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1. Do your own research and critically discuss whether the financial accounting and reporting should be regulated or manager should be allowed to disclose financial accounting information voluntarily.

2. Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?

3. From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.

4. Provide a comparative analysis of the debt and equity position of the four firms that you have selected.

Regulatory Bodies for Reporting and Accounting of Financial Information

The report has 3 major sections. The first one dealing on the requirement of regulated accounting procedures instead of voluntary reporting in hands of managers. The 2nd deals with functions of AASB and IASB, two of the major accounting bodies, the 3rd and 4th section deals on the financial reporting aspect (Bumgarner & Vasarhelyi, 2018).

1. The management of the company is responsible for preparation and presentation of the financial statements of the company and is majorly involved in dealing with all the other departments, divisions within the company and then reporting the same in the financial statements. The management are their disposal to decide on the estimates and assumptions to be taken while preparation of the financial statements and the judgements to be made during the process. It is this report based on which the audit is being conducted by the auditors and then they express their opinion on the financial statements. Some of the major financials parts include profit and loss account, the balance sheet, the statement of changes in equity and the cash flow statement (Belton, 2017). The management also needs to ensure that the company has complied with all the rules and regulations, laws, accounting standards and guidance notes while preparing the financial statements such that there is clarity in understanding by the stakeholders.

The decision to give the authority to managers to report and account the financial information can work both the positive as well as negative side. The positive side may include the more detailed information regarding the component profit and loss account and other financials with all the adjustments and assumptions stated in annual report. And the negative side may many of the critical and significant disclosures which are now compulsory and important from the perspective of investment decision may be missed out as disclosing information would be voluntary and this may affect the investor’s big time (Goldmann, 2016). Furthermore, it may also lead to window dressing of the financials as most of the accounting managers would try to show only the positive sides of business leaving the negative side. Lastly, the financials may become lengthy and irrelevant if information that is not required is also being disclosed in the financial statements. Considering all the above discussion and the repercussions it may have on the investors and stakeholders, it can be concluded that the reporting and accounting of financial information should not be made voluntary and should be regulated by the regulatory body which will prevent the instances of fraud, window dressing and manipulation. It will also prevent biasness and enable standardization of data (Dichev, 2017).

Financial Analysis of Australian Companies

2. The Australian Accounting Standards Board is the regulatory body for setting up of the accounting standards and implementing the same in Australia. It is responsible for setting it up for both the private as well as the public companies. It also helps in the overall development and monitoring if the companies in Australia are meeting the minimum requirements of reporting and disclosures and thereby take corrective actions. Similarly, the global accounting standards are being developed and implemented by the accounting body called International Accounting Standards Board (IASB). The standards which are being set up and prepared by IASB in congruence with the accounting bodies over the world are called International Financial Reporting Standards, denoted as IFRS (Choy, 2018). The primary objective of IFRS standards is to develop standards in such a fashion that they are easily understandable and acceptable and meets all the critical and significant requirements of the stakeholders.

The AASB also plays a significant role and does an active participation in the standard setting procedure and which is being framed by IASB (Carlin, 2009). The AASB is being supported by one of the regulatory bodies called financial reporting Council (FRC) in the overall implementation and monitoring of the standards and the guidance notes all across Australia. In terms of standards, the AASB standards have also originated from global accounting standards only and the same can be evidentiated as follows:

  1. AASB 1 deals with First time implementation of Australian Accounting Standards is derived from IFRS 1 – First time implementation of International Accounting Standards.
  2. AASB 101 deals with presentation of financial statements, IAS 1 deals with the same.
  3. AASB 101 deals with presentation of inventories, IAS 2 deals with the same.

There are nearly 120 member nations of the IASB Board out of which nearly 90 nations have adopted the IFRS standards and confirmed on the same (Fay & Negangard, 2017). The rest have either adopted with some changes or in convergence with the local standards or the same has not yet been adopted as it may have a direct impact on all the companies or even the economy. Therefore, the standards being introduced by IASB have not been made compulsory and prudence has been followed in this aspect. Furthermore the decision to not make it compulsory is justified considering the circumstances of the case (Werner, 2017).

3. In this section of the report, the financial analysis of the 4 companies for the last 4 completed financial years has been done in respect of the equity and its components. The annual report has been considered for the years 2014, 2015, 2016 and 2017. All the 4 companies which has been chosen for analysis are listed on the Australian Stock Exchange and do belong to the material industry (Mubako & O'Donnell, 2018).

  1. Alt Metals Limited
  2. Amcor Limited
  3. Adelaide Brighton Limited
  4. Admiralty Resources NL

Conclusion

The components of equity has been shown below for the last 4 years.

  1. Alto Metals Limited

The components of equity in the given company have been listed below:

  • Issued capital: This is the share capital of the company as has been explained above. It shows the capital invested by the owners (investors) in the company
  • Reserves: This is mostly due to the requirement of the laws and legal regulations. This is separated from the yearly profit for special purposes.
  • Accumulated Losses: this is the sum total of the losses and profits of the past year earned by the entity(Dumay & Baard, 2017).

The brief summary for equity components for the last 4 years has been shown below:

Equity component

Year 2017

USD

Year 2016

USD

Year 2015

USD

Year 2014

USD

Issued Capital

18,680,470

16,008,208

11,044,157

11,044,157

Reserves

257,671

681,323

292,751

32,101

Accumulated losses

(11,054,205)

(9,571,763)

(7,649,968)

(3,949,791)

The above table indicates that the company has been issuing the share capital every year and so the balance has increased. The reserves have decreased because of the losses incurred by company and the utilization of the reserves. Also, the accumulated reserves has increased due to continuous losses in past year.

  1. Amcor Limited:
    • Contributed Equity: The overall share capital of the company is being divided in small parts called shares. The owners of these share units are called shareholders of the company and are called the owners. These are generally listed on some stock exchange and can be bought, sold or traded. The annual report shows the issued, subscribed and paid up share capital in the notes section.
    • Retained Earnings: this is the share of the earnings of the company and is generally the sum total of all the accumulated profits and losses of the company as on date. Dividend is declared out of the same.

  • Non-controlling interest: This is the share capital of the shareholders in subsidiary companies. Since the holding is no more than 50%, it is called minority interest(Meroño-Cerdán, et al., 2017).
  • Reserves: Reserves are generally being created by the companies for some specific purposes and as a compliance of some law and regulations. Some of the examples include dividend equalization reserve, general reserve, and capital reserve. It is nothing but appropriation of profit.

The brief summary for equity components for the last 4 years has been shown below:

Equity component

Year 2017

USD million

Year 2016

USD million

Year 2015

USD million

Year 2014

USD million

Contributions

1416.90

1445.10

1680.60

2072.20

Reserves

(881.70)

(800.20)

(666.50)

(414.30)

Retained Earnings

286.70

139.00

452.10

370.40

Non-controlling interest

69.60

61.60

120.80

111.00

From the above table, we can see that the contributions have decreased continuously over the years indicating the decrease in capital due to buy back of own shares by company. The balance of reserves has declined year on year due to creating of reserves for various purposes. The retained earnings has increased in 2017 due to the profits earned and decreased in 2016 due to losses. The non-controlling interest has declined due to the decline in the subsidiaries and thus balances of shareholders.

The components of equity in the given company have been listed below:

  • Issued capital: This is the share capital of the company as has been explained above. It shows the capital invested by the owners (investors) in the company
  • Reserves: This is mostly due to the requirement of the laws and legal regulations. This is separated from the yearly profit for special purposes(Knechel & Salterio, 2016).
  • Accumulated Losses: this is the sum total of the losses and profits of the past year earned by the entity.

The brief summary for equity components for the last 4 years has been shown below:

Equity component

Year 2017

USD million

Year 2016

USD million

Year 2015

USD million

Year 2014

USD million

Share Capital

733.10

731.40

729.20

727.90

Reserves

1.90

2.90

1.20

3.30

Retained Earnings

510.60

483.30

474.30

402.80

Non-controlling interest

2.60

2.50

2.60

2.70

For this company, the share capital has remained more or less constant without much changes, the reserves has also been constant with very minimal changes, the retained earnings have grown substantially over the year indicating profits earned during last few years and finally the non-controlling interest has been more or less constant (Timothy, 2004).


  1. Admiralty Resources NL
  • Contributed Equity: The overall share capital of the company is being divided in small parts called shares. The owners of these share units are called shareholders of the company and are called the owners.
  • Retained Earnings: this is the share of the earnings of the company and is generally the sum total of all the accumulated profits and losses of the company as on date. Dividend is declared out of the same.
  • Non-controlling interest: This is the share capital of the shareholders in subsidiary companies. Since the holding is no more than 50%, it is called minority interest.
  • Reserves: Reserves are generally being created by the companies for some specific purposes and as a compliance of some law and regulations.

The brief summary for equity components for the last 4 years has been shown below:

Equity component

Year 2017

USD

Year 2016

USD

Year 2015

USD

Year 2014

USD

Issued Capital

145,649,257

145,649,257

143,237,430

140,145,943

Reserves

(773,488)

(770,142)

(555,129)

(562,801)

Accumulated losses

(127,699,451)

(129,144,799)

(126,803,917)

(122,354,202)

In this case, the share capital has remained more or less constant, the reserves have increased marginally due to special purposes and requirement of law and the accumulated losses have increased marginally due to the losses in past year.

4. This section of the report deals with the debt equity ratios of the company and what is the proportion of the debt and equity in the total capital. The below table highlights the same for 4 companies in 2017.

Particulars

Amcor Ltd

Alto Metals Ltd

Admiralty Resources NL

Adelaide Brighton Ltd

Debt

4179.40

-

1.7063

560.00

Equity

891.50

7.8840

17.1763

1248.20

Debt/Equity Ratio

4.688

0

0.099

0.449

From the above table, we can see that apart from debt equity ratio of Amcor Limited, the debt equity ratios for all the other companies have been fairly favorable considering the ideal industry trend of 2:1 times (Appelbaum, et al., 2018). The debt equity ratio is the measure of how solvent the company is and whether it will be able to do the business with its own capital. Alto Metals Limited being a purely equity company, is risk free and Amcor having the debt equity ratio of 4.6 times is most risky (Bizfluent, 2017).

Conclusion

The key learnings from the assignment include that there should be and there is a need of the regulatory body for reporting and accounting and it should not be made voluntary considering the consequences to the users of financial statements. Furthermore, the IASB is justified in not making it mandatory to implement the global accounting standards, IFRS for all member nations considering the impact it may have on the economies.

References 

Appelbaum, D., Kogan, A. & Vasarhelyi, M., 2018. Analytical procedures in external auditing: A comprehensive literature survey and framework for external audit analytics.. Journal of Accounting Literature, 40(1), pp. 83-101.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Carlin, T. F. N. a. L. N., 2009. Goodwill accounting in Malaysia and the transition to IFRS – a compliance assessment of large first year adopters. Journal of Financial Reporting & Accounting,, 7(1), pp. 75-104.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.

Mubako, G. & O'Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.

Timothy, G., 2004. Managing interest rate risk in a rising rate environment. RMA Journal, Risk Management Association (RMA), November.

Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25(1), pp. 57-80.

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[Accessed 13 July 2024].

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