Regulation Of Financial Accounting And Reporting: Role Of AASB In Standard Development And A Comparative Analysis Of Equity And Debt Of Four Australian Companies

Importance of Financial Accounting and Reporting

A report has been prepared highlighting the aspect that whether or not the financial accounting and reporting should be regulated or it should be left to the management or manager of the company to disclose the financial information voluntarily. The report also highlights the role being played by AASB in the accounting standard development and setting which is done by the IFRS committee and IASB (Chron, 2017). It also mentions why the standards set and introduced by IASB is not compulsory to be followed by member countries. Finally, it the annual report of the 4 companies has been studied for last 4 years and the each item of equity has been explained along with the changes in same. The comparative analysis of the debt and equity has also been provided at the end.

The process of financial reporting and accounting is inevitable for any organization as it gives the overall view of the financial performance and position of the company over a period of time. In case the financial accounting and reporting function is not being performed, the company would be standstill as neither it would be able to generate funds for doing the business neither the investors and the stakeholders would be interested in doing the business with the company (Dumay & Baard, 2017). There are various departments and functions in each companies who coordinate amongst themselves to achieve the set goals and objectives of the organization. The working and the result of operations of each of the product divisions, the functions and departments is being consolidated and reported in the financial statements. The primary objective of financial reporting is to ensure transparency of operations such that the relevant stakeholders are aware of what is going in organization. Some of the necessary enclosures include profit and loss account, cash flow statement, and balance sheet, statement of changes in equity, notes to accounts and other disclosures. There are various laws, statutes, regulations and accounting standards in place which the company needs to adhere to while preparation and presentation of the financial information. The statutory auditors of the company do check and evaluate all this and express their opinion thereon. Based on the reasonable assurance given by them, the investors do invest in company and the company is able to conduct business in the market (Gooley, 2016).

In case the transparency, completeness, reliability, validity, timelines and effectivity of the financial statements is not ensured, it would lead to wrong and incorrect decision making of the major stakeholders. All the aspects mentioned above are qualitative aspects and needs to be ensured while financial statement preparation and the same can be ensured on when the managers are given the freedom to disclose the information which is critical and material on voluntary basis. However, there is also a need of the regulatory body which will govern and check if the company is in compliance with all the necessary and compulsory disclosure norms. It should mention and state a few points which are applicable to all the companies and thus needs to be abided by all. But in case the managers are allowed to disclose the information voluntarily, it may also lead to unnecessary information overload or even window dressing of the information. Therefore considering both the advantages and disadvantages of voluntary reporting and the huge stake of investors, it can be said that that financial reporting and accounting should be regulated (Defond & Lennox, 2017).

Role of Regulatory Body in Accounting Standards Development

The agency or the committee which is responsible for overseeing, developing, maintenance and implementation of the accounting standards across companies is the Australian Accounting Standards Board. It is a government agency which is responsible for development of accounting standards which has applicability for both the public and the private companies in Australia. Similarly, the global accounting standards are being developed by International Financial Reporting Standards and the standards developed by them are known as International Financial Reporting Standards. The basic purpose of forming and implementation of these standards is to ensure uniformity all across the globe be it any company situated in any part of the globe. Furthermore, it has been prepared in a way that makes the data understandable and comparable for the end user (Kew & Stredwick, 2017).

The Australian Accounting Standards Board play a very pivotal role and act as a bridge between the companies in Australia and The International Accounting Standards Board. It do participates in standard setting and implementation plan of the IASB and has also enacted a legislation and administration in Australia for adoption of these through Australian Financial Reporting Council (FRC). The Australian Accounting Standards are a refinement of the global standards with a few changes here and there but the very essence and the intent is one and same. Some of the Australian Accounting Standards which have been directly taken from global standards are AASB 1 dealing with First time Adoption of Australian Accounting Standards is taken from IFRS 1 dealing with First time adoption of international financial reporting standards. Similarly, IAS 1 and IAS 2 dealing with presentation of financial statements and the inventories has been incorporated in AASB 101 and 102 respectively (Marques, 2018). There are some 120 member nations of IASB out of which around 90 countries have adopted the global reporting standards IFRS and have confirmed on the same, however, the same has not been made compulsory considering the impact it may have on the companies in a given economy. Thus, it can be said to be a prudent step by IASB not to make it mandatory for all the countries to adopt it instead the same needs to be analyzed beforehand.

In order to analyze the financial statements for 4 years with respect to debt and equity, the 4 companies which have been selected are Admiralty Resources NL, Amcor Limited, Adelaide Brighton Limited and Alt Metals Limited. All of these companies are listed on the Australian Stock Exchange and the reason of choosing them is all of them belong to the material industry. The annual report for the year 2014, 2015, 2016 and 2017 has been analyzed (Tysiac, 2017).

Comparative Analysis of Equity and Debt of Four Australian Companies

The equity items and the changes in those items during the course of 4 years has been shown below:

1. Admiralty Resources NL

Issued capital: This is the total shareholding of the company which is being held by the shareholders.

Reserves: This can be as per the requirement of the law or as has been created by the company for some specific purposes.

Accumulated losses: This is the loss incurred by the company over years and which has been brought forward.

The table for changes in equity balance over 4 years is shown below:

From the above analysis of equity line items over the years, it can be observed that here the issued equity balance increased till 2016 and was constant in 2017 indicating share issue in 2015 and 2016. Furthermore, the reserves balance as well as the accumulated losses has been increasing year on year indicating the company’s losses in the recent years.

Contributed equity: It is the summary of the total share capital of the company and includes the paid up and the subscribed share capital by the shareholders. It includes the shares held by corporates as well.

Reserves: Reserves are generally an allocation for a particular purpose which may have been created in the past. Some of it may be because of regulatory requirement or in compliance of law as well (Erik & Jan, 2017).

Retained Earnings: These are appropriations from the profit. It is accumulated profit or loss of the company and the dividend is declared out of it.

Non-Controlling Interest: This comprises of shareholding of shareholders in subsidiary companies. They are generally having less than 50% share and thus called minority interest. 

The table for changes in equity balance over 4 years is shown below:

From the above table, we can see that there is a continuous decline in the contributed equity which is due to the buy-back of the shares by the company over past years. The reserves is an apportionment from the profits or losses of the company. Similarly, the retained earnings of the company has decreased till 2016 and then increased in 2017 indicating the profitability in 2017. The share of the minority shareholders has been coming down continuously (Mubako & O’Donnell, 2018). 

1. Adelaide Brighton Limited

Share capital: It is the summary of the total share capital of the company and includes the paid up and the subscribed share capital by the shareholders. It includes the shares held by corporates as well.

Conclusion

Reserves: Reserves are generally an allocation for a particular purpose which may have been created in the past. Some of it may be because of regulatory requirement or in compliance of law as well.

Retained Earnings: These are appropriations from the profit. It is accumulated profit or loss of the company and the dividend is declared out of it.

Non-Controlling Interest: This comprises of shareholding of shareholders in subsidiary companies. They are generally having less than 50% share and thus called minority interest.

The table for changes in equity balance over 4 years is shown below:

In the given case, the share capital of the company has increased due to issue of share capital, the reserves has declined due to its utilization, retained earnings have increased due to increase in profitability and finally the non-controlling interest has also increased due to increase in subsidiary holding (Knechel & Salterio, 2016). 

Issued capital: This is the total shareholding of the company which is being held by the shareholders.

Reserves: This can be as per the requirement of the law or as has been created by the company for some specific purposes.

Accumulated losses: This is the loss incurred by the company over years and which has been brought forward.

The table for changes in equity balance over 4 years is shown below:

From the above analysis, it can be seen that the share capital of the company has increased over the years indicating that the company is issuing the shares and the reserves were increasing till 2016 but all of a sudden has declined in 2017. This indicates company used few of the reserves in 2017. Furthermore, the losses of the company has been multiplying and increasing over years as can be seen from the balance of accumulated losses (Sithole, et al., 2017).

The comparative analysis of the debt and equity of the 4 companies mentioned above has been enlisted below:

From the above table, the debt equity ratio of the 4 companies can be seen. It is representing how much of the company’s capital is out of debts and how much out of own funds. The ideal debt equity ratio is 2: 1 and in the given case, we can see that apart from Amcor Limited all are within the range. Amcor is highly leveraged and has high risk as the ownership is diluted.

Conclusion

All the requirement of the report has been discussed analyzed and evidentiated with reasons. Along with the need for regulatory body for reporting and accounting, the role of AASB with IASB was also discussed and finally the annual report of 4 companies were analyzed and discussed. 

References

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Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
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Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

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Mubako, G. & O’Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Tysiac, K., 2017. Rulemaking gives auditors a chance to provide more insight. Journal of Accountancy.