Acc518 | Accounting | A Assessment Answers

1. Demonstrate that you can analyse a current accounting issue reported in a news article, and to write a report for the CEO that provides her with a deeper theoretical understanding of the issues identified in the news article.

a. Identify, describe and discuss the key issues reported in the news article

2. Demonstrate that you can review an upcoming accounting standard and provide a report to the partners of the accounting firm you work for. The report should outline the key elements of the upcoming standard, the opinions of other industry stakeholders, and the implications of the new standard for the firm.

Introduction

In the given assignment a news article has been selected to be presented in front of the team to put their opinions on the same. The article that has been selected is “'Worrying': Companies' reporting of climate risks goes 'backwards', this article highlights the needs of disclosures that the companies make with relation to environmental issues that occur because of their activities and what are the steps that they are taking to take care of that (Abdullah & Said, 2017). The article is discussing an important topic of corporate social responsibility that occurs due to increased dependence of the companies with relation to the various stakeholders that are dependent on the company in some way or the other. The companies have some important responsibility towards the environment in which they are functioning and thus it is important that proper disclosures are being made with relation to that. It has also highlighted how companies have reduced providing proper disclosures with relation to environmental effects that they are making. The article highlights how the annual reports of various companies have been downloaded and making sure that how they have changed with relation to environmental disclosures that they are making in their annual report (Alexander, 2016). It has also shown how the investors are being affected with the fragmented information that they have provided in their annual report with relation to environmental disclosures. It thus raises an important point how accounting standards and regulations are there that are guiding how companies should fulfil their responsibility that they have towards the stakeholders.

A copy of the news article has been given below:

Source : https://www.smh.com.au/business/companies/worrying-companies-reporting-of-climate-risks-goes-backwards-20180920-p504yt.htm

a. The key issues that have been included in this article are-

The article highlights the need that companies should state in their annual report proper disclosures with respect to the environmental effects that their activities are causing to the environment.

As per this article, The Australian Securities and Investments Commission, have downloaded the annual report of 60 companies and have reached to a conclusion that 17 percent of the total companies out of those 60 companies have provided disclosure regarding to enviro.nmental risks. Also the companies that have provided the environmental risk, is very limited and not proper disclosure are giving (Antle & Smith, 1985). The overall information is very fragmented and not proper and not valid at times, thus investors are not able to make an opinion on how the companies are making proper disclosure with respect to that. The ASIC has also downloaded the annual report of 1500 companies and have analyzed their past six years and based on that they can see that from the past 2011 to 2014, there has been an overall reduction of 22 percent in the total disclosure that has been made. As per the ASIC, it has been stated that this reduction was due to the fact that repeal of the Gillard-era emissions trading scheme legislation (Belton, 2017). It can also be seen that the disclosure provided are very fragmented and not clear and not precise. Also if 100 companies have provided their disclosure, then that is also not clear and proper. In this article the ASIC has urged the companies that they should follow proper disclosure policies and state the same in their annual report under proper headings (Bouret, 2017). It has also urged the investors that they should focus more in this repsect and see that companies are able to put their stand in a proper way. . This ramped up the guidelines that were issued by the G20 taskforce, known as TCFD, that was anchored on the fact that the Paris agreement had pledged to keep the global warming below 2 degrees. It has also stated that companies in New Zealand and Australia that are having funds that are more than $2 trillion funds for management, then with respect to that they should make proper disclosure as that might affect their capital credibility of the company. It is evident that the overall reporting that has been down by the companies have gone “backward” and they need to make sure that they are changing this scenario and take this situation seriously.

b.i. There are various accounting policies and theories that guides the environmental disclosures that companies need to do with respect to the environmental damage that they might do. In past there have been serious cases of air pollution and global warming that has affected the environment a lot and most of them have been caused because companies were not able to install proper equipment’s and meet proper safety standards (Charles H, Giovanna, Dennis M, & Robin W, 2015). Because of this there were situations in which the companies lost their license and the management were held guilty and were punished very badly. Because of this the investors had to lose a lot of money. Then there were serious guidelines that stated that if companies are not meeting safety standards or are involved in such type of industry then they should disclose the same in them annul reports and follow accounting policies with that respect. But now it can be seen that this has reduced a lot and companies have taken it very lightly. The same has been highlighted in this article (Coate & Mitschow, 2017).

ii) The theory of materiality can be linked to this policy of accounting disclosure with respect to environmental issues that the causes. Materiality as a concept refers to the fact that any event, transaction or activity that might affect the position of the company financially and can affect its going concern policies then it should be stated and disclosed. In case of environmental risks companies never considered it to be material enough that they need to give disclosure with respect to that. But it can be seen that with changing times, the effect that activities that the companies were doing was affecting the environment very badly and thus on that note there wasa lot of harm caused and thus it was important that companies should state this in their annual report (Eddy, Filip,R, & Warlop, 2004). Corporate Social Responsibility is a model that frame rules and regulations that helps companies in taking care of all the stakeholders that are dependent on them in some way or the other. There are many cases where companies need to balance the interest of all one stakeholder in pursuance of another and in this case, we see that CSR policies are very effective. So, they are effective in term of environmental policies also, and environment is an important stakeholder for the companies, as it is their responsibility to take care of the society in which they are functioning. Thus, government has set standards of safety that every company needs to meet and in case they fail, they will be penalized. Not just meeting the standard is important, giving proper disclosures with respect to this is also important as investors needs to be aware about the stand that the companies are taking (Ghofiqi, 2018). Investors are the people who are putting their funds in the company, in case where the company fails, the investors would be also affected. It has also been highlighted in this article that companies that are providing disclosure are in a very vague manner, which makes it difficult for them to are depending on the annual reports. Thus, need arises that there should be clear disclosures and that should be on point and that should be helpful to the companies in some way or the other. So, we see that still not many rules are there guiding the principles of environmental disclosures but whatever is there they seek to spread awareness among the investors, companies, public that it is the duty of the companies to protect the environment in which they are functioning, and it is material and hence should be stated in the annual report of the companies (Ruth, 2018).

Conclusion

Based on the overall analysis it can be said that there have been many changes that have occurred with respect to environmental disclosures but what is required is that companies should take their responsibility seriously and put proper information for the investors as the ASIC is stating in the given article.

2. The second part of the assignment deals with draft exposures that are given for the public on the specific websites of the accounting standards and policies forming board and the public can comment on that exposure draft. All the comments are considered and based on that they can take decision whether they want to pass that accounting standard or policy or not and implement it. In this assignment one of such exposure draft that have been published on the IASB websites is discussed and various comments on that are also analyzed and then proper conclusion has been given (Lepistö & Ihantola, 2018).

Introduction

There are many exposure drafts that are there and people can comment on them whether they agree to it or not. In the given case the draft exposure is in relation to the IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The article is mainly highlighting the difference between the accounting policies and accounting estimates. It is very difficult for accountants and professionals to understand the basic difference between accounting policies and estimates and this exposure draft aims to make it clear in a better way. It highlights the difference between the accounting estimates and accounting policies. It is very important that companies should be aware of this because accounting estimates are those that affects the profit loss and balance sheet transactions and accounting policies do not impact them (Kusnadi & Wei, 2017). So, they are materially relevant and affects the financial position of the company in some way or the other. And thus, they need to understand what are the accounting estimates and accounting policies are.

An extract of the exposure draft is given below:

Source : https://www.ifrs.org/projects/work-plan/accounting-policies-and-accounting-estimates/comment-letters-projects/exposure-draft-accounting-policies-and-accounting-estimates/#consultation

In the above exposure draft it can be seen that the authority have stated the various amendments that has been made with respect to IAS8. It can be stated that accounting policies are those that helps in the functioning of the company, they are the rules and regulations that affects the company. It is inclusive of measured procedure for disclosure of facts that are important to the company and the stakeholder. On the other hand, accounting estimate is the measurement or appropriation of the accounts of the companies, and deals with which account needs to debited and credited and how the books of the company will be affected by the same. It is based on judgement and knowledge that companies derive from relevant sources and are mostly based on facts and figure. Few example of accounting estimates are provision for bad and doubtful debts, provision for debtors, general reserves, measurement of inventories, various types of costing etc (Iggers, 2018). There are many authorities that decides based on relevant facts of accounting on how these figures would be calculated and there are specific methods that companies need to follow for this. In case if the company fails they wont be able to present the correct value of the elements of the financial statements and that would affect their position financially. Thus we see that knowing the difference between accounting estimates and accounting policies is so important. If the accountants are not aware then they wont be able to take correct decisions for the companies.

Various Comments that have been stated in the exposure drafts.

Nandi Uchenna, is a professional from Nigeria and he has stated that he is ok with the overall amendments that are stated in the proposed draft however he is not in favor of one policy that the authorities have stated. In his comment he mentions that paragraph 32A and 32B are not consistent with each other and are providing contrast opinion on the overall concept of accounting policy and estimates. In his opinion he states that in case of measurement of inventories, FIFO or weighted average method can be selected as a process of accounting estimates and not accounting policy (Johan, 2018).

Mr. Hans Hoogervorst, he is the chairman of the IASB IFRS foundation, he has presented his opinion on the exposure draft is given below. As per him he states that the various provisions of the accounting standard with relation to the difference between the accounting policies and accounting estimates is stated. He has stated only one point as per which it states that the authorities must frame definite rules and regulations with relation to the specific rules that must be presented for the overall treatment of the inventories that can be interchanged between companies.

Segun Adebiyi, who is one more professional and he has stated that he agrees to the overall amendments that have been made by the authorities except one. He feel that when it comes to accounting for inventory, the companies should see to it that they are IAS 2 should be treated as an accounting policy and not an accounting estimates as most of the inventories are brought from outside and then treated in the store and hence they are also part of interchangebale inventory and companies should have proper knowledge on how they are going to treat them (Golden, 2006).

The Australian Council of Auditors, have stated in their comment that they are with the authorities and they feel that the authorities have done full justice and have clearly stated what is the diffferance between accounting policy and estimates when it comes of treatment of some specific assets like inventories, intangible assets etc. So in case accountants go through this they will have a clear idea based on which they can proceed and decide whether the company should treat inventory or any other asset in some specifc way or not. Hence in the given case it can be seen that the they are in favour of the amendments that have been done.

Application of Theories of Regulation

Public Interest – The given exposure draft is in interest of the general public because not all people are conversed with all the accounting standards and regulations and therefore when they are going through the annual report of any company, they should understand the basic difference between calculation of accounting estimates and following of accounting policies. There are many times when the accountants can get confuse and take wrong decisions with regards to the financials of the company and therefore it is important that they should have proper knowledge with respect to that. This exposure draft highlights the same effectively (Gullet, Kilgore, & Geddie, 2018).

Private Interest Theory – It highlights the interest of the stakeholders who are dependent on the company and aims at transferring the wealth to the stakeholder that deserves the best. It is in contrast to the general public theory that aims at efficient market intervention and regulations. This exposure drafts highlights the needs of the stakeholders and are effective for them, cause when the investors will have proper knowledge regarding the accounting that the company is doing, then they can decide whether the company is correct in its approach or not. Hence it is helping in spreading awareness.

Capture Theory – It highlights the theory that often the amendments are made in order to capture the needs of the people who are affected by it. In this case it can be said that it is somewhere true as the companies need to understand what the difference is between accounting policy and standard and authorities have also stated facts about those items which is related to the general accounting of companies and is helpful to the accountants in some way or the other (Bouret, 2017). Thus we see that the capture theory is being followed by the exposure draft that is analyzed above.

Conclusion

Based on the overall analysis it can be said that the exposure draft has been presented in a very good manner and have highlighted all the points related to accounting estimates and accounting policies. It is important that accountants need to have correct knowledge about that else they will not be able to prepare the financial statement correctly and might over or under state it. Also, there are various comments that have been given the exposure drafts and authorities should consider all of that before giving out the final copy for implementation and thus we see that all the people have their say when any accounting standard is proposed.

References

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Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bouret, I. (2017). Benefits of higher education in mid-life: A life course agency perspective. Journal of Adult and Continuing Education, 23(1), 15-31.

Charles H, C., Giovanna, M., Dennis M, P., & Robin W, R. (2015). CSR disclosure: the more things change…? Accounting, Auditing & Accountability Journal, 28(1), 14-35.

Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility.

Eddy, C., Filip,R, & Warlop, L. (2004). The Value of Activity-Based Costing in Competitive Pricing Decisions. Journal of Management Accounting Research, 16, 133-148.

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Gullet, N., Kilgore, R., & Geddie, M. (2018). USE OF FINANCIAL RATIOS TO MEASURE THE QUALITY OF EARNINGS. Academy of Accounting and Financial Studies Journal, 22(2).

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Ruth, W. (2018, September 20). 'Worrying': Companies' reporting of climate risks goes 'backwards'. The Sydney Morning hearld.