HA2032 | Accounting | The Regulatory Bodies for Financial Statement

omic and various other investments decisions to be made by the prospective investors and various other stakeholders to invest in the company. The financial reporting of the company is an inevitable process and it is expected out of the management that the financial statements would give a true and fair reflection of the financial performance and financial position of the entity for the given year. It is further expected that the management would disclose all the material and critical information for decision making purposes through notes on accounts and the disclosures in the financial statements. Some of the major financial documents include the balance sheet, the profit and loss account and the statement of changes in equity along with the cash flows statement.

There is always a positive as well as the negative side to giving the discretion in the hands of the management and managers to report the financial information voluntarily. Some of the managers may give additional and detailed information and disclosures which may help the user in better understanding but which also makes the financial statements heavy and irrelevant from the perspective of the end user (Vieira, et al., 2017). Furthermore, this may have other negative and unfavourable impacts like the chances of window dressing of the financials increases in a bid to show better position and performance of the company to attract investors. IN case the important and critical disclosures are being missed out to be reported, this may have a direct impact on the investors and they may suffer huge losses. Considering all these impacts and issues in case reporting is made voluntary, it can be said and concluded that the accounting and reporting should always be regulated by an accounting body as this will reduce the chances of frauds and errors (Guragai, et al., 2017).

2. This part of the question is on Australian Accounting Standards Board and Internal Accouting Standards Board and the role played by them in accounting area. AASB is the accounting and governing body in Australia, which is responsible for formulating, and implementation of the Accounting Standards in Australia across all the companies, be it public or private. It develops monitors, oversees the issues in accounting, and helps in the overall supervision of accounting profession in Australia. IASB is the global accounting body, which formulates accounting standards, and guidance notes globally (Linden & Freeman, 2017). The standards, which are formulated and introduced by IASB, is called IFRS, International financial reporting standards. The main objective of these standards is to bring about harmony in accounting process such that there is standardization in the process of reporting and comparability amongst the financial statements across the globe can be enabled. It also focuses on the understandability aspect of the accounting information of the users.

The AASB is actively involved, participates in all the standard setting and implementation procedure of AASB, and is the sole authority to oversee if these standards are properly implemented and used in Australian companies. It is also being supported by one other committee called financial reporting council (Solicitors, 2016). Most of the Australian Accounting Standards have also been adopted from the global accounting standards or the IFRS. Some of them are AASB 1 on First time implementation of Australian Accounting Standards (this is based on IFRS 1 on First time adoption of International Accounting Standards), AASB 101 dealing with presentation of the financial statements (derived from IAS 1)

Out of the 120 member nations of the IASB, nearly 90 countries have adopted the International Accounting Standards and shared the confirmation on the same. The rest of the nations have either not adopted the same or has adopted the same in convergence with the local GAAP. This is because the situation of every country is different and the economy may be affected separately and uniquely in each of the cases. It is for this reason that the implementation of IFRS has not been made compulsory and is optional (Jones, 2017). It is quite justified because the principle of prudence should be observed in this case considering the wholesome impact.

3. This question highlights the equity components of the 4 listed Australian companies and how they have changed over period of time. The annual reports of the year 2014 to 2017 has been considered for the same and the analysis of all the items of equity and the changes in the same has been done. The four companies are listed below:

1. Telstra Corporation Limited
2. Wesfarmers Limited
3. Woolworths Limited
4. Adelaide Brighton Limited

The detailed description of the equity line items and the corresponding changes in the same are listed below:

Telstra Corporation Limited

The changes in equity and its components over the past 4 years is shown below:

Equity Components	2017	2016	2015	2014
Common Stock	5,793	5,284	5,284	4,530
Retained Earnings	8,311	8,842	10,640	10,221
Comprehensive Inc. and Other	(282)	(23)	(53)	(210)
Minority Interest	138	407	36	19

 

• Issued Capital: This is the total share capital of the company, it is generally divided in small parts called the shares and sum total of the same is called share capital. It is traded on the stock exchanges and its owners are called the shareholders of the company. It is often referred to as the own capital. In the given case, the equity has increased over the years indicating that the company has been raising capital through issue of equity shares particularly the nbn acquisition (Bumgarner & Vasarhelyi, 2018).
• Retained Earnings: There are apportionment of the profit and allocated for some specific purposes. This is also as per the requirement of the law and legal regulations most of the times. Some of the examples of the reserves include the general reserve, the capital reserve, the debenture redemption reserve, capital redemption reserve, etc. In the given case, the same has declined in all the years indicating a major utilisation.
• Comprehensive Income and others: These are the sum total of the profits earned and losses incurred by the entity in the previous years after all the apportionment. In the given case, the same has increasing year on year with the negative balance indicating the continuous losses incurred by the company (DeZoort & Harrison, 2016).
• Minority Interest: This is the amount of shares held by shareholders of subsidiary companies. In the given case the same has increased considerably because of the acquistions.

Wesfarmers Limited

The table showing the status of equity over the 4 years in shown below:

Equity Components	2017	2016	2015	2014
Common Stock	22,708	21,844	21,937	22,268
Retained Earnings	2,901	2,742	874	1,509
Comprehensive Inc. and Other	378	195	138	164

 

• Common Stock: This is the total share capital of the company and what the shareholders of the company towards the capital invested have contributed. This section shows the issued capital, the subscribed capital as well as the paid up capital of company. The same has been more or less constant during the years.
• Retained Earnings: This is the profits and losses of the previous year, which is accumulated. The dividend is being paid out of this only. For Wesfarmers the same has increased because of the profit in the past years (Fukukawa & Mock, 2011).
• Comprehensive Income and others: This is the comprehensive profit that is belonging to the shareholders and arises from items like hedging, actuarial gains and losses, etc. the same has increased for the given company year on year.

Woolworths Limited

The table showing the status of equity over the 4 years in shown below:

Equity Components	2017	2016	2015	2014
Common Stock	4,850	5,065	5,347	5,719
Retained Earnings	5,423	5,736	2,877	3,555
Comprehensive Inc. and Other	(21)	33	247	252
Minority Interest	273	298	311	350

 

• Common Stock: This is the total share capital of the company, it is generally divided in small parts called the shares and sum total of the same is called share capital. It has decreased in past years due to buy back of shares (Chongsoo, et al., 2017).
• Retained Earnings: There are apportionment of the profit and allocated for some specific purposes. This is also as per the requirement of the law and legal regulations most of the times. It has increased due to allocation to reserves. This has increased due to continuous profits in last few years.
• Comprehensive Income: This is the comprehensive profit that is belonging to the shareholders and arises from items like hedging, actuarial gains and losses, etc. the same has decreased for the given company year on year.
• Minority Interest: This is the amount of shares held by shareholders of subsidiary companies. In the given case the same has decreased again because of the less investment in subsidiaries.

Adelaide Brighton Limited

The table showing the status of equity over the 4 years in shown below:

Equity component	Year 2017 USD million	Year 2016 USD million	Year 2015 USD million	Year 2014 USD million
Share Capital	733.10	731.40	729.20	727.90
Reserves	1.90	2.90	1.20	3.30
Retained Earnings	510.60	483.30	474.30	402.80
Non-controlling interest	2.60	2.50	2.60	2.70

• Contributed Equity: This is the total share capital of the company and what the shareholders of the company towards the capital invested have contributed. The same has increased for the company considering the issuance of the shares.
• Reserves: The reserves are generally being made as the requirement of the law or for the attainment of some specific objective or goal. The reserves has almost remained constant (Goldmann, 2016).
• Retained Earnings: This is the profits and losses of the previous year, which is accumulated. The dividend is being paid out of this only. For Adelaide, it has increased considering the profit in past years.
• Non-controlling interest: The non-controlling interest may be defined as holding of shareholders in the subsidiary company. Since, the holding is less than 50%, it is called minority interest. It has remained constant for almost all the years.

4. This section shows the proportion of debt and equity in the four companies for the year 2017.

Debt Equity Ratios
Particulars	Telstra	Wesfarmers	Woolworths	Adelaide Brighton Ltd
Debt	14,993	4,066	2,775	560
Equity	13,960	25,987	10,525	1,248
Debt/Equity Ratio	1.07	0.16	0.26	0.45

From the above summary, we can see that all the companies have favourable debt equity ratio except for Tesltra Limited. The ideal debt equity ratio is 2:1 and therefore Wesfarmers is in the best position considering the minimal debt in the company. For Tesltra the risk is high in terms of repayment of interest and the principal amount (Deegan, et al., 2002).

Conclusion

From the report it can be concluded that reporting of accounting information should not be made voluntary in the hands of managers and that the IFRS implementation should not be made compulsory in the member countries considering the repercussions.

References

Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.

Chongsoo, A., Cheh, J. & Kim, I., 2017. Do Value Stocks Outperform Growth Stocks in the U.S. Stock Market?. Journal of Applied Finance and Banking, pp. 99-112.

Clarke, J., 2013. Australian Contract Law. [Online] [Accessed 8th August 2016].

Deegan, C., Rankin, M. & Tobin, J., 2002. An examination of the corporate social and environmental disclosures of BHP from 1983-1997 : A test of legitimacy theory. Accounting, Auditing & Accountability Journal, 15(3), pp. 312-343.

DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud within organization. Journal of Business Ethics, pp. 1-18.

Fukukawa, H. & Mock, T., 2011. Audit risk assessments using belief versus probability. Auditing: A Journal of Practice & Theory, 30(1), pp. 75-99.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.

Guragai, B., Hunt, N., Neri, M. & Taylor, E., 2017. Accounting Information Systems and Ethics Research: Review, Synthesis, and the Future. Journal of Information Systems: Summer 2017, 31(2), pp. 65-81.

Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.

Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Segal, M., 2017. ISA 701: Key Audit Matters-An exploration of the rationale and possible unintended consequences in a South African. Journal of Economic and Financial Sciences, 10(2), pp. 376-391.

Solicitors, S., 2016. The Principles of Contract. Contract, p. 13.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).