Regulation Of Financial Reporting In Australia: Sources, Procedures, And Enforcement

Sources of Regulation of Financial Reporting in Australia

1. Identify and discuss the main sources of regulation of financial reporting in Australia.

2. Describe the procedures for preparing accounting standards in Australia.

3. Discuss, how accounting standards are enforced in Australia?

4. The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.”Critically discuss the above statement using the research literature that users of financial information have identical information needs.

5. The AASB Framework identifies Present Value as a measurement base to measure assets and liabilities.Critically discuss the limitations of Present Value as a measurement base in generating decision-useful information for the users of financial statements using the research literature.

6. Review AASB 138 “Intangible Assets” and discuss the limitations of AASB 138 in providing decision-useful information to the users of financial statements with the help of research literature.

Financial regulation has become one of the most important topics of today’s world. Regular financial crimes have been on an all-time high. Financial scams and flouting of financial fair play rules have become one of the most common norms of today’s world. Moreover, due to the uncertainty of today’s business world, coupled with the financial irregularities have crippled various economies of the world. The areas of financial crimes have also expanded in due time. Data leakage, cyber-crime, money laundering have become rampant in today’s financial world. For all these increase in the number of financial crimes, the need and the importance of the reporting of financial crimes and the need for financial regulations have increased.

In Australia, the mantle of financial regulations is looked after by two organisations which are the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA). Additionally, the Australian Securities Exchange has also played a major role in regulating the overall conduct of the financial market in the island country of Australia.

ASIC has the primary responsibility for protecting the integrity of the financial market, the responsibility of ensuring the protection of the consumers and the regulations of the working of the different investment banks and other finance companies. It has divided wings which looks after these which is the External Dispute Resolution Schemes (EDRs). There are mainly two EDRs operating in Australia. The first is the Financial Ombudsman Service of Australia and the Credit and Investment Ombudsman. Both these receive well over 30,000 complaints and 4760 complaints on an average in a yearly basis, respectively. APRA on the other hand, is responsible for licensing and for ensuring prudential regulation of the life insurance companies, superannuation funds. Each of these institutions under APRA are required to be reported to APRA on a periodic basis (Asic.gov.au. 2018). All the investment banks are also required to provide relevant statistical information to APRA. ASIC and APRA specifically looks into the following areas, which forms the main source of financial regulations:

• Transparency: ASIC strongly advocates the need and the importance of disclosing all the relevant financial information, which are important for the stakeholders of the various business organisations. For this purpose, ASIC has decided to launch new accounting standards such as the Australian Accounting Standard AASB 9, AASB 15 and AASB 16 (leases) for ensuring complete transparency.
• Disclosure of mineral asset information: ASIC has strongly asserted that there is a need for disclosing in a concise manner, all the details about the mineral information such as the technical information should be disclosed by various organisations. The small technical information should not be overlooked.
• Regulations of unlisted property and market issuer listings: ASIC reviews all the market issuer listings minutely on a regular basis. It periodically reviews all the historical data associated with these and in some cases, it assigns an independent auditor to enquire in the financial statements, whenever any discrepancy is noticed (Asic.gov.au. 2018). ASIC also taken regulates and takes deep interest in the actions of the small property developers, which seek fund from the general public through preference shares.
• Insurance regulations: APRA takes a keen interest in regulating the insurance companies operating in Australia. It includes general insurance and life insurance. The financial jurisdiction of both the general as well as the life insurance companies are looked into by APRA. From providing licenses, looking into their growth, decline as well as their financial well-being are also looked into by APRA. In fact, APRA also looks into the various financial operations and normal functioning of the private insurance players in the Australian insurance market.
• Overviewing risk management: APRA looks into the risk managementsection of various organisations. It supervises the factors affecting the risk environment of the various organisations. It looks into liquid, credit, operational, insurance as well as the various kinds of market risks for various organisations. They set legally binding risk principles which must be followed by various business organisation, failure to do so, results in unwanted penalty and legal action from APRA. These legally binding principles are created in such a way which addresses the various inherent risks faced by the companies, with a view to ensure financial fair play and protection of the various components of the financial markets.

Procedures for Preparing Accounting Standards in Australia

The standard setting process is overseen by the Australian Accounting Standards Board (AASB). The standard setting process is a comprehensive procedure and it is borrowed from the IFRS and the Australian organisations and individuals. A pictorial overview of the standard setting process has been provided below:

The entire procedure of seven steps, which is mandatorily followed by AASB for a smooth and effective implementation of the process. Each of these seven steps has been provided below:

1. Identification of technical issue: All the board members initially identify technical issues which require consideration. Issues identified in the profit entities are referred to IASB and for the non-profit entities are given to the IPSASB or are redressed internally. Australian organisations as well as individuals also can suggest or present their views to the AASB for any technical issue.
2. Research: Once the issues have been identified, AASB prepares a project proposal. It contains the pros and cons of undertaking the project. A formal review of this assessment is done. Thereafter, when an issue has been taken into the agenda, AASB discusses the scope of the issues, the various alternatives available and the required time of the output (Asic.gov.au, 2018). If necessary, some issues are discussed with the standards board of New Zealand, when their country’s involvement becomes important.
3. Holding consultations: Once the entire research has been completed, AASB conducts discussions with the various stakeholders with the help of the following documents:

• Exposure drafts: It is a draft of a proposed draft which has been prepared forresearch and discussion purposes by the way of comments and exhaustive discussions.
• Invitations to comment: This is generally prepared for the purpose seeking feedback on the research proposals.
• Discussion papers: They contain a variety of accounting policies on the different research proposals made by the staff of AASB. Various kinds of discussion papers, consultation papers are issued by AASB for conducting extensive discussions and debates for ensuring the relevance of these standards (Asic.gov.au, 2018).
• Draft Interpretations: It is a draft of the proposed standards which has been prepared by AASB.

1. Issuing of the standard or any other announcements: The main outcome of the exhaustive debates, discussions and meetings with the different stakeholders is the issuance of the standard or any other announcement as deemed fit by AASB. Any announcement related to profit making entities are made in consistency with the IFRS guidelines. Additionally, AASB even considers the specific needs of the non-profit making organisations in both the private as well as the public sectors, while preparing the final draft.
2. Submission to international organisations: The AASB makes formal submission to all the international organisations. It submits the documents which have been commented by the IASB and the IPSASB. This is done in order to ensure high quality international standards. It is expected that the experts of these international organisations would suggest any additional information, which would be necessary before the final implementation of these standards (Asic.gov.au, 2018). This is done to ensure that the standard which is being produced caters to the requirement for which it was originally devised and developed.
3. Comments from Stakeholders in Australia: The AASB formerly requests various kinds from the various stakeholders. It is done for the purpose of asking their modified versions. It requests formal letters from these stakeholders in order to include their suggestions and viewpoints in the formulation of the final standard.
4. Final implementation and compliance: AASB monitors the complete implementation of the different standards. It can also lead to various kinds of changes to the existing domestic standards of AASB or to the various submissions made to the IFRS. The compliance of the standard is also looked into by the following organisations:

• The Australian Securities and Investment Commission.
• Chartered Accountants Australia and New Zealand.
• Institute of Public Accountants.
• CPA Australia.
• The Australian Prudential Regulatory Authority.

All these majors’ institutes are being referred to for the smooth and effective implementation of the standards. Only when these standards are backed by the fruitful suggestions of these institutes, then only, the issuance of these standards would be deemed successful. Thus it could be seen that the creation and implementation of any standard requires in depth planning, preparation and successful participation of all the entities.

The enforcement of accounting standards in any country is one of the most important functions of any regulatory body. It helps in assessing the financial health and wellbeing of the various economies, where they are implemented. In the Australian arena, there are various bodies which deal with the setting up of as well as the enforcement of the accounting standards.The main accounting standards enforcement bodies include AASB and the ASIC. Both these entities look into the various kind’s ways of properly enforcing the financial regulations in the island country of Australia.

These entities are recognised bodies by the Government of Australia. Members of these institutes are generally employed as auditors as well as various kinds of company secretaries to the leading companies all over the world. These organisation have their own board of directors who are mostly reputed and accomplished auditors or chartered accountants or CFAs from reputed places. It is there duty to ensure that all the accounting standards are properly implemented, enforced and followed by the companies all over Australia.

In the initial years of the creation of these accounting standards, these standards were of recommendatory nature, but with the passage of time, these standards have become a compulsion. The adoption of these accounting standards in Australia has become rampant in the recent years due to the incessant trend of financial crimes, like the Plutus payroll scandal. There are some specific ways of enforcing the various kinds of accounting standard. Some prominent ones have been discussed here. AASB 101 deals with the presentation aspect of the financial statements of the companies. It stresses on the impartial and complete disclosure of the financial statements. For this purpose, the companies are required to follow the disclosure principle of the accounting standard. If any company fails to do so, that entity would be barred from conducting any kind of business in the Australian subcontinent. Similarly, the AASB 108 deals with the accounting errors and estimates. This standard deals with the proper estimation of the accounting data and the prevention of any kind of errors in the financial statements. This ensures that the financial statements are free from any kind of errors. For the enforcement of this standard, AASB ensures that all kinds of compliances are made and followed. If any company is seen to be violating this provision, it would be barred from trading in the Australian Securities Exchange. For the smooth implementation, all these companies must ensure that all the provisions of these standards would be invariably followed. The AASB along with the ASIC ensure that all the companies rigorously follow the all these accounting standards. Failure to comply with all the different kinds of accounting standards would result in cancelling of trading licenses, imposition of levies and penalties and on severe flouting of rules and accounting provisions might also result in legal action on the behalf of the Government of Australia.

Enforcement of Accounting Standards in Australia

The importance of the proper enforcement of accounting laws and provisions cannot be downplayed in today’s uncertain business environment. The accounting regulatory bodies must extra vigilant and attentive in dealing with the cases of financial frauds. Today, financial crimes are at an all-time high, which has made it very difficult for these accounting regulatory bodies to keep a tab on all these different kinds of financial crimes. The Plutus Payroll scandal or the Executive remuneration scandal of the Commonwealth bank of Australia, had rocked the Australian economy along with the financial fair play rules of the companies. This has led to a significant amount of loss of reputation of the Australian accounting bodies over their power to control these kinds of financial frauds. The Australian government has already provided warnings for performing botched up auditing investigations , to all the big four companies, who are engaged in the auditing services, namely KPMG, Deloitte, E&Y and Pricewaterhouse Coopers. This serves as a big warning for the financial regulatory entities of Australia and worldwide. If the organisation entrusted to investigate the financial and auditing operations, are themselves engaging in financial malpractices, then it is causing a significant amount of risks. Therefore, more stringent enforcement of must be followed, which could challenge the financial might of the companies, engaging in financial scams.

The primary aim and objective of general purpose financial reporting is to provide various kinds of financial information to the various kinds of stakeholders of the company. They include the existing as well as the potential creditors, suppliers, consumers, who require these kinds of information on daily basis, in order to take important investment and buying decisions. Many existing as well as potential investors, lenders and various other creditors require reporting entities to provide information on a direct basis and as a result of which, they rely very heavily on general purpose accounting reports. Therefore, it can be seen that they are primary users of the general purpose financial reports. There are a variety of reasons for which these kind of financial information are required by the various stakeholders of the various companies worldwide. In order to assess any entity’s prospects for the future net cash flows, debt conditions, equity conditions and overall financial conditions.

There are various kinds’ information which are needed by the users of financial statements at different points of time. Some of the prominent ones are:

• Creditors require financial data from the balance sheet and the profit and loss statements, in order to take investing decisions. They also require liquidity information for the purpose of assessing the short term returns of the business entity. This is available from the cash flow statement of the companies. All this financial information helps the creditors in assessing the creditworthiness of the company involved and also helps them to understand the kind of returns and the period of return, which can be expected from the company involved.
• Suppliers also require information about the production scales, kinds of products produced, the amount of raw materials required by the company for ensuring a smooth and uninterrupted production process on a continuing basis. This is necessary for providing smooth and efficient products at the right time.
• Customers do require information of various kinds, which helps them in implementing their buying decisions for ensuring the maximum amount of returns from the company at a short period of time. The customers always want the best quality product from the company and as a result of which they require all the important and relevant information about the products available to them. This helps them in making a well informed and comprehensive decision regarding the type of goods they are going to buy.
• Moreover, the general financial reporting information helps in providing information about the amount of returns received from the usage of the economic resources of the company. If the returns received from the economic resources of the company is substantially large than the standard returns of that particular industry, then it could be concluded that the company has been successful in utilizing its resources in an optimum way. The stakeholders of the companies look for these economic indicators in the form of returns expected from these returns from the economic resources employed by the company. It is only because of these indicators that the stakeholders and various other users of financial statements are able to assess and gauge the functioning of these organisations. It helps them in assessing the true worth of the organisation. It is all the more essential for these stakeholders to know more about the working of the company and its overall financial health, because they invest their time and money in the company or the organisation in question and no investor or stakeholder would like to invest or hold a stake in a poorly run and business, which is fighting for its own financial stability and survival.

Critically Evaluating the Objective of General-Purpose Financial Reporting

As stated by Soomro, Soomro, S.A. and Memon (2016), the present value techniques attempt to measure the assets/ liabilities at their fair value. The argument of the use of the present value has been seen to be depicted with various type the factors which are directly related to the risk of the timing of the cash flows. This form of the accounting measurement is seen to be based on the various types of the evaluation which are seen to be considered with capturing of the economic substance for the set of cash flows in a way similar to how the market behaves. The opponents of the use of the present value method has been seen criticised for its effects which are seen to be associated to the threat to the reliability in the accounting information. The present value computation has been seen to be considered with the numerous estimations related to the timing and the amount of the future cash flows, economic conditions and rate of interest. The use of such estimated as prescribed by the AASB has been seen to be based on the various type of the problems related to differing options in the future conditions. The main implications of these has been seen to be depicted in terms of the” opinions as to future conditions (decreased verifiability of estimates)”. In various cased some of the more significant issues are seen to be associated to the biasness in the estimating techniques which will lead to decreased neutrality. The exposure draft on the treatment of the present value in the assets has been depicted with the factors which are directly related to the calculation of which are more relevant to the information being provided to the financial statement users without hammering the reliability aspect(Anderson, Baur, Griffith, and Buckley2017).

The different types of the measurement techniques as suggested by the ASASB pertaining to the treatment of the fair value as considered as the value of the present value technique which are applied as per the measuring of the assets or the liabilities at the initial time of the recognition. This aspect is seen to be fundamental to the changes to the FASB made in 1997 proposal. There have been various types of the later drafts presented by the AASB relating to the objective of the initial recognition process. The main form of the adoption of the fair value measurement as per the AASB relies on the capturing of the elements which are seen to be already existing in the markets. In addition to this, “the elements that taken together would comprise a market price if one existed” (Costanzaet al. 2014).

Limitations of Present Value as a Measurement Base

The fair value adoption of the AASB is identified with the uncertainties and the risk which are seen to be seen to be associated to the future cash flows. This has been further set forth with the arguments which are related to the acquisition or the settlement of the non-financial assets or liabilities in a non-current transaction. The expected cash flow approach has been further seen to be considered with the risk adjustments related to the adjusting of the interest rate. Henceforth the higher is risk thee higher is chance of the increased interest rate to be used by the discounting the cash flows. 

The adoption of the 138 intangible assets, which are adopted with the reporting entities exiting in Australia for the various types of the reports with periods beginning on or after 1 January 2005. These are seen to be required for the recognition of the intangible assets which are internally generated. Before this adoption process, the standard was seen to be widely expected to have a considerable impact on the reports of entities which were affected.  The main form of the expected effects of the “AASB 138 on reported intangible assets” is seen with the key financial reporting measures pertaining to the measurement of the equity ratio and debts. The main discourse of the review of “AASB 138 Intangible Assets” and limitations of AASB 138 in providing decision-useful information to the users of financial statements has been depicted with the definition of the intangible asset. This criterion is particularly seen with the separability aspect. The separability is required with the potential assets like customer relationship, reputation and assets such as Human Resources. Henceforth, the recognition of such asses cannot be considered as intangible in nature. As per the depictions of the paragraph 63 the restriction of the recognition of the internally generated brands are seen to be considered with the various types of the factors which are seen to be associated to the paragraph 63 restrictions on recognition of the internally generated brands, publishing titles, customer list and similar substances. In addition to this, some of the other limitation of the AASB 138 is depicted with the revaluation method. Furthermore, the AASB 138 allows the intangibles to be acquired in a business combination and measurement of the same as per the fair value without the presence of active market (Bond Govendirand Wells2016.

It is not feasible as a direct application of the “AASB 13 Fair Value Measurement” is seen to be more appropriate measurement. Additionally, the para 57 criteria relating to the internally generated intangibles shows the limitation by not directly applying the fair value measurement applicable as per the “AASB  13 Fair Value Measurement”. In general, most of he Australian companies has been seen to be adopting IASB IAS 38 which depicts the reporting requirement as per the intangible assets. It is able to align the various measures to present the carrying value of the asset which are associated to the carrying amount and the disclosures associated to them. He three critical aspects of the intangibility has been discerned in form of the identifiability, future economic benefit and control aspect(Hu, Percyand Yao2015).

Reviewing AASB 138 Intangible Assets

As discussed by Yaoet al.(2015), the identifiable asset characteristic is conducive in separating the assets. The application of the AASB 138, post harmonization as been depicted to be detrimental and led to wide number of the issues associated to the Australian companies. Previously the companies were seen to report the issues in terms of the “identifiable intangible assets in the financial statements”, with the view to consider the same assets for the organization. Post harmonization as per the IAS 38, the business entities were seen to be no longer able to report the assets pertaining to the probable IAS 38, the companies were not able to report as the assets were allowed only to be reported in case if the future economic benefits flowed with the company. This was also relevant in case the cost of the asset was measured accurately. It needs to also understood that the various type to the factors depicting the close relationship of the stock process of the company and the voluntarily recognition of the disclosed intangibles such as trademarks and various types of the other intellectual property. The restrictive properties of the AASB 138 depicts that the disclosures will go down in the financial statement thereby leading to a lower amount of the stock price(Bond, Govendirand Wells2016).

References

Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 13 May 2018].

Aasb.gov.au. (2018). Australian Accounting Standards Board (AASB) – Home. [online] Available at: https://www.aasb.gov.au [Accessed 13 May 2018].

Anderson, H.J., Baur, J.E., Griffith, J.A. and Buckley, M.R., 2017. What works for you may not work for (Gen) Me: Limitations of present leadership theories for the new generation. The Leadership Quarterly, 28(1), pp.245-260.

Asic.gov.au. (2018). ASIC Home | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au [Accessed 13 May 2018].

Bal, M., Bryde, D., Fearon, D. and Ochieng, E., 2013. Stakeholder engagement: Achieving sustainability in the construction sector. Sustainability, 5(2), pp.695-710.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136.

Costanza, R., de Groot, R., Sutton, P., Van der Ploeg, S., Anderson, S.J., Kubiszewski, I., Farber, S. and Turner, R.K., 2014. Changes in the global value of ecosystem services. Global environmental change, 26, pp.152-158.

Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

Mainardes, E., Alves, H. and Raposo, M., 2013. Identifying stakeholders in a Portuguese university: a case study: La identificación de los stakeholders en una universidad portuguesa. Ministerio de Educación.

Soomro, M.A., Soomro, S.A. and Memon, A.H., 2016. PROCESS AND LIMITATIONS OF VALUE FOR MONEY ANALYSIS TESTS FOR INFRASTRUCTURE PUBLIC PRIVATE PARTNERSHIPS.

Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.

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