Understanding Financial Reporting, Regulated And Voluntary Disclosure, And Accounting Standards

Debt and Equity Analysis of Airline Companies

Financial Reporting can be referred to as a procedure of developing statements which represent an organization financial status to the management, investors and the government. Moreover, financial reporting is believed as a core part of the corporate disclosure. It is the source through which the actual position of the company is communicated to the general public. Present report initiates with discussion relating to regulated and voluntary financial reporting and role of AASB in developing global accounting standard. Further detail debt and equity analysis of four airline companies have been present to ascertain the company having a most appropriate position.

With accordance to Kelly and Tan (2017), the two channels of the corporate disclosure are mandatory financial reporting and voluntary disclosure. Further, with the help of these two channels executives communicate personal information with capital markets, both are related as evidenced by stock price and liquidity modifications associated with the two kinds of disclosures.  Moreover, according to Li and Yang (2015), mandatory disclosure and voluntary disclosure could be complements, where the former generates verifiable data that enhance the integrity and the latter supports executives to make more predictions that are the positive role of mandatory reporting. At the same time, most of the times executives use voluntary disclosure in order to supplement mandatory reporting and communicate the information related to the performance of the company with the investors. In order to obtain capital as well as to attract investors, it is essential that the financial reports of the company are synchronized in a manner through which the limitation of voluntarily disclosed business data could be overcome (Cianciaruso and Sridhar, 2018).

Apart from this, voluntarily disclosure indicates the financial statements which is not openly ruled by laws, it is considered that many of this voluntary disclosure is made to be in agreement with the requirements of the stock exchange commission’s regarding the administration of the company, analysis and management presentation regarding risk, opportunities and outcomes achieved or provisioned. Voluntary disclosure takes into consideration the information made public by the company’s free choice. The administration is forced to have a choice between exploiting the competitive advantage of the organization’s market by not publishing the information. In case the executives are choosing this option then it will have the negative impact on the image of the company, and if the information is published by the company than in that case, it will assist the capital market in acquiring an effective appraisal regarding the shares of the organization. Another limit which will be faced in case of the specified option is that financial reports will be focusing only on satisfying the requirements of shareholders and not of employees, stakeholders. In addition to this, most of the time the voluntary disclosure is controlled through costs which are incurred by accumulating, dispensation, achievement and audit of data with which the indirect costs are appended. It can be concluded that in order to overcome the limitation of the application of voluntary disclosure it is necessary to comply with regulated financial reporting and disclosures.

Regulated and Voluntary Financial Reporting

As per the assertions of Christensen, et al. (2015), the board of members of AASB has the main objective of identifying the problems under accounting which requires more concentration. The same implies that AASB plays an important role in resolving the problems related to the accounting as it provides the base through which the issue can be resolved with ease. After ascertaining the issue which relates to accounting or financial reporting a project or proposal is developed. The motive behind the same is to the pros and cons of a technical issue which has been presented by AASB. Eventually, after accomplishing the research, the proposed changes in accounting are presented for public comment and for the suggestion of shareholders. Thus, it can be concluded that AASB works as a base for initiating any required change in global accounting standard.

Substantial heterogeneity exists in the outcomes of IFRS because of the diversity in the country’s institutional infrastructures. In addition to this, the main characteristic of IFRS is the fair value orientation, provides that this standard utilizes more of market-to-market approaches (Ball, Li and Shivakumar, 2015). At the same time, fair value accounting is in many ways conceptually appealing; execution of this is difficult and includes managerial discretion.  Apart from this, IFRS produces more appropriate and value-relevant income numbers, the demand for executives to give supplementary details in order to assist investors with better forecasts related to earnings in the future can be reduced. Hence, adoption of IFRS in the company will results in more prudence to the company regarding its current financial status which would lead to diversification in the representation of financial statements. As per the study of De George, Li and Shivakumar (2016) these are also known as principle-based standards, do not specifies laws in detail, leaving the project of actual accounting dispensation to the discretion of individual entities and auditors.  On the contrary, the concept which is applied by IFRS is fair value is base on the economic theory or information available in the existing scenario can be referred to as another limitation of IFRS. As this provides an opportunity for the manager to manipulate detail in order to provide fake detail to the investor or other users of the financial report. Thus, due to these limitations, IFRS is not mandatorily required by its associate countries to comply.

Table 1 Statement presenting a comparison of variants of Equity of Qantas

Role of AASB in Developing Global Accounting Standard

It can be assessed that there is an increase in profit of company from -$2483 million to $560 million in the year 2015 (Qantas Annual Report 2015). At the same time the reserves of the company are negative that are -$61million in the year 2015 and -$81 million in the year 2014 but since the company had operated its functions efficiently in the year 2017,the profit increases and impact of same can be accessed in retained earnings as well as reserves.  Moreover, the profits have overcome the negative balances of reserves. In addition to this, in the year 2017, the retained earnings of Qantas enhanced form -$100 million to $472 million (Qantas Annual Report 2017). The same implies that profits are constantly increasing and the company is performing in an efficient manner.

Table 2 Statement presenting a comparison of variants of Equity of Virgin Airlines

A significant increase in share capital for the year 2015 from $11473 million to $1152.90 can be assessed since shares are issued.  Hedging reserves are utilized to recognize profits and losses on a hedging instrument in cash flow hedge, i.e. recorded directly in equity (Virgin Annual Report 2015). Further, the retained earnings of Virgin Australia are negative in the year 2016. The reason behind the same is that the company has incurred a loss. Moreover, it can be assessed that Virgin Australia is not performing efficiently due to which company they have incurred a loss in the year 2017 (Virgin Annual Report 2017). 

Table 3 Statement presenting a comparison of variants of Equity of Alliance Aviation

In the year 2015, the retained earnings of Alliance Aviation has decreased from $ 84854 million to $46044 million (Alliance Aviation Annual Report 2015). Cash flow hedge reserves are utilized to recognized profits and losses on hedging instruments in the cash flow hedge which are recorded in other comprehensive income of the company. The reason behind same decreases in a profit of company form $1064 million to -$ 36583 million. Further, in the year 2017 retained earnings of the company have increased from $ 59533 million to $75660 million (Alliance Aviation Annual Report 2017). Further, it can be assessed that Alliance Aviation has operated its functions in a proper manner due to which they are able to earn the profit in the year 2017 as they incurred a loss in 2015.

Table 4 Statement presenting a comparison of variants of Equity of Air Services

It can be accessed from details of above table that no equity has been issued by the company since last four years. Moreover, an increasing trend in retained earning can be accessed in a continuous manner which reflects the efficiency of the company. A major part of retained earning relates to defined benefit fund which is a provision based on length of service and average of final salary. Income Tax adjusted relating to same are also reduced in the related year, and the final amount is transferred to retained earnings. As no stability exists in a profit of four years, it can be concluded that Air Service has a fluctuating trend in profit and loss account. 

Adoption of IFRS in the Company

Table 5 Statement representing a comparison of debt and equity of specified companies

Debt to Equity ratio represents the proportion of company assets which have been financed through debt. The higher the ratio, the more the company is aggressive in financing its growth with debt. Moreover, the ratio also represents the extent to which a company is capable of raising funds internally. Excessive debt ratio represents that enhanced creditor has been used for financing in comparison to stockholders. The equity and debt position of the companies specified above have been accessed by considering non- current  liabilities as debt.  It can be assessed from the above statement that the company which has the lowest debt in comparison to other companies is Air Services. Moreover, the same implies that the company is not relying more on debt for the operations and using more of equity. On the other hand, the company Qantas has the highest debt to equity ratio. The same implies that the company is highly dependent on the debt for raising funds. Hence, it should be considered that Qantas Airlines has the highest debt ratio in contrast to other specified companies which means that in order to operate its functions in an efficient manner they are using more debt in comparison to internal funds such as retained earnings and equity.

It can be concluded from the above study that AASB plays a vital role in making any change in global accounting standard or from introducing any new provision in same. Further, it will be not wrong to state that it is necessary to comply with regulated reported in order to provide appropriate information to the users of the financial report. Moreover, Qantas Airlines has a highest debt-equity ratio in comparison to other companies of same industry which represent that the company is dependent on an external source of the fund in a significant manner.

References

Air Services Annual Report 2015. 2015. [PDF]. Available through < https://www.airservicesaustralia.com/wp-content/uploads/15-137BKT_Annual_Report_2014-15_WEB.pdf>. [Accessed on 26^th September 2017]

Air Services Annual Report 2017. 2017. [PDF]. Available through < https://www.airservicesaustralia.com/wp-content/uploads/17-0099-BKT-Annual-report-final-WEB-v3.pdf>. [Accessed on 26^th September 2017]

Alliance Aviation Annual Report 2015. 2015. [PDF]. Available through < https://www.allianceairlines.com.au/docs/default-source/info-announcements/annual-report-for-the-year-ended-30-june-2015.pdf?sfvrsn=2>. [Accessed on 26^th September 2017]

Alliance Aviation Annual Report 2017. 2017. [PDF]. https://www.allianceairlines.com.au/docs/default-source/info-announcements/2017-08-10—alliance-aviation-(a)-fy17-annual-report.pdf?sfvrsn=2>. [Accessed on 26^th September 2017]

Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53(5), pp.915-963.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Cianciaruso, D. and Sridhar, S.S., 2018. Mandatory and voluntary disclosures: Dynamic interactions. Journal of Accounting Research, 56(4), pp.1253-1283.

De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption literature. Review of Accounting Studies, 21(3), pp.898-1004.

Kelly, K. and Tan, H.T., 2017. Mandatory management disclosure and mandatory independent audit of internal controls: Evidence of configural information processing by investors. Accounting, Organizations and Society, 56, pp.1-20.

Li, X. and Yang, H.I., 2015. Mandatory financial reporting and voluntary disclosure: The effect of mandatory IFRS adoption on management forecasts. The Accounting Review, 91(3), pp.933-953.

Qantas Annual Report 2015. 2015. [PDF]. Available through < https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2015_qantas_annual_report.pdf>. [Accessed on 26 September 2017]

Qantas Annual Report 2017. 2017. [PDF]. Available through < https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2017AnnualReport.pdf>. [Accessed on 26^th September 2017]

Virgin Annual Report 2015. 2015. [PDF]. Available through < https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/annual-financial-report-2015.pdf>. [Accessed on 26^th September 2017]

Virgin Annual Report 2017. 2017. [PDF]. Available through < https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2017-annual-report.pdf>. [Accessed on 26^th September 2017]

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