Regulation Vs Voluntary Disclosure: A Critical Discussion

Financial Accounting and Reporting: Regulation or Voluntary Disclosure?

For the reflection of expertise knowledge and enhancement of consistency in the reports, Standardization is important to be incorporated potentially. That’s how the litigation risk is reduced from an auditor’s point of view as it helps in making justified decisions. With the corporate scandals like Worldcom and Enron, the regulators and standard boards have made a strong urge to improve this transparency and bring significant changes. This requires the financial reporting and accounting to be regulated through accounting standards. Though regulation is a complex process, it is believed that a good regulation would promote efficiency and effectiveness of financial economy as well as it is a mission of never ending. Where the global scenario looks forward for growth, it is important for the regulators to have a check about the impact of regulations on financial reporting. We need regulation reforms majorly for our stakeholders (Adelaja, 2015). This is because different types of users have different uses of an organization’s financial reports and where an organization looks forward for their stakeholder’s satisfaction, it is important for the organization to prepare and present their financial reports in the best possible manner. Also, the job doesn’t get over with the organization but the role of regulators comes in the picture where they are required to analyze such reports to ensure about the standardization. In this way, different users can extract different information from such reports as per their requirements and can make relevant decisions (Alvarez, 2013).

We see a close link between voluntary disclosures and transparency in financial reports. The organizations sees disclosures as an opportunity more than a burden so as to increase competitiveness. It is believed that the more is the disclosure level, the lower would be information hidden risk (Atkinson, 2012). The stakeholders are considered as the most prioritize objective of an organization and to protect its interests, the pressure has been made on voluntary disclosures for enhanced quality. Voluntary disclosure practices builds a trustable image of an organization and somewhere instills confidence in their investors. However, the same practices can even create suspicions about an organization’s performance and might reflect its unethical behavior leading to poor valuation. Let us discuss both the aspects of voluntary disclosures by the management.

Voluntary disclosures are those disclosures made by the management in extra, that is, more than what has been mandatorily required by the regulations. The organizations do this as an effort to give a more clear picture to the stakeholders and in return, to benefit from such improved perceptions. Management looks forward for highly standardized disclosures so as to avoid surprises. For example, voluntarily disclosures helps an investor to accurately calculate the future value of the firm and accordingly, make capital investment decisions. In a similar way, organizations opt such practices to increase their credibility power or strengthen their credibility status (Berry, 2009). This is because stronger is its credibility position, the stronger it would be supported by the market even if its actions costs so high that the current earnings might be compromised. However, where a firm aims at reducing risk of non-disclosure of information that it thought to be immaterial, it somewhere sets a benchmark for its disclosures and might find difficulty to meet uo with its own benchmark in future.

The Role of Australian Accounting Standards Board in Global Accounting Standard Setting Process

One most critical disadvantage of voluntary disclosure is that it somewhere makes available its sensitive information on a public platform which in turn could give benefits to its competitors. Hence, this is where the organizations bear the competitive disadvantage due to their urge of disclosing voluntarily (Girard, 2014). However, where a firm bears the competitive disadvantage, it can apply the same thing onto its competitor’s disclosures and ultimately, that would nullify the danger of competitive disadvantage. FASB (Financial Accounting Standards Board) states that three factors would define the availability of competitive advantage, that is, the kind of information, the disclosures timing and the levels of providing details.

 Market uses such financial reports as the proxy for analyzing the quality of an entity. The disclosure practices are somewhere rewarded by the market participants as they go beyond the narrow levels of traditional financial reporting. We shall, from a long term perspective, conclude that the management should opt voluntarily disclosures practices (Holtzman, 2013).

The IFRS (International Financial Reporting Systems) is globally based accounting standards that works within the framework as prescribed by IASB (International Accounting Standards Board). AASB adopted IFRS regulations on January 1, 2005 so as to align with the Financial Reporting Council. Therefore, any issue arising on the IASB work program is an issue to be worked upon by the AASB work program. However, the involvement of AASB might not remain same in every issue. AASB program takes major initiatives to find issues and accordingly conduct a project proposal (Jensen & Meckling, 1976). Through this project analysis, they assess the benefits & the costs associated with it, the available resource and the timing of such project. It will review its program proposals and accordingly, decide whether to include it in the agenda or work program so as to discuss them on a global platform, say, with the IASB work program. Australian stakeholders also have right to communicate their concerns or issues to the international standard setter called AASB. Once the research has been completed from the side of AASB, they take an effort to invite public reactions and stakeholders review by issuing relevant documents such as draft interpretation, discussion papers, invitation of comment and exposure drafts. They hold discussion meetings with a defined group of different stakeholders called roundtable discussions, focus groups, interpretation advisory panels and project advisory panels.

After having a detailed research about an issue, it takes a global initiative that is, addressing its issue to international standard boards through formal submissions. This is how it communicates its issues and acts as a global accounting standard setter or makes a contribution to the setting of highly qualitative international accounting standards (Kuti, 2014).

Listing Equity Items and Discussing Changes in Each Item of Equity for Public Limited Companies

However, IFRS adoption is not compulsory for all the member states. The reason behind this is convergence to IFRS is a way broader concept than just a change in accounting process. It will affect the business from its operations to its information technology systems to internal control system to taxation reporting requirements. IFRS adoption is a complex process and no organizations have a comprehensive knowledge about its standards. Also, it is a costly process in terms of hiring of professionals having in depth knowledge about IFRS, advanced level system, enhancement of control over the working environment, etc.

The equity of an organization shows the capital structure in terms of funds invested by its shareholders, retained earnings and reserves and surpluses (Lyon, 2010).

Contributed Equity refers to the money raised by the company from the general public. Such public, being investors in nature, assumes the title of owner of the company since ins spite of investing in the organization, they bear the maximum risk such as not having dividends in case of less profits or the board recommends so, no redemption policy and no priority over other shareholders or debt holders in repayment of capital in case the company goes into liquidation. That’s why the company’s investors are its owners themselves.

Retained earnings, commonly known as plough back of profits, is reinvestment of earnings into the business for using it for various projects and plans. However, excessive plough back of profits leads to losing of investor’s trust as such an action is conducted at the cost of returns payable to them (Rivenbark, Vogt, & Marlowe, 2009).

Reserves and surplus reflects the operating profit or losses of the company and is an important component for the organization as various reserves are created out of these surpluses so as to meet up with its unforeseen situations immediately and smoothly. For example, workmen compensation reserve which is created to provide compensation to the workers in case of any injury faced during the business hours or while conducting the business task (Seal, 2012) 

We have selected four public companies working in the same industry for analyzing their equity and leverage structure. All the four companies, working in the mining industry, are discussed one by one :

Stockholders’ equity	2014	2015	2016	2017
Common stock	2255	2243	2243	2243
Retained earnings	74548	60044	49542	52618
Treasury stock	-587	-76	-33	-3
Accumulated other comprehensive income	2927	2557	2538	2400
Total Stockholders’ equity	79143	64768	54290	57258

From the above representation, we can see that the the company is experiencing a downfall past previous four years. This might degrade its market position. Analyzing the reason behind this downfall, we see that it happened due to exercising of excessive employee share awards which in turn resulted in huge reductions in reserves of the organization as continuous transfers have been made for such share awards.

Stockholders’ equity	2014	2015	2016	2017
Common stock	1975	1954	2025	2068
Other Equity	-70	-147	-149	-123
Retained earnings	2895	1247	1247	1460
Accumulated other comprehensive income	-537	-70	-341	-443
Total stockholders’ equity	4263	2985	2782	2962

From the above representation, we see that Orica is experiencing a continuous fall in its equity component and the company might face a fall due to fluctuations. Analyzing such an impact, we see the heavy expenditure made by the company over material costs due to existing contracts. However, the good part observed in the above table is maintenance of high retained earnings due to reinvestment of previous years’ profits which are sufficient enough to cope up with future unforeseen circumstances (Siciliano, 2015).

Stockholders’ equity	2014	2015	2016	2017
Additional paid-in capital	9053	8474	8443	8666
Retained earnings	26110	19736	21631	23761
Accumulated other comprehensive income	11122	9139	9216	12284
Total Stockholders’ equity	46285	37349	39290	44711

The above representation shows the high value of retained earnings as well as accumulated and other comprehensive income. This is due to huge profits made by the entity in past years. Also, our analysis reflects the strong control of the management over the business.

Stockholders’ equity
Common stock	1368	1685	1752	1676
Other equity	71	60	44	51
Retained earnings	6593	8052	9504	10910
Accumulated other comprehensive income	2		0	0
Total Stockholders’ equity	8035	9797	11301	12637

The above representation shows that the organization is visualizing an increasing trend in its common stock. But, on the other hand, it is also experiencing a decreasing trend in its equity component. Analyzing the reason of such a decline, we observed that the due to problems faced in the mining fields as well as in its other businesses, the company is also having a deficiency in its accumulated and other comprehensive income.

Debt Equity Ratio analyzes the burden of leverage on the company by calculating the share of the debt component in its shareholder’s funds. Let us have the data represented through the following table:

FMG
Debt	16056	18016	14739	12214
Total Stockholders’ equity	8035	9797	11301	12637
Debt equity ratio	1.998258	1.83893	1.304221	0.966527
BHP Billiton
Debt	72270	59812	64663	59748
Total Stockholders’ equity	79143	64768	54290	57258
Debt equity ratio	0.913157	0.923481	1.191066	1.043487
Orica
Debt	4576	4337	3813	3823
Total stockholders’ equity	4263	2985	2782	2962
Debt equity ratio	1.073422	1.452931	1.370597	1.290682
RIO Tinto
Debt	61542	54215	49973	51015
Total Stockholders’ equity	46285	37349	39290	44711
Debt equity ratio	1.329632	1.451578	1.271901	1.140994

With the above represented data, the following analysis can be made :

• Fortescue is having a high debt equity ratio which is considered as an adverse situation as high debt equity ratio signifies high leverage burden over the company which has a negative impact on the business operations as the entity may get overburden with the responsibility of fulfilling its obligations, that is, interest payments, in situations of not sufficient earnings (Taillard, 2013).
• Coming to BHP Billiton Ltd, we see an equilibrium condition, that is, a balance between the equity and debts. This reflects the efficiency of the company’s operations and a positive financial structure of the company.
• In case of Orica, we see an expansion of debt equity ratio due to which it might face difficulties in the future.
• Coming to Rio Tinto, where we see a high debt equity ratio, we also see a high value of retained earnings. Thus, the obligations in connection with high debt equity ratio are compensated by the high retained earnings. Also, the company is having exponential growth since past few years and therefore, it is probable that even with high leverage risk, the company would be able to recover all its losses.

From the initial discussion, we critically analyzed the importance and problems of voluntarily disclosures by the management where the long term perception is in the favour of it. It’s just that the organizations should play smart to save themselves from the competitive disadvantages and on the same hand, complying with its different stakeholders requirements. From the discussions on comparative analysis of the four public companies, we discover the importance of maintenance of equilibrium between the leverage capital and equity capital of an entity as that somewhere impacts the functioning of an organization and a smooth functioning of business operations is what is desired by the organizations.

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