HA2032 Corporate and Financial Accounting For Accounting Standard

Answer:

Introduction 

There has been a debate om Financial reporting, on whether to be left to the managers to decide on whether to disclose financial information or not, this assignment explains areas to consider if such a decision has to be made. It also explains how Australian accounting board gets involved in global accounting standard setting. And finally, an analysis of equity items in the financial statement of four companies that are listed in Australia stock exchange are explained. 

Decision whether to allow manager to disclose financial accounting information voluntary

Accounting standards are all inclusive

Before an accounting standard is set, procedures to be followed. This ensures that all the relevant bodies are consulted and their views incorporated in it, so by making it compulsory for managers to disclose financial information it is the best decision because it is required by other users of the financial statements this includes the investors, government and other interested parties. (Ifrs, 2017)

Information prepared by on the financial statement is mostly for the stakeholders and any potential investors. The shareholders are able to see whether wealth is being generated for them and if they can be able to get back their investment in form of dividends, without being directly involved in the running of the company so the directors should always disclose all the required information in the annual financial report.

When left for managers to decide what to disclose and what to leave they would only disclose what favors them and thus portraying a picture that does not reflect the state of the company. (Kieso, D.E., 2010)

These regulations are set in a way to encourage transparency when preparing the financial statement. But if that choice is left to the directors they may disclose only the information that portrays that the business is doing well and in real sense there are other issues that maybe affecting the business negatively.

When right procedures are followed in preparing the financial report it eases the understandability and it is easy to interpret for all the stakeholders. Otherwise the managers may prepare something that cannot be understood by anyone but them. (Van Greuning, H., 2011)

When this information is set it saves the company a lot of other unnecessary expenses that may result in legal expenses through wrong decision made by investors upon relying on information provided by the managers that may be incorrect.

On other hand this information is available to everyone that includes a company’s competitor and they use this information to create even a stiffer competition for the market share. So, to protect a company from such unnecessary competition it would be good to withhold such information.

When such information is released if the company did not do well financially it directly affects the share price in the stock market thus causes a series of negative effect on the company which could have been avoided if the information was not disclosed. Also, the share price would remain stable instead of declining which is often the case.

 To prepare such documents it is an expensive exercise, so if a company was not doing well financially and it goes ahead to prepare such documents, cost would be incurred which would otherwise have been used to improve the business.

Therefore, I can conclude that if the manger has the best interest of other users in mind on making the decision on whether to disclose financial information they can choose not to disclose otherwise they should follow the regulation already set and disclose all the necessary financial information. 

Australian accounting standards board involvement in global accounting standards 

The process which IASB Takes before setting up any standard is very rigorous with a very vast public consultation even up to a period of four month which gives the AASB as well as other accounting body in the world a chance to make their contribution in developing global accounting standards. (Ifrs, 2017)

When the AASB sets their own accounting standards they are done in a way that even if any country in the world adopt the same standard they would meet most of the IFRS standards that has been set.

Already they have a governing body in the country

As a result of this not all standard set by the IFRS maybe followed because a country is governed by its own accounting board and so the companies in that country have to adhere to the set rules and regulations as set by the body in their country.

Information prepared may be just for local market

Information prepared by these companies may not be intended for other international market so it would be unnecessary to use IFRS which is not mandatory.

Superior Standards

The member country may feel they have superior accounting standards thus adapting IFRS standards will like downgrading, so it would be better they maintain their own standards

Switching from a country standard to the IFRS is a costly affair which needs to be executed with proper planning, as a result of this it is not mandatory because a country may not have allocated the funds to train its work force, have system changes and other expenses that maybe directly related to it.

Though IFRS brings a common global ground for understanding and interpreting financial information, from the study that has been done, though a market liquidity increases where IFRS are mandatory it is not measurable as the sole source of the observed market effect so discouraging some member states from mandatory effecting the IFRS as no much positive changes will be brought to the country economy.  (Barth, M.E.,2007)

The IFRS may have some flaws which may make a country to maintain their own standards instead of following IFRS.

IASB in its establishment it came up to harmonize accounting standard that were already there that meant it was left for a country to make their own choice whether to adopt the standard or continue using their system depending on how suitable the standard fitting them and how those standards improved the already set standards. (Eng, L.L.,2003)

Case study companies 

The following companies have been used in this study,

• Adalta limited
• Actinogen medical limited
• Acrux limited
• Aft pharmaceuticals limited

These companies are all dealing with pharmaceuticals.

The following items are listed in the equity part of the income statement of the above companies;

Ordinary shares

This is the most common type of shares; these kinds of shares have no privileges or preferences and they present a portion of ownership by any given shareholder. When it comes to dividends they are only given dividend when the directors of the company decide so and the company has made enough profits. And incase of wounding up they are the last to be repaid back.

These are common in all the four firms. 

Preference shares  

These are shares that have a fixed dividend rate and have preferential rights this means that after tax they will be first to be paid dividend at the fixed rate and incase of the company being wound up they are paid before the holders of ordinary shareholders. This type of shares has been issued in Adalta Limited.

Share based payment reserve

These arises when a company receives goods or services but instead of making the payment in cash it is made by issuing of shares or other equity instrument at their price as per the entity prices. These types of shares were issued by Adalta Ltd.

Convertible note

This is a short-term debt. When matures  instead of an investor getting their money back plus interest, they  are given shares in the company, which maybe fixed from the beginning or will be confirmed at the maturity period of the debt. Adalta Ltd has this type of shares.

Vested employees share option

This is a case where employees of a company are given the option to purchase shares at a discounted price in the company but they can only do that after a given period of time has expired this is to discourage employees from exercising such rights then reselling them and even moving out of the company. Such shares have been offered by Acrux Limited.

Reserves

These are profits that has been set aside to grow the financial position of a business

Retained earning

These are net earnings that has remained after paying dividends and are available for re-investment. 

Cash flow hedge reserve

This is a caution taken by a company to eliminate or reduce dangers that arise from changes in cashflow of a financial statement this maybe caused by change in interest rates and other items.

Foreign currency translation reserve

Because books of accounting have to be presented in the parent company currency any gain from its subsidiary is recorded as an equity in the balance sheet as a foreign currency translation reserve.

Acrux Ltd 

There is change in accumulated losses

There is increase in accumulated losses this is because though the company made profit after tax all of it was distributed as dividend thus the increase in in accumulated losses.

Reserves

This has increased due to reserve made for the employees who may exercise they share option.

ACTINOGEN LTD

Contributed equity is increasing because of the following reasons

Shares issued during the year and because of the cost that was incurred in raising the capital

Accumulated losses

This increased due to research and development expenses and also because of share based payments expenses that were recognized.

Reserves

These are made up of share-based reserve which are incurred as a result of share-based payment.

ADALTA LTD

There is increase in issued capital this is because of exercising of convertible notes to fully paid shares.

There is accumulation of losses continually this is because the company has been making losses for the last four years.  

AFT PHARMACEUTICALS LIMITED

Share capital has increased due to the issuance of new preference shares.

There is a decrease in retained earnings because the company has been making losses

Foreign currency translation reserve

This is a new item that arose that brought increase to the equity 

Comparative analysis of the debt and equity position 

Acrux Ltd 

Using the

Debt ratio = total debt / total equity

This company has a low debt ratio, these means only a small percentage of its total equity is financed by debt thus this is a low risk. It had the highest debt ratio of 26.5 % in 2014 but by 2017 it had reduced to 7.7 %.

 This company has a low debt ratio, these means only a small percentage of its total equity is financed by debt thus this is a low risk. It had the highest debt ratio of 9 % in 2017 and lowest at 1 % in 2015.

Though Adalta ltd started as a high-risk company with a high debt ratio it has been able to overturn that from a company fully financed by debt to only 9 % financed by debt

AFT can be considered a high-risk company because mostly is being financed by debts. (Bragg, S. 2011). 

Conclusion 

In conclusion we can say that for the best interest of the investors it is better for the managers to always disclose financial information. Also, Australian accounting body gets involved in making global accounting standards and finally companies should always check their debt ratio to avoid being a high-risk company.

Reference

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