The Role of Social Accountability in Australian Accounting Standards
1. Social accountability is considered one of the key objectives of general purpose financial reports in the AASB Conceptual Framework. The above statement is false because based on the accounting standards of Australia, the most significant item to account for as a company is the financial position of that particular organization. It is the responsibility of every organization to be socially responsible and hence undertake activities which are beneficial to the surrounding society (Laswad and Redmayne, 2015 p.180). Being socially responsible is the objective of the specific organization and this is due to the benefits associated with it. For example, it will create a good public image for the company. It may also result in huge profitability for the organization, and this is especially when it produces goods and services which are of high quality to the community.
Corporate social responsibility forms one of the key objectives of an organization towards the community such that all the activities should be aimed at meeting the various interest of different stakeholders in the society. The organizations must conduct their activities in an ethical manner, and this, therefore, forms an integral role of a company. The AASB is only concerned about the reporting technique which has been applied by an organization during the financial accounting and reporting (Cordery and Sinclair, 2016 p.500). It, therefore, does not consider whether the business has ethically conducted its activities or not. The social accounting, therefore, is not part of the objectives of the general purpose financial reports. It typically forms one of the goals of the specific organization with the aim of enhancing its image to the public and all the other stakeholders in the real world business such as the investors, government, creditors, customers, and suppliers. The fundamental goal of the general purpose financial report is to ensure that the financial information reported is done systematically to enable the various users to make viable decisions.
2. Based on the financial regulatory framework of Australia, it is vital to develop and establish the AASBs in the Australian business practices. The disclosure regime in Australia is different based on the requirements during the financial reporting, and this is because they are set according to the type of business (Henderson, Peirson, Herbohn and Howieson, 2015 p.70). Such financial reporting requirements are also principally based on the public interest level in a particular entity. The key entities typically include small proprietary companies, disclosing entities and the unlisted public companies.
Heenetigala, De Silva, Armstrong and Ediriweera, 2016 p.340), argues that the process of setting the standards is a multi-process which requires the involvement of various business groups, such as the accountants, investors, and other key stakeholders. This therefore means that Acacia Coal Limited Company has to involve all the stakeholders during the annual reporting of the financial information. After making of a standard, it is to be published to the Commonwealth of Australia Gazette and the Australian Parliament is given a copy. Since the standards are set based on the particular entity in Australia, it is prudent for the standards to be set based on the Australian business practices.
3. The company selected is Acacia Coal Limited, and the following are the types of information contained in the annual reports of the firm (https://www.marketscreener.com/ACACIA-COAL-LTD…/Acacia-Coal-Annual-Report).
Necessity of AASBs in Australian Business Practices
The statement indicates a summary of the total income of the company, and this also includes the various expenses is incurred during its fiscal year. The company uses expenses layout for the profit and loss statements while preparing the financial reports (H?bek and Wolniak, 2016 p.400). However, at times.it may decide to change the layout based on the prevailing financial regulatory framework.
According to Frias?Aceituno, Rodríguez?Ariza, and Garcia?Sánche (2014 p.70), the statement of financial position generally contains the assets, equity, liabilities, allocations, and provisions of the company during the financial year which ended and a financial report had been prepared. The balance sheet is prepared using the vertical format, and this makes it easy and simple to comprehend by all the users of financial information of the company.
It contains a variety of ratios and margins such as profitability ratio, the gross margin, operating margin, return on equity, net margin and the liquidity ratio. Such ratios and margins are to establish the financial position of the company to know if it can meet various obligations when they fall due (Kavanagh and Johnson, 2017 p.567).
It contains all the revenues the company has generated for the whole of the financial year. Additionally it has the forecasted revenue by the company for the period of the fiscal year. They are therefore the future estimated earnings for the company based on the earnings per share.
The cash flow statement contains the total amount of capital investment and funding the company has received during the financial year (Frias?Aceituno et al.2014 p.70). For example, it includes the investment activities, financial activities, marketing activities, operating activities and also the non-cash financing activities.
Explain what are the incentives for the managers to disclose certain type of information in the annual report (6 marks)
There are various incentives which the managers obtain when they disclose certain types of information in the annual reports. For example, the managers are likely to be given bonuses by the company, and this is because some of the information disclosed in the annual reports are significant to help in the valuation of the company by the various users such as the investors. The bonuses awarded to the managers form a key incentive for the disclosure of certain information by the managers in the annual reports (Guay and Verrecchia, 2018 p.67). The other incentive is the promotion to another level in the company’s hierarchy. When the information provided in the annual reports are such that it reflects good performance by a company, the managers responsible for the management and administration of such an organization is likely to be promoted to a higher rank, and this is a motivating factor for the disclosure of information in the annual reports.
Types of Information in Annual Reports
The other incentive is profit making by the particular organization. It is argued that those companies which make additional disclosure in their annual reports are likely to generate more profits compared to those who do not. The additional disclosure of information results in more benefits than the costs (Kitch, 2017 p.70). The disclosure of certain types of information by the managers is also motivated by better performance a company is likely to obtain in the financial market. Further, the desire of the managers to increase the shareholders’ wealth in the company is a vital motivator to disclose certain types of information in the annual reports of the company, and this forms one of the incentives of disclosure of information by the managers in the annual reports.
The incentive to differentiate a particular company from the other based on profitability is significant for the disclosure of information by the managers. The additional information provided by the managers is used as a basis for evaluating the company’s performance, and this enables the organization to raise capital depending on the best terms available (Miller and Skinner, 2015 p.230). The more a company is profitable, the more it is likely to raise capital easily, and hence it can be concluded that the disclosure by the managers is to enable a firm to raise additional capital easily.
In your opinion, from the perspective of the investors and securities market, discuss how the investors or securities markets will react to the disclosures of certain information provided in the annual report, which are discussed in item 3), or in other sources. Provide appropriate evidence to demonstrate your arguments. (6 marks)
The investors and the securities market react differently based on the information provided in the annual reports. For example, when the financial statement of position indicates that the company has more liabilities than the assets, it would be clear that that the company may be running at a loss. The investors will, therefore, be forced to remove their shares from the company. Additionally, the potential investors who could be interested in the company may decide not to invest. However when the company’s balance sheet shows more assets than the liabilities, it is likely that the company is doing better and making more profit, the reaction of the investors in such circumstance will be to invest more of their shares with the aim of the obtaining more profits(Miller and Skinner, 2015 p.230). The potential investors, on the other hand, will be willing to put their investment in the company .The auditor’s report information is also important to the various investors since it establishes the fair view of a company. The ratios and margins typically indicate the profitability level of a company and hence based on the ratios and margins displayed in the annual reports, the investors and other users are likely to react differently. For example when the profitability ration is low, it shows that the company is not generating enough profit and hence the investors will automatically invest in another firm which is more profitable.
According to Grewal, Riedl, and Serafeim (2018 p.100), the information on the income statement is also an important element for the investors and the quality of information influences the decisions made by the investors. For example, when there is a consistent loss in the company, most of the investors will leave the company and look for other firms which are making profits instead. Additionally, when the information in the profit and loss statement displays more profits being generated by the company, the reaction of the investors would be to invest more into the business enterprise with the aim of obtaining more revenue.
References
Cordery, C.J., and Sinclair, R.s, 2016. Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.
Frias?Aceituno, J.V., Rodríguez?Ariza, L. and Garcia?Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting. Business strategy and the environment, 23(1), pp.56-72.
Grewal, J., Riedl, E.J. and Serafeim, G., 2018. Market reaction to mandatory nonfinancial disclosure. Management Science.
Guay, W. and Verrecchia, R.E., 2018. Conservative disclosure. Journal of Financial Reporting.
H?bek, P. and Wolniak, R., 2016. Assessing the quality of corporate social responsibility reports: the case of reporting practices in selected European Union member states. Quality & quantity, 50(1), pp.399-420.
Heenetigala, K., De Silva, C., Armstrong, A. and Ediriweera, A., 2016. Investigation of criteria used for assurance practices of sustainability reporting in Australian listed companies. Victoria University.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Kavanagh, M.J. and Johnson, R.D. eds., 2017. Human resource information systems: Basics, applications, and future directions. Sage Publications.
Kitch, E.W., 2017. The law and economics of rights in valuable information. In Who Owns Knowledge? (pp. 35-76). Routledge.
Laswad, F. and Redmayne, N.B., 2015. IPSAS or IFRS as the Framework for Public Sector Financial Reporting? New Zealand Preparers’ Perspectives. Australian Accounting Review, 25(2), pp.175-184.
Miller, G.S. and Skinner, D.J., 2015. The evolving disclosure landscape: How changes in technology, the media, and capital markets are affecting disclosure. Journal of Accounting Research, 53(2), pp.221-239.
https://www.marketscreener.com/ACACIA-COAL-LTD…/Acacia-Coal-Annual-Report.
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