Corporate Regulation, Accounting Standard Setting, And Owners Equity

Corporate Regulation

This report focuses on the execution of IFRS for the presentation of financial reports of the organization. It also laid more emphasis on establishing equal alignment the debt and equity component of the firm so as to have preferred capital structure which will automatically drop the financial leverage and cost of capital of the organization. It set out the significance of deliberately revealing the financial data and recommends that the same is especially vital for reflecting the fair and true perspective of the organization’s performance and position in monetary angles. Further, it talks about the significance of managing and regulating corporate financial reporting procedures so as to avoid problems like misstatements, manipulation of figures, falsification of accounts and other voluntarily done misconducts on the part of management.

In the later part, the report highlights the AASB’s role in setting accounting standards at global level. It states that IASB has collaborated with various domestic standard setting bodies so as to formulate relevant and appropriate global accounting benchmarks. The board identifies few problems and asked IASB for feedback in order to get approval for building up bookkeeping benchmarks. Also, it features the reasons why a few individuals from IASB has not yet move towards the implementation of IFRS and the same isn’t obligatory for them. The report additionally gives bits of knowledge about the capital structure of four ASX recorded organizations for the past four years. It looks at their debt and equity position and outlines all the findings under the head conclusion at the end.

Part 1

It is a fact that disclosure of accounting data has turned out to be fundamental piece of administration work and the same has been demonstrated by numerous analysts who conducted several researches led in the field of accounting. The researches proposed that the directors and officials ought to voluntarily uncover all the pertinent and reliable fiscal information in order to give bits of knowledge about the financial performance and position of the organizations. The managers and executives communicate all the financial data to its stakeholders through the annual report of the company. The report comprises both the financial and non-financial information which assist the stakeholders to take correct and suitable decisions regarding the future prospectus of the organization. In particular, introduction of bookkeeping data is especially valuable for the outside stakeholders as they don’t take an interest in the everyday exercises of the firm and don’t know about its internal working (Christensen, Nikolaev and WITTENBERG?MOERMAN, 2016). These outside users of report includes government, lenders, investors and other people who simply put their cash in the business and earn a return on their investment. They don’t have any significant interest in the activities and operations of the company. Unveiling the financial data will provide such people about the working and monetary execution of the organization for the present and past years. They can undoubtedly take vital and fitting choices with respect to their interest in a specific organization and can evaluate the profitability and liquidity position of the same. The investors keep different viewpoints in their psyche while ascertaining and measuring the performance of a firm. The points of view incorporate liquidity, productivity, efficiency and solvency which assess the quantitative information and give dependable results. As far as qualitative factors or non financial perspective is concerned, company’s sustainability reports, corporate governance statement, GRI compliance, statement of corporate social responsibility and others are properly analysed and by the investors and other users to enhance and strengthen their decisions or judgement in context of a particular entity (Collier, 2015).

Answer Part 1

As it is clear that the disclosure of financial accounting information is necessary for the managers and other users, the company should also focus on regulating the procedure of preparing the financial reports. The principle motive of preparing such reports is to demonstrate the genuine and fair view of organization’s position and performance amid the particular timeframe. These reports mirror the general working of the organization in a summarized manner and therefore it is necessary to properly direct and control the process preparing the same. Setting up the directions will result in harmonization and consistency in the method of planning corporate financial reports. It gets consistency in the information and makes comparable with other data, in a way helping the investors and different clients to legitimately comprehend it and make an appropriate decision (Kaya and Koch, 2015). Each business applies such accounting benchmarks as per its nature, size and kinds of activities it undertakes. The consistency will evade the control of records and blunders on part of calculating figures. In addition, it will expel the likelihood of misrepresentation of records and evacuate the complexity between the adoption of national and international standards. Overall, it tends to be said that deliberate revelation and corporate direction is the key component of management as it will enhance the quality of financial reporting and reduce the chances of establishing internal control for the accounting purposes. The regulatory framework will assists the accountants in representing all the financial data in an understandable manner and require the companies to prepare their reports within a legal framework. The implementation of IFRS standards will create harmony and uniformity in firm’s accounting practices. It will naturally build up control on the strategies and make the accountants work as per the correct principles and directions (Naranjo, Saavedra and Verdi, 2017).

Part 2

Accounting standards are the guidelines and principles which are put to use at time of preparing reports that contain money related explanations and financial data. They are the definitive gauges created by board like AASB and IASB and are the essential wellspring of Generally Accepted Accounting Principles (GAAP). These guidelines set out the treatment of some particular business transactions and events that has occurred amid a particular timeframe. Each and every company working across the world is required to present their financial accounting information in a manner suggested by international accounting standards.

With a thought process of making harmonization and standardization IASB has worked together with AASB keeping in mind the end goal to build up the bookkeeping norms at worldwide level. Australian Accounting Standard Board is an administration specialist which was formed with a motive of setting out the accounting benchmarks that must be embraced by each publically and privately owned business listed on ASX and working in Australia. To the extent the job of AASB has concerned, it has assumed that the board has played an imperative job in building up the reporting standards. The approved body in charge of setting the principles at worldwide level is International accounting standard board (IASB) which has been authorized to plan accounting measures and benchmarks on the global level. The benchmarks set by IASB must be trailed by every organization working in different parts of the world at time of preparing their annual and other financial reports. IASB has hold hands with AASB and other domestic bodies to incorporate the benchmarks that will get harmonization and consistency. Thinking about the job of AASB as a standard setter, the board has made a few strategies which legitimize its job in the changing and dynamic condition. It figures its arrangements and systems in such a way, that they properly align with the requirements and necessities of IASB. AASB identifies some specialized issues and got feedback from the Australian organizations which are considered by IASB at the time of setting principles. The problems faced by Australian companies while presenting their accounting data are identified which eventually help IASB in making relevant and appropriate standards for every type of business and entities (AASB. 2018). Australian accounting board also gather the feedback of the entities working in the country so as to know about the reliability of the existing standards and the need for bringing the new ones. AASB has presented formal archives and articulations with IASB in order to got the input and remarks from the international board so to get the approval for formulating reliable accounting standards (AASB. 2018).

Accounting Standard Setting

Nonetheless, even after the overall acknowledgment of IFRS there are some members of IASB which don’t have any significant bearing to the same. Also, it isn’t mandatory for them to go for the same. For example, USA has not yet received IFRS in their bookkeeping practices and still tails US GAAP. One reason is that execution of IFRS will be expensive affair for the nation. Additionally, settling on GAAP and IFRS is a questionable choice and the nation will confront issues while looking at the financial information of the organizations working in different areas of the world. Quality factor is additionally the explanation behind not receiving IFRS. Every such reason legitimizes that for a few individuals from IASB, it isn’t necessary to go for IFRS (Lam, 2015).

The four listed firms selected for performing the analysis are listed on ASX and have their operations in Australia. They are Beach Energy Limited, Santos limited, Origin Energy and Caltex Limited. The past fout year data of each entity is analysed from the perspective of its debt and equity component. The elements are then compare to figure out which company has strong solvency position.

Part 3

• Ordinary Share Capital: It is the amount raised by the company by issuing the number of shares. It represents the capital invested by the owners or shareholders in the business.

Santos has the highest share capital which reflects the increased market value of the company and its enhanced performance. Following it is the Origin Energy whose share capital has also increased in the past four years. This reflected that company has increased its returns to attract more investors towards the business (Morningstar. 2018).

• Reserves: They represent the amount which is kept aside for the purpose of meeting liabilities that might occur in future.

High reserves are maintained by Origin Energy and Santos Limited as compare to the other two companies. Caltex reported negative reserves in the past years which mean the value of the company has degraded due to its low profits.

• Retained Earnings: It is the amount which is left after paying all the financial obligations and liabilities. It reflects the figure retained by the company for making dividend payments to its shareholders.

Caltex and Origin has high and positive RE in past years reflecting the improved profitability of the companies. However, Santos reported negative earnings in 2016 and 2017 along with the Beach Energy’s negative RE in 2017. This was due to the losses made by the companies in last few years (Morningstar. 2018).

Part 4

The analysis of debt and equity states the degree of financial leverage taken by the firm. It can be observed that Beach energy has very low D/E ratio of 11% in 2017 as compare to the ratio of Santos Limited which stands at 52% (Morningstar. 2018). Origin energy also has a high and increased ratio of 74% whereas Caltex reported the ratio of 19% only. Among all it can be said that Caltex has low financial leverage and a preferred mix of equity and debt as proportionate increase in both has reduced its degree of financial leverage. Also, the low ratio of Beach energy determines that company relies heavily on equity financing (Morningstar. 2018).

Conclusion 

The above report concludes that from view point of financial risk, Beach energy and Caltex limited has low risk as compare to the other companies. They are focused on reducing their debt and increasing their equity component. However, from profitability point of view Caltex and Origin has performed well in past years. The report also suggested that it is very much important for the companies to properly comply with all the international accounting standards in order to show a true and fair view of their performance and position.

References 

AASB (2018). The Standard-Setting Process. [Online]. Available at: https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx [Accessed 28 September 2018].

Christensen, H.B., Nikolaev, V.V. and WITTENBERG?MOERMAN, R.E.G.I.N.A.  (2016). Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.

Collier, P.M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Kaya, D. and Koch, M. (2015). Countries’ adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)–early empirical evidence. Accounting and Business Research, 45(1), pp.93-120.

Lam, H. (2015). Why does the US Continue to Use GAAP and Will it Ever Converge to IFRS? CMC Senior Theses. Available at: https://scholarship.claremont.edu/cgi/viewcontent.cgi?referer=https://www.google.co.in/&httpsredir=1&article=2018&context=cmc_theses [Accessed 28  September 2018].

Morningstar (2018). Beach Energy Ltd. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=BPT&region=aus&culture=en-US [Accessed 28 September 2018].

Morningstar (2018). Caltex Australia Ltd.  [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=CTX&region=aus&culture=en-US [Accessed 28 September 2018].

Morningstar (2018). Origin Energy Ltd. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=ORG&region=aus&culture=en-US [Accessed 28 September 2018].

Morningstar (2018). Santos Ltd. [Online]. Available at: https://financials.morningstar.com/ratios/r.html?t=STO&region=aus&culture=en-US [Accessed 28 September 2018].

Naranjo, P., Saavedra, D. and Verdi, R. (2017). Financial reporting regulation and financing decisions. Available at: https://www.hbs.edu/faculty/conferences/2017-imo/Documents/Rodrigo_nsvcapstruc04052017.pdf 

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