1. In 350 words or less, summarise the article citing the reasons on whether IFRS has delivered on its promise of improving financial reporting. What are some of the suggestions made to create a more efficient financial reporting system?
2. According to Lev and Gu, in today’s business environment, are financial statements still relevant? Why? What has changed? Explain. According to some Australian researchers, there are differences between the usefulness of financial statements in Australia and the United States. Highlight these differences and explain the reasons for them.
3. The IASB is intent on improving the communication value of financial statements. What are some of the current problems and what strategies are they adopting to address these weaknesses? Explain.
4. What is a social contract? Is there a social contract between the banks and the community? If so, what are the explicit and implied terms of the contract? Explain.
5. Name the various stakeholder groups involved and explain their roles, motivations, strategies adopted and benefits obtained, if any in this case study.
6. What is meant by organisational legitimacy? Whose legitimacy had been negatively impacted in this case study and what had led to that? What strategies have been used to regain organisational legitimacy and have they been genuinely implemented? Explain with relevant theories, appropriate examples from the case and applications.
7. Are there other strategies that you can suggest to improve organisational legitimacy? Support your answers with reasons.
After critical assessment of the article, it is inherent most of the global nations have adopted “International Financial Reporting Standards (IFRS)” for their financial reporting purposes. The primary aim of IFRS is to develop a common international language in relation to business affairs along with assisting in readability and comparability of the company accounts (Intheblack.com 2018). The IFRS standards have been a mechanism in facilitating the flow of debt and equity capital within and throughout the international economies. In this regard, Warren (2016) remarked that IFRS would result in rooms to manipulate accounting numbers, since IFRS is a principle-based set of standards. In other words, IFRS increases the creativity of the managers in using professional judgement, which would minimise comparability, flexibility, reliability and relevance of financial information.
The article identifies that the role of professional judgement is significant in numerous short-term estimates that comprise of bad debt provisions, deferred revenues along with valuations of inventory and income tax. Similarly, professional judgement is needed for long-term estimates like impairment of assets, costs and liabilities of retirement benefits and deferred tax. Another dominant feature of IRS is fair value accounting, which is subjective in nature. Hence, the formulation of reliable measures of fair value could be challenging in few emerging nations, in which the necessary information might not be readily available. Hence, it could be stated that IFRS is yet to deliver its promise of enhancing financial reporting.
There are some suggestions laid out in the article for developing an effective financial reporting system, which are enumerated as follows:
According to the provided article, it has been identified that two US academics have stated that the usefulness of the financial information is fading for the investors. According to their research, Tesla listed on NASDAQ stock exchange has not made any profit; however, in 2017, the investors purchased its battery visions and futuristic electric car have driven its market capitalisation above General Motors. This is further supported on the part of Amazon, Tesla and Google that information like balance sheets, cash flow statements and income statements have fading benefits, since the investors could access information from other sources, which could drive the share prices quickly (Intheblack.com 2018). Thus, traditional accounting fails to capture the actual value of the organisation.
However, according to the research work of three Australian academics, shareholders’ equity and net income are still pertinent in order to undertake investment decisions, which would remain constant with the passage of time. The net income and shareholders’ equity are included into the share prices of the organisations and it has been argued that the value of an organisation is within its strategic and value-enhancing sources (Pelger 2016). Considering the example of Tesla, the US academics have argued that more emphasis is placed on the increased value of intangible assets.
However, there are certain differences between the usefulness of financial statements in US and Australia. Firstly, in US, the calculation of shareholders’ equity and reported net income is made with the help of US GAAP, which is adjudged in the form of rules-based standards. However, in Australia, IFRS-based standards of accounting are used for calculating shareholders’ equity and net income, which is termed as the principles-based standards. Secondly, the liquidity of the US market is greater in contrast to that of Australia, since frequent trading is carried out depending on non-accounting information (Gordon et al. 2015).
Thirdly, the Australian investors might depend on depend on shareholders’ equity and reported net income for undertaking investment decisions, while the US investors take into account other organisational fundamentals comprising of intangible and cash-related amounts. Fourthly, divergence is inherent between the Australian and US investors on intangibles. The financial reports of telecommunication industry having greater intangible asset valuations are still beneficial for the Australian investors. Hence, based on this discussion, it could be said that the financial statements perform a confirmatory role in the current era, which meet the expectations of the investors.
As laid out in the article, some problems are inherent in enhancing the communication value of the financial statements and the strategies to address them are described briefly as follows:
It has been identified that several users of the financial statements find the sub-total operating income as highly beneficial; however, it is not clearly defined in the framework of IFRS. In addition, inconsistency could be observed while presenting the line items. Some organisations take into account impairment of intangible assets for obtaining the adjusted operating income, while this is not the case in case of other organisations (Intheblack.com 2018). For meeting the user needs and in order to eliminate these inconsistencies, IASB aims to improve structuring, including additional line items and sub-totals. Another concern of IASB is that the measures of non-GAAP might be utilised for painting a flattering picture which could hide he actual picture of the performance of the business organisations (Andersson et al. 2016).
According to Weetman (2017), IASB is confronted with a number of challenges. The main issue is whether non-recurring exceptional items need to be excluded from the operating income. However, according to the current thinking pattern of IASB, these items are preferred to be indicated to obtain operating income. In fact, the board is taking into account to enable an alternative for including a sub-total of adjusted operating income, while excluding the non-recurring and exceptional items (Barth 2018).
Most of the stakeholders want IASB to describe profit or loss and other comprehensive income. This is an issue, since in the absence of a principle describing the above-stated terms, there would be inconsistency in segregating expenses and incomes between the two categories.
As commented by Deephouse et al. (2017), social contract functions as a basic approach for legitimating liberty in society. This contract helps in providing a suggestion on the moral rules to be followed and the way through which these rules are justified. Thus, it provides clear instructions regarding the reasons for the rules to be followed, which include mutual benefit and fear of punishment. Based on the provided case study, it could be found out that the big four banks in Australia have decided to abolish the ATM fees that the customers are needed to incur for withdrawing cash from their bank accounts. The intention is to minimise the expenses of the customers belonging to other banks in cash transactions, which would help them in maintain higher savings in their bank accounts (Deegan 2014). Since the number of ATM transactions has been falling in Australia each year due to such fees, it could be another reason that this type of fee is eliminated completely. Hence, this indicates the existence of a social contract between the big four Australian banks and the community.
Explicit term of a contract could be defined as the communication, in which something is agreed upon and implicit term of a contract takes place at the time when actions imply that agreement to something is actually made. In the provided case study, the explicit term of the contract is the abolition of $2 fee for each withdrawal the customers make on the part of Commonwealth Bank of Australia (CBA). Westpac has adopted this move as well to provide benefits to those residing in regional and rural Australia (Abc.net.au 2018). The other two banks, Australia-New Zealand Bank (ANZ) and National Bank of Australia (NAB) have dropped the fees to provide benefits to the overall community.
The various groups of stakeholders identified from the provided case study include the customers, the banks, banking regulatory authority and the government. The customers and the banks are the primary stakeholders in this situation, while the banking regulatory authority and the government could be identified as the secondary stakeholders. In this case, the customers are motivated to make additional transactions in ATMs at free of cost. In other words, they do not incur an additional fee of $2 for every ATM transaction in the big four banks.
The big four banks are forced to make this change owing to the governmental pressure of the nation. Due to this move, the banks in Australia would suffer a loss of $500 million a year. Another reason that could be identified behind the adoption of this particular strategy is to drop the unpopular $2 fee to withdraw cash from the ATMs of other banks (Dailymail.co.uk 2018). The benefit that is obtained from adopting this strategy is the increase in number of ATM transactions, which has declined in the past few years. In addition, this move would signify the move of the banks regarding the willingness of listening and acting on feedback of the customers.
The banking regulatory authority and the government of the nation would keep close observation on all the probable closures of ATM. In addition, it has been assured that the banks would bear all the costs and they would not increase their other charges. The motive or strategy of these stakeholders is to ensure that the banks do not close their ATM services due to the loss incurred, as it would negative effects on the customers and the overall community (Cho et al. 2015).
In the words of Dumay, Frost and Beck (2015), legitimacy could be defined as something, which is lawful, beneficial and ethically conducive at the same time for the parties associated with it. Organisational legitimacy could be described as something that could be perceived as legal and social compliance within and outside the organisation, performing social obligations and duties and behavioural science through the advancement of resources and mechanisms to be used. This needs a system of internal control, effective governance organisation-wide for protecting the assets of the organisation. This holds the system design, which needs to be in harmony with the company values, ethics and human factors associated with the business (Goddard et al. 2016). It needs to be pliable enough for helping the organisation to grow at its own pace as well as for the society for obtaining both tangible and intangible benefits.
The operating management of an organisation like supervisors or department heads are responsible for the efficacy and effectiveness of operations. The audit reports aid operating management in this context by identifying those areas requiring improvement along with stimulating action in the right direction. Such outcomes might provide objective support related to issues needing the support of higher authority. At the time of compliance audit, it is ascertained whether the organisation has adhered to the related regulations and laws along with industrial or professional standards or contractual obligations, which could be introduced with the help of regulations. The management needs to have effective mechanism to identify applicable policies, standards, processes, regulations and laws.
In the provided case study, the legitimacy of the Australian banks has been influenced negatively due to the law imposed on the part of the federal treasurer of the nation. The banks have been challenged of not transferring the cost of tax, which would increase $6.2 billion. Instead, the banks need to pay attention on their annual income of $30 billion and they are required to absorb the new levy cost. For regaining the organisational legitimacy, the banks have started to warn that the shareholders and borrowers would be compelled to pay the tax cost, which would be eventually transferred to the customers.
In order to comply with this new legislation, the banks feel that they have tax enforced on them uniquely, which is not applied to any other part of the business community. As per the chief executive of Westpac, this levy is considered in the form of stealth tax, which would minimise the global competitiveness of the industry. For dealing with this issue, the banks are needed to increase their rates of interest for the borrowers, cut jobs along with minimising the overall returns to the shareholders. In addition, the chief executive of CBA has stated that there is lack of detail and there is no consultation regarding tax. Furthermore, the banks perceive that the shareholders or customers are required to borne the additional costs. However, the tax rates or interest rates have not been increased yet to deal with this specific issue.
According to the provided case study, it could be observed that the big four banks have abolished fees for the customers of other banks in relation to their ATM services (Afr.com 2018). The laws of the government and the banking regulatory authority of the nation have violated the legitimate interest of the banks by placing their business goals in danger. The effectiveness of the banks could be enhanced by assessing the interests and needs of the customers. The strategies of quality management could be enforced efficiently for enhancing the overall efficacy of the banks. The client feedback could be obtained, which would enable in enhancing the plan of quality management and accordingly, the strategy could be implemented (Higgins, Stubbs & Love 2014).
In the current era, technology plays a significant part in the strategy of organisational improvement. The collaboration with the professionals from different fields to enhance on the effectiveness and quality of banks would be beneficial. In the provided case study, the legitimacy of the Australian banks has been influenced negatively due to the law imposed on the part of the federal treasurer of the nation. The banks have been challenged of not transferring the cost of tax, which would increase $6.2 billion. Instead, the banks need to pay attention on their annual income of $30 billion and they are required to absorb the new levy cost. Hence, if the banks decide to absorb this levy cost, they need to raise their rates of interest on the loans provided (Hoque 2018). Alternatively, they could minimise the return on investment to the shareholders in the form of paying lower dividends for retaining greater profits, as this move would help them to cope up with the cost absorption related to ATM fees.
References:
Abc.net.au 2018, ‘The game is up’: Big four banks drop their ATM withdrawal fees, [online] ABC News. Available at: <https://www.abc.net.au/news/2017-09-24/commonwealth-bank-and-westpac-axe-atm-fees-fornon-customers/8979250> [Accessed 10 Apr. 2018].
Afr.com 2018, ATM fee abolition fails to quell royal commission calls, [online] Financial Review. Available at: <https://www.afr.com/news/scomo-warns-banks-to-absorb-atm-fee-costs-20170924-gynlxs> [Accessed 10 Apr. 2018].
Andersson, T, Haslam, C, Tsitsianis, N, Katechos G & Hoinaru, R 2016, ‘Stress testing International Financial Reporting Standards (IFRSs): Accounting for stability and the public good in a financialized world’, Accounting, Economics and Law-a Convivium.
Barth, ME 2018, The Future of Financial Reporting: Insights from Research, Abacus.
Cho, CH, Laine, M, Roberts, RW & Rodrigue, M 2015, ‘Organized hypocrisy, organizational façades, and sustainability reporting’, Accounting, Organizations and Society, vol. 40, pp.78-94.
Dailymail.co.uk 2018, Fears banks may cut ATMs after withdrawal fees removed, [online] Mail Online. Available at: <https://www.dailymail.co.uk/news/article-4915888/Fears-banks-cut-ATMs-withdrawal-feesremoved.html#ixzz5916PQ1eZ> [Accessed 10 Apr. 2018].
Deegan, C 2014, ‘An overview of legitimacy theory as applied within the social and environmental accounting literature’. Sustainability accounting and accountability, pp.248-272.
Deephouse, DL, Bundy, J, Tost, LP & Suchman, MC 2017, ‘Organizational legitimacy: Six key questions’, The SAGE handbook of organizational institutionalism, pp.27-54.
Dumay, J, Frost, G & Beck, C 2015, ‘Material legitimacy: blending organisational and stakeholder concerns through non-financial information disclosures,’ Journal of Accounting & Organizational Change, vol. 11, no. 1, pp.2-23.
Goddard, A, Assad, M, Issa, S, Malagila, J & Mkasiwa, TA 2016, ‘The two publics and institutional theory–A study of public sector accounting in Tanzania’, Critical Perspectives on Accounting, vol. 40, pp.8-25.
Gordon, EA, Bischof, J, Daske, H, Munter, P, Saka, C, Smith, KJ & Venter, ER 2015, ‘The IASB’s discussion paper on the Conceptual framework for financial reporting: a commentary and research review’, Journal of International Financial Management & Accounting, vol. 26, no. 1, pp.72-110.
Higgins, C, Stubbs, W & Love, T 2014, ‘Walking the talk (s): Organisational narratives of integrated reporting’, Accounting, Auditing & Accountability Journal, vol. 27, no. 7, pp.1090-1119.
Hoque, Z 2018, Methodological issues in accounting research, Spiramus Press Ltd.
Intheblack.com 2018, 10 years on, are international standards helping financial reporting?, [online] Available at: <https://www.intheblack.com/articles/2016/10/04/10-years-on-are-international-standards-helping-financial-reporting> [Accessed 10 Apr. 2018].
Intheblack.com 2018, Do financial statements still matter?, [online] Available at: <https://www.intheblack.com/articles/2017/12/19/financial-statements-still-matter> [Accessed 10 Apr. 2018].
Intheblack.com 2018, The push to improve communication in financial reporting, [online] Available at: <https://www.intheblack.com/articles/2017/03/01/improve-communication-financial-reporting> [Accessed 10 Apr. 2018].
News.com.au 2018, ‘This is a good outcome for customers’, [online] Available at: <https://www.news.com.au/finance/business/banking/atm-fee-removal-comes-with-a-catch/newsstory/d62b3513646d98d24a8cae9a74419163> [Accessed 10 Apr. 2018].
Pelger, C 2016, ‘Practices of standard-setting–An analysis of the IASB’s and FASB’s process of identifying the objective of financial reporting’ Accounting, Organizations and Society, vol. 50, pp.51-73.
Warren, CM 2016, ‘The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16)’, Property Management, vol. 34, no. 3.
Weetman, P 2017, Financial reporting in Europe: Prospects for research, European Management Journal.
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