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HA2032 Corporate And Financial Accounting3

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Question:

1. Corporate Regulation
 
(i) 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. Accounting Standard Setting
 
(ii) 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?
 
Owners Equity
 
Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name. In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial statements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer. You need to do the following tasks:
 
(iii) 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.
 
(iv) Provide a comparative analysis of the debt and equity position of the four firms that you have selected.
 
 

Answer:

Part-(i)

The question is very important from financial accounting of view as it is one of the fundamental aspect of business on account of its strategic importance in understanding the true and transparent position of the company. Any error of non-reporting can hide material facts and may lead to wrong understanding of the financial position of the company. The said statement is used by multiple user with multiple vested interest including shareholders, creditors, investors, government, buyers etc. The report includes details of past, present and it set pace for the future course of actions (Accounting Edu.org, n.d.) in a standardised manner which if unregulated can present a false and incorrect information that can impact million of users.

The second point in favour of regulation and standardisation of financial statement of comparability of companies in same sector through similar type of reporting which if unregulated shall lead to different presentation and comparability of companies shall become difficult.

The third point that shall be considered is if the reporting is left at the discretion of the management, the financial shall be cooked up and shall represent only those aspects of the company which it wants its user to look and shall not represent true and fair view of the company.  

Further, in the financial statement directors not only present the financial statement to the outside people but also appoint an independent auditor to express opinion on the financial statement and state whether the financial statement reflects a true and fair view and are free from any material misstatements.

Though there are various points in favour to continue the regulation as the same prevents any scam like Enron etc.

 

Part(ii)

The Australian Accounting Standard Board is an agency which is controlled and monitored by the government of Australia. The Board has a reporting obligation to the parliament of Australia. On the other hand International Accounting Standard Board (IASB) is an independent organisation privately managed and controlled and is located in London. The Australian board contributes to International Accounting standard board under various ways including the following

  • Funding for management of day- to day affairs of IASB;
  • Cooperation with IASB on matter relating to preparation and presentation of financial statement;
  • Sending replies to any draft questionnaire sent by IASB to its members for review;
  • Raising any issue being faced by the AASB in the reporting standards;
  • Aligning vision with IFRS;
  • Adopting IFRS.

The flow cooperation has been detailed here-in-below:

  • AASB identifies technical issue  which require look through;
  • Theissues are referred to IASB;
  • The issue shall be added to agenda;
  • The AASB shall do research and consider the issue;
  • A consultation shall take place with stakeholders;
  • Issuing of standard or other pronouncement;
  • The report shall be submitted to IASB for comment;
  • Implementation and compliance

The members have not been compelled to comply with IFRS on account of following reasons:-

  • Adoption of IFRS is not a simple process;
  • IFRS has its own limitations and implications;
  • The matter involves various countries which has its own accounting system and infrastructure;
  • IFRS requires a lot of convergence from national standard.
 

Part (iii) and (iv)

The Chosen Companies for analysing under part B of the report belongs to pharmaceuticals and Medical industry and are listed on Australian Stock Exchange. The name of the companies that have been chosen for analysis has been detailed here-in-below:-

  • Actinogen Medical Limited:
  • Adalta Limited;
  • AFT Pharma Limited;
  • Antara Lifesciences Limited;

About the Company

Actinogen Medical limited is an entity listed on Australian Stock Exchange and primarily deals with treatment of Alzheimer disease and age related neurodegenerative disease. The company is a clinical stage biotechnological company. ( Reuters.com, 2018)

A detailed breakup of the equity of the company has been extracted from the annual report of the company and the same has been detailed here-in–below:

 

$ Mio

Sl No

Particulars

2017

2016

2015

2014

1

Contributed Equity

26.57

26.31

26.25

7.25

2

Reserve Shares

-1.14

-1.14

-1.14

0

3

Reserves

7.01

6.84

6.5

4.79

4

Accumulated Losses

-23.07

-19.89

-16.25

-10.82

5

Total Equity

9.37

12.12

15.36

1.22


(Ernst & Young, 2017) (Ernst & Young, 2017)

On perusal of the above table it can be seen that the contributed equity of the company has seen a sharp escalation in the year 2014 to 2015 and the losses of the company has been ever increasing on account of poor performance to the extent wiping out the entire contributed entity. Further, it can also be understood that reserve shares of the company has seen no increase since 2015 as the company has not proposed any buyback since then.

The reserves of the company have been at normal with not much fluctuations. There is no element of minority interest in the consolidation statement of the company in the past 4 years as analysed under the report. Before, analysing further, let us understand the key assumption underlying the analysis:

  • Only interest bearing liability has been considered as debt;
  • Only non-current part of debt has been considered as debt;
  • Consolidated Balance sheet has been considered for analysis;
  • Restated figures have been considered wherever necessary;
 


Further, let us understand the key terms in the equity portion of the balance sheet:

  • Ordinary Shares: This is the shares of the company which have been issued to the shareholders of the company. The person holding these shares are the owners of the company and the holder of these shares are paid at last at the time of liquidation of the company. Further, it shall be pertinent to note, ordinary shares carry significant voting rights of the company but they are not entitled to fixed dividend. However, they are entitled to any left-over profit post distribution of profits to other shareholders of the company;
  • Preference shares; these shareholders are below equity shareholders and are entitled to a fixed rate of dividend. These shares are also convertible to equity shares if the terms of issue so specify or in case of non-payment;
  • Options: These are potential shares which when become due becomes ordinary shares of the company. They include employee stock option plan etc.
  • Reserves: These are the amount set aside by the company to meet any future requirements. There are various types of reserves that are formed by a company and includes the following:
  • Foreign Currency translation Reserve: The same is created while merging the books of account of subsidiary in the accounts of parent by using current, temporal or any other method. The difference arising on account of foreign exchange and books maintained under different currency is adjusted through this reserve;
  • Available for Sale Investment Reserve: This reserve is created to mark investment mark to market;
  • Option Reserve are created with an intention to make appropriate apportionment to met any liability to convert option right into equity;
  • Cash flow hedging reserve is created by an entity to reduce the impact of change in estimated cash flows of a financial asset or liability;
  • Non- Controlling interest: Non-Controlling interest represent that portion of holding of the company which is hold by small investor who do not exercise significant control over the company but have their interest vested in such company;
  • Treasury Shares: These represent that portion of ordinary shares of the company which has been called back by the company with an intention to cancel the same and pay off the shareholders on account of excess cash reserve pool lying with company;
  • Retained earnings/ Accumulated losses: These portion represents the profits that have accumulated in the company over the years of operation and it is an indicator of soundness of the company. The higher the retained earning the better the return to ordinary shareholders.

On analysing the contributed equity of the company, the following has been understood that company has incurred significant cost to raise capital in the period 2015. The details of the same has been detailed here-in-below:

Contributed Equity

Sl No

Particulars

2017

2016

2015

2014

1

Full Ordinary Shares

28.86

28.59

28.53

8.67

2

Capital Raising Costs

-2.28

-2.28

-2.28

-1.43

3

Total Contributed Equity

26.58

26.31

26.25

7.24


Further, capital raising cost represent expenditure that has been incurred by the company for raising money through issue of ordinary shares.

It can also be observed that company has been making losses for a long time and is ever increasing as presented in the table above. Further, there is no non-controlling interest as displayed in annual report Statement of Financial Position of the company for the past 4 years.

To further understand, let us analyse the reserve portion of the company. The same has been detailed here-in-below:

Reserve

Sl. No

Particulars

2017

2016

2015

2014

1

Option Reserve

6.93

6.82

6.5

4.79

2

Available for Sale Investment Reserve

0.077

0.022

 

 

 

 

7.01

6.84

6.50

4.79


On perusal of the above, it can be seen that company has only two reserve i.e option and available for sale investment reserve in terms of relevant standards under AASB. The information about these reserves have already been detailed above.

Further, to conclude the analysis of the company debt to equity ratio and capital gearing ratio has been computed. Further, cash and cash equivalent has not been reduced to compute net debt as the company has no debt in its statement of financial position:

Gearing Ratio

Sl. No

Particulars

2017

2016

2015

2014

1

Debt

0

0

0

0

2

Equity

9.37

12.12

15.36

1.22

3

Debt Equity Ratio

0

0

0

0

4

Gearing Ratio

0

0

0

0


On perusal of the above, it can be seen that company has no debt and thus analysis does not bear any fruits in the said case.

The company is listed on Australian Stock Exchange and is engaged in discovery and development of drug. The company has been using its technology to generate protein therapeutics. (Reuters.com, 2018)

The break of equity as presented in statement of financial position has been detailed here-in-below:

Adalta Limited

$ Mio

Sl. No

Particulars

2017

2016

2015

2014

1

Issued Capital

17.56

8.15

5.49

5.49

2

Reserves

0.04

0.04

0.04

0.04

3

Accumulated Losses

-9.82

-6.99

-6.701

-5.321

4

Convertible Notes

 

 

1.035

 

5

Total Equity

7.78

1.2

-0.136

0.209


On perusal of the above table, it may be understood that the company losses have been ever increasing on account of poor financial results of the company.

The issued capital of the company has increased significantly twice in 4 years. The detailed breakup of the same has been given here-in-below:

Contributed Equity

Sl No

Particulars

2017

2016

2015

2014

1

Full Ordinary Shares

17.56

2.49

2.49

2.49

2

Fully paid Series A Preference Shares

 

3

3

3

3

Fully paid convertible notes

 

2.66

 

 

4

Total Contributed Equity

17.56

8.15

5.49

5.49


On perusal of the above, it can be understood that the increase is on account of conversion of notes and preference shares of the company. Further the company has issued fresh ordinary shares during period 2017.

There is no minority interest as detailed above.

The breakup of reserve has been presented here-in-below:

Reserve

Sl. No

Particulars

2017

2016

2015

2014

1

Share based payment reserve

0.04

0.04

0.04

0.04

 

Total

0.04

0.04

0.04

0.04


There has been no change in reserve.

Capital Gearing ratio

Gearing Ratio

Sl No

Particulars

2017

2016

2015

2014

1

Debt

0

0

0

0

2

Equity

7.78

1.2

-0.136

0.209

3

Debt Equity Ratio

0

0

0

0

4

Gearing Ratio

0

0

0

0


On perusal of the above, it can be understood that the company has not debt accordingly the said analysis does not bear any fruit.

AFT Pharma Limited

The company is listed on Australian Stock Exchange and is the developer and distributor of pharmaceutical intellectual property. (Reuters.com, 2018)

The changes in equity over the period has been detailed here-in-below:

AFT Pharmaceuticals

$ Mio

Sl No

Particulars

2017

2016

2015

2014

1

Share Capital

62.944

53.902

12.892

0.033

2

Retained Earnings

-44.025

-25.637

-10.732

3.181

3

Share Option Reserve

0.295

0.065

 

 

4

Cash Flow Hedge Reserve

 

 

-0.305

 

5

Foreign Currency Translation Reserve

0.256

-0.1

0.166

-0.166

6

Total Equity

19.47

28.23

2.021

3.048


(pwc, 2017) (pwc, 2017)

 On perusal of the above, it may be seen that the share capital of the company has gone drastic change. The detailed breakup has been provided here-in-below:

Contributed Equity

Sl. No

Particulars

2017

2016

2015

2014

1

Full Ordinary Shares

55.994

55.994

0.033

0.041

2

Capital Raising Costs

-2.174

-2.092

-1.035

-0.008

3

Redeemable Preference Shares

9.124

 

13.894

 

4

Total Contributed Equity

62.944

53.902

12.892

0.033

The above increase has been on account of issue of shares and conversion of shares by the company over the period.

There is no minority interest in the company. Further, the company has been making losses over the years on account of poor performance which is alignment with the industry. The company has three reserves and the description of all the reserves have already been provided.

Gearing Ratio

Sl No

Particulars

2017

2016

2015

2014

1

Debt

23.426

23.161

20.739

13.137

2

Equity

19.47

28.23

2.021

3.048

3

Debt Equity Ratio

1.20

0.82

10.26

4.31

4

Gearing Ratio

0.55

0.45

0.91

0.81


The company has debt and the company has reduced the debt equity ratio by increasing equity.

 

Antara Lifesciences Limited

The statement of changes in equity as presented in balance sheet has been presented here-in-below:

Anatara Life Science

$ Mio

Sl No

Particulars

2017

2016

2015

2014

1

Share Capital

16.941

16.941

8.42

0.8

2

Retained Earnings

-5.369

-3.663

-2.939

 

3

Other Reserve

0.448

0.197

 

 

4

Total Equity

12.02

13.475

5.481

0.8


On perusal of the above, it may be understood that company has raised capital from the market. The detailed break up of equity is presented here-in-below:

Contributed Equity

Sl No

Particulars

2017

2016

2015

2014

1

Full Ordinary Shares

16.942

8.421

1.971

0.8

2

Capital Raising Costs

 

-0.585

-0.55

 

3

Additional Equity raised

 

9.106

7

 

4

Total Contributed Equity

16.942

16.942

8.421

0.8


It can also be understood that company has been incurring losses which is in alignment with the industry. Further, the detailed breakup of other reserve is provided here-in-below:

Reserve

Sl. No

Particulars

2017

2016

2015

2014

1

Share based payment reserve

0.198

 

 

 

2

Share based payment expense

0.251

0.242

 

 

3

Exercise of Options

 

-0.044

 

 

 

 

0.45

0.198

 

0.00


Further, the analysis of debt to equity has been presented here-in-below:

Gearing Ratio

Sl No

Particulars

2017

2016

2015

2014

1

Debt

23.426

0

0

0

2

Equity

12.02

13.475

5.481

0.8

3

Debt Equity Ratio

1.95

0.00

0.00

0.00

4

Gearing Ratio

0.66

0.00

0.00

0.00 

On perusal of the above, it can be understood that company has recently issued debt and there was no debt over the past 3 years.  The company has done  the same on lack of availability of funds through other modes.

 

References:

Accounting Edu.org, n.d. What is Financial Accounting?. [Online]
Available at: https://www.accountingedu.org/what-is-financial-accounting.html
[Accessed 21 September 2018].

BUTLER SETTINERI (AUDIT) PTY LTD, 2017. Financial Report 2017. [Online]
Available at: https://adalta.com.au/investors/annual-financial-reports/
[Accessed 28 September 2018].

Ernst & Young, 2017. Annual Financial statement. [Online]
Available at: https://actinogen.com.au/wp-content/uploads/2017/10/20171023-ASX-1729365-Annual-Report-to-Shareholders.pdf
[Accessed 28 September 2018].

pwc, 2017. AFT Financial Statement. [Online]
Available at: investors.aftpharm.com/.../annual-reports/170524_2017_Financial_Statements.pd
[Accessed 28 September 2018].

Reuters.com, 2018. Actinogen Medical Ltd (ACW.AX). [Online]
Available at: https://in.reuters.com/finance/stocks/overview/ACW.AX
[Accessed 28 September 2018].

Reuters.com, 2018. Adalta Ltd (1AD.AX). [Online]
Available at: https://www.reuters.com/finance/stocks/companyProfile/1AD.AX
[Accessed 28 September 2018].

Reuters.com, 2018. AFT Pharmaceuticals Ltd (AFT.NZ). [Online]
Available at: https://in.reuters.com/finance/stocks/overview/AFT.NZ
[Accessed 28 September 2018].

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