HA2032 Corporate and Financial Accounting 13 -

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.

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).

Accounting Standard Setter

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).

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.

Owner's Equity

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 :

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.

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).

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.

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:

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.

Cinclusion

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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