Regulation Of Financial Accounting And Reporting, Participation Of AASB In Global Accounting Standard Setting Process, And Equity Analysis Of 4 ASX Listed Companies

The need for regulation of financial accounting and reporting

The requirement for regulation of the financial accounting reporting occurs due to numerous reasons. The IASB (International Accounting Standards Board) in its Financial Reporting framework states that the main purpose of financial reporting is to give financial information about reporting firm, which is vital for existing investors and lenders for making decisions about offering resources to enterprise (Nobes 2014). This has significant number of users that ranges from investor’s group, employee’s group, public analyst as well as government adviser group to vital stakeholders. Edwards (2013) opines that it is necessary for the users to utilize financial information as well as interpret systematically for making financial decisions.

Besides this, it also helps the potential investors for making important decisions relating to investment. In absence of financial reporting regulation, the financial report can be prepared in varied way by aligning to its needs (Watson 2015). Therefore, users can interpret varied financial reporting in various ways. The financial report might be changed based on the change in material in organizations financial position. Moreover, the contained financial information might be ambiguous for the users to understand in proper way. Another vital aspect of regulating financial reporting is the accounting framework. This framework relates the fundamental system that makes this standard consistent via stating that the accounting reports are mainly based on guidelines.

The accounting practice varies among the nations and the accounting regulation is needed for eliminating differences between making standard practice and accounting practice (Botzem 2012). There are several advantages of regulating financial accounting reporting, which are as under-

• Protecting investors- Regulation of financial accounting reporting would increase the confidence of investors in regards to the investment to be done. This is because the investors are mainly concerned in realizing the fact that their investment are ensured via reviewing correct as well as authentic information.
• Guidance- This is considered as another benefit for regulating financial information that is involved in financial reports. Owing to complexity of financial world, it has been becoming highly complex in creating standardized format for the organization. However, the report that has been prepared through regulations will help to create standardized format.
• Credible commitments – Another benefit of regulation of financial accounting reporting mainly comes from the facts that it generates proper information and most of which outcomes from reliable information. There must be effective enforcement that is imposed by the regulatory regimes in comparison with voluntary regimes, which aids to generate reliable disclosures and credible information.
• Comparability- Regulation of the financial report offers benefit of information standardization, which can be attained in effective way when such financial reporting is made on obligatory basis (gov.au 2018).

Financial reporting and voluntary disclosure are the two main channels, which can be utilized by the managers for communicating private information that is taken into account by changes in stock price and liquidity. The managers of the organization use voluntary disclosure for communicating proper knowledge regarding firm’s performance to the investors and supplementing reporting. As the managers private information manly forms the voluntary disclosures basis, they apt to be highly informative about earnings. Despite of having some advantages, few disadvantages exists in regulating financial reporting as well as accounting if the managers are permitted to disclose voluntary information. These disadvantages are-

• Involvement of cost- Utilization of regulation such as accounting standards during the preparation of financial statements needs high cost. However, the enterprises are needed to change its processes involving- employees training, system upgrades and cost of labor.
• Financial statement mainly involves balance sheet, cash flow statement and income statement that is prepared according to regulation as well as accounting standards. Moreover, the managers try to avoid these steps while disclosing information voluntarily (Henderson et al. 2015).

It has been observed from the above discussion that financial accounting and reporting will increase the quality of reporting irrespective of few limitations.

Analysis of participation of the Australian accounting standard board in setting global accounting standard process

            The AASB (Australian accounting standard board) summarises the functions as well as working power and its contribution to global standard setting procedure. Australia adopts international financial reporting that aligns with strategic direction of financial reporting council. However, the AASB work program involves IFRIC and IASB work program (Eccles et al. 2012). The international public industry accounting standard board work program is mainly monitored by AASB.  The activities given below are mainly undertaken by AASB in order to make contribution in setting global accounting standards-

• It promotes IFRS with regard to Australia experience to adopt IFRS, which in turn helps to transitioning jurisdictions. It is vital to avoid huge range of IFRS versions.
• It attempts to act as leader in developing global standards by IPSASB and IASB and also sets up their priorities as well as agenda (Preiato, Brown and Tarca 2015).
• It acts as active contributor that participates in activities relating to IASB meeting for global standard letters. It takes part in national standard setters, standard setter groupings and regional grouping for the national standard setters such as- AOSSG and NSS.
• It makes submission on IASB and an IPSASB consultative document that is predicted to be taken into account in the Australian aspect and motivates the Australian constitutes to participate for IASB and IPSASB process.

Reason behind IFRS is not compulsory for the member nations of IASB

      The IFRS (International Financial Reporting Standards) refers to the accounting standards that have been adopted as well as developed by the IASB board. Near around 120 nations as well as reporting jurisdictions are needed IFRS for domestic listed enterprise and around 90 nations are conformed to IFRS (Chua, Cheong and Gould 2012). Moreover, the business has the ability to aid comparison with the financial statements by implementing specific reporting standard. According to SEC clearance 2015, this was the earliest date for utilizing IFRS by public enterprise.

Advantages and disadvantages of regulating financial accounting and reporting

SEC also states that if any nation does not pursue early adoption, it might reconsider adoption later. In the present scenario, it might not be mandatory for IASB member nations for adopting reporting standard owing to full acceptance of proper outcome to lose quality level. Moreover, it can be believed that the benefits might be outweighed by cost connected to IFRS adoption (Brüggemann, Hitzand Sellhorn 2013).

Owner’s equity

4 public limited entities those are listed on ASX under same industry considered for this part are BHP Billiton, Altura Mining, Evolution Mining and Rio Tinto. All of these 4 entities deal in the mining and energy sector. 

Equity items

BHP Billiton – equity items found in the balance sheet of the company under owner’s equity section are listed below –

• Share capital – amount required by the entity for the purpose of carrying out its activities are financed through share issue. The raised amount through share issue is known as share capital. The entity that is limited through shares will have the share capital.
• Treasury shares – treasury stock are the part of shares kept by the company in its treasury. Treasury share may come from the float part or outstanding shares before the entity repurchase it.
• Reserves – reserves are the profits appropriated for specific purpose. Sometimes the reserves are set up for purchasing the fixed asset, payment of the estimated legal settlement, payment of bonus or payment of various obligations. Hence, funds accumulated under reserves can be used for any purposes (BHP 2018).
• Retained earnings – it is the cumulative net profits or earnings for the entity after payment of dividend. This amount is available for the purpose of re-investment in core business of the company or making payment for the debt.

Equity changes for BHP Billiton

Retained earnings were changed due to dividend payment and reserves were changed due to payment of employee’s dues and contribution towards employees.

Altura Mining – equity items found in the balance sheet of the company under owner’s equity section are listed below 

• Contributed equity – it is the element of total equity recorded by the organization. Contributed equity can be further segregated into common stock and stakeholder’s equity.
• Reserves – as explained for BHP Billiton
• Accumulated losses – it is the loss carried forward from the previous year with regard to offset the future earnings. It reduces tax burden of the company for the years with profit as accumulated losses are deducted from taxable profit (com 2018).

Equity changes for Altura Mining

Contributed equity is changed due to share based payment shifted to equity and share issued to the employees as bonus payment.

Evolution Mining – equity items found in the balance sheet of the company under owner’s equity section are listed below –

• Issued capital – issued capital is the number of shares that is issued by the entity to shareholders. It is the allotted shares those are subsequently held by share holders. It represents part of authorized capital that the company is authorised to sell through shares.
• Reserves – as explained for BHP Billiton
• Accumulated losses – as explained for Altura Mining

Equity changes for Evolution Mining

Issued capital has been increased due to contributions made to equity and accumulated losses were changed due to dividend payment (Evolutionmining.com.au 2018).

Rio Tinto – equity items found in the balance sheet of the company under owner’s equity section are listed below –

• Share capital – as explained for BHP Billiton
• Share premium – share is issued by the company at premium while the price at which the shares are sold at more than its per value. This is common practice by any company as the par value is the minimum value. Hence. Premium is the difference between the selling price and par value (com 2018).
• Other reserves – as explained for BHP Billiton
• Retained earnings – as explained above for BHP Billiton

Equity changes for Rio Tinto –

Changes in retained earnings took place due to share buyback and dividend payment. Share capital changed due to share buyback.

Debt – equity position of the company is analysed for evaluating the leverage position of the company. It states the firm’s financial position regarding the fund raised by the company from creditors or the investors.  Generally, the firms with aggressive approach prefer to borrow major portion of its fund through borrowing (Heikal, Khaddafi and Ummah 2014). However, debt percentage of 40% or below is considered as lower leverage. It can be identified from the Evolution Mining as well as Altura Mining has moderate approach that is their debt percentage is lower than 40%. However, BHP Billiton as well as Rio Tinto has quite aggressive approach as compared to other.

References

BHP., 2018. BHP | A leading global resources company. 

Botzem, S., 2012. The politics of accounting regulation: Organizing transnational standard setting in financial reporting. Edward Elgar Publishing.

Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.

Chua, Y.L., Cheong, C.S. and Gould, G., 2012. The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International accounting research, 11(1), pp.119-146.

Eccles, R.G., Krzus, M.P., Rogers, J. and Serafeim, G., 2012. The need for sector?specific materiality and sustainability reporting standards. Journal of Applied Corporate Finance, 24(2), pp.65-71.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Nobes, C., 2014. International classification of financial reporting. Routledge.

Preiato, J., Brown, P. and Tarca, A., 2015. A comparison of between?country measures of legal setting and enforcement of accounting standards. Journal of Business Finance & Accounting, 42(1-2), pp.1-50.

Watson, L., 2015. Corporate social responsibility research in accounting. Journal of Accounting Literature, 34, pp.1-16.