Financial Accounting and Reporting Process and its Importance

Financial Accounting and Reporting is that part of Managerial Function on which the success and survival of an organization depends upon.  Any organization which does not utilizes its valuable resources  especially financial resources in an efficient or proper manner will face an early closure.

Financial accounting and reporting is important in order to effectively analyze the efficiency of the finance function of an organization. Financial Accounting and Reporting can be described as a process which synthesizes and summarizes the financial and operational data of an organization with the help of various financial statements thus enabling internal and external parties to get an insight into the operational and financial activities of the organization and helps them to understand comprehensively the operations of the organization and the impact of these operations on the financial aspect.

Financial records are intended to provide an accurate financial position of an organization at a specific point of time.  It also reflects the operating results in a condensed form during the period under study. It provides a detailed financial information o the cause and effect of the profitability and financial position of the organization. It helps its users in predicting the future means of comparison, evaluation and communicate  useful financial information to its interested parties internal and well as external which includes the management, creditors, shareholders, government agencies, credit rating agencies, investors etc.

Users of the financial statements may find it easier to understand and comparable with other organizations. Interpretation of financial statements will be easier and thus will enable users to undertake correct financial decisions. Regulation of financial accounting and reporting will minimize training costs as there will be a specific form of training program devised. Monitoring of the financial positions of the organizations will be easier and will minimize any form of discrepancies.  Even in case of discrepancies they can be identified easily and rectified immediately under a regulated environment. In case of a regulated environment financial terminologies can be easily interpreted and understood.

Voluntary disclosure of financial records refers to the disclosure of financial information by the organization at its own free will and decision. But in case of voluntary disclosure a manager is always faced with the problem of identifying which financial information should be released to the investors and which information should be withhold.  This bifurcation of information is essential because any information released to the investors strategic, financial or non –financial impacts the economic decisions taken by the investors. Moreover it will be difficult to measure the accuracy of the information provided without any preset framework of measurement. However voluntary disclosure creates an aura among the investors that the administrators are working in an ideal way and they are ready to provide quality information as compared to other organizations. Also financial accounting records which is released voluntarily also highlight the information in a detailed manner as it is not encompassed in the rigors of any mandated standards.  The higher quality of accounting reports availed due to voluntary disclosure enables the users to take efficient decisions and thus an organization is bound to reap benefits from it.

Benefits of Financial Accounting and Reporting Regulation

Conclusion

In the conflict between mandatory disclosures versus voluntary disclosure of accounting records it can be safely conclude that both methods of accounting disclosures have their benefits as well as shortfalls.  Mandatory disclosure can save costs, provide uniform framework for comparisons and analysis, whereas voluntary disclosure can be qualitative and detailed.  Mandatory disclosure acts as a mandated commitment of the organization in providing financial information and will also reduce conflicts between organizations. Whereas in voluntary disclosure the organizations by themselves are responsible for the interpretations provided by their financial records as the managers may consider flexibility in reporting their earnings. Moreover it is widely acknowledged that insiders may reveal only a portion of private information. A Manager may also not disclose financial statement information which is not useful for stock valuation. Thus it can be safely said that voluntary disclosure should be practiced over and above the regulatory disclosure in order to provide its users to get a complete knowledge about the financial position of the organization and efficiently allocate their scare resources. 

International Accounting Standards Board is an independent body a part of IFRS which has been establishes to formulate and implement Accounting Reporting Standards that can be globally accepted. International Accounting Standard Board collaborates and accepts inputs from various members of finance sector from all over the world which includes investors, analysts, regulators, business leaders etc., in order to upgrade IFRS .   

Australian Accounting Standards Board and International Accounting Standards Board: 

In the continent of Australia the Australian Accounting Standards Board is the highest authority for maintaining and directing the Accounting Standards applicable to organizations and companies operating from Australia as per the Australian Securities and Investments Commission Act 2001.  As per the Corporation Act 2001 adoption of standards set by the International Accounting Standard Board has been mandated and some of the standards of IFRS has been incorporated in the AASB. Majorly among the IFRS standards that has been incorporated in AASB enumerates that the AASB  is equal to IASB and the series of AASBs 101-199 correspond to the  IAS series as well. Apart from this AASB also adopted the standard of interpretations equivalent to the interpretation issued by IASB and has been depicted in the AASB 1048 Interpretation and Application Standards.Though majority of the AASB standards have been revised as per the IASB standards domestic standards having no equivalent in IASB have been retained such as ancillary Standards like AASB 1031 and AASB 1039, industry Standards like AASB 1023 and AASB 1038, and public sector Standards such as AAS 27, AAS 29 and AAS 31 

AASB can address domestically or refer to IPASB for consideration any technical issue regarding work program of IASB and IFRS.  These considerations may lead to improve the reliability and relevance of financial information and or reduce costs of financial reporting. 

IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB:

IASB which was established in 2001 is an independent ,mom-profit, private organization involved in setting standards for IFRS Foundation.  The IFRS standards are a group of highly understandable, enforceable, qualitative and globally accepted standards of accounting principles.  However they have no authority to impose these standards. They provide only accounting principles and implementation guidance.  Hence they are not mandatory as they are not a part of IFRS standards.  Moreover the interpretation of each standard forms a basis for explanation the need of developing the particular standard. This explanation which forms conclusions for the standard is again not a part of IFRS standards hence not mandatory.  The IASB has developed IFRS standards for public interest and to consult and engage investors, regulators, business leaders etc. for setting a worldwide standard for the accounting community.  Discussion Papers and Exposure Drafts are published for public debates and comments again which is not a part of IFRS standards. 

Mandatory Disclosures versus Voluntary Disclosures

Many member of the 14 countries of IASB have their own local GAAP or  GAAP based on or similar to the IFRS standards.  This is so because in order to identify the domestic environment and to prepare a GAAP that is suitable to the domestic economic environment.  Many a times the IFRS standards adopted by a member country  is used to analyze and compare the national accounting and auditing standards with international stands and to identify the applicability of the accounting and auditing standards by assessing its strengths and weakness. Also IFRS can be used as a tool for developing and implementing accounting standards with a view to improve the institutional capacities and the Financial Reporting by the countries corporate. 

Owners Capital of BHP Billiton Ltd and BHP Billiton Plc consists of Ordinary Shares Fully paid up, Special Voting Shares, Preference Shares, Equalisation share and DLC Dividend share Treasury shares.

The ordinary Shares of BHP Billiton Ltd values to 99.99% of the total number of shares. Special Voting shares are issued to facilitate and joint voting by shareholders on Joint Electorate Actions. Since 2014 there has not been any specific movement in these two shares indicating a stable capital requirement of the company.

Preference share holders have the priority over the right to repayment than any other class of shares, but they have limited voting rights.  There has been no specific movement in this class of share also since 2014.

An equalization share which is issued to enable a distribution to be made by BHP Billiton Plc to BHP Billiton Ltd if required under the Dual Listed Company (DLC) terms was not required in the year 2017.

In the year 2016 DLC Dividend Shares were issued in order to enable efficient and flexible capital management in DLC.  The value of each share at par was US$10.  In the year 2017 a Dividend of US$440 million was paid as dividend byBHP Billiton Limited as a part of dividend share arrangements of DLC and is to be eliminated on consolidation.

Treasury shares are those  shares of BHP Billiton Limited and BHP Billiton Plc which are held by the ESOP Trusts for the purpose of issuing shares to employees under the Group’s Employee Share Plans. These shares are recognized at cost and the equity are exempted from any effects of income tax.  However when the treasury shares are sold or reissued any consideration received thereof is, directly attributable costs and income tax effects. Any difference between the carrying amount and the consideration, if reissued, is recognized in retained earnings.

Return on equity of BHP Billiton Limited and BHP Billiton Plc is 13% which is less than the average Australian Metals and Mining Industry Average of 20% indicating that shareholders funds are not being used efficiently.

Australia United Mining Limited is a domestic exploration organization engaged in gold production.  Their operations spread over New South Wales and Queensland.  It was formerly known as Altus Mining Ltd.

The owner’s Capital of AYM consists of fully paid up ordinary shares. As on 31^st Dec 2017, the general public owns 11.03% of shares, Institutional ownership is 8.30%, Private company ownership is 7.55% whereas the majority 73.12% is inside ownership.   Return on equity is (-24%) negative since last 4 years since it is a loss making unit.

International Accounting Standards Board

Evolution Mining Ltd. is an Australian based gold mining organization with its operations in Western Australia. It was formerly known as Catalpa Resources Ltd. but changed its name in the year 2011.  The head office of the organization is located in Sydney Australia.  The owner’s capital or equity capital of Evolution Mining Ltd. is divided into four types of investors. First the individual insiders consisting of important group of stakeholders directly responsible for taking decisions.  The percentage of individual insiders is approximately 1% of the equity capital.  Second are Private companies with 9.83% stake in the equity capital.  Third are Private Institutions with 32.65% share in the equity capital they are the second largest ownership investor in the company. The largest ownership investment of 56.85% is from general public. Dividend payment on equity has been stable with nearly 50% payout ratio.  Though comparatively less than the industry ratio the payment of dividend leads to a positive lookout from the point view of its investors.

It is the world’s fourth largest producer of iron ore with a production capacity of 165 million tons per year. Started in 2003 Fortescue Metal Group is based in East Perth, Australia and exports iron ore internationally. The equity capital of the company is divided between Individual insider, Private companies, General Public and Institutional Investments.  Analyzing the balance sheet of the company shows an earnings growth rate of 9.3% and revenue growth rate of 2.8% which is comparatively better but less than the Industry rate which is 11.9% and 6.2% respectively.  Howeveer Fortescue Metal Group’s earnings and revenue are expected to grow by 9.3% and 2.8% , however these rates are not so positive as compared to the high market growth scheduled for coming years. Past performances of the company and that the company is not efficiently using Shareholder’s Funds as the Return on Equity is less than 20%.

In previous five years the earnings growth rate of the company has been below average thus highlighting that the Company’s assets are not being efficiently used.  However recently the company has significantly improved and its return on capital employed in current year 2017-18 is 23%. Dividend payment of the company has been highly volatile ( once in 8 years) with a dividend payout ratio in the current year 2017-18 is 52% as compared to 36% in previous year.

BHP Billiton Limited and BHP Billiton Plc: Return on equity of BHP Billiton Limited and BHP Billiton Plc is 13% which is less than the average Australian Metals and Mining Industry Average of 20% indicating that shareholders funds are not being used efficiently.  Its short term assets is greater than its short term liabilities and long term liabilities.  The Debt equity ratio has increased in past five years and currently is 44.2% more than 40% indicating an excellent net worth growth. However the Debt Equity ratio is only marginally high than the average set by Australian Metals and Mining Industry. Debt is covered by short term asses at 1.3 times more than debt. But it can be observed that the level of debt has reduced in the last four years indicating an efficient operating cash flows and efficient coverage of interest payment via earnings.

Australia United Mining Limited: Return on equity is (-24%) negative since last 4 years since it is a loss making unit. Australia United Mining Limited is a loss making unit.  Its Debt is not covered by short term asses and assets amount to only 20% of debt.  Analyzing its historical data revels that the level of debt at Australia United Mining Ltd.  has  been continuously increasing since past four years.

Evolution Mining Ltd.: A comparative analysis of the annual reports of Evolution Mining Ltd. highlights that previous 4 years the company has not effectively  used its shareholder’s fund resulting in a ROE less than 20%.  But recently performance of the company has considerably improved and its Return on Capital employed has significantly increased as compared to three years ago.

The company’s short term commitments have been effectively covered by its good holding of cash and short term assets.  These also have contributed in covering up the long term commitments of the company. Assets are 1.7 times more than its debt. The level of debt in the year 2017-18 is comparatively lower than its net worth i.e. less than 40% which is satisfactory.  Analysis of past 4 year’s show that the debt has considerably reduced as compared to the company’s net worth in the past 4 years. Interest payment on debt is also aptly covered by it EBITDA.

FMG Ltd. is capable of meeting its short term commitments however in case of long term commitments the debt is not covered by its short term assets which amount to 40% of its total debt commitment. FMG Ltd. level of debt is higher than the company’s net worth.  However the level of debt in the past years has decreased from 239% to 40.8% in the current year.  The interest payment on debt is aptly covered by the company’s EBITDA.

References:

1. BHP Billiton Limited and BHP Billiton Plc (2014-2017) Annual Reports
2. Australia United Mining Limited(2014-2017) Annual Reports
3. Evolution Mining Ltd. (2014-2017) Annual Reports
4. Fortescue Metal Group Ltd. (2014-2017) Annual Reports
5. Pawsey N (2016, Oct),”The impact of IFRS adoption in Australia: Evidence from Academic Research”, AASB Research Report -3,AASB
6. AASB (2018, Aug),  “Amendments to Australian Accounting Standards-Reduced Disclosure Requirements”, AASB
7. Burnett M B(2017,Nov),”Market implications of voluntary accounting disclosure in the absence of a mandatory disclosure requirement: Evidence from the OTCBB” (Dissertation) University of Colorado at Boulder.
8. Bushman R, Landsman R W (2010, March) “The pros and cons of regulating corporate reporting: Critical review of the arguments” (paper presentation), Kenan Flagler Business School, University of North Caroline
9. AASB (2018,Nov,30),”The AASB’s approach to international public sector accounting standards,”(comments) AASB.
10. Karthik B, LIXi and Yang H (2012,Sept),”Mandatory Financial Report environment and voluntary disclosure evidence from mandatory IFRS adoption”, (Research Collection) School of Accountancy, https://ink.library-smu-edu.sg/soa_research/1163

AASB(2011),”AASB policies and processes” Australian Accounting Standard Board.