Overview Of Corporate Regulation, Accounting Standard Setting, And Owners’ Equity

Necessity of Regulating Financial Accounting and Reporting

The report is prepared with the intent of providing a brief overview of the corporate regulation, accounting standard setting and owners’ equity from the global perspective. The first section would provide a brief overview of the necessity of regulating financial accounting and reporting along with providing power to the manager in voluntary disclosure of financial accounting information. The second section would emphasise on the role of the “Australian Accounting Standards Board (AASB)” in setting the international standard setting process, which is identified as IFRS. Moreover, it would discuss the reasons that IFRS is not mandatory for the member nations of IASB. Finally, the report would shed light on selecting four public listed firms in ASX and evaluation would be made in relation their owners’ equity position as well as debt-equity position.

There is need to regulate financial accounting and reporting due to a variety of reasons. Firstly, if it is not regulated, the information published by the business organisations might be selective and it could be manipulated by the individuals accountable to send the same into the market (Henderson et al. 2015).Therefore, the organisations are need to fulfil various criteria for aligning with the public interest of the current as well as potential investors. The regulating authorities formulated the criteria for assuring information quality at minimal or no cost for shielding the public from misleading, fraudulent and hidden disclosures. Secondly, the demand for actual and true accounting information is on the increasing scale from the prospective investors. When investments are made in the business entities, it is necessary for the regulating authorities to intervene into the matter for ensuring that the formats of accounting and reporting fulfil the investors’ needs by answering to their questions.

When an organisation finds its shares listed in the stock market, it would be proper when such information is published in standardised formats. This would help in comparing the same with the financial performance of the peers for ensuring that both shareholders and insiders have equal knowledge of information (Beatty and Liao 2014). Therefore, it could be said that the necessity of regulation is important for increasing the standard of the profession.

When managers are provided with the opportunity of disclosing voluntary financial information, they would conduct the work in a fair and responsible manner as suitable agents of their owners or shareholders. Since the managers have knowledge about internal activities of the organisations, they have more knowledge about the actual financial conditions. This would assist them in to provide certain non-standardised financial information to the market (Jehu and Ibrahim 2017). This could be considered as signalling theory, in which the concerned organisations have the unique benefit of transferring significant information like likely dividend in the form a signal to the market regarding their growth tendencies. When such information is disclosed by the managers of the business organisations, the share price would increase significantly and the business outsiders would be ensured about the financial conditions.

Role of Australian Accounting Standards Board in Standard Setting

However, the managers might not be willing to disclose the internal financial information to all users of the financial statements. Instead, they might distort such information to the investors for gaining more funds due to the fear of losing their jobs. Moreover, all information should not be made public, as per the demand of the regulations (Page 2014). Hence, regulation on financial accounting and reporting is preferred over voluntary disclosure of financial information in order to avoid manipulation and frauds in the financial reports of the business organisations. 

AASB has the vision of enhancing its reputation in the form of a leading national standard setter for gaining recognition in the international centre of excellence. This would be ensured by formulating and maintaining greater quality standards of financial reporting for all the Australian economic sectors by contributing through talent and leadership in order to develop international standards of financial reporting (Bamber and McMeeking 2016). AASB takes part in the global standard setting process in the following ways:

• The accounting standards as well as standard amendments made by IASB are in line with the legislative drafting protocols of Australia and the requirements of “Federal Register of Legislative Instruments”.
• The accounting compilations or standards are filed on the “Federal Register of Legislative Instruments” and they are disclosed on the website of AASB within three days after they are finalised (Erb and Pelger 2015).
• The responses are made to all the important drafts of IPSASB and IASB.

The IASB is a private and independent group, which formulates and approves IFRS. It functions under the oversight of the foundation of IFRS. The IFRS Foundation is involved in overseeing the operations conducted by IASB. The formulation of IASB dates back to 1901 for replacing the ‘International Accounting Standards Committee (IASC)”. At present, IASB has 14 member nations and in accordance with the Constitution of the IFRS Foundation, IASB has full accountability for all technical aspects of the foundation. These include complete discretion to form and pursue its technical goal, which is subject to consulting needs with the public and the trustees (Erb and Pelger 2015). Moreover, it takes into account the formulation and issuance of IFRS as well as exposure drafts following the due procedure mentioned in the constitution. Finally, it considers the issuance and approval of interpretations developed from the end of the Committee of IFRS interpretations.

All nations have their own accounting standards; however, for bringing comparability and standardisation, the organisations like IASB have made attempts to develop a single standard acceptable for maximum countries. Despite such attempts, it is not mandatory for the member nations to converge into IFRS, since they have their own groups of accounting standards. Hence, the IFRS convergence is not occurring in phases (Pelger 2016).            

The four organisations that are selected for this section include BHP Billiton, Rio Tinto, Orica Limited and Fortescue Metals Group.

Evaluation of Four Public Listed Firms’ Owners’ Equity and Debt-Equity Position

iii) In the statement of financial position of an entity, three significant items are apparent, out of which is equity is one of them. As per this statement, the main items of equity include share capital, reserves, treasury shares and retained earnings. Issued capital is considered as equity of the business organisations (Benson et al. 2015). From the annual report of BHP Billiton, the issued capital of BHP Billiton has fallen from $2,052 million in 2014 to $2,043 million in 2015, which has remained constant in both the years 2016 and 2017. The issued capital of Rio Tinto has fallen from $224 million in 2014 to $220 million in 2016, which has increased again to $224 million in 2016 and further to $230 million in 2017. For Orica Limited, the issued capital has fallen from $1,975 million in 2014 to $1,954.4 million in 2015; however, it has increased to $2,025.3 million in 2016 and $2,068.5 million in 2027. In case of Fortescue Metals Group, the issued capital has risen from $1,289 million in 2014 to $1,294 million in 2015, which has increased to $1,301 million in 2016 with further decline to $1,289 million in 2017. The variation in issued capital is the outcome of the motive of maintaining an optimal capital structure for all the business organisations.       

The next item of equity for all the four organisations includes reserves. For BHP Billiton, Rio Tinto and Fortescue Metals Group, the trend is fluctuating; however, the reserves of Orica Limited seem to carry a negative amount. In the words of Marshall (2016), reserve is considered as a part of equity obtained in excess of basic share capital. The main reason that Orica Limited has negative reserves is due to the fact that it has accumulated business losses.

The final item of equity is considered as retained earnings. It signifies the earnings and losses of an organisation from its establishment after paying out dividends to its shareholders (Hoskin, Fizzell and Cherry 2014). The retained earnings for Orica Limited, BHP Billiton and Rio Tinto have declined over the years and the only exception could be observed in case of Fortescue Metals Group where an increase could be witnessed over the years.

Therefore, it could be said that BHP Billiton accumulates more funds through equity followed by Rio Tinto, Fortescue Metals Group and Orica Limited, since its asset base is the largest among the four organisations operating in the mining industry of Australia.                  

iv) In order to evaluate the debt and equity position of the four chosen organisations, debt-to-equity ratio is used. With the help of debt-to-equity ratio, it is possible to gain an overview of the capital structure of an organisation regarding its optimality (Horngren and Harrison 2015). The debt-to-equity ratio of these organisations is represented briefly as follows:

Particulars	Details	2014	2015	2016	2017
Net debt	A	$      25,786	$      24,417	$    26,102	$    26,102
Total equity	B	$      85,382	$      60,071	$    70,545	$    62,726
Debt-to-equity ratio	A/B	0.30	0.41	0.37	0.42

                                                           (Source: BHP 2018)

As per the above table, an increase in debt-to-equity ratio could be observed from 2014 to 2015 followed by an increase in 2016 with increase again in 2017. A ratio until 0.5 or below 1 is considered as an optimal capital structure (Collier 2015). In this case, the ratio is below 0.5 in all the years. This implies that the financial leverage of BHP Billiton has not been high over the years due to focus on raising more funds through issuance of equity shares in the market.

Particulars	Details	2014	2015	2016	2017
Net debt	A	$      12,945	$      13,783	$      9,587	$      3,845
Total equity	B	$      45,730	$      51,115	$    62,726	$    60,670
Debt-to-equity ratio	A/B	0.28	0.27	0.15	0.06

                                                   (Source: Riotinto.com 2018)

In accordance with the above table, it could be noticed that the debt-to-equity ratio of the organisation has fallen over the years and it is well below the ideal standard of 0.50 in all the years. This denotes that the organisation is reliant on its shareholders for raising funds. However, it is to be borne in mind that raising maximum funds through equity minimises the decision-making power of the management.

Particulars	Details	2014	2015	2016	2017
Net debt	A	$   2,236.70	$   2,026.10	$ 1,549.40	$ 1,440.90
Total equity	B	$   4,399.10	$   2,987.20	$ 2,783.20	$ 2,963.50
Debt-to-equity ratio	A/B	0.51	0.68	0.56	0.49

                                           (Source: Orica.com 2018)

The above table clearly makes it evident that there has been fluctuation in the ratio of the organisation, in which it has been above the ideal standard until 2016; however, it has managed to maintain optimality in 2017. This implies that Orica Limited maintains a balance in the mix of debt and equity while raising funds for future investments.

Particulars	Details	2014	2015	2016	2017
Net debt	A	$        7,159	$        7,188	$      5,188	$      2,633
Total equity	B	$        7,583	$        7,537	$      8,406	$      9,734
Debt-to-equity ratio	A/B	0.94	0.95	0.62	0.27

                                            (Source: Fmgl.com.au 2018)

It is apparent from the above table that the debt-to-equity ratio of the organisation has remained almost identical in both 2014 and 2015 with significant decline observed consecutively in the later two years. This implies that Fortescue Metals Group has started to raise maximum amount of funds from its shareholders for minimising its financial leverage or overall financial risk.

Based on the above evaluation, it could be stated that Orica Limited is placed favourably in terms of solvency in the Australian mining industry in 2017, since its ratio is near to the ideal average of 0.50.

Conclusion:

The above discussion makes it prominent that financial accounting and reporting is not regulated, the information published by the business organisations might be selective and it could be manipulated by the individuals accountable to send the same into the market. Moreover, when managers are provided with the opportunity of disclosing voluntary financial information, they would conduct the work in a fair and responsible manner as suitable agents of their owners or shareholders. However, the managers might not be willing to disclose the internal financial information to all users of the financial statements. Instead, they might distort such information to the investors for gaining more funds due to the fear of losing their jobs.

It has been further evaluated that all nations have their own accounting standards; however, for bringing comparability and standardisation, the organisations like IASB have made attempts to develop a single standard acceptable for maximum countries. Despite such attempts, it is not mandatory for the member nations to converge into IFRS, since they have their own groups of accounting standards. Finally, it is found out that Orica Limited is placed in a better position in the Australian mining sector in terms of debt and equity.

References:

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Orica.com., 2018. Annual Report . [online] Available at: https://www.orica.com/Investors/annual-report#.W6iGCvkzbIU [Accessed 24 Sep. 2018].

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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, 50, pp.51-73.

Riotinto.com., 2018. Results & reports. [online] Available at: https://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed 24 Sep. 2018].

Fmgl.com.au., 2018. Announcements and Reports | Fortescue Metals Group Ltd . [online] Available at: https://www.fmgl.com.au/investors/asx-announcements [Accessed 24 Sep. 2018].