Discuss about the Financial Management for Australian Accounting Standard Board.
This essay is based on the subject area of financial management. The primary discussion in this essay is focused on the concepts of accounting measurements and the problems in accounting measurement in context of Australian Accounting Standard Board (AASB) and International Accounting Standard Board (IASB). The discussion under this essay follows a specific follow, which starts with the discussion on the accounting measurement concepts and ends with the evaluation of the issues in the measurement techniques. In order to get a proper flow, the study analyzes and evaluates the measurement technique applied by Amcor Limited, which is a multinational packaging company in Australia.
Accounting measurement is the most vital part of overall accounting system in the business organizations. Ellul et al. (2015) stated that proper accounting measurement helps to identify and understand the actual strength of the company. In the words of Macve (2015), accounting measurement refers to the measurable element that helps to evaluate and analyze the accounting information. Demerjian, Donovan and Larson (2016) believed that accounting measurement is measuring the financial transaction in terms of money.
However, in accounting there are mainly two accounting measurement concepts or methods – fair value method and historical cost method. In fair value method, the valuation or measurement is done based on the current market price or value of the assets or liability (Campbell, 2015). On the other side, in case of historical cost method, the measurement of the assets is done based on the original cost or the cost that was spend by the company at the time of purchasing the assets. Therefore, it can be said that the two concepts or methods of accounting measurement differ to a high extent from each other (Barker & Schulte, 2015).
In this context, Magnan, Menini and Parbonetti (2015) mentioned that there is no such strict rule about the use or applicability of the accounting measurement methods. The business organizations can adopt either historical cost method or fair value method. However, different accounting sand tandards like, AASB, IASB or FASB have preferred to use the mixed method that is fair value as well as historical cost method together at the time of ascertaining the value of the assets liabilities (Bradbury, 2015). This actually creates a huge problem and confusion to the companies while measuring their assets and liabilities. The companies at present scenario are also trying to adopt the mixed concepts for accounting measurement (Akdogan & Ozturk, 2015).
For example, as per the 2016’s annual report of Amcor Limited, the company has measured the financial transactions based on the historical cost concept except few items stated in the balance sheet, which are measured based on the fair value concept (Amcor.com, 2016). At Amcor Limited, the derivative financial instruments, the assets those are available for sale, non-derivative financial instruments through profit or loss and liabilities those are needed to be settles on cash are valued based on the fair value concept (Amcor.com, 2016). The financial report of the company has clearly mentioned that the company has followed the guidelines stated under the AASB.
Measuring the financial transactions or assets and liabilities of the company based on the mixed concept of accounting measurement originates several issues during measurement. Strouhal (2015) noted that there is a basic and major difference between the two concepts of accounting measurement. One concept is based on the current price or value and the other is based on the past price (Sotti, Rinaldi & Gavana, 2015). Therefore, it is clear that there are huge possibilities that the value of the assets or liabilities will be different if the measurement is done based on two different methods.
As stated in the above discussion, the accounting standards do not provide any strict rule for measuring the assets and liabilities of the companies. However, Škoda and Sláviková (2015) argued that AASB 13 has especially emphasized on the applicability of the fair value method. In the current business world, the companies like Amcor Limited are using the mixed approach of accounting measurement. The major problem that occurs due to the use of mixed concept is the accountants get different values for measuring different financial transactions using two different concepts of accounting measurement (Vlaeminck, Vandoren & Vranken, 2016). Due to this, the overall measurement becomes incorrect and the financial reports of the company display inaccurate financial position of the company.
However, in order to improve the measurements of accounting transactions, the accounting standard boards suggested the companies to use the fair value method for the accounting measurements (Ryu, Kang & Suh, 2015). The standard setters believed that the fair value method is more accurate because it is based on the current market value of the assets or liabilities. However, Munteanu and Zuca (2015) pointed that the fair value method of accounting measurement is not flawless. Moreover, Ebach et al. (2016) argued that the fair value method of accounting measurement influenced the financial crisis in the global economy.
According to Sotti, Rinaldi and Gavana (2015), the fair value method of accounting measurement bubbles the prices of the assets in the market, which was one of the main reason behind the global financial crisis in the recent past. Fair value accounting as suggested by AASB or IASB is more accurate method than the historical cost method (Malone, Tarca & Wee, 2016). However, the standard setters did not consider the situation when the assets’ price continuously increases and at a certain point the value suddenly decreases. This type of situation took place in 2007-08 and as the banks were following the fair value accounting measurement method, they were forced to modify the values of the investments, which influenced the financial bubbles (Elfaki & Hammad, 2015). However, the sudden decrease in the value of the assets affected the financial positions of the banks badly. In the same way, if the accountants at Amcor Limited use the fair value measurement method continuously, then it is possible that the organization may face critical problem in the future financial years.
On the other side, Casta and Ramond (2016) mentioned that there are many other problems in fair value accounting. Accounting measurement through fair value accounting may be very problematic if the value of the financial assets swings several times. High volatility in the financial market creates barriers in ascertaining the right price of the financial assets likes derivative instruments (Bond, Govendir & Wells, 2016). This problem is a major problem for Amcor Limited also. According to the 2016’s annual report of the company, the derivative instruments of the company are measured by using the fair value concept. Therefore, the value of total assets of the company increases when the value of derivative instruments increases and vice-versa. Hence, in the volatile market, the fair value method fails to disclose the actual financial position of the company.
Apart from the above-mentioned issue, the fair value measurement concept of accounting measurement sometimes reduces the interests of the investors (Kabir & Rahman, 2015). In case of the fair value method, the total value of the company becomes low if the market price of the assets is less. This shows weak financial position of the company in the financial or annual report (Malone, Tarca & Wee, 2016). If the investors check the financial reports at the time when the market value of the assets is low, the investors feel insecure and dissatisfied with the financial position of the company. For example, in 2015, the total value of property, plant and equipment of Amcor Limited was US $2566.7 million, whereas the value of the same fixed assets in 2016 is US $2690.9 million (Amcor.com, 2016). Therefore, it can be seen that the increment in the value of plant, property and equipment in Amcor Limited is not that much high, which sometimes de-motivates the investors to invest in Amcor Limited.
If the current situation at Amcor Limited is analyzed, then it can be identified that the company is also facing several issues in maintaining the accounting measurement standard stated by Australian Accounting Standard Board or International Accounting Standard Board (Amcor.com, 2016). The major issue that the accountants of the company are facing is changes in the values of the assets for several times. In the last few financial years, the market prices of the assets have changed several times and every time, the accountant required changing and modifying the values of the assets and other financial transactions (Amcor.com, 2016). This is very time consuming and creates confusion. This also increases the chances of mistakes at the time of measuring the financial transactions of the company (Bond, Govendir & Wells, 2016).
Apart from the issue of several times measurement, the fair value measurement method also creates problem at the time of auditing the financial reports of the company. At the time when the internal as well as external auditors conduct auditing at Amcor Limited, every time they need to check and compare the market price of the assets and the price or value of the assets stated under the financial statements (Amcor.com, 2016). Checking the value of the assets every time is very hectic and time consuming. This actually makes the process of auditing lengthy and at the same time, the cost of the company also increases (Malone, Tarca & Wee, 2016).
The accounting measurement under the fair value method sometimes fails to provide reliable data to the management at Amcor Limited. The application of this particular method of accounting measurement has been mandated by AASB 13 (Akdogan & Ozturk, 2015). However, many times, it has been identified that the method failed to provide reliable and verifiable information regarding the non-financial or intangible assets of the company. This particular method cannot measure the value of the intangible asset like goodwill accurately estimation of the market value (Ryu, Kang & Suh, 2015). This influences manipulation of the financial measurement as well as financial reports.
As per the annual report 2016 of Amcor Limited it can be said that the value of most of the assets of the company has been measured with the help of fair value accounting measurement method (Amcor.com, 2016). However, the fair value accounting measurement method is not that much reliable at the time of inflation. In recent era, inflation is going on in the Australian market and for that the values of the assets are increasing, which can be seen in the annual reports of Amcor Limited (Barker & Schulte, 2015). For example, the 2015, the total value of assets of the company was US $8547.1 million, which increased to US $8682.1 million in the year 2016. This is clearly indicating that the value of the assets has increased from 2015 to 2016 (Amcor.com, 2016). At the same time, in the annual report of the company it has also mentioned that most of the assets are measured by using the fair value method. Hence, it can be said that by using the fair value method, the value of the assets has increased. Now, if recession comes then the values of the assets of the company will fall suddenly, which will negatively affect the financial position of the company (Sotti, Rinaldi & Gavana, 2015).
Amcor Limited uses the fair value accounting measurement method as per the suggestion given by the AASB and IASB (Amcor.com, 2016). However, in fair value accounting measurement method, the total capital of the company decreases due to the weak financial condition, which ultimately reduces the share prices of the company in the market. If the 2016’s annual report of Amcor Limited is identified, then it can be seen that the capital of the company has decreased at a high rate from 2015 to 2016. In the year 2015, the total capital of the company was US $1466.2 million, which decreased to US $783.9 million in 2016 (Amcor.com, 2016). This indicates that the company faced a weak financial condition and as the capital value of the company reduced, the share prices of the company also fall down in 2016, which is a big loss for the company.
Casta and Ramond (2016) stated that the fair value accounting measurement method sometimes destroy the confidence of the people on the company. As stated before that in 2016, the capital value of the company decreased by huge amount. Reduction in the capital directly affects the thinking of the investors. Investors think that the future of the company may not be safe and so they lose their confidence on the company (Bond, Govendir & Wells, 2016). This ultimately affects the financial position of the company more badly and the share price of the company decreases more.
Therefore, from the above discussion, it can be said that the use of fair value method for the measurement of the financial transactions or assets and liabilities in context of AASB or IASB standards can negatively affect the financial measurement as well as financial position of the company. There are several problems that Amcor Limited is currently facing due to the application or use of fair value method for accounting measurement (Amcor.com, 2016).
In the annual report of Amcor Limited, it can be identified that the organization has used both historical cost method and the fair value method for measuring the financial transactions. At the same time, it can also be noticed that the company has mostly used the fair value method for measuring the values of its assets and liabilities. However, as per the provisions under the AASB and IASB, the companies are bound to provide all important information related to the measurement and valuation of the assets and liabilities in the annual reports.
According to AASB and IASB it is mandatory for each company to disclose all necessary information in their annual reports. This provision helps the companies to maintain the transparency level (Bond, Govendir & Wells, 2016). The accounting standard boards also stated that the companies must clearly mention the measurement method that they have used for measuring the financial transactions during the particular financial year. At the same time, proper justification must be provided by the companies regarding the selection of measurement method.
If the annual report of Amcor Limited is analyzed, then it can be identified that the company has maintained the provisions of decision useful information stated under AASB and IASB. In the annual report of the company it has been clearly mentioned that the company has used the fair value accounting measurement method for measuring the derivative instrument, non-derivative instrument and few more assets. At the same time, the company has also mentioned that it has used the historical cost method for measuring the financial transactions other than the specified assets, which are valued under the fair value method. For example, in section 6 of the annual report of the company, it has been clearly mentioned that the company has prepared the financial statements by following the historical cost method except the items, which are measured under the fair value method.
At the same time, if the auditor’s opinion of the company is noticed then it can be identified that the auditors of the company has clearly mentioned that the company has followed the provisions under the Corporation Act 2001 as well as AASB and IFRS. Therefore, if the relationship between the measurement method employed by the Amcor Limited and the provision of decision useful information is identified, then it can be easily said that the relationship between these two is positive. The company has not only maintained the provisions of decision useful information but it has also provided each necessary information in its annual report.
If the investors or other stakeholders analyze the annual report of Amcor Limited, then they can easily identify the needful information. The company has disclosed all of the information that is useful rather essential for the decision making of its stakeholders. However, it is very important for the company to maintain these positive relationship in the future financial years.
Conclusion
In this study, it has been identified that there are mainly two methods for measuring the financial or accounting transactions. These two methods are – historical cost method and fair value method. These two methods are quite different from each other. The historical cost method measures the value of the assets, liabilities and other financial transactions by considering the past cost or past price. However, on the other side, the fair value method considers the current market price for measuring the values of assets, liabilities and other financial transactions.
According to this particular study, there is no particular guideline regarding the choice of accounting measurement method and due to that, many confusions take place in the companies. Previously, the accounting standard boards line, IFRS, IASB or AASB suggested to use mixed method, means the combination of historical cost and fair value method but due to several problems, the Australian Accounting Standards Board or AASB 13 specified to use the fair value method for measuring the financial transactions. The main reason behind selecting the fair value method was to make the measurement more accurate because the fair value method considers the current market value.
However, the study has also identified that the fair value method is also not flawless. There are several problems associated with the fair value method of accounting measurement. The main issue or problem with the fair value method is that the method creates problems when the market is volatile. In the volatile market it does not provide the accurate measurement of the accounting transactions. At the same time, the fair value method sometimes disappoints the investors because in recession, the values of the assets decreases, which decrease the interests of the investors.
The study has found out that Amcor Limited has also faced several problems due to the use of fair value method. The accountants of the company get confused regarding the valuation of the financial transactions, when the market is more volatile. The auditors also require more time and cost for verifying the measurements and values of the transactions. However, the company has maintained the provisions of decision useful information properly.
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