Regulatory Bodies And Their Role In Australian Accounting Standards And Financial Reporting Analysis Of Retail Companies

Regulatory Bodies and their Role in Setting Accounting Standards

Regulation of any sector across the globe sets the benchmark and standards upon which the sector is run. Professions all over the world have specific global bodies that are charged with the setting of standards and regulation that will govern the conduct of the professionals. For instance engineers, doctors, lawyers, and accountants have various regulatory bodies that help oversee the profession. In essence, accountants have the International Accounting Standards Board (IASB) that often reviews and issues the International Financial Reporting Standards (IFRS). Besides setting the benchmark, regulation plays a key role in mitigating the contingencies that arise as a result of information inefficiency in the various markets across the globe. Nevertheless, regulation gives control to individuals and corporations over their scarce resources as they are able to obtain the desired information that is made possible through the existing standards and benchmarks. Regulation also protects investors from fraudulent organizations that cannot bear the costs that come with regulation (Du Plessis, Hargovan, & Harris, 2018).

The Australian Accounting Standards Board (AASB) takes part in the global standard setting process through making a significant amount of monetary contribution towards the activities of the International Accounting Standards Board (IASB) which is basically the setting of International Financial Reporting Standards (IFRS) (AASB, 2018). Additionally, the AASBtakes into consideration the work of the IASB in the development and issuance of accounting standards for public sector entities in Australia (AASB, 2018).

It is worth noting that the various member countries of the IASB have their own set of rules that are basically derived from IFRS. Hence, it is not a must that they should fully comply with the IFRS. Compliance is only compulsory when the member country is heavily involved in international transactions. Besides, the synchronization of the accounting standards is still an ongoing process across the world and this provides various countries with the freedom to follow procedures and standards as provided by their accounting standards boards.

The four chosen companies are found in the retailing segment of the Australian Stock Exchange. They include Bapcor Limited, Harvey Norman Holdings Limited, Nick Scali Limited, and The Pas Group Limited. This section shall examine the various items of owner’s equity and the year-to-year changes in each of the items for the past four years. Moreover, this section shall provide a comparative analysis of the debt equity position of the firms stated above.

 A look into Bapcor Limited’s Consolidated Statement of Financial Position reveals that the company has three main items of owner’s equity, namely, contributed equity, other reserves, and retained earnings. Each of these items is examined below.

The Australian Accounting Standards Board (AASB) and its contribution to International Financial Reporting Standards

This is also known as the contributed capital or the paid-in capital. Contributed equity is the amount of assets or cash that the shareholders give to a particular company in exchange for stock.

Bapcor’s contributed equity rose from $180.775 million in 2014 to $337.390 million in 2015, representing a 86.6% rise. The amount rose further to $416.427 million in 2016 representing a 23.4% rise; and to $600.675 million in 2017 representing a 44.2%. The rise in these amounts is attributed to an increase in the number of ordinary shares that were issued to the company shareholders.

This is a section of the statement of financial position that quantifies the shareholder’s equity exclusive of the basic share capital portion (Russell, 2017). In many conventional statements of financial position, the reserves section is composed of items such as capital reserves, hedging reserves, retained earnings, fair value reserves, asset revaluation reserves, foreign currency translation reserves, and statutory reserves (Russell, 2017).

Capital reserves arise out of issuing the shares in excess of their par value while the fair value reserves are as a result of adjustments for available-for-sale securities and assets (Russell, 2017). On the other hand, hedging reserves arise out of the hedges taken by the company to cushion itself against volatility in inputs while asset revaluation reserves are born out of adjustments made by the company with respect to the value of an asset found in the asset section of the statement of financial position needing an offsetting transaction (Russell, 2017).

Foreign currency translation reserves are born out of the changes in the relative value of the currency in which the balance sheet is reported while statutory reserves are the reserves that a company is required to maintain by law and cannot be remitted as dividends (Russell, 2017).

Bapcor’s other reserves rose from $56,000 in 2014 to $441,000 in 2015, representing a 687.5% rise. Furthermore, the reserves rose to $845,000 in 2016, representing a 91.6% risebefore decreasing to -$202,000 in 2017. The rise and decrease in reserves was attributed to fluctuations in net investment hedge reserve, cash flow hedge reserve, foreign currency reserve and share-based payment reserve.

Retained earnings are “the profits generated by the firm that are not distributed to the shareholders as dividends but are either reserved for particular purposes or reinvested into the business” (Business Dictionary, n.d.). On the flip side, when the business fails to generate profits it encounters accumulated losses which are recorded in the statement of financial performance as a negative figure.

Analysis of Owner’s Equity in Retail Companies

Bapcor’s retained earnings for the four-year period under review were all accumulated loses. In 2014, the firm had an accumulated loss of $83.87 million while in 2015 it was $70.908 million. In 2016, the accumulated losses were $51.052 million while in 2017 it was $17.067 million.

The year-to-year losses are attributed to a large dividend payout that was paid in 2014 amounting to $94.313 million compared to retained earnings of $1.16 million in 2014. Eventually, the firm had a net profit after tax of $19.507 million in 2015 and a dividend payout of $6.543 million resulting in a net loss of $70.906 million in 2015. In 2016, the net profit after tax was $43.582 million while the dividend payment was $23.728 million resulting in an accumulated loss of $51.052 million in 2016. In 2017, the net profit after tax was $64.044 million while the dividend payout was $$30.059 million hence resulting in an accumulated loss of $17.067 million.  

Harvey’s contributed equity rose from $259.61 million in 2014 to $380.328 million in 2015 representing a 46.5% increase. In 2016, the company posted a contributed equity amounting to $385.296 million, representing a 1.31%; while in 2017 the amount was $386.309 million. The rise in contributed equity is attributed to movements in the ordinary share on issue during the period of review.

Harvey’s reserves rose from $102.735 million in 2014 to $113.29 million in 2015. In 2016, Harvey’s reserves totaled $155.814 million and the amount rose to $174.95 million in 2017. The continued increase in the reserves is attributed to fluctuations in the elements of reserve, that is, foreign currency translation reserve, asset revaluation reserve, employee equity benefits reserve, available for sale reserve, cash flow hedge reserve, and acquisition reserve.

The retained profits posted by Harvey in 2014 amounted to $2.109 billion while in 2015 the amount was $2.043 billion representing a 3.13% decline. The decline is attributed to increase in the amounts of dividends being paid out in the period of review. In 2016, the amount of retained profits posted rose to $2.125 billion representing a 4% increase. In 2017, the amount posted was $2.229 billion representing a 4.9% increase. The year-to-year rise in retained profits between 2015 and 2017 was attributed to an increase in the profits generated for the years under review.

Besides the three most common items of shareholder’s equity discussed above, Harvey Norman had other items of equity namely, parent entity interests and non-controlling interests. The parent entity is an entity that controls one or more entities (Australian Accounting Standards Board, 2013). In this case, the parent entity interests represent the parent’s interest in its entities. On the other hand, non-controlling interests represent a stake of ownership that is less than 50% in a particular corporation (Financial Accounting Standards Board, 2017). In this case, the position that is held by the investor gives them an insignificant amount of influence or no influence at all on how the firm is run (Financial Accounting Standards Board, 2017).

Contributed Equity

Harvey’s parent entity interests grew from $2.471 billion in 2014 to $2.537 billion in 2015. This interest grew further to $2.666 billion in 2016. In 2017, the parent entity interest was $2.79 billion. On the other hand, the non-controlling interests grew from $19.729 million in 2014 to $19.779 million in 2015. In 2016, this interest grew to $22.378 million and further to $22.448 million in 2017. The year-to-year growth is attributed to an increase in the parent company’s interest in ordinary shares, reserves, and retained earnings of its other entities in the period under review. 

Nick Scali’s contributed equity stood at $3.364 million for the period under review, that is, 2014-2017. A look into the notes to the financial statements reveals that it is the policy of the firm’s board to maintain a strong capital base so as to maintain investor, creditor, and market confidence and to sustain future development of the company’s business (Nick Scali Annual Report, 2017)..

Nick Scali’s reserves grew from -$35,000 in 2014 to $324,000 in 2015. The reserves then declined to -$488,000 in 2016 before rising to -$24,000 in 2017. These fluctuations are attributed to changes in the amounts of cash flow hedges and equity benefits reserves in the period under review. Fundamentally, the cash flow hedges “recognize the effective portion of the gain or loss of cash flow hedge instruments that is considered to be an effective hedge” (Nick Scali Annual Report, 2017). On the other hand the equity benefits reserve“records the value of share-based payments provided to employees as part of their remuneration” (Nick Scali Annual Report, 2017).

Nick Scali’s profits grew from $36.801 million in 2014 to $42.538 million in 2015. The profits grew further to $54.918 million in 2016 and $67.044 in 2017.  

The firm’s contributed equity stood at $153.963 million for the four year period of review (2014 – 2018). The reason for the constant amount of contributed equity over that period is attributed to the fact that the company did not issue any new shares.

The company’s reserves grew from -$4.819 million in 2014 to -$2.558 million in 2015 before declining to -$4.804 million in 2016. As at the end of financial year 2017, the company’s reserves stood at -$4.976 million. The fluctuations in the amounts of reserves are attributed to the changes in the amount of share based payments reserve, cash flow hedge reserve, foreign currency translation reserve, and corporate reorganization reserve.

Other Reserves

The firm’s retained earnings declined from $8.446 million in 2014 to -$26.085 million in 2015. The company still dwindled in accumulated losses worth -$23.315 million in 2016. In 2017, the firm had accumulated losses worth -$22.404 million. The year-to-year accumulated losses are attributed to little amounts of profits and eventual losses attributed to owners of the company as well as dividend payments in the period under review. 

The previous section looked into the equity position of the four selected companies. It is worth noting that the capital structure of a company is made up of debt and equity. The debt element of this structure is composed of both short-term and long-term debt. Debt in financial terms is often referred to as liability.

To understand the debt and equity position of the companies, it is prudent to determine the debt-to-equity ratio. In essence, the debt-to-equity ratio indicates the portion of a company financing that comes from creditors and investors (Corporate Finance Institute, 2016). Basically, a higher ratio indicates that the business is being financed more by the creditors while a lower ratio indicates that the business is being financed more by the investors. Therefore, the lower the ratio the more stable the business is.

The formula for debt-to-equity ratio is as shown below:

D/E Ratio = Total Liabilities / Total Equity

Below is a tabular analysis of the debt and equity position of the four companies.

Table 1: Debt-to-Equity Ratio Comparative Analysis for Year 2014

	Bapcor	Harvey Norman	Nick Scali	The Pas Group
Total Liabilities ($million)	143.367	1,715.025	40.296	25.938
Total Equity ($million)	96.961	2,491.106	40.130	157.590
D/E Ratio	1.48	0.69	1.00	0.16

Table 2: Debt-to-Equity Ratio Comparative Analysis for Year 2015

	Bapcor	Harvey Norman	Nick Scali	The Pas Group
Total Liabilities ($million)	87.285	1,801.684	50.111	28.449
Total Equity ($million)	266.925	2,566.860	46.226	125.320
D/E Ratio	0.33	0.70	1.08	0.23

Table 3: Debt-to-Equity Ratio Comparative Analysis for Year 2016

	Bapcor	Harvey Norman	Nick Scali	The Pas Group
Total Liabilities ($million)	317.202	1,743.126	63.677	49.075
Total Equity ($million)	366.22	2,688.674	57.794	125.844
D/E Ratio	0.87	0.65	1.10	0.39

 
Table 4: Debt-to-Equity Ratio Comparative Analysis for Year 2017

	Bapcor	Harvey Norman	Nick Scali	The Pas Group
Total Liabilities ($million)	746.732	1,376.837	68.732	44.126
Total Equity ($million)	589.967	2,812.907	70.384	126.583
D/E Ratio	1.27	0.49	0.98	0.35

Table 5: Four year average (2014-2017) for the debt-to-equity ratio

	Bapcor	Harvey Norman	Nick Scali	The Pas Group
2014	1.48	0.69	1.00	0.16
2015	0.33	0.70	1.08	0.23
2016	0.87	0.65	1.10	0.39
2017	1.27	0.49	0.98	0.35
Average	0.99	0.63	1.04	0.28
Rank	3	2	4	1

From the above comparative analysis of the debt and equity positions of the four selected companies, it is evident that The Pas Group is in a better position where it is financed more by the investors rather than creditors while Nick Scali is at a worst position where it is financed more by the creditors rather than the investors. Harvey Norman ranks in second place while Bapcor comes in third.

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