Answers
1: The share prices of Commonwealth Bank (CBA) have steeply declined during August 2017, in spite of a reported profit figure of nearly $9.93 billion during the closing of the financial year 2017. Reports suggest that the profit was necessarily 8% over and above previous year period and assisted the management of the bank to make payment of dividends of amount $4.2 per share to their investors over the entire year on company earning of nearly $5.7 per share. Essentially, the higher amount of gains of the bank was registered despite net interest margin as an important dimension of profitability declining 3 basis points to around 2.1%. The overall profitability of the bank was supported by the growth observed in more
cost-effective financing sources namely deposits of different customers that plummeted to around $561 billion during 30
th June 2017. The customer deposits are up by around $43 billion as compared to the year ago period. Essentially, customer deposits reflect 67% of the overall funding of the bank that particularly the bank lends to different borrowers in a bid to acquire profit. Nevertheless, the prices of the shares have decreased sharply only after the AUSTRAC that is the AML regulatory body alleged that the bank has failed to put into effect certain checks that are formulated to avert criminals or else nonpayers of tax from cash depositing in their bank (Williams 2014). This is normally carried out through Intelligent Deposit Machines in a bid to hide diverse ill gotten profits.
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Figure: Share Price of CBA during the period of August 2017
Reports suggest that the regulatory body AUSTRAC has asked for commands for civil pecuniary punishments against particularly Commonwealth Bank under the legal directive of s.175 of the AML/CTF of the year 2006 and provided the serious allegations the bank could encounter an enormous fine that could adversely affect the overall profit of the company. Basically, the investors are selling the shares of the company as the sidelines are now important t before considering investment in this bank. Therefore, it is no surprise that the entire market reacted in a negative manner to the scandal of CBA where it was sued by the court for violations of money laundering as well as terrorism financing regulations (Scott 2015). The sharp declined in the share prices of CBA and losses incurred in the energy segment directed the way towards to a weak sitting for the entire share market of Australia, where particularly All Ordinaries index declined by around 7.6 points, or in other words 0.13%, to nearly 5,779.1 points during the closing of the market of the market August 4. This specific behaviour of the investors can be described as panic among the investors due to the sudden news of the scam. Primarily, investors who are of the view that the market is going to falter start to dump stocks in a bid to avert loss making. However, with acceleration in the speed of the fall on the prices of the shares, the panic began to grip leading others to follow similar suit. In essence, as everyone begins to offload their stocks, share supply exceed the overall demand directing the prices to further plunge deep down (Edwards 2013).
2: The resource segment and the ones who invest in it encounter the pressure of disclosing the overall risk of climate alteration. Primarily, some of the publicly listed Australian corporations such as Woodside as well as Rio Tinto encounter changes in the way in which they formulate, model and plan for disclosing the risk specifically from change in climate to different investors. Essentially, they way the management of these companies react also impact their overall ability to acquire finance from the lenders, diverse insurers along with superannuation funds who are under tremendous pressure to carry out stress test different investments for mainly a carbon controlled future. As per reports, the climate associated financial disclosures are anticipated to add pressure on different publicly listed corporations to properly formalise the risk associated to climate disclosure exercises specially by means of scenario analysis or else risk financiers extracting finances and diverse rating agencies presenting suppositions regarding the overall risk profile of the corporations. However, the main purpose of the task force is to make certain that the disclosures on particularly climate associated risks as well as opportunities are more methodical, comparable as well as consistent (Christensen et al. 2016). Essentially, it is also a keep at bay worldwide financial crisis style correction since the financial community handles its exposure assets that could swiftly become redundant as limits on emissions of carbon tighten to nearly 2050. This is well within the economic life of majority of the large scale infrastructure plans. The main objective is to enable superior decision making by specific capital markets and finally to make certain that the financial system is not exposed to systematic risk or else shock that have been witnessed in the past with economic crises. The suggestions of the taskforce shall go to the G20 summit particularly in Hamburg. Over and above 100 business concerns with market capitalisations of over and above US $3.3 tn as well as financial concerns accountable for assets of more than US $24 tn have inspired the adoption of the recommendations of the taskforce. The Paris contract implies that majority of the world has to attain zero emissions by the year 2050 and it is clear that several businesses are not pursuing a strategy that is consistent with this target. Nevertheless, it is not the resources segment but the ones who necessarily invest as well as finance them, and the ones who depend upon them (Freeman et al. 2014). However, both the oil as well as auto industry are currently coming to terms with the outlook that the entire era of internal combustion engines may be ending much quicker. () asserts that the utilization of the positive accounting can be analysed in combination with diverse social disclosures behaviour. Again, the legitimacy theory was also utilized in the earlier period as the theoretical basis for different corporate social disclosures. Several studies that indicate that research paradigm both the logical as well as normative reasoning were utilized to arrive at theories of actual income.
3: There are several researches that reflect emotional influence on judgement as well as decision making. Bodie (2013) mention that there has been revolution in particularly decision theory at the time when bounded rationality was introduced. This is primarily a notion that calls for the need of the existing models of specific rational or else viable choices that can include specific cognitive as well as situational constraints (Bodie 2013). There are theories along with evidences from specifically promising field of emotion and rational decision making that mainly emphasizes on behavioural science, particularly psychology as against studies in neuroscience that are comprehensively analysed. Indeed there are several psychological scientists who suppose that emotions can be considered as the central driver of rational decisions. (Bodie 2013) asserts that decisions serve as the channel through which different emotions essentially supervise and guide several attempts for averting negative feelings and enhancing positive feelings even at the time when people lack awareness regarding the procedures. In addition to this, at the time when the outcomes of the decisions materialize, people often feel new emotions. To put it in simple words, emotions as well as decision making go hand in hand. Behavioural finance is a term that changed the way managers thought about their actions and their desire for particular conclusiveness. Theorists namely James March, Henry Mintzberg and many others presented the foundation of the study of specifically managerial decision making. Essentially, according to theorists, the study of particularly managerial decision making is an integration of different intellectual disciplines namely mathematics, economics, political science, sociology as well as psychology (Macve 2015).
However, with technological advancements the decision making process took another new turn. Technology aided process of decision making and the internet provided retailers new methods of forming decisions and the purchasers more power to select from a wider choice for purchasing. The technology induced business process helped the retailers to understand the behaviour of the consumers and undertake businesses in a new way. Managers started using computers for coordinating retail planning for their businesses and implemented technologically advanced procedures to specific decisions regarding investments, advertising strategy, pricing as well as logistics and many other functionalities. However, all these decisions made by the retailers are primarily based on their understanding of the behaviour of the stakeholders. Bodie (2013) mention that the decision makers also prefer instinct and they cry out for creative thoughts and synthesis that can better suit to different intuition than to analytical findings. As such, the instincts of the decision makers are also influenced by their emotions, patterns of thoughts, overall personality traits that in necessarily inform the distinctive choices made by the leaders. Several behavioural economists are of the view that the intellect of the managers also develops both intuition as well as analysis. Therefore, it can be hereby said that there are implications of emotions behind the understanding of the managers regarding the market for retail (Beatty and Liao 2014). For example, it is important for the managers to comprehend the reactions of customers to specific brochures that are presented with pictures of models or reactions of customers to availability of mutual funds on discounts. In this case, the emotional instincts hereby assist the retailers to understand their customer better and frame customer centric decisions for their business. Nevertheless, the beliefs and preferences or choices regarding the outcomes also shape the decision making processes.
4: As rightly put forward by Bushman (2014), social contract refers to an ancient philosophical notion that mentions about a particular individual’s ethical as well as political necessities associated to a contract with other individuals in the society. Thus, social contracts can be considered as tacit agreements that are unspoken as well as unwritten contract of social agreements.
The present scenario mentions about thw Australian gas exports. The case study suggests that the Prime Minister of Australia Malcolm Turnbull is of the opinion that the federal government had enough power to limit exports in Australia including exports of gas. However, he was asking for the gas corporations in place of the government to take actions to limit their exports and help bridge the gap or shortage in Australia. Turnbull is of the view that the management of the gas corporations are very much aware as regards advantages of a social license from particularly the people of Australia. The shortage created in Australia due to excessive exports of gas can be cited as a socially irresponsible act on the part of the companies. There has been breach or violation of the implicit as well as unwritten social and psychological agreement that in turn reflect the ethical obligations of the employers to be socially responsible. As rightly indicated by May (2013)stakeholder theory refers to organizational management as well as business ethics that concentrates on morals and ethical values involved in management of corporation. This concept indicates towards the fact that there are social responsibilities of business that encompasses socio-econnomic, legal as well as discretionary expectations that the community has of the businesses. It is implicit or else an unwritten contract that making diverse contributions to the community in which the business operates will be considered as social good that might go beyond firm’s interest. Essentially, this assists a corporation in gaining social license to carry out their function. However, it is important to stress that corporate social responsibility can be considered as a situation where firms have the need to go beyond compliance and participates in acts that can enhance the social good and that is beyond the interests of the corporation and is required by the law. In this case, there has been unwholesome development in the gas companies in Australia. These companies failed to reflect positive corporate behaviour that led them to export gas in a way that created shortage of gas in Australia. There is clear condemnation of the federal government as is clear from the statement of the prime minister and the government wants the corporations to take into consideration the unwritten social contract and operate in a socially accountable manner. The management of the firms need to take into consideration the new reporting practices that require ethical disclosure necessities. The disclosures can help in maintaining transparency of the business operations and is founded on appropriate, professional and ethical code of conduct of the companies (Pratt 2016). This can reflect that intents of the management of the firms to be honest in their behaviour and provide the requisite information and enhance adherence to different professional as well as ethical considerations as well as standards that in turn can eliminate chances of ethical violation. Thus, the ethical disclosure policy in the annual reports of the gas companies in Australia can help in the process of truth telling by the companies and assist users of the information to understand their intention to stick to the unwritten social contract.
5: Report presented by EY mentions that the inconsistent application of the regulations of International Financial Reporting Standards IFRS essentially undermines its overall value as a set of worldwide standard. The nations that are adopting IFRS need to avert national or else local variants of IFRS. There is need for disclosures in areas where adoption of the standard is incomplete or else there is divergence from particularly full set of regulations of IFRS as declared by the IASB (Beattie 2014). The entire process of transformation of the (IFRS) into a single set of worldwide language of financial assertions is very much under way and faces difficulties owing to inconsistent application from one nation to another, however with negative outcomes for the international comparability of financial assertions. It can be hereby observed that the flexibility of different provisions of IFRS, that in turn is unavoidable in several cases, amendments for their amalgamation into national regulatory structures and the multiplicity and unequal efficacy of national instruments for its enforcement and the process of supervision of execution becomes the main reasons of inconsistent accounting exercises. As rightly put forward by Kaya (2017), regulators of national financial reporting have the need to enhance their engagement as well as coordination particularly among themselves. In addition to this, International Accounting Standards Board (IASB) also has the need to make added efforts, that should mainly be concentrated on the worldwide promotion of the elementary basis of the standards of IFRS. As per reports of EY IFRS just as GAAPs) permits firm’s management to decide on accounting methods and select between two or more methods of accounting that in turn can deliver a faithful representation. However, there are cases in which IFRS does not spell out a specific accounting concept and principle. for itself, management have the need to utilize informed as well as sound judgement in order to determine the policy of accounting that suits appropriately with diverse facts as well as circumstances. Nonetheless it is probable that in certain cases, two different conclusions can be reached for identical scenarios. For instance, IFRS does not detail the process accounting for different control business blend. Therefore, business entities might select to utilize the method of pooling of interests, whilst some other entities might select to apply the acquisition mechanism. Nevertheless, once a process has been selected, the concern have the need to apply that process steadily for all similar kind of business transactions, otherwise it might lead to inconsistency in application. In addition to this, following regional variants of the standards of IFRS by the nations adopting IFRS also have inconsistency in application (Rutherford 2016).
On the other hand, there are participating nations that reaffirms commitments to the process of adoption of IFRS identifying certain jurisdictions that is attained through the procedure of convergence. Nations adopting IFRS also have appreciation for the efforts of the IASB for conduction of a thorough as well as comprehensive consultation of the upcoming agendas. Essentially, the participating nations also work towards the process of adoption of the set of internationally accepted accounting principles and notions. In addition to this, regulators also function together with not only with the international accounting standards board but also with different setters of national regulations and standards together with the regional standard setting units in order to better align regional policies. Thus, this removes the possibility of inconsistency in the process of adoption of the standards of IFRS. () mentions that the integration of the requirements of specific standards into regional framework is considered as the key to the process concluding the mandate of G20 for a single standard set that is internationally acceptable standard of accounting (Chan et al. 2016). This in turn can help in the process of enhancement of communication as well as collaboration between different stakeholders. Again, it is acknowledged that the standards of IFRS are properly endorsed that in turn makes it globally acceptable and this in turn helps in the process of implementation, audit and enforcement on a constant basis. IFRS provides thereby provides avenues for different standard setters, regulators as well as policy makers to share practices as well as difficulties encountered in respective areas. The forum sessions helps in setting strategic directions, governance framework along with the work plan in the consultation process. This comprehensive consultation process also helps regulators and markets worldwide to work together with the IASB and to deal with the process of adoption of IFRS .This in turn helps in lessening inconsistencies and proper application of the standards worldwide. However, since IFRS is essentially principle based structure of accounting that calls for the need of utilization of judgement, any incompatible application can surely undermine its entire value as a single set of common standard that is acceptable internationally. Particularly in this regard, this forum discusses the outreach efforts of the IASB and adopts expanded approach for interpretation. In order to curb inconsistency in application, educational initiatives are undertaken and experiences are shared by different preparers as well as analysts that in turn can form a strong foundation for application of IFRS (Laughlin 2014).
6: As per the given case the chief executive as well as founder of Telit resigned after a London listed technology corporation substantiated his involvement in an alleged mortgage scam in the United States 25 years ago. An arrest warrant was also issued against Oozi Cats, however he was never detained in the case by the federal court documents observed by Reuters. Essentially, historical indictments were never divulged to the board or any of the previous board members. The board members have come to know about the fact and made aware regarding the existence via different third parties. This incident led to the fall in the prices of the shares of the company. However, Telit declared that there necessarily no substance behind this kind of speculation over the financial condition and health of the company. As per reports presented in the case, there has been a violation of a debt covenant that was particularly set by one of the banks and that was just eight weeks after the incident of raising 39 million pounds from financiers.
A rightly indicated by Laughlin (2014), positive accounting theory makes attempts to arrive at good predictions of different realm world incidents and translate the same to diverse accounting transactions. However, on the other hand, normative theories intend to
present suppositions regarding what needs to be done. As per the notions of this theory, the more closer a firm is to violation of accounting based covenants of debt, the more probable it becomes for the firm manager to adopt a practice of accounting that can shift the registered earnings of the firm from the upcoming period to the present period. In doing this, the management of the firm can enhance the overall bonus for the present year. With the increase in the current income or earnings of the firm, the company becomes less likely to breach the debt covenants and the administration of the business concern minimizes different constraints that run the corporation. Therefore, the debt covenant can be registered as a basis of the predictions regarding the real incidents that have taken place that in turn led to the negative speculation over the company’s engagement in a bankruptcy (Beattie 2014). In addition to this, efficiency perspective of the positive accounting theory can be referred to in this case. This can help in illustrating the way managers of the company Telit chose diverse methods of accounting that can reflect the true replication of the overall performance and financial health of the firm. It can be hereby mentioned that accounting practices of different corporations are normally illustrated based on the presentation of the financial performance of the corporations (Beatty and Liao 2014). The opportunistic perspective of the positive accounting theory also helps in understanding the case of Telit. Opportunistic perspective of the notion mentions that managers as well as other agents of the corporation act in their own self interest and select the accounting policies that permit them to gain. The debt covenant in this case indicates financial contracting of the firm Telit and helps in understanding the when debt covenants are particularly violated.
7: The political environment also exerts influence on the standard setting processes. The general purpose financial reporting do not and always cannot deliver all the required information that different existing as well as potential financiers, lenders as well as different creditors require, however the users have the need to take into consideration diverse pertinent information from diverse sources. For instance,
general economic conditions as well as expectation, different political events as well as political climate, industry as well as outlook of the company (Beatty and Liao 2014). Therefore, it can be hereby said that the conceptual framework of the general purpose financial reports provides the provision of integrating information from
diverse sources regarding the political environment in their financial reports. Thus, the conceptual framework helps in informing about the political affairs affecting the reporting entity to a large extent as the financial reports cover the information regarding the effects of different transactions as well as other events that alter the economic resources of the business entity as well as claims. Thus this intricate information regarding the political events that affect the economic resources deliver useful insight regarding the provision of resources to the business entity. Essentially, the political environment of the business entity that have the capacity of altering the economic resources as well as claims of the business concern affect the financial performance of the firm (Kaya 2017). The alterations in the events come from diverse political events or else transformed business transactions namely debt policy, taxation policy as well as use of financial instruments. All together these events can have an effect on the cash flows of the company in the upcoming period. As per paragraph 1.15 of the conceptual framework, in a bid to asses company’s prospect for flow of cash in the future and stewardship of the management of the resources of the entity, the financial information users have the need to distinguish between different alterations. As per paragraph 1.21, a reporting business entity’s various economic resources as well as claims might also alter owing to reasons other than financial performance (Beatty and Liao 2014). Thus, it can be seen that the conceptual framework helps in incorporating the information in the financial statements that occur due to reasons other than financial circumstances. According to the conceptual framework, this kind of information is necessity for users to get a comprehensive understanding regarding the economic resources of the firm. For instance, the developing nations follow the developed nations in their process of adoption of different international financial reporting principles for standardizing and harmonizing worldwide accounting regulations. However, the political environment of the nations directs them to create certain variants to the accounting methods as per the requirements of specific nations for adoption of the standards. Therefore, theoretically the conceptual framework needs to drive the overall development and setting of accounting standards and make amendments as per requirement (Kaya 2017). In practice, political factors along with other socio-economic factors are said to play a dynamic role and exert influence on the directives presented by the standards. The obligations of capital markets, regulators along with reactions of the public to diverse scandals of accounting shall continue to have influence on the entire process of standard setting and amendments of standards.
References
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.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.
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Bodie, Z., 2013. Investments. McGraw-Hill.
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Chan, S.H., Song, Q., Rivera, L.H. and Trongmateerut, P., 2016. Using an educational computer program to enhance student performance in financial accounting. Journal of Accounting Education, 36, pp.43-64.
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Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
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Kaya, ?., 2017. Accounting Choices in Corporate Financial Reporting: A Literature Review of Positive Accounting Theory. In Accounting and Corporate Reporting-Today and Tomorrow. InTech.
Laughlin, R., 2014. Rob Gray, Social and Environmental Accounting and Organisational Change. Social and Environmental Accountability Journal, 34(2), pp.81-86.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
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Rutherford, B.A., 2016. Articulating accounting principles: Classical accounting theory as the pursuit of “explanation by embodiment”. Journal of Applied Accounting Research, 17(2), pp.118-135.
Scott, W.R., 2015. Financial Accounting Theory 7thEdition. Canada: Pearson.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.
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