au/images/ausdrill/files/20170823_AUSDRILL_ANNUAL_REPORT_2017.pdf [Accessed 20 Sep. 2018].
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Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.