Critical Analysis/ Discussion:

The objective of this report is to dissect certain accounting issues in one of the leading ASX listed organisations. In order to meet this purpose, Insurance Australia Group Limited is taken into consideration. Moreover, the report considers the discussion regarding a news article on Insurance Australia representing the fall in the share price of the organisation.

In this regard, one significant issue for the organisation is the adherence of the organisation with different needs of AASB and conceptual framework. All AS listed entities are needed to conform to the doctrines and principles of the accounting conceptual framework for preparing and presenting financial statements in a precise and accurate manner. If adequate adherence is not maintained in relation to AASB standards and conceptual framework requirements, there might be increase in financial errors and frauds (Aasb.gov.au 2018).

Insurance Australia Group Limited is involved in underwriting general insurance products and it operates across Australia, New Zealand along with corporate and other segments. In addition, the organisation provides consumer insurance products like motor vehicles, lifestyle and leisure, home and contents, travel and insurance, income protection products and others (Iag.com.au 2018).  It has workforce of nearly 13,500 employees operating in Australia, New Zealand, Malaysia and Thailand.

In the current times, a significant accounting issue is non-compliance with the necessary accounting guidelines and principles for financial reporting. This might develop the opportunity for financial frauds and even the demise of the organisations. For avoiding this issue, it is necessary for the organisations to conform to the necessary standards of accounting. Moreover, the report covers the evaluation of two particular theories for financial reporting of Insurance Australia, which mainly include stakeholder theory and positive theory with respect to the organisation.

Discussion of the issues:

Issue 1: Share price drop

From the above extract, it is evident that the share price of Insurance Australia has declined by 8% to $7.59 after the disclosure of its annual results. The reason might be due to the announcement made by the management of Insurance Australia in selling its businesses in Indonesia, Vietnam and Thailand. In addition, there has been capital reduction due to the quota share arrangement of the organisation with Berkshire Hathaway that minimises the amount of capital needed to be held. From the perspective of the investors, all these aspects imply that Insurance Australia has been shrinking its business slightly along with engineering its way to greater margins and better return on equity. The above discussion makes it inherent that this is a significant financial issue for Insurance Australia, which is associated with financial performance and selling intentions.  

Issue 2: Accounting requirements

Evaluation of the annual report:

After evaluation of the annual report of Insurance Australia Group Limited in 2018, it is apparent that the organisation has developed and presented its financial reports by conforming to the Corporations Act 2001 and AASB. At the same time, it could be seen that the organisation has conformed to the doctrines of IASB and IFRS. Moreover, from the annual report of Insurance Australia in 2018, it is observed that the organisation has conformed to the guidelines laid down in ASIC Corporations Instrument 2016/191 (Iag.com.au 2018). Thus, it could be said that adequate conformance has been maintained by Insurance Australia to the necessary accounting principles.

Issue 1: Share price drop

Adherence to the conceptual framework:

The conceptual framework of AASB has five elements constituting of income, expenses, assets, equity and liabilities. One requirement of the conceptual framework is that the organisations need to adopt more than one measurement base to gauge elements such as liabilities, assets and others. This is because following only one measurement base does not ensure necessary financial information to the users. The significant measurement bases for AASB include fair value, current value, historical cost and value-in-use (Beattie 2014). The discussion below depicts whether Insurance Australia has adhered to the measurement needs of AASB:

It could be seen that Insurance Australia has followed the mechanism of fair value, historical cost and present value. Additional evidences are provided as follows:

From the above extracts, it could be seen that Insurance Australia has used current value, fair value and historical cost for gauging various conceptual framework components like liabilities, assets, income and others. Thus, the above discussion clearly shows the fact that the entity has assured compliance with all AASB requirements and conceptual framework.

As per the conceptual framework of AASB, the financial statements of the business organisations need to possess both enhancing and fundamental qualitative characteristics and the below-stated discussion depicts the conformance of Insurance Australia with such characteristics:

Issue 3: Enhancing qualitative characteristics

Verifiability: The financial statement users of Insurance Australia could verify the accounting method used in the financial reports by using their independent observations as well as accounting knowledge (Cheng et al. 2014).

Comparability: Insurance Australia represents its financial information in a way that the users could contrast them with other entities or with varying timeframes of similar entities.

Understandability: By providing notes to the financial statements, the users could gain an overview of the various accounting treatments of the organisation.

Timeliness: The organisation publishes the required information to the users within time with the help of different financial statements so that they could take sound decisions.

Issue 4: Fundamental qualitative characteristics

Faithful representation: Insurance Australia discloses both theoretical as well as numerical description of the various financial components such as liabilities, assets and others for ensuring completeness of information (Henderson et al. 2015).

Relevance: The financial information of Insurance Australia contains predictive value as well as confirmatory value through which the users of the financial statements of the organisation could project the financial results and assess the last judgements.

One of the significant competitors of Insurance Australia is Suncorp, as they operate in the Australian insurance sector. The below-stated discussion contrasts the financial performance of Insurance Australia with Suncorp:

(Source: Iag.com.au 2018: Suncorpgroup.com.au 2018)

From the above extracts, it is observed that both Insurance Australia and Suncorp have experienced a slight decline in net loss in 2018; however, Suncorp is enjoying competitive advantage over Insurance Australia, as it has higher net profit.

(Source: Iag.com.au 2018: Suncorpgroup.com.au 2018)

After analysing the balance sheet statements of the two organisations, the total assets of Suncorp are higher than Insurance Australia. Hence, based on the above discussion, it could be cited that the financial position of Insurance Australia is not effective in contrast to Suncorp.

Issue 2: Accounting requirements

Stakeholder theory:

In accordance with this theory, the stakeholders are deemed to possess intrinsic moral worth or value. Stakeholders are the individuals or classes possessing active interest in the operations of the business entities. Moreover, they are needed to take into account the shareholder interest as intrinsic value and hence, all stakeholder concerns need to be addressed (Lang and Stice-Lawrence 2015). It is noteworthy to mention that Insurance Australia has applied this theory in its business operations by addressing the stakeholder needs. For instance, the current and potential investors are the significant stakeholders of the organisation and they are willing to invest in the entity for obtaining better return. Due to this reason, Insurance Australia has addressed the stakeholder interest by delivering them with the necessary financial information regarding their financial condition for investment decisions (Nobes 2014).

Agency theory:

This theory assumes an organisation to be an agency and it gives an association for a group of contracts and owing to this reason, agency cost arises because of various contracts and interests (Simnett and Huggins 2015). Insurance Australia has applied this theory as well. According to the theory, the principal is Insurance Australia and the agent is the management of the entity. The agents are needed to act on behalf of the principals. For Insurance Australia, the management of the entity undertakes the needed decisions and it carries out the activities on the behalf of the organisation (Zhang and Andrew 2014).

It has been analysed from the above discussion that Insurance Australia has complied with the necessary accounting standards and conceptual framework of AASB. In addition, the financial reports contain enhancing and fundamental qualitative characteristics as well. However, the drop in the share price of the organisation and lower net income compared to Suncorp, which pose concern for the investors. Therefore, despite the presence of accounting compliance, the financial performance of the organisation is declining and thus, the investors should not invest in the organisation.

As the share price of Insurance Australia has declined due to the announcement of selling some parts of its business, it is suggested to the organisation to undertake sound financial strategies for reviving the situation by seeking assistance from the strategic experts. In addition, the organisation is advised to maintain conformance with the guidelines of the conceptual framework in order to avoid accounting issues.

Conclusion:

It is observed that Insurance Australia has complied with the essential accounting standards and guidelines of the conceptual framework as well as enhancing and fundamental qualitative characteristics. However, the financial performance of the organisation is not sound due to decline in share price. Finally, it has been observed that Insurance Australia has used stakeholder theory and agency theory to conduct its business operations.

References:

Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 14 Dec. 2018].

Beattie, V., 2014. Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods and a research framework. The British Accounting Review, 46(2), pp.111-134.

Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Iag.com.au., 2018. [online] Available at: https://www.iag.com.au/sites/default/files/Documents/Results%20%26%20reports/The-Numbers-2018-annual-report.pdf [Accessed 21 Dec. 2018].

Iag.com.au., 2018. IAG Limited. [online] Available at: https://www.iag.com.au/ [Accessed 21 Dec. 2018].

Lang, M. and Stice-Lawrence, L., 2015. Textual analysis and international financial reporting: Large sample evidence. Journal of Accounting and Economics, 60(2-3), pp.110-135.

Motley Fool Australia., 2018. Results: Why I’m avoiding Insurance Australia Group Ltd (ASX:IAG) shares for now. [online] Available at: https://www.fool.com.au/2018/08/15/results-why-im-avoiding-insurance-australia-group-ltd-asxiag-shares-for-now/ [Accessed 21 Dec. 2018].

Nobes, C., 2014. International classification of financial reporting. Routledge.

Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.

Suncorpgroup.com.au., 2018. [online] Available at: https://www.suncorpgroup.com.au/uploads/FY18-Directors-Report-and-Financial-Statements.pdf [Accessed 21 Dec. 2018].

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.