Corporate Regulation, Accounting Standard Setting, And Owners Equity In Australia

Significance of regulated or voluntary financial accounting and reporting

IASB is a sovereign accounting standard-setting entity, located in London. It comprises 15 members from nine countries, taking in the United States. The mandatory features which are required to be applied related to reporting are ruled at national or even at the district level by qualified companies or government authorities. Present report emphasizes the critical discussion relating to the significance of regulated or voluntary financial accounting. Further, the reason behind the non-compulsory application of IFRS for the member countries has been discussed. The second part of the study analyses the debt and equity of four companies of the retail industry, i.e. Wesfarmers, Woolsworth, Adairs Ltd and Accent Group in order to provide a comparative analysis of four years of specified companies.

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(I)In accordance with Tsalavoutas and Dionysiou (2014), the theory of disclosure signifies that corporate disclosures are difficult constructions which are able to conclude different interpretation. Further, it is to be considered that companies might disclose the information in order to sustain the effectiveness in the exchange of information to manufactures, etc. However, they also disclose information to ascertain their development with social values replicated in the system and informal norms. Mandatory disclosure can be defined as the factors and information which should be published as a cause of the subsistence of some authorized or statutory requirements, capital market, stock-exchanges commissions or laws of accounting authorities (Leuz, and Wysocki 2016). The main objective of the mandatory disclosure is to fulfil the information requirements of users, guaranteeing the production quality control by regulations and standard’s execution (Christensen et al., 2015).

Further, the mandatory periodic disclosure is the dissemination of yearly or half-yearly financial accounts, combined financial reports, manager report, audit accounts, yearly, half-yearly or quarterly statements and financial calendar. On the other hand, voluntary disclosure considers information made public by the company’s free choice. The executives are frequently enforced to have a choice between exploiting the competitive advantage of the company’s market by not making available the information publicly. The same will influence the competitive position of the company negatively and if the information is made publicly available to assist the capital market in obtaining an effective assessment related to shares of the company.  Another limit will be that as the earlier the annual statements were concerned with contending the requirements of shareholders only and of workers as well as stakeholders. Further, the voluntary disclosure is mostly restrained by the costs which are occurred through assembling, dispensation, attainment as well as inspection of data to which the indirect costs is attached. In addition to this, indirect costs have an important role relating to the risk of providing information which could be utilized by authentic or potential rivalries. The cost is an aspect which is frequently used as a cause behind limit of the volume of voluntarily revealed information.

According to Li and Yang (2015), voluntary disclosure indicates the financial reports which is not openly ruled by regulations, it is believed that most of this voluntary disclosures are made to be in contract with desires of stock exchange commission’s concerning the organization’s management, scrutiny and administration presentation relating to risk, opportunities and the outcomes attained or provisioned. Thus, according to Bonaimé (2015), to acquire capital and also to attract investors, financial reports must be synchronized in such a manner so that they can conquer the limits of voluntarily revealed business information. It can be done in case of financial accounting, and reporting is regulated

(II)It is stated by Mhedhbi and Zeghal, (2016) that, the main objective of board members of AASB and their employees is to recognize issues relating to accounting which needs consideration. Further, issues relating to accounting of profit organizations are generally referred to the IASB or IFRIC for deliberation. Once an issue is ascertained, the same is developed as a project proposal by AASB. Thus, it can be stated that AASB develops a base for resolving issues relating to accounting through developing accounting standard.  The AASB  then reconsiders the project offer and compose a decision in order to determine whether the project is profitable or not and whether it should be positioned on its program or not.  Moreover, an indemnity of pronouncement might be an issue of AASB’s consideration, for example, a standard, an explanation or a theoretical framework document. On the other hand, the conclusion that is how to tackle an issue can be specified by AASB by providing an outlook on the problem in the minutes of a conference or under official Board Agenda Decision.

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Role of the Australian Accounting Standards Board in global accounting standards setting process

Moreover, pronouncement pertinent to profit motive companies will be in accordance with  International Financial Reporting Standards (IFRSs) concerned through the IASB that is the International Accounting Standards Board. In addition to this, the same is to make sure that common purpose financial reports prepared by the company in reference to AASB standards would also be according to IFRS. The AASB has applied transaction impartiality strategy in which identical transactions and events must be recorded in an identical way by companies, whether they belong to profit sector, non-profit private sector or public sector, except there is an appropriate reason to be diverse in specific conditions. It is to be considered that AASB is taking into account the requirements of non-profit companies under private as well as public sector while preparing the amended IFRS for implementation in Australia.

As per the study of Cascino and Gassen, (2015), International Financial Reporting Standards (IFRSs) are a set of accounting standards which is build up by IASB which is being developed as a global standard for the preparation of public company financial reports. Further, the same IFRS set by IASB are not mandatory for associated countries due to some reasons which are discussed below:

The first reason is related to the concept of IFRS which is fair value. The fair value of an asset must be its basic value, equal to the present value of future cash flow which is computed with the utilization of accessible information, basic economic theory (Eisenschmidt and Schmidt 2018). The same will lead to open doors for dishonest executives to manipulate the estimation model and fundamental statistical information.

 Further IFRS are also known as principle-based standards which do not stipulate rules in detail manner, leaving the assignment of real accounting dispensation to the prudence of individual organizations as well as auditors. Therefore, transactions which are identical in nature are practised in the way they are understudied by every organization. Due to the same, the window dressing will occur.

Application of IFRS will lead to providing more prudence to the organization to present financial status which will result into diversification in financial report presentation. The same will not be in the interest of investors.

Part b

(I)ADAIRS LTD.

Table 1:  Statement is presenting a comparison of variants of Equity of Adairs Ltd.

Year

2017

2016

2015

Equity

Increase / Decrease in percentage

0%

0%

97%

Cash flow hedge reserve

Increase / Decrease in percentage

-34%

-235%

-146%

Share based payment reserve

58.00

0.00

0.00

Increase / Decrease in percentage

Foreign currency translation Reserve

-7.00

0.00

0.00

Increase / Decrease in percentage

Retained Earning

Increase / Decrease in percentage

16%

208%

9%

Total Equity

Increase / Decrease in percentage

5%

23%

86%

A significant enhancement in the year 2015 can be accessed in equity share capital as the ordinary share was split prior to IPO amounting to $116305 and shares amounting to $14852 were issued on IPO (Initial Public Offer) (Addairs Annual Report, 2015). As Adair’s Ltd listed on ASE at $2.4 per share and prior to listing the share capital was restructured and split into multiple of 4.35 shares. Due to same share split, 116305000 additional shares were valued at zero cost. No change has been observed in the year 2015 in capital reserve. Closing balance of retained earnings has been changed every year as the profit of the current year has been added in same. However, a major improvement in performance of the year 2016 can be assessed with the significant change in a profit for the year which increased from $9076000 to $ 27954000 (Addairs Annual Report, 2017).

Comparative analysis of debt and equity position of four publicly listed companies in the same industry

WOOLWORTHS LTD

Table 2:  Statement is presenting a comparison of variants of Equity of Woolworths Ltd.

Year

2017

2016

2015

Equity

Increase / Decrease in percentage

7%

4%

4%

Reserve

Increase / Decrease in percentage

21%

-1%

-52%

Retained Earning

Increase / Decrease in percentage

22%

-46%

8%

Non-controlling interest

Increase / Decrease in percentage

12%

5%

9%

The share held under trust

Increase / Decrease in percentage

100%

29%

Total Equity

Increase / Decrease in percentage

12%

-21%

6%

Increase in the share capital for the year 2015 can be accessed as shares have been issued as a result of dividend reinvestment plan. Hedging reserve provided in financial statement comprises the affected share of cumulative net change in fair value of cash flow hedging instrument regarding the hedging transactions which haven’t yet occurred (Woolworths Annual Report, 2015). Further, the cumulative gain or loss is provided in consolidated P&L when the same have an impact on profit or loss. The main reason behind the decrease in retained earnings in the year 2016 is a higher loss in Big W. However, in the second half EBIT has continued operation and increased by 11.0% (Woolworths Annual Report, 2017).

Wesfarmers

Table 3: Statement is presenting a comparison of variants of Equity of Wesfarmers Ltd.

Year

2017

2016

2015

Equity

Increase / Decrease in percentage

2%

0.4%

-4%

Reserve

Increase / Decrease in percentage

-7%

-10%

3%

Retained Earning

Increase / Decrease in percentage

73%

-68%

-5%

Total Equity

Increase / Decrease in percentage

4%

-7%

-5%

It can be analyzed from above comparative analysis that even after providing average performance in the year 2016, Wesfarmers has recorded a profit of $2873 million which can be considered as increase of $2466 million in comparison to the previous year (Wesfarmers Annual report, 2017). Moreover, a significant part of the same, i.e. $1946 million is related to significant items. It has positively affected NPAT which has increased by 22.1% and return on equity to 12.4% from 9.6% (not considering the impact of significant items.) The specified strong recovery of earnings has been driven in an enhanced manner due to high coal prices and enhanced metallurgical coal production.

ACCENT GROUP

Table 4: Statement is presenting a comparison of variants of Equity of Adairs Ltd.

Year

2017

2016

2015

Equity

Increase / Decrease in percentage

Revenue Reserve

Increase / Decrease in percentage

8%

159%

22%

Revaluation Reserve

Increase / Decrease in percentage

-2%

-76%

-3%

Insurance Reserve

Increase / Decrease in percentage

 NA

NA

35%

Total Equity

Increase / Decrease in percentage

5%

-29%

1%

No amount has been specified in the Accent Group Balance sheet relating to share capital as it comprises non-equity share capital (Accent Group Annual Report, 2015). A significant change in the balance of the insurance reserve can be assessed in the year 2016 and 2017. The reason behind the same is the closing balance for the year 2015 has been nullified in the year 2016. It can be assessed that the company has performed efficiently in the year 2016 and the same is represented by the enhanced retained earnings.

Figure 1: Note relating to share capital non-equity of Accent Group Ltd

(Source: Accent Group Annual Report, 2017)

(II)Table 6: Statement representing a comparison of debt and equity of specified companies

(Amount in Millions)

Particular

Wesfarmers

Woolsworth

Accent Group

Adairs Ltd

Interest bearing loan and liabilities

4066.00

3079.30

0.00

41.95

Total Equity

23941.00

11132.00

6195.68

1003.12

Debt Equity Ratio

0.17

0.28

0.00

0.04

In order to assess debt and equity position of above-specified company long-term bearing interest, liabilities have only been considered as debt. In case of Accent group, it can be assessed that no interest-bearing liability exists in the company which represent that the company does not believe in outside financing. On the contrary in the case of Woolworths Ltd, this is having a comparative higher debt-equity ratio which means that it is aggressive in financing its growth with debt in comparison to other companies in the retail industry. In other words, it can also be said that Woolsworth applies significant debt for financing its asset in comparison to other companies. However, generally 2:1 is believed as an appropriate debt-equity ratio. Thus it can be said that even though Woolsworth has a higher debt-equity ratio, it is not significantly dependent on debt for financing its asset or for succeeding other investment successfully.

Conclusion

Above discussion depicts that there is no universally accepted meaning or theoretical background related to voluntary disclosure. Thus in order to restrain the limitation of voluntary reporting, it is necessary to continue regulated financial reporting. Further, through the comparison of debt-equity of the specified company, it can be concluded that Woolworth is comparatively more aggressive in financing debt in comparison to other companies.

References

Accent Group Annual Report 2017. 2017. [PDF]. Available through < https://www.accentgroup.org/media/258546/report-and-accounts-2017.pdf >. [Accessed on 17th September 2018]

Accent Group. Annual Report 2015. 2015. [PDF]. Available through < https://www.accentgroup.org/media/69022/accent-group-financial-report-2015.pdf >. [Accessed on 17th September 2018]

Addairs Annual Report 2015. 2015. [PDF]. Available through < https://www.accentgroup.org/media/258546/report-and-accounts-20157.pdf >. [Accessed on 17th September 2018]

Addairs Annual Report 2017. 2017. [PDF]. Available through < https://www.accentgroup.org/media/report-and-accounts-2017.pdf >. [Accessed on 17th September 2018]

Bonaimé, A.A., 2015. Mandatory disclosure and firm behaviour: Evidence from share repurchases. The Accounting Review, 90(4), pp.1333-1362.

Cascino, S. and Gassen, J., 2015. What drives the comparability effect of mandatory IFRS adoption?. Review of Accounting Studies, 20(1), pp.242-282.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Eisenschmidt, K. and Schmidt, M., 2018. Integrating prediction markets into the due process of international accounting standard setting: A possible path to achieving legitimate accounting standards?. The Journal of Prediction Markets, 11(2), pp.77-102.

Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.

Li, X. and Yang, H.I., 2015. Mandatory financial reporting and voluntary disclosure: The effect of mandatory IFRS adoption on management forecasts. The Accounting Review, 91(3), pp.933-953.

Mhedhbi, K. and Zeghal, D., 2016. Adoption of international accounting standards and performance of emerging capital markets. Review of Accounting and Finance, 15(2), pp.252-272.

Tsalavoutas, I. and Dionysiou, D., 2014. Value relevance of IFRS mandatory disclosure requirements. Journal of Applied Accounting Research, 15(1), pp.22-42.

Wesfarmers Annual Report 2015. 2015. [PDF]. Available through < https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4>. [Accessed on 17th September 2018]

Wesfarmers Annual Report 2017. 2017. [PDF]. Available through < https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0>. [Accessed on 17th September 2018]

Woolworths Annual Report 2015. 2015. [PDF]. Available through < https://www.woolworthsgroup.com.au/icms_docs/183565_Annual_Report_2015.pdf>. [Accessed on 17th September 2018]

Woolworths Annual Report 2017. 2017. [PDF]. Available through < https://www.woolworthsgroup.com.au/icms_docs/183565_Annual_Report_2017.pdf >. [Accessed on 17th September 2018]