Accounting standards are rules that guide how accounting directors measure, recognize and find methods of recording financial information. Policymakers set these rules in partnership with company’s stakeholders.
The financial statements, therefore, should conditionally follow these accounting standards. Some of the standard accounting standards include; conditioning policy. These are the central policy exploited by the accounting directors of Transaburn Holdings limited. The chosen accounting policy, however, should be within the agreement to abide by the established standards. For companies that do not abide by these policies, which is a very rare scenario, the system allows for the implementation of an external strategy. The strategy, however, should abide by all the accounting standards (Henderson et al 2018).
The three types of selections that can be based on three very fundamental policies. These policies include; a choice based on accounting standard setters, the determination based on accounting preparers of financial statements and creative accounting policy. The article exploits the third policy. Use of creativity in accounting policies to benefit the financial statements being reported for that particular fiscal year (Kullab & Yan 2018).
For this report, the chosen financial statement is from the Transurban Holding Limited. Transurban Holding Management is in charge of managing and developing urban toll road networks in Australia. It is a top 20 company on the ASX and has been in operation since 1996. The financial statement is found at the following link. https://www.transurban.com/content/dam/investor-centre/04/2013_Annual_report.pdf. The report is dated 30 June 2013.
The company owns City Link in Melbourne. The City Link holds the major highways. The company has operated in major Australian highways. Currently, the company has its stakes in six tolled motorways in Sydney. The company is seeking to get to the cities of Brisbane soon(Henderson, Peirson, Herbohn & Howieson 2015).
The company engages in, network planning and forecasting as a way of getting more contracts and doing more road networks. The deals can be from private owners or the government. Secondly, the company engages in operations and customer management. There is an operation that seeks to satisfy customers while getting the correct feedback. The feedback that helps the company improve their operational scope.
The company has also advanced their technological systems by using smart products. This move is to ensure that the company is attractable to the youth. The youth are easily attracted to the exceptional products; therefore, the company takes advantage of this system as a way of reaching such a population target (Gorm & Shklovski 2016).
The community also engages in CSRs as a way of helping the society. The company has donated funds to orphanages and other institutions that favor the less privileged. This philanthropic experience helps the company build the strong bond between it and the society.
Toll and fee revenues. This is revenue collected from the road projects done by the company.
Other road revenues. Revenue received from advertisements, rental, and avenues that are related to the same.
Construction revenue. These are revenue that the company collects at the phase of collecting an intangible asset. These assets are sold to third parties who are not part of the shareholders of the company.
Revenue that accrues from managing the already constructed intangible assets (Alayemi 2015). These services are provided to the third parties who ask for the management and development of these assets. The company has proved the worth to be used for this report. It is a well-established company that serves as the customer and competes well in the market with companies of the same caliber. These provide an opportunity for the report to do the in-depth exploration of its financial statements and news.
Most accounting policies depend on the prediction of the directors (Kullab & Yan 2018). The estimations help to determine the place where the company would be in the foreseeable future. The evaluations can be done on any of the assets, market analysis, and any other future elements. The prediction also involves prediction of items whose values depreciate and trying to estimate what their costs would be in future. These estimations give room for accounting creativity. The accounting directors can make an inter-period allocation of funds creatively. They are also able to predict future market trends
From the financial report of Transurban Holdings limited as per the financial statement dated 30th June 2013, the company provide leases of significant proportions. They predict a lease incentive of the rental expense over a lease term on a straight-line basis. The straight base assumes all the features that might accrue before the end of the lease period. The prediction is biased since the accounting directors do not recognize any rewards and risk of ownership that might be transferred to the lease later after the agreement years. The payments are only made on operating leases. This is very risky for the company since it might work against their favor if a hazardous situation happens suddenly. However, if nothing happens between the lease periods the company will be the one that gains the highest. Therefore the move is to enable the stakeholder to see and recognize the consistency in revenue that accrues from the company lease activities. This form of accounting biased estimation is a typical example of accounting policy creativity by an accountant (Christensen 2016).
The second example of biased estimation from the financial statement is on available for sale financial assets. At these points, the financial accountants assume the security measures of the market. They predict the values that the assets might fetch without considering the market price that each of these assets exactly brings. They include these assets in disposal investments for the next 12 months without accessing the security of the market (Ali and Ahmed 2017).
The company will gain if the market trends remain the same. If the market trends raise the profits margin are also likely to increase, and therefore the company will also learn. For the case that the market trends go down for many reasons, it is expected that the company will make losses from the assets. The estimation by the accounting director is therefore biased. It doesn’t take into account the crucial consideration of market trends (Kim 2015). This is a perfect example of accounting creativity used in making biased estimations for the Transurban holding limited.
The accounting directors might explore the accounting creativity on the timing policy when they interfere with the timing procedures of particular business operations of the company. These are done on the financial statement by not capturing specific dates to overlook the essentialities of such timely information. They can interfere by bringing the time forward or pushing to a later date.
An example from the Trans burn company according to their financial statement is under their financial liabilities. These liabilities are limited to trade and other payables, where the company, through its economic insecurities develop a timeline of 30 days maximum to pay for the business and other payable goods. The accounting standards allow for one financial year before the transaction is done. The company sets this limits to avoid liabilities accruing to become permanent debts. This is an example of accounting creativity that involves the accounting directors adjusting the time limits for transactions (Hitt et al 2016).
The accounting director predicts the duration that the assets will take to depreciate. The depreciation is calculated on a straight line basis to enable the director’s plan for the transaction time that the asset will fetch the highest finances when sold (Vafeas & Vlittis 2015). They, therefore, came with a figure of 3-15 years of useful life. This time estimation is very useful to the company. There is an ideal example of accounting creativity employed by the accounting directors of the Transurban Holdings Limited.
The financial statement has also used creativity in the choice of policy to use in displaying their financial report. Though the statement acknowledges being in line with the set standards, the company recognize that they are in line with the established standards provided by the AASB and the IRFS. They, however, use the accounting creativity to use particular actions and neglect. The standard rule for hedging is that. The derivatives are designated, and fair value is recorded in the income statement. Any changes in the reasonable amount hedged are attributable to the hedged risk. The gained profit or any loss made relating to any affected portion is recognized in the financial income statement. The accountant, however, realizes that the derivatives of the company no longer meet the criteria for the hedge accounting procedure(Apostolou, Dorminey, Hassel & Rebele 2016).. At this point, the accountants use their accounting creativity. They recalculate effective interest rates that amortize the profit or loss made by the hedged item. This is built over a period where the maturity rate is considered. By so doing the accountants shall have used the right accounting policy to determine a factor that was missing from the financial statement. This is a perfect example of using accounting creativity together with the accounting policy (Ali & Hirshleifer 2017).
All the discussed creativity have particular intentions behind them. The accounting directors take these creative decisions with a motive behind it. Some of the reasons include; capital market motivation, contractual motivation, and financial motivation. The report will discuss two types of motivation, i.e., the contractual and capital motivation.
The company engages in different contracts with clients, other organization and even essential stakeholders (Yadav, Kumar & Bhatia 2014).
. They risk losing all this information if there is a faulty part of the financial statement. When they see a proper financial report, it is likely that they will abide by the terms of the contract. The accounting managers, therefore, would instead engage in high levels of creativity while saving the deal. For example the case of calculating profit and loss interest rates to determine the hedge accounting rates of hedge items. This move seeks to show the high-profit rates that the hedge items have. The stakeholders are likely to view this as an incentive to engage in new contracts with the company.
This is the intention that accrues for the need of the company to compete favorably in the particular industry that it serves in. Accounting creativity on policy, therefore, for the company to be considered a top performing one in the industrial sector, specific information is forgone or underexposed. For instance, the Transaburn Holding limited is one of the top 20 companies in the ASX. To maintain this, it adjusts the time transaction from a minimum of 12 months to 30 days. This is mainly done so that, they support high profits. These high profits can be used in raising the stakes of the company at the capital market levels. This is, therefore, a motivation towards the use of creativity in accounting policy (Lail & Martin 2017).
These are behaviors by particular managers. The intentional making of a decision that doesn’t impact on the company or any of the shareholder but impacts on the manager’s life. These accounting decisions do not in any way associate with critical stakeholders in the sector but only a few or even one manager. For example in instances where a manager signs a contract with a client who will be paying revenue to his account while the company offers the services to the client (Dunn 2015).
There are two ways of engaging in this behavior; one that maximizes the benefits to the individual and another that gives the advantage to the company that the manager works for. The type of opportunistic behavior that benefits the company is referred to as efficiency motive (Speckbacher 2017).
Effective motive
An example of opportunistic behavior by the accounting director in the Transburn Company. The accountants convert the interest rates for particular loaning clients. The various interest rates are therefore saved from compounding loan interest to fixed rates. The client (in this case the company) who has the loan can pay a fixed price and swap the agreed contract. These behavior benefits the managers as the debts are reduced, and the interest that is supposed to be paid by the company is used for individual benefits. The stakeholders are not made aware of this loaning deal (Ho & Hensher 2016). Therefore the revenues of the company shoe rates that pay the loaning company while the loan is calculated at a fixed rates.
Many stages precedes the contracting process. The contracting process entails planning, initiation (tender), award, contract, and implementation. These stages are explained in the diagram below:
Monitoring can lower the chances of an opportunistic behavior happening. It involves strict strategies by the company to reduce the chances of the norm happening again. The first strategy consists of the firm’s accountant reporting to the stakeholders after a particular interval before writing a financial statement (Goshunovaa & Kirpikovb 2016).
The stakeholder will also be involved with being part of any external contracts signed between the company and any other company that they are engaged in business with. Any contracts signed should have one stakeholder as a signatory. The financial reports should be audited by a private company before it is submitted to the relevant stakeholders. The stakeholder will include any persons who are beneficiaries of the company (Phillips 2014).
When such designed monitoring is done, the company shall have solved the element of opportunistic behavior happening once more. The monitoring solves the case of the sufficient motive of the company swapping contracts.
Conclusion
From the report, we can derive that it is advantageous for the company to use accounting creativity for different policies that work in favor of those firms. The types of accounting policies that are helpful are also mentioned in the report. The ways that it can be constructive has also been suggested. The report further suggests what can motivate an accounting director into using accounting creativity on already existing policies. However, the problem only comes when the opportunity is used for the malicious purpose. The false goal is what the report refers to as opportunistic behavior. The involvement of opportunistic behavior doesn’t mean the end of the accounting financial statement. Remedies including, monitoring and contracting can be used as explained in the report (Phillips 2014).
References
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Ali, M.J. and Ahmed, K., 2017. Determinants of accounting policy choices under international accounting standards: Evidence from South Asia. Accounting Research Journal, 30(4), pp.430-446.
Ali, U., & Hirshleifer, D. (2017). Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct. Journal of Financial Economics, 126(3), 490-515.
Apostolou, B., Dorminey, J. W., Hassell, J. M., & Rebele, J. E. (2016). Accounting education literature review (2015). Journal of Accounting Education, 35, 20-55.
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