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What Items Impact Stakeholder’s Equity?

Corporate Regulation

Financial reporting frameworks are the most important tools to the preparation and presentation of the financial statements. In this assignment, we will be discussing the needs of the standards or guidelines for the accounting and reporting of financial records of an organization. We have also covered in the assignment the reason to why should preparation and presentation not be voluntary to the organizations.

International Accounting Standard Board (IASB) issued the International Financial Reporting Standards (IFRS). We will be discussing the adoption of IFRS by the Australian Accounting Standard Board (AASB). We will also discuss the reason for not adopting the IFRS by the countries which are the member of IASB.

We will also discuss the equity analysis of the four companies from the retail sector and which are listed in ASX. We will be analyzing the debt and equity relationship of these companies.

There are various financial reporting frameworks which are to be complied with in the preparation and presentation of the financial statement of an organization. Now the basic question comes that why these frameworks have been developed and why these should be complied with? Before answering this question, we have discussed one thing that what would be the situation if the entities have freedom of financial accounting and reporting as per their own wish. It would be interesting where the company will maintain their own reporting standard. Financial reporting is the base of decision making by the users or stakeholders (Gordon, 2015).

If the financial accounting is done by the company as per its own standards then it is very clear that financial accounts of the same or similar company in the same industry will not be comparable to each other. The reason thereof may be as they were adopting their own standards, accounting policies, reporting framework etc. for the financial accounting and reporting purposes (Deloitte, no date). 

For Example, Company A and B are dealing in the retail market. During the recording of sales revenue the company A considers the accrual concept, while company B does not consider the accrual concept. It means that Company A will record its revenue on cash as well as credit basis. But, company B will book the revenue on the cash basis. In that case, financial statements of both the companies are not comparable.

Where the power of voluntary preparation and presentation of financial statement goes in the hand of entities, they will prepare and present their financial statement in such manner which may be beneficial to the company in all aspect. It may cause the various issues some of them are as under (Rouse, no date):

  1. Misstatement in the financial statement
  2. It may influence the investor’s decision
  3. It may impact the shareholder’s interest
  4. It may disrupt the economy of the country in which it operates.
  5. Users of financial statements may not take correct decisions etc.

Accounting Standard Setting

As such, there are a lot of complexities in the voluntary preparation and presentation of the financial statement of the companies. To eliminate such types of complexities, the regulatory framework has been designed for the preparation and reporting of the accounting records of the companies (Bonner, 2012). By using these frameworks or guidelines, all the companies come at par. Which become a very useful tool in the decision making either by users of the statements or management as well.

As such, if the financial accounting and reporting are regulated by any law or any regulatory body, it would be benefited to everyone, who is most concerned with them. There are some benefits to follow the rules of accounting and reporting, which are as under (Anon, 2017):

  1. It would be beneficial to the organization in term of providing the useful information for decision making, planning, and analysis.
  2. Shareholders can rely on such financial statements of the companies as they would not be worried about the manipulation in the data that usually followed in the traditional approach.
  3. Investors would take the decision to invest in the company without any hesitation.
  4. Actual industry data can be calculated.
  5. Actual picture of the contribution of industry in the country’s economy etc.

As such, financial accounting and reporting should be regulated rather than voluntary preparation and presentation thereof. It would be useful to all the stakeholders as well as the company itself. In this concept, companies cannot manipulate the data which ultimately mislead the users of the financial statements.

International Financial Reporting Framework (IFRS) refers to the accounting standards issued by the Internal Accounting Standard Board (IASB) to recognize the transactions or reporting of the financial statements, which come on at par with the international business reporting (PWC, no date). Nowadays, the number of organizations operates in the different countries. Accounting record of such companies should be prepared in such a manner that can be comparable with the internal business or it may be useful for the overseas users of the financial statements (AICPA, no date).

Australian Accounting Standard Board (AASB) is the Australian government body, which set out the accounting standards for the organizations of country Australia. It is engaged in the regular monitoring of the financial reporting standard and proceeds to make an amendment accordingly.

IFRS is the globally recognized accounting standard i.e. it should be adopted by the all the organization operates in different countries. But, there may be a problem of deferment of adoption by some countries. The reason may be that every country has its own policies to govern the rule (AUASB, 2009). As such, every country may not adopt the international standards as a whole. They are adopted with some modification and amendments.

In the present case, AASB is the convergence of IFRS from the perspective of the country Australia. As such, Australian companies need to prepare its financial statement in compliance with the standards issued by the AASB. If the Australian companies are adopting the AASB in the presentation and reporting of the financial statements, It does not mean that companies are not adopting the IFRS. We should not forget here that, standards developed by the AASB are the part of IFRS which have been adopted following some changes due to country’s specific requirements.

IFRS not compulsory for the member countries of IASB?

For Example, A company adopting the IFRS can value its inventory by following the normal procedure. But if in the case of AASB LIFO method is not allowed for the valuation of inventory.

In addition that in the IFRS, changes in the accounting policies are allowed only where it is legal requirements. Besides that, AASB does not the changes in the accounting policies even in case of legal requirements. AASB allows the changes in the accounting policies only when it is necessary to tally the adopted accounting policies with the other accounting policies (Wikipedia, no date).

Mostly the member country of the IASB, are adopting the Generally Accepted Accounting Principles (GAAP). IFRS are slightly different from the GAAP. The countries adopted GAAP were criticizing that it would be costlier for them to migrate to IFRS in term of staff training, change in the systems etc (Anon, no date). They had also criticized that IFRS is not quality standards in comparison to the GAAP. By these reasons, IFRS is not compulsory for the countries adopted GAAP (Kumaran, 2015).

For the purpose of this analysis, we have taken the following four companies from the retail industry. These are as follows:

  1. Accent Group Limited
  2. Adairs Retail Group Limited
  3. Baby Bunting Group Limited
  4. Bapcor Limited
  1. Accent Group Limited: The Company is engaged in the business of distribution of footwear through the retail outlets. Former name of the company is RCG Corporation Limited. Equity analysis of the company is as under:

Particular

2017 ($ ‘000)

2016 ($ ‘000)

2015 ($ ‘000)

2014 ($ ‘000)

Equity

3,85,310

3,19,319

2,57,741

70,860

In this year equity portion includes the option exercised during the year 2014. In the year 2014 the group has acquired the business of Saucony and Podium Sports and in consideration thereof, it has issued the shares of $ 5953000. In addition to that in this year, it has capitalized the option fees.

In this year equity portion also includes the option exercised during the year. Options are share available to the employees of the company based on their work performance, experience etc. When such shares are exercised by the employees they become the shareholder of the company and the respective amount is shown as equity of the company. The company during this year has acquired the business of Accent Group and issued the shares of $ 160714000 against consideration.

A major reason for the change in equity from the last is the shares issued as consideration for acquisition of the business of Accent Group (David, 2017). 

In the year the equity includes the share issued under placements which amount to $ 50000000 and shares issued under the share purchase plan of $ 10056000. The equity also includes the share issued for the payment of debt i.e. where debts are not repaid actually but for settlement thereof share are issued at an agreed price.

Owners Equity

Reason for the change in equity in comparison to the last year is the issue of the placement shares and shares issued under share purchase plan (Calla, 2011).

In the year 2017 the company has paid a lot of debt through the issue of shares. Thus, the major portion of the equity of this year covered by the share issued for the settlement of debts. In addition to that, the company has acquired the business of Hype DC Pty Limited and issued shares of $ 62926000 as consideration thereof.

Reason for the change in equity as compared to the previous is same as above i.e. acquisition of the business of Hype DC Pty Limited and loan paid through shares issued.

Adairs Retail Group Limited: The Company is engaged in the retail business of home furnishing. It deals in the products like, bedding, towels etc. Equity analysis of the company is under:

Particular

2017 ($ ‘000)

2016 ($ ‘000)

2015 ($ ‘000)

2014 ($ ‘000)

Equity

1,00,312

95,590

77,952

41,900

Debt

60,347

59,513

45,796

1,22,663

In this year the company comes up with Initial Public Offer of $ 35,645 and but equity get reduced by the reserves adverse balance.

In the year 2015, the company has restructured the equity and it had split the 1 share by 4.35 shares resulting which 116305000 shares have zero value.

Reason for the change in equity was only the increase in the retained earnings and reserves. Reserve has been increased due to capitalization of forward currency contracts.

In the year 2016 contributed equity was same as the previous year. Component of the total equity includes the retained earnings and cash flow hedge movement. Cash flow movement is the result of hedge accounting because the company has purchased of inventory in US Dollar and for the payment thereof in the US Dollar, the company has most concerned with the foreign currency fluctuations.

The reason for the change in the total equity was the recognition of cash flow movement due to hedge accounting.   

The year 2017 contributed equity of the company was the same as the previous year. But the total equity includes the foreign currency translation reserves and share-based payment reserves.

Reason for increase in equity in comparison to earlier year is an increase in retained earnings is much higher than the other adjustment in the equity such as reversal of foreign currency translation reserves etc (Zacks, no date).

Baby Bunting Group Limited: The Company is engaged in the business of catering to babies and their parents. It provides the products like toys, baby wear, car seats etc. The equity and debt structure of the company is follows:

Particular

2017 ($ ‘000)

2016 ($ ‘000)

2015 ($ ‘000)

2014 ($ ‘000)

Equity

84,816

92,724

72,014

63,529

Debt

4800

-

7950

-

In the year 2014, the company has issued the shares to raise the funds of $ 1532000 and also the equity component includes the share options exercised by the employees of the company

In this also the company has raised the fund by the issue of equity share of $ 1868000 and in addition to that share has been issued to the employee by way of options. Retained earnings are also the component of equity

Reason for the increase in the equity was options exercised by the employee are greater than in comparison to the earlier year.

In this company has come up with the initial public offer of $ 25000000 and also issued the shares to its employees who have exercised the options. Apart from that company has offered the employee gift in terms of shares.

In this year the company has only issued the share as a gift to its employees. In this year the company has granted the performance right.

Bapcor Limited: The Company is engaged in the business of providing Auto Parts. It deals with these products through its wholesale and retail outlets. Equity and debt position of the company is as under:

Particular

2017 ($ ‘000)

2016 ($ ‘000)

2015 ($ ‘000)

2014 ($ ‘000)

Equity

5,89,967

3,66,220

2,66,925

96,961

Debt

4,29,747

1,48,184

-

73,342

In this year the company has issued the shares to raise the fund of $ 143615000 and also received the amount of partly paid-up shares of $ 1168000.

In this year the company come up with an IPO of $ 159821000 and capitalized the cost related to such issues of shares amounting to $ 3206000.

These are also the main reason of an increase in the equity of the company.

In this year it has acquired the business of Hellaby Holdings Limited and issue the shares of $ 161051000 and 16288000 as consideration. Apart from that, it has recognized the relating that issues of share and capitalized it into the equity of the company

In this year the company has booked the cash flow hedge reserve arising out of the hedge fund accounting. Also has considered the foreign currency reserves in the equity.    

Conclusion

From the above discussion of the requirements of financial regulatory frameworks, we conclude that it should be followed in the preparation and presentation of the financial statement. It should not be left on the part of management. Further, we have discussed the relationship between the AASB and IFRS. Based on this we can conclude that the AASB is the convergence of the IFRS. There is no more difference in the AASB and IFRS.

At last, in the equity analysis of the four companies, we can conclude the equity of an organization is affected by some factors i.e. issues of shares in IPO, shares issued under options exercised, shares issued as consideration of an acquisition of any business etc. We also conclude that Accent Group Limited has maintained the debt and equity relationship in proper manners i.e. it has paid the debt through the issues of shares through which it converts debt into equity.  

References

Accounting Tools (2017), Applicable financial reporting framework [Online] Available from: https://www.accountingtools.com/articles/2017/5/7/applicable-financial-reporting-framework [Assessed 04 September 2018]

AICPA (no date), IFRS FAQs [Online] Available from: https://www.ifrs.com/ifrs_faqs.html [Assessed 04 September 2018]

Anon (2017), Financial Reporting [Online] Available from: https://www.edupristine.com/blog/financial-reporting [Assessed 04 September 2018]

Anon (no date), Why is the United Sate not adopting the IFRS and are continuing with the GAAP whereas most of the countries are moving to IFRS? [Online] Available from: https://www.quora.com/Why-is-the-United-States-Canada-not-adopting-IFRS-and-are-continuing-with-GAAP-whereas-most-of-the-other-countries-are-moving-to-IFRS [Assessed 04 September 2018]

AUASB (2009), Applicable Financial Reporting Framework [Online] Available from: https://definedterm.com/applicable_financial_reporting_framework [Assessed 04 September 2018]

Bonner, J. (2012), Voluntary vs. Mandatory Reporting, [Online] Available from: https://blogs.accaglobal.com/2012/10/05/voluntary-vs-mandatory-reporting/ [Assessed 04 September 2018]

Calla, H. (2011), What Affects Shareholder’s Equity? [Online] Available from: https://www.sapling.com/8606124/affects-stockholders-equity  [Assessed 04 September 2018]

David, R., 2017, Types of Transactions that Affect the Equity of the Company, [Online] Available from: https://pocketsense.com/types-transactions-affect-equity-company-8433302.html [Assessed 04 September 2018]

Deloitte (no date), Conceptual Framework for Financial Reporting 2018 [Online] Available from: https://www.iasplus.com/en/standards/other/framework [Assessed 04 September 2018]

Deloitte (no date), Adoption of IFRS by country [Online] Available from: https://www.iasplus.com/en/resources/ifrs-topics/adoption-of-ifrs [Assessed 04 September 2018]

Kumaran, S. (2015), The Ten Generally Accepted Accounting Principles [Online] Available from: https://www.invensis.net/blog/finance-and-accounting/ten-generally-accepted-accounting-principles-gaap/ [Assessed 04 September 2018]

Gordon, E. (2015), The IASB’s Discussion Paper on the Conceptual Framework for Financial Reporting: A Commentary and Research Review. Journal of International Financial Management & Accounting [Online]. V. 26(1), pp (72-110), Available from: https://onlinelibrary.wiley.com/doi/abs/10.1111/jifm.12024 [Assessed 04 September 2018]

PWC (no date), Financial Reporting Framework [Online] Available from: https://www.pwc.com/zm/en/publications/financial-reporting-framework.html [Assessed 04 September 2018]

Rouse, M. (no date), GAAP (Generally Accepted Accounting Principles) [Online] Available from: https://whatis.techtarget.com/definition/GAAP-generally-accepted-accounting-principles [Assessed 04 September 2018]

Wikipedia (no date), International Financial Reporting Standards [Online] Available from: https://en.wikipedia.org/wiki/International_Financial_Reporting_Standards [Assessed 04 September 2018]

Zacks (no date), What Items Impact Stakeholder’s Equity? [Online] Available from: https://finance.zacks.com/items-impact-stockholders-equity-3448.html [Assessed 04 September 2018

Cite This Work

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