Contemporary Issues in Accounting and Accounting Theory
The main aim of this report is the critical analysis of the application of various relevant accounting theories and concepts in a real-life organization. The chosen real-life organization is TPG Telecom Ltd (TPG Telecom) which is currently listed on ASX Top 100. The report first analyses the contemporary issues and accounting theories relevant to the chosen company. Then it assesses the conceptual framework for financial reporting and standard-setting in the chosen company. The next part sheds light on the normative and positive accounting theories. After that, the report analyses the implications of capital market research for accounting in the chosen company. The last part discusses earnings management and quality.
Measurement, disclosure and corporate governance, and corporate social responsibility (CSR) are some of the significant issues in contemporary accounting practices.
As per the AASB Conceptual Framework (CF) for Financial Reporting, the applicable measurement bases are Historical Cost and Current Value, which includes Fair Value, Value in Use and Fulfilment Value, and Current Cost (Conceptual Framework, 2022). As mentioned in the 2021 Annual Report, TPG Telecom prepares its financial statements as per the historical cost bases, but the fair value is used to measure the receivables for unsold handsets and accessories, assets held for sale, and derivative financial instruments (Annual Report 2021, 2022). Disclosure is another major issue that requires releasing all information about the company timely to assist the decisions of different stakeholders. This issue is addressed by the management of TPG Telecom by disclosing its full and half-year financial results timely at its website (Investor Relations, 2022).
Agency theory, Stakeholder theory, Stewardship theory, and Resource Dependency theory are the leading accounting theories associated with corporate governance. As per the agency theory, the senior management of TPG Telecom acts as the agents of the company’s investors and shareholders (Panda and Leepsa, 2017). As per the stewardship theory, the corporate governance framework of TPG Telecom requires its Board of Directors and management to work as stewards for protecting and maximizing the wealth of the shareholders through achieving company performance (Madhani, 2017). In order to ensure the same, the provisions of short-term incentive (STI) and long-term incentive LTI) have been introduced in the director’s remuneration to encourage and motivate the directors and other executives (Annual Report 2021, 2022).
CSR and stakeholder theory are associated as CSR initiatives require the organizations to consider the interests of their key stakeholders by recognizing them to take adequate actions (Freeman and Dmytriyev, 2017). By incorporating the stakeholder theory, TPG Telecom has identified its key CSR issues and associated stakeholders for addressing those issues, such as customer wellbeing, including and belonging, and others (Sustainability Report 2021, 2022).
Conceptual Framework for Financial Reporting and Standard Setting
The AASB CF defines the objectives for and objective of the general purpose financial reporting. By complying with Section 1.4 of the AASB CF, TPG Telecom has provided its existing and potential investors, lenders, and other creditors with information on its economic resources, claims, and change in those resources and claims through its consolidated statements of income, comprehensive income, financial position, change in equity, cash flows and notes to the financial statements. In addition, the “Operating and Financial Review (OFR)” section in the annual report discloses information on how the responsibilities of the management and governing bodies have been discharged for using TPG Telecom’s economic resources (Annual Report 2021, 2022).
The AASB CF puts the obligation on the companies to prepare their financial statements in a manner so that the fundamental and qualitative characteristics are preserved (Conceptual Framework, 2022). To preserve the fundamental qualitative characteristic, TPG Telecom has disclosed the most relevant and material information in the financial statements in a complete, neutral, and free from error manner. To preserve the enhancing qualitative characteristics, TPG Telecom has disclosed the financial information in tabular format by including the data of previous years. It helps the users compare and understand the financial data and information. Furthermore, the half-yearly and annual financial statements are published in a timely manner (Annual Report 2021, 2022).
As mentioned earlier, TPG Telecom has measured the financial elements at historical cost and fair value measure bases as per the AASB CF. As required by the AASB CF, the management of TPG Telecom has prepared its financial statements as per the going concern assumption (Annual Report 2021, 2022).
The positive accounting theory is called the practical approach, and it is grounded on tangible statistical evidence. It takes into what is presently occurring in a business, and it collects data and information using bookkeeping and various data collection techniques (Santoso and br Sebayang, 2017). The business of TPG Telecom can be discussed through the lens of positive accounting theory because it is a for-profit organization, and the aim of its senior and executive management is to make a profit by making sure that cash or resource inflow is greater than cash or resource outflow.
On the contrary, the normative accounting theory is grounded on observations as it advises the policymakers based on the theoretical principles (Rogowska, 2018). This theory is most relevant to the accounting standard-setters as the accounting standards are developed basis the accounting issues identified through various observations. The aim is to set accounting standards that have acceptability to all companies.
Normative and Positive Accounting Theories
Capital market researches specify the information perspective of financial and accounting information. These researches indicate that accounting and financial information are relevant to company valuation. This information affects the company’s stock price,s which eventually influences the investor’s perceptions of the company (Karuna, 2019). The implication for TPG Telecom is that the company releases vital financial and accounting information about its financial performance and position through the consolidated financial statements so that the investors get assistance in assessing its stock’s performance. Apart from the financial information, non-financial information is also actively considered by the investors to value the company and assess its performance. The implication is the publication of the sustainability and other CSR-related reports by TPG Telecom so that the investors can access them for various purposes. It implies that the non-financial performance of the companies also impacts stock price.
Earnings management happens when judgments are used by the management in financial reporting and structural transactions for changing the financial statements in order to cheat certain partners in relation to the economic performance of the company. Certain factors are there in TPG Telecom that may tempt its senior management to involve in earnings management. First, TPG Telecom’s loan facilities require the company to adhere to financial covenants, which require the company to operate within specific financial ratios in the areas of leverage and interest coverage. It may tempt the senior management to manage its earnings associated with leverage and interest coverage if the company is exposed to the risk of violating the financial covenants (Strakova, 2021). Second, the STI and LTI of the directors are based on the financial, non-financial, and individual performance, which may lure the directors into managing the company’s earnings to appear a better financial performance of the company (Strakova, 2021). It requires the auditors to be careful of these possibilities.
Conclusion
The contemporary accounting issues have been efficiently considered by the management of TPG Telecom by maintaining compliance with the AASB CF. For instance, historical cost and fair value conventions have been used to measure its financial elements. Moreover, the financial statements and associated information have been prepared and presented in a way so that the fundamental and enhancing qualitative characteristics are preserved. The discussion shows that the positive accounting theory has been incorporated into the company’s financial reporting since it is the company’s aim to make a profit by ensuring a higher inflow of cash and other resources than the outflow of the same. The capital markets research implies that the firms release information on their financial performance and position through their financial statements so that the investors and other stakeholders can assess their share prices based on the released information. It shows that investors value both the financial and non-financial performance of the companies. The discussion also demonstrates that the senior management of TPG Telecom may be lured to manage its earnings to receive a higher bonus and/or maintain the financial covenants if the company is exposed to the risk of breaching these covenants. Therefore, the auditors are recommended to consider these matters in audit planning so that the overall quality of the earnings can be maintained.
References
Aasb.gov.au. 2022. Conceptual Framework. Available at: https://aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19_COMPmar20_07-21.pdf (Accessed: 5 April 2022).
Freeman, R.E. and Dmytriyev, S., 2017. Corporate social responsibility and stakeholder theory: Learning from each other. Symphonya, (1), pp.7-15.
Investor Relations | TPG Telecom 2022. Available at: https://www.tpgtelecom.com.au/investor-relations (Accessed: 5 April 2022).
Karuna, C., 2019. Capital markets research in accounting: Lessons learnt and future implications. Pacific-Basin Finance Journal, 55, pp.161-168.
Madhani, P.M., 2017. Diverse roles of corporate board: Review of various corporate governance theories. The IUP Journal of Corporate Governance, 16(2), pp.7-28.
Panda, B. and Leepsa, N.M., 2017. Agency theory: Review of theory and evidence on problems and perspectives. Indian Journal of Corporate Governance, 10(1), pp.74-95.
Rogowska, B., 2018. Ethical aspects of normative theories of accounting. Annales. Etyka w ?yciu Gospodarczym, 21(8), pp.17-29.
Santoso, M.R. and br Sebayang, M.M., 2017. A glimpse of positive accounting theory (PAT). Junior Scientific Researcher, 3(2), pp.70-77.
Strakova, L., 2021. Motives and techniques of earnings management used in a global environment. In SHS Web of Conferences (Vol. 92). EDP Sciences.
Tpgtelecom.com.au. 2022. Annual Report 2021. Available at: https://www.tpgtelecom.com.au/sites/default/files/asx-announcements/TPG_Annual_Report_Accessible%20Version.pdf (Accessed: 5 April 2022).
Tpgtelecom.com.au. 2022. Sustainability Report 2021. Available at: https://www.tpgtelecom.com.au/sites/default/files/asx-announcements/2021%20Sustainability%20Report%20-%20Final_.pdf (Accessed: 5 April 2022).
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