Critical Analysis Of Corporate Regulation, Accounting Standard Setting, And Owners Equity In Australia

Corporate Regulations

The financial statements prepared by the companies require the knowledge of an expertise to maintain consistency. This will help in incorporating standardization.  This results in reduction of litigation risk from the view point of the auditor (Berry, 2009). It was observed that many companies such as Enron and WorldCom was engaged in various scams which forced the standard boards as well as the regulators to set such standards that would enhance transparency and quality of the financial statements. We all know regulation is not a simple process but it helps in promoting the effectiveness and efficiency of the financial economy. The regulators must always check the impact of the regulations set up by them because this affects the global growth. The main purpose to bring regulation reforms was for the sake of the stakeholders of the company (Edwards, 2014). There are various users of the financial statements such as shareholders, creditors; debtors etc who use this financial report for in order take important decisions. Each of them is dependent on the information provided in the financial statements differently. Therefore, it is the responsibility of the management to prepare a financial report that gives true and fair view of the company to the stakeholders. It is the responsibility of the organizations to follow the regulations that are set up by the regulators but it is the responsibility of the regulators to analyze the financial reports prepared by the companies and check whether it is standardize or not (Girard, 2014).

The transparency of the financial reports is closely related with the disclosure made in the financial reports. The companies prefer disclosing information in the financial reports voluntarily because this helps them to compete well with their competitors. If the company makes sufficient disclosures, then the risk of hiding information reduced. So, the organizations see disclosures as an opportunity. It is not possible for the company to survive in the long run if it does not keep its stakeholders satisfied. In order to keep them satisfied the company must make voluntary disclosure of a high quality. Voluntary disclosures help the company in building its image and maintaining its reputation in the market. However, this may also create suspicion in the minds of the people (Kuhn, 2013).

The disclosures that are not required to be compulsorily made because of the regulations but the management disclose certain information itself, and then such disclosures are called voluntary disclosures. The management of the company wants to provide a clear picture about the operations carried out and the return it has generated to the stakeholders. In order to avoid surprises, the management tries to make standardized disclosures. If the company makes voluntary disclosures then the investors are able to carry out valuation of the firm and take capital investment decisions accordingly (McLaney & Adril, 2016). The management of the company also adopts such practices because these practices improve the credibility of the company. A company with strong credibility position is supported by the market participants even if the earnings of the company is not that high. The firm must not disclose immaterial information to the public as it may also affect the organization.

Voluntarily Disclosures

The disadvantage of voluntary disclosures made by the management may provide the competitors with sensitive information about the company which can have an adverse impact. So, we can also say that on the urge of making voluntary disclosures the company might have to bear the competitive disadvantage (Menifield, 2014). Likewise, the company also has information about its competitors. So, such information can be used to nullify the influence of competitive disadvantage. The three factors that are stated by Financial Accounting standard boards is the type of information, the timing of providing such information and the extent of details.

The quality of an entity can be assessed by evaluating its financial reports (Paul, 2014). The market participants tend to reward the disclosure practices adopted by the companies because this has made financial reporting go beyond its narrow levels of traditional financial reporting

The globally based accounting standards that are also known as International Financial Reporting System (IFRS) lies within the framework of International Accounting Standards Boards (AASB).IFRS was adopted by AASB on 1^st January, 20015 for the alignment of Financial Reporting Council. So, if there arises any issue in the IASB program then there may be a requirement to work on AASB work program also. AASB extends its hands in initiating to find issues and conduct project proposal accordingly (Pratt, 2009).

The Australian stakeholders have been provided a right to communicate the problems that they face to the international standard setting body which is also called AASB. There are various relevant documents issued by AASB such as discussion papers, draft interpretation, exposure drafts and invitation of comments for the purpose of knowing public reaction and collecting review from the stakeholders. The different categories of stakeholders are invited to the discussion meetings (Rogers, 2015).

A detailed research is carried out about a particular issue and then a global initiative is taken to address such issue to the standard boards by the way of formal submissions (Rosenfield, 2009). This is the process by which the communication of issues is done or the contribution for setting highly international accounting standards is made.

It is not compulsory for all the member nations to adopt IFRS. However, the adoption is recommended because it is considered as an adoption of a broader concept and not just changing the accounting process. It will have a huge impact on the operations, internal controls, information technology and also the tax requirements. The adoption on IFRS is not a simple process and there exists no entity that has a detailed knowledge about this standard. It is considered to be costly because a large number of knowledgeable professionals has ti be hired (Schroeder, 2014).

Accounting Standard Setting

The equity of a company mainly consists of the shareholders fund, retained earnings and also reserves and surplus.

The money that has been raised from the general public is known as the Contributed capital. These shareholders of the company are also considered to be the owner because the maximum risk that is held by them. The risk that is undertaken by them is in the form of no dividend when the company has low profits, there is no policy for redemption and also they are not given priority over the debt holders and other shareholders. Therefore, we can say that the investors have an interest in the workings of the company and so they are considered to be the owners (Scott, 2014).

Retained earnings are formed when the company plough backs a portion of profit that is earned by them. If the company ploughs back a major portion of profits earned then the investors of the company might get hurt because it magnifies the risk undertaken by them.

The operating profit or loss of the company along with various reserves is categorised under reserves and surplus. These reserves are created by the company to meet its obligations at the time when any unforeseen situation arises. The reserves are created out of the surplus earned by the company. For example, if there is any injury caused to any employee during the working hours then the company might provide them compensation by using the workmen compensation reserve (Siciliano, 2015).

We have selected four public listed companies from the mining industry in order to analyse the equity and leverage structure:

BHP BILLITON

Stockholders’ equity	2014	2015	2016	2017
Common stock	2255	2243	2243	2243
Retained earnings	74548	60044	49542	52618
Treasury stock	-587	-76	-33	-3
Accumulated other comprehensive income	2927	2557	2538	2400
Total Stockholders’ equity	79143	64768	54290	57258

We can observe in the table above, there has been a downfall over the past four years. This might lead to degradation in the market position. On analysing, we have found out that this downfall occurred because the reserves of the company reduced substantially as the company exercised employee share awards (Taillard, 2013).

Orica Limited

Stockholders’ equity	2014	2015	2016	2017
Common stock	1975	1954	2025	2068
Other Equity	-70	-147	-149	-123
Retained earnings	2895	1247	1247	1460
Accumulated other comprehensive income	-537	-70	-341	-443
Total stockholders’ equity	4263	2985	2782	2962

From the above table, we can observe that the equity of the company is falling continuously over the years. On analysing, we think that the reason for it is the huge expenditure on the material costs of the existing contracts that are held by the company. There is also a positive point indicated from the above table which is the maintenance of the level of retained earnings of the company. This is because the profits earned in the previous years were reinvested (Warren, 2017).

Owners Equity

Rio Tinto

Stockholders’ equity	2014	2015	2016	2017
Additional paid-in capital	9053	8474	8443	8666
Retained earnings	26110	19736	21631	23761
Accumulated other comprehensive income	11122	9139	9216	12284
Total Stockholders’ equity	46285	37349	39290	44711

The above table shows the high amount of retained earning along with the comprehensive income. This is due to the high profits that were earned by the company in the previous years. So, we can conclude that the management has strong control over the business.

Fortescue

Stockholders’ equity
Common stock	1368	1685	1752	1676
Other equity	71	60	44	51
Retained earnings	6593	8052	9504	10910
Accumulated other comprehensive income	2		0	0
Total Stockholders’ equity	8035	9797	11301	12637

It is observed that there is an increasing trend in the common stock of the company. At the same time, we can also see that the equity of the company is falling. We carried out an analysis in order to know the reason behind it. The reason behind the falling equity is certain issues that arose in the mining industries.

Debt Evaluation

The debt equity ratio helps to determine the share of debt component in the total shareholders’ funds. The following table will help us to understand better:

FMG
Debt	16056	18016	14739	12214
Total Stockholders’ equity	8035	9797	11301	12637
Debt equity ratio	1.998258	1.83893	1.304221	0.966527
BHP Billiton
Debt	72270	59812	64663	59748
Total Stockholders’ equity	79143	64768	54290	57258
Debt equity ratio	0.913157	0.923481	1.191066	1.043487
Orica
Debt	4576	4337	3813	3823
Total stockholders’ equity	4263	2985	2782	2962
Debt equity ratio	1.073422	1.452931	1.370597	1.290682
RIO Tinto
Debt	61542	54215	49973	51015
Total Stockholders’ equity	46285	37349	39290	44711
Debt equity ratio	1.329632	1.451578	1.271901	1.140994

The following analysis has been done on the basis of table provided above:

• Fortescue has a high debt equity ratio which is considered to be unfavorable for the company. It magnifies the financial risk of the company which might affect the business operations and the entity might have to make huge interest payments even when the company has no sufficient earnings (Zyla, 2013).
• In case of BHP Billiton Ltd, there is an equilibrium situation, which means that the company has maintained balance between the equity and debt components of the capital structure. This reflects that the management of the company is very efficient and the financial structure is also positive.
• In case of Orica, the debt equity ratio of the company is increasing substantially which may lead to several difficulties in the future.
• Now let us talk about Rio Tinto, there is a high debt equity ratio which is accompanied by the high retained earnings of the company. So, we can say that the company has compensated its high debt with the high retained earnings. Also, the company has grown over the past years.

Conclusion

In this assignment, we have discussed about the importance and disadvantage of the voluntary disclosures that are made by the management. The impact of disclosures on the stakeholders as well as the competitors has been discussed. We have also carried out a comparative analysis among the four listed companies that belong to the same industry. The importance of maintaining a balance between the debt and equity component in the capital structure has also been discussed.

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