Importance Of Corporate Regulations For Financial Accounting And Reporting In Organizations

Importance of Corporate Regulations for Financial Reporting

This report is developed for creation of knowledge about importance of corporate regulations for key business activities like financial accounting and reporting in the organizations. It will help to know, whether organizational managers should be allowed permission for voluntary disclosure of financial/ business information or not. In addition to this, the report will help to understand role of Australian Accounting Standards Board in development of IFRS. Moreover, this report will help to evaluate different elements of total equity of the four companies selected from list of ASX (Australian Stock Exchange) and the changes in each element in latest four years. Final section of this report will provide understanding about debt and equity position of the four companies selected from list of ASX.

According to Leuz and Wysocki (2016), development and implementation of regulations for the governance and control of financial reporting are important for prevention of internal fraud, and scandals in the organizations. In this context, the development of such regulations is important to ensure safeguarding of interest and welfare of different stakeholders of business. In contrast to this, Fligstein and Roehrkasse (2016) opine that occurrence of situations of financial crisis like global financial crisis of 2007-2009 have also created the need for development and applications of better financial reporting regulations. It is so because the global financial crisis has created scope for a serious debate on issues of systematic risks across globe in association with the weak areas of financial regulators. In addition to this, the debates were also started after this financial crisis on the proposal for changes in financial regulations for preventing the occurrence of large scale financial meltdown across globe in the future.

In the views of Adams (2015), the presence of financial regulations can be helpful to the organizations to avoid company failure linked with the market externalities, redundancies associated with opportunistic behavior and information production, and minimize enforcement costs faced by organizations. In support of this, Claessens and Van Horen (2015) articulates that the countries across globe have differences in terms of government structure, political system, and the financial regulations, which also limits the ability of technical/ financial analysts to control incidents of global financial crisis. In this context, there is great need of some common financial regulations that apply on every company irrespective of country, in which it is operating.

As per the opinion of Samaha et al. (2015), managers of the organizations should be allowed for voluntary disclosure of information about company. Right of voluntary disclosure in the hands of managers can enhance their ability to obtain business finance for company with an ease due to greater disclosure about the organizations. In support of this Chen et al. (2016) tell that voluntary disclosure of by managers can be very beneficial for the companies. For example, the investors in share market are ready to pay only average price for purchase of shares of a company, which discloses only limited information to outsiders. In contrast to this, if the more information about company is available in market, then investors will be ready to pay higher amount for purchase of shares of such company.

Voluntary Disclosure of Financial/Business Information

Australian Accounting Standard Board or AASB plays an important role in the setting process of international accounting standards like IFRS (Gov AU, 2018). The standard setting process in AASB for international accounting standards includes different steps. Example of these steps includes the following:

Identification of technical issue by the AASB: This is the initial step, in which staff of AASB identifies any technical issue that needs to be considered by organization. The issues that have been observed in context of some profit making organizations are referred to IFRIC or IASB for the analysis (Morris, 2017). In contrast to this, the issues that are identified as affecting non-profit business firms are evaluated by IPSASB.

Identification of Issue by any Australian Organization or Individual: If any organization or individual identified in the issue with IFRS or IASB, then he or she can raise the issue before team of AASB (Henderson et al., 2015).

Adding Issue to the Agenda: AASB shall start development of project proposal that comprises of different details like possible benefits of undertaking the project, as well as the cost or issues that may be faced, if the project is not undertaken. It is also evaluated by AASB that are the resources available for this project and what are timing constraints. After this the review of project is performed by AASB for ensuring the worth/ feasibility of project for the work program of AASB and IFRS (Gov AU, 2018). In this situation, if the board (i.e. AASB) finalizes for not adding the issue of topic to the agenda, then it may provide its decision as board agenda decision. This decision is often called as ‘agenda rejection statement’, or ‘items not taken into the agenda’. This decision is officially kept or recorded in minutes of meeting of AASB.

Research and Consider Issue: This step is taken into account, if the issue is included in agenda. In this situation, the AASB will process discussion on the developed agenda papers on issue. This agenda paper contains different details like timing of outputs, alternative approaches for the solution to the issues raised and the scope of issues (Morris, 2017). The relevant material in these papers is also taken into account or drawn from multiple sources (i.e. other standard setters) like New Zealand Accounting Standards Board, IPSASB, IASB or other similar organizations.

Consultation with Stakeholders: After the completion of research, AASB will make the all relevant documents open for public comments and will also initiate discussion on same with the stakeholders. Two types of techniques are used for the purpose of discussion with stakeholders such as focus group and the round table discussion (Henderson et al., 2015). Focus group technique can be suitable for discussion with different stakeholders like credit and equity analysts, investment professionals and the investors. The focus group technique is also taken into account for discussion with stakeholders of non-profit organizations like community agencies, credit grantors, donors and the preparers of financial statement.

Role of Australian Accounting Standards Board in IFRS Development

Thereafter a ‘Project Advisory Panel’ is developed by including the stakeholders that appointed by AASB. This panel is asked to provide advice to the members of AASB on the solution to the issue. AASB also designs the ‘Interpretation Advisory Panel’ in accordance to topic to topic basis (Gov AU, 2018). This panel has the responsibility to provide alternative views on the raised issue and sometimes it also provides the recommendations that should be taken into account by AASB. Example of different members of this panel includes regulators, auditors, users and the preparers of financial accounts.

Issue Standard and other Pronouncement: Under this step, the issuance of a pronouncement is done by AASB in the form of conceptual framework document, interpretation or standard. This type of pronouncement applies on all the profit making organization and will be consistent with the international standards like IFRS (Howieson, 2017).

Submission to International Organizations: In this phase, the AASB initiates official submission of document to the international organizations like IPSASB and IASB for purpose of receiving comments on the same. This process is quite beneficial setting-up of international standards with high quality.

Comments from Stakeholders in Australia: At this stage, the comment letters are invited from stakeholders over consultative documents issues by the international organizations like IPSASB and IASB (Howieson, 2017). The inputs from this are taken into consideration by AASB before making the final pronouncement.

Implementation and Compliance: The monitoring of implementation of the changed accounting standards is done by AASB. It may result in changes in domestic AASB standards (Gov AU, 2018). This may ultimately lead to revision in international accounting standards in key organizations like IPSASB, IFRS and IASB.

The IFRS standards are not compulsory for the IASB member countries because these countries already have their own accounting standards that are quite consistent with the IFRS (Henderson et al., 2015). In addition to this, the countries are still working to make their accounting standards more consistent with the IFRS for better financial reporting and interpretation of same.

The four companies that selected from the list of Australian Stock Exchange (ASX) are Ramsay Healthcare, Cochlear Ltd, CSL Ltd and Health scope Ltd. These all companies are operating in health care sector.

There are different items in total equity of Ramsay healthcare such as issued capital, treasury shares, convertible securities, other reserves, retained earnings and the non-controlling interest. Issues capital has remained same from 2014 to 2017. It is so because the company has not issued additional share capital in the stock market for raising capital. The value of treasury shares has increased from $50330 in 2014 to $70608. Treasury shares are those securities that can be buy-back by issuing company from the shareholders. The increase in these shares means, the company has issues more treasure shares during 2014 to 2017 for raising funds in the market (Ramsay Healthcare, 2017). Value of convertible securities has also remained same in all the years (i.e. 252165). It means, the company has not issues additional convertible securities during 2014 to 2017. Value of retained earnings of the company has increased from $766656 in 2014 to $1398664 in 2017. Retained earnings are that portion of net profit of company that is retained in business for reinvestment purpose.

Analysis of Equity Position of Four Companies Listed on ASX

Similar to this, the net equity of Ansell Ltd consists of four items like common stock, retained earnings, treasury stock and other stock holder equity. The value of treasury stock has increased from $58900 to $90200 in 2017, which is indicating the issue of new treasury stock by company. At the same time, value of retained earnings has also increased from 2014 to 2017. This is showing improvement in financial strength of company. This increase is caused due to increase in profitability of company. In the same manner, different items in equity of CSL Ltd are contributed equity, reserves and retained earnings (CSL Ltd, 2017). Growth in value of contributed equity is signifying issue of new equity shares by company for raising additional capital in the market. Value of CSL Ltd has also increased from 5221 in 2014 to 7403 in 2017. This means the profitability of company has increased.

The total equity of Healthcare Scope Ltd is also composed three components like issued capital, reserves and accumulated losses. It means the company is suffering from huge losses in the business. The value of issued capital is showing high level of increase from 1219 in 2014 to 2708 in 2017 (Health Scope Ltd, 2017). This means, the company has issued new shares for raising additional capital for the business.

Following table is helpful to conduct the comparative study of debt and equity position of the selected companies (based on the financial statements of 2017):

(Source: Yahoo Finance, 2017)

The debt to equity ratio of Ramsay health care ltd is highest (i.e. 1.795). At the same time, debt to equity ratio of CSL Ltd is also above standard of 1 (i.e. 1.49). In contrast to this, the debt to equity ratio of Ansell Ltd and Health Scope Ltd is below level of 1. The value this ratio for Ansell and Health Scope is 0.65 and 0.76 respectively. The debt to equity ratio with value below level of 1 is considered favorable for the company due to lower financial costs to the company (Yahoo Finance, 2017). In this context, the debt to equity ratio of Ansell Ltd and Health scope ltd is favorable.

Conclusion

On the basis of above analysis, it can be concluded that financial regulations plays an important role for improvement of financial accounting and reporting practices. These can help to protect the global financial markets from adverse situations like organizational collapses, and global financial collapses. It is observed from the analysis of regulatory sources that standard setting process of AASB for international accounting standard is very systematic and consultative as it involves the views of all stakeholders of business. From the comparison of debt to equity structure of four companies for 2017, it is ascertained that debt to equity ratio of Ansell ltd and Health scope ltd is favorable for the companies. At the same time, debt to equity ratio of rest two companies (i.e. Ramsay and CSL ltd) is adverse. It is very high as compared to level of 1.0. This is indicating high level of financial cost to the companies.

References

Adams, C.A. (2015) The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, pp. 23-28.

Source: https://researchportal.port.ac.uk/portal/files/4585164/HUSSAINEY_cright_6A_The_impact_of_board_characteristics_and_audit_committee_on_voluntary_disclosure.pdf 

Chen, L., Srinidhi, B., Tsang, A. and Yu, W. (2016) Audited financial reporting and voluntary disclosure of corporate social responsibility (CSR) reports. Journal of Management Accounting Research, 28(2), pp. 53-76.

Claessens, S. and Van Horen, N. (2015) The impact of the global financial crisis on banking globalization. IMF Economic Review, 63(4), pp. 868-918.

CSL Ltd (2017) CSL Ltd: Annual Report 2017. [Online]. Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_CSL_2017.pdf (Accessed: 19 September 2018).

Fligstein, N. and Roehrkasse, A.F. (2016) The Causes of Fraud in the Financial Crisis of 2007 to 2009: Evidence from the Mortgage-Backed Securities Industry. American Sociological Review, 81(4), pp. 617-643.

Gov AU (2018) The Standard-Setting Process. [Online]. Available at: https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx (Accessed: 19 September 2018).

Health Scope Ltd (2017) Annual Report of Health Scope Ltd 2017. [Online]. Available at: https://healthscope.com.au/application/files/3715/0344/5418/HS_Annual%20Report%20FY17_v15_FA_low.pdf (Accessed: 19 September 2018).

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B. (2015) Issues in financial accounting. Australia: Pearson Higher Education AU.

Howieson, B. (2017) The Phoenix Rises: The Australian Accounting Standards Board and IFRS Adoption. Journal of International Accounting Research, 16(2), pp. 127-154.

Leuz, C. and Wysocki, P.D. (2016) The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp. 525-622.

Morris, R.D. (2017) Discussion of: The Phoenix Rises: The Australian Accounting Standards Board and IFRS Adoption. Journal of International Accounting Research, 16(2), pp. 155-157.

Ramsay Healthcare (2017) Annual Report of Ramsay Healthcare Ltd 2017. [Online]. Available at: https://www.ramsayhealth.com/common/emag/rhc/annualreport2017/pubData/source/RHCAR2017.pdf (Accessed: 19 September 2018).

Samaha, K., Khlif, H. and Hussainey, K. (2015) The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis. Journal of International Accounting, Auditing and Taxation, 24, pp. 13-28.

Source: https://drcaroladams.net/the-international-integrated-reporting-council-a-call-to-action/ 

Yahoo Finance (2017) Health scope Limited (HHCSY). [Online]. Available at: https://in.finance.yahoo.com/quote/HHCSY/balance-sheet?p=HHCSY (Accessed: 19 September 2018).

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