Question:
Discuss bout the Accounting Theory and Current Issues for Human Rights, Legitimacy.
This report determines the valuation of principal, property, plant, and equipment (PP&E) by measuring the historical cost and fair market value. This report also focuses on the merits and risks related to the triple bottom line reporting approach. It also explains the importance of legitimacy and provides a recommendation to restore the legitimacy of the company. It also discusses the different ways to record the environmental expenditure.
Historic Cost or Fair market value
KGC Ltd. may revalue its PP&E assets from historic cost to fair market value. But, both historical cost and fair value are contradictory to each other. In this context, the fair value dimension requires updating of all factors whereas historical cost requires only limited and temporary updating of resources (Penman, 2011).
In addition to this, historical cost is based on the General accepted accounting principle (GAAP). In this principal, property, plant, and equipment (PP&E) are recorded in the balance sheet at the nominal and original cost. Therefore, this principle provides more reliability for keeping the information in the asset and liabilities statements. This helps the company ensure the impartiality in valuation of the PP&E and to make sure about constancy of the cost (Flood, 2014).
In opposition to this, under fair value method the value of the PP&E may change according to the volatility in market price. As a result, the cost of the asset will also be changed as per the market prices. Additionally, it can be explained that fair value method is appropriate for the firm because it focuses on the current market value excluding the original value. Hence, it offers the significant framework with regards to the financial position. Although, fair value may cause the changes in the profit and loss report but, it represents the authentic reflection of the economic situation.
Thus, it can be stated that fair value is better than the historic cost. It is because; the historic cost creates the outdated data that may lead to inappropriate decision in the organization (Greenberg, et al., 2013).
On the other side, historical cost does not provide information about the existing value of assets in the organization. Hence, it may generate the misunderstanding among the managers of the organization in order to take the relevant decisions. Moreover, for the historical cost, there is no need to record the opportunities cost of the older resources. Therefore, it is not effective to determine the loss or gain of the real value of the resources causes inflation and deflation in the economy (Ginter, 2013).
Contrary to this, fair value is more appropriate rather than the historical cost because it facilitates the relevance in the decision making of the users of the financial report. For example, the members of the corporation have permission to communicate with the private information related to the asset value. Thus, it can be said that fair value measurement should be used by the company in order to enhance the transparency, timeliness, and comparability of the accounting information as well as value of assets (Albrecht, et al., 2010).
Besides this, it can also be stated that historical cost measurement does not involve the price changes in the balance sheet. Hence, it impacts the production line. It is because; there are several external environmental factors such as political relation, economic condition, government rules and regulation that influence the prices. Therefore, it can be said that historical cost measurement may produce maximum risk for the business. For the reason behind, it estimates the cost on the wrong basis so that it cannot offer the relevant value of the financial resources of the company (Swayne and Dodds, 2011).
Thus, it can be stated that historical cost measurement cannot provide the realistic value of fixed assets due to core focus on historical prices. It also ignores the volatility in the market value of PP&E, so actual value of fixed asset cannot determine by the firm. Therefore, it can be said that KGC Ltd should revalue its major assets (i.e. PP&E) on basis of fair value rather than historical cost (Trucco, 2015).
True and Fair value of the PP&E
Fair value is defined as the price in which assets might be traded at the particular date among the key competitors in the logical manner. After identifying the resources, the fair value of PP&E may be determined on the revalued amount. It defines the fair value of assets as total value of PP&E after deducting subsequent accumulated depreciation and successively accumulated impairment losses of the relevant assets (Trevino and Nelson, 2010).
Accumulated impairment loss = Replacement value – Current value
$20.5 billion AUD- $12 billion AUD
= $8.5 billion AUD
Thus;
Fair value = fair value of the re-evaluation – subsequent accumulated depreciation and successively accumulated impairment losses
30 – (30/17) – 8.5
30- 1.765 -8.5 = $19.735 billion AUD.
This analysis represented the fair and true value of PP&E as per the re-evaluation technique. It is also related to the existing value of the asset.
Merits and risks of “Triple Bottom Line” aspect to reporting approach
KGC Ltd involves triple bottom line aspects in its reporting approach that has created different benefits and risks to the organization. This approach is beneficial to accomplish the objectives with respects to the community, profit, and globe. KGC has been blamed for irresponsibility towards the environment due to the clearance of the ore waste into the river (Stoner, 2012).
At the same time, many of the environmental regulatory bodies have claimed against the company for environment-harming practices. But, the company states that it provides employment, clean filtered water, healthcare and education for local people (Linger and Owen, 2012). Besides this, its operation reimburses the problems in the mining and processing of Star Mountain Range in PNG. In this way, it can be explained that triple bottom line may be effective to enhance the image of the corporation with regards to the environmental responsibilities. It is because; this approach helps to increase the awareness about the practices among the people of the region. This approach is based on environmental protection and society benefits (Caraiani, and Chiraha 2015).
The triple bottom line is also advantageous in reporting because it allows to the company for communicating with the stakeholders on the topic of managing the environmental condition, economic and social aspects of its operations. This is also useful to enhance the reputation and to meet the brand’s benefits and protect the social licenses for operating the company without any obstacle. For this reason; company offers employment opportunities, healthcare and education facilities and focuses on responsibility of the company towards the environment, society, and investors (Maraghy, 2011).
In opposition to this, the company faces difficulties in implementation of the triple bottom line. This approach considers the environment protection through purifying the sludge spill. In this way, KGC Ltd. will have to pay the cleaning expenditure and penalty. Besides this, the company will have to offset the work in a different place and pay compensation to losses that will occur in the business practices. In this circumstance, the company may face a risk to meeting objective of generating high revenues for the stakeholders. For the reason behind this; there is a need for the company to invest a lot of parts of the profit in the social and environmental protection. In this case, the company cannot be able to provide more interest to the investors of the company (Larmer, 2013).
Nature and Importance of “Legitimacy”
KGC Ltd not only considers the resources and technical information but also focuses on the legitimacy. The nature of legitimacy is based on the recognition of organizational resources at the legal, environmental, and social and culture level. The approach of legitimacy focuses on selection of best ways that are necessary to meet interest of different stakeholders.
In addition to this, organizational legitimacy represents the correlation among the organization and its working environment. Moreover, stakeholder legitimacy shows the authority that is required to keep the coalition with the supportive stakeholders (Buchanan, 2010).
Legitimacy of KGC Ltd in the eyes of the traditional land-owners, the government of PNG and the people of Australia is important for the successful running of the organization without any obstacle. Through using the legitimacy, KGC Ltd may get the support from the different kinds of stakeholders like landowners, government, and community to make the stress free environment of the company. It facilitates the community recognition for the company in order to manage the stakeholders through exercising the power and authority (Henham, 2013).
In this way, it can be explained that stakeholder power and authority create a great impact on the business’s operation. Moreover, it is important to increase the social acceptance and maintain the relationship with the stakeholder that is helpful to company for acquiring business resources. Along with this, the company can also ignore the lawsuit and legal issues through maintaining the legitimacy and by fulfilling the government rules and regulations. In this way, it can be said that organizational legitimacy is necessary to make the changes in the business environment (Stout, 2012).
Furthermore, it can be interpreted that stakeholders like traditional owners of the land, government and people of Australia may assess the organization as per the rule, structure, and procedure of the company. In this case, it can be said that if the company keeps its legitimacy then it will be able to maintain consistency in the procedure and structure of the organization. It also helps to maintain the flow of assets to control the gold and copper mine in the Star Mountain Range in Papua New Guinea (Jacobs and Baglay, 2016).
Loss of Legitimacy and its Consequences
The legitimacy of the KGC Ltd is at risk due to environmental claims on the corporation. From analysis of the given case, it can be stated that company has not been able to meet the responsibilities regarding the environment protection that harm to Australian residents. In this situation, KGC Ltd. gives royalties to the traditional owners of the land and also pays taxes to the government of PNG. Besides this, it also donates some portion of the profit to the development of the community by using social welfare programs like grade schools, hospitals, and health centres in the Star Mountain Range in PNG (Lucarelli, et al., 2011).
Moreover, it also works on the water processing plant for environment protection. In addition to this, KGC Ltd. is the key basis to provide employment in the local areas. In this way, it can be stated that if the company shut down its mining process in the Star Mountain Range in PNG then 45% of the unemployment rate will rise to 95% in the market (Kramer, 2011).
On the other side, it is also analyzed that company has been blamed for operating activities because it harms the environment at the large scale. It is also identified that KGC Ltd. dumped 5 million litters of ore-waste sludge into a river that used by the local areas people for drinking water, fish, hunt, harvest lotus root and irrigate their crops (Rotberg, 2010).
At the same time, it can be determined that KGC Ltd may suffer from the losses of the business in the local areas due to declining the brand image and lawsuits. In this way, it leads to shutting down the business due to the loss of support with the local areas people. Hence, it affects the mining operation of the company. Besides this, it can be interpreted that company faces lawsuit through the environmental committee and local people. Therefore, KGC Ltd. faces the loss of reputation and survival in the market. It also declines the financial performance of the organization in the marketplace (Pelling, 2010).
Ways to Restore the Legitimacy
There are different ways in which management of KGC LTD can restore the legitimacy like change in business policies and practices, strict follow-up of environmental policy etc. First of all the management of the company should focus on the usage of stakeholder’s theory for identifying its responsibility towards different stakeholders. Freeman’s stakeholder theory is helpful to identify different stakeholders of the company. As per this theory, a stakeholder is an individual or a group that is affected (i.e. benefited or harmed) by business operations of company. In this context, there are various stakeholders of KGC Ltd such as management, local community, customers, employees, environment, suppliers and the owners (Phillips, 2011). It is company’s responsibility to meet interest and well-being of its stakeholders. From the analysis of given case, KGC Ltd has failed to fulfill its responsibility towards environment and community. For example, company operations have lead to 5 million liters of ore-waste sludge into a river, which is used two local villages for different purposes such as drinking water, fishing, harvest lotus root and water their taro root, yam and cassava crops etc. This way, the company is ignoring responsibility towards the environment and local community (Frederickson and Ghere, 2014).
Management of KGC Ltd needs to design and adopt effective practices for minimizing the dumping of sludge in the river. In addition to this, company should focus on strict compliance with environmental laws and regulations of country. It is because compromise with these laws may impose regulatory fines and ban on company operations. Company can utilize advanced technologies for removal of ore slug from river. It is also the responsibility of KGC to focus on CSR activities like participation in river cleaning practices. These practices may help the company to restore its legitimacy (Bobocel et al., 2011).
Image restoration theory is also helpful to the management of KGC Ltd for the purpose of restoring the legitimacy of business. Through the use of this theory, the company may focus on planning and communication of CSR practices like minimization of waste flow from operations, and initiatives related to river water purification for restoring its image as well as legitimacy (Heath and O’Hair, 2010).
Ways to Record the Cost of the Harm Associated With the Sludge Spill
There are different ways, in which management of KGC Ltd can record the cost of the harm associated with the sludge spill with its operations such as recording of historical environmental cost, recording of current pollution cost related to company operations, and recording of future environmental costs (Burritt et al., 2011).
Recording of the historical environmental cost is a way which provides an idea about the volume of ore sludge spill associated with company operations from past facts. These facts are actual data and more believable for people and management of the company. On the basis of such figures, the company can measure the harmful effects of its operations over environment and community. But, the historical facts and data cannot serve future strategic planning of the company, as it does not have scope for current and future business strategies (Epstein and Buhovac, 2014).
At the same time, recording of current pollution cost is also a good way to record cost of the harm associated with sludge spill. Under this method, the environmental costs can be recorded by company in terms of pollution associated with its operations. The cost of environmental remediation practices can be recovered by the company from customers by adding cost of remedial practices to total product cost. But, it is very difficult for the company track or separates the environmental costs of specific products in business (Chapman and Ciment, 2015).
Apart from these, the third method which can be considered as appropriate is a recording of future environmental cost of company operations. It is based on planning or making estimates of environmental harms and costs associated with remedial practices that may be occurred in a particular business year. This method is appropriate for the management of KGC Ltd because through the use of this company may pre-plan the budget for environmental remedial practices. It will also enable the company to meet out restoring of legitimacy purpose of business through investing in environmental restoration programs (Burritt et al., 2011).
Conclusion
On the basis of above, it can be concluded that there are two types of assets valuation methods available to KGC Ltd such as historical cost method and the fair value method. Fair value approach is identified as an appropriate method. It can also be concluded that it is an important strategy for KGC Ltd to invest in environmental remedial practices like reducing ore-waste spill and cleaning of river water being polluted due to company waste for the restoration of its legitimacy and brand image.
References
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