Financial Accounting And Reporting: Regulation And Standards

Corporate Regulation

Financial reporting has gained wide significant importance in the recent times. The entities have to report on their financial performance on the regular basis to their stakeholders. The information contained in the financial reports of the company enables the stakeholders of the company to take informed decisions. To undertake the financial reporting function, the accounting regulators across the world issue various standards on different financial reporting matters to guide the entities about the treatment of specific event or transaction in the financial statements.  The guidance is given in the form of international national financial reporting standards. One of the major objectives of issuance of such accounting standards is to promote the uniformity in the accounting practices across the world. This report covers the equity analysis of four companies from the top 100 Australian securities exchange (ASX) listed companies. The companies are: Caltex Limited, Origin Energy, Woodside Petroleum and Whitehaven Coal. All these companies operate within the energy industry of Australia. The changes in the equity portion of all the four corporations over last 4 financial years is analysed in this report. Further, a comparative study of capital structure of all the 4 companies is undertaken to assess the degree of financial risk faced by these companies.

Financial accounting and reporting is the function of preparation and presentation of financial statements. Financial statements are prepared with the objective of determining the financial performance of the business in the given period of time. The financial statements such as income statement, balance sheet and cash flow statements help the stakeholders of the company to make informed decisions with respect to the business of the entity. Provision of accurate, relevant, reliable financial information to the interested parties is quite necessary for the companies and the function of financial accounting and reporting must be regulated properly by the official bodies. The managers of the company must not be allowed to disclose the financial information on their discretionary basis rather there must be some standards which are to be followed by all the entities for like business nature or other features so as to promote the uniformity of the accounting function among along those entities.

If managers of the companies are given the authority to voluntarily disclose the financial information as per their own discretion, the basic purpose of financial reporting will not be served. Only such financial information which reflects the financial strengths and opportunities available with the company will be incorporated in the reports so as to deceive the stakeholders of the company such as providers of finance (investors, banks or financial institutions), government, employees of the company and so on. The management of the company would not disclose the material financial information that casts significant financial risk or threats to the company so as to prevent the stakeholders of the company know about the financial weaknesses of the company.

Accounting Standard Setting

If accounting and financial function is adequately regulated, it will necessitate it for the companies to disclose all the relevant financial information transparently which could influence the readers decision so that they can undertake sound decision making. The accounting profession has a distinctive feature of protection of public interest which could only be achieved when the accounting function is highly regulated. In the absence of appropriately regulated financial accounting and reporting function, the companies could not be prevented from committing serious accounting scandals or frauds, the occurrence of which causes huge loses to the stakeholders and economy as a whole in which such companies operate their businesses.

Regulation of accounting function and financial reporting system will promote high level of trust and confidence among the general public in the accounting framework. Apart from this, it will also allow the users of its financial information to understand its true financial position in the market by making proper comparison of the financial performance of different entities of similar business nature (Australian Government. n.d.).

Australian Accounting Standard Board (AASB) is the official body which is formulated for the development and maintenance of financial reporting standards to be applied by the Australian entities. Also, AASB contributes in the development of international financial reporting standards by participating in the accounting standard setting function of International Accounting Standard Board (IASB) and facilitates the Australian community’s participation in the global accounting standard process. The functions of AASB are set out in the Australian Securities and Investments Commission Act 2001. The board has the vision to be recognised as the global excellence centre by delivering a positive contribution towards the development of high quality global standards in relation to various aspects of financial accounting and reporting (Australian Government. n.d.).

The AASB is one of the most active participants in the events and activities which are aimed at development of single set of financial reporting standards (accounting standards) that could be used world-wide. AASB has formulated strong strategies for its participation in the global accounting standard setting process. As a part of those strategies, recently AASB has set out a strategic plan in the name of AASB Strategic Plan 2013 to 2017 (AASB., 2014). Moreover, AASB is one among the 12 member bodies of the IASB’s Accounting Standards Advisory Forum and also it is the member of Asian-Oceanian Standard-Setters Group

The Board members of AASB identifies the technical issues that seek due considerations. The identified issues are then referred to IASB for the further consideration. The AASB, IASB and other authorised bodies than considers the development of requisite accounting standard for which technical concern is raised. AASB collects the inputs from domestic organisations in relation to the technical matters to understand the practical aspects of those matters and after obtaining inputs, it makes final submissions on the documentation issued by IASB in order to make contribution the development of high quality IFRS. Once the accounting standards are implemented, AASB then closely monitor the functioning of such standards and if any changes are required in their practical implementation, then it proposes such changes to the IASB.

Owners Equity

The IASB is currently in no authority for imposition of IFRS on the corporations and the reactions on the IFRS are different its different member countries. Some of the countries have ignored the adoption of IFRS while some other countries have accepted it by abolishing their domestic Generally Accepted Accounting Principles (GAAPs). The reason as to why the adoption of IASB has not made it mandatory to adopt the IFRS for its member countries is due to the significant differences in the provisions of their Domestic Accounting Standard and requirements of IFRS. The smaller companies of different member countries of IASB are inclined more towards the continuation of their traditional practices.

Caltex Limited

Issued capital is the amount of share capital that has been issued to the shareholders of the company. In 2016, the company had announced buy-back of its shares for the purpose of its capital management due to which there is a reduction in the amount of issued capital of the company in 2017 for an amount of $ 146439. There is a reduction of $18 million in the issued share capital of the company (Caltex Australia. 2018).

Treasury stock is the stock that has been reacquired by the company through the buy-back approach. Since, in the present case of Caltex the company the treasury stock is shown as the contra equity account and hence it is shown as negative figure. Since 2016, the company has bought back certain number of shares and hence the treasury stock has become almost negligible in 2016 (Caltex Australia. 2016).

Retained earnings are the part of company’s earnings of the year which are ploughed back in the business for the subsequent uses.  In the case of Caltex, retained earnings had consistently declined over the past 4 years due to dividend payment and implementation of share buy-back strategies. Also, there are some movements in the funds of reserves also which has caused changes in the quantum of retained earnings maintained each year.

Non-controlling interest holders are those parties which do not have the power to vote in the decisions of the company because they hold less than 50% of the total shareholding. There has been a slight increase in the non-controlling shareholders in 2017 as compared to last 3 years.

There has been an increase in the share capital of Origin Energy due in 2016 as compared to 2015 because of issue of shares under a right issue program and under a dividend reinvestment plan. Also there was a dividend reinvestment plan introduced in 2014 (Origin Industry, 2015).

Financial Reporting and Regulation

The reduction in the reserves amount in 2017 after 2016 is due to the reporting of foreign currency translation differences in respect of foreign operations of amount $ 200 million. Also, there was loss on the hedging transactions undertaken by the company for $ 202. Further, there was a valuation decline in the assets held for sale for $ 41. The increase in the reserves in 2016 as compared to 2015 is because of profit from hedging transactions and foreign currency translation transactions.

The reason for the decline in the retained earnings balances is due to the dividend payment made by the company in all the 4 years (Origin Industry, 2015).

The share capital in 2016 is increased from 2015 because of implementation of Dividend Reinvestment plans (Woodside Petroleum, 2016).

Employee share purchase plan is the plan under which employees of the company purchases shares of the company at the discounted price. In 2017, here was an increase of $42$ million because of purchase of share purchase plan but at the same time these plans were redeemed at $ 40$.

 The difference in the retained earnings balance is due to profits earned and dividend paid in all the years.

The other reserves changes are due to the hedging transactions and adjustments for the foreign currency translation reserves.

The hedging reserve is maintained by the company to undertake the share or options hedging. Due profit in hedging transactions in 2017, the hedging loss of 2016 has been recovered and there is also a surplus profit.

The non-controlling shareholders have almost become nil over the last years.

Share based payment reserve has been reduced due to introduction of share-based plans. In 2017 and 2016, some plans have been exercised and some have been lapsed out of total plan amounting $ 4760 due to which the balance has reduced (Whitehaven, 2018).

The proportion of debt and equity in the capital structure is used to determine the financial leverage of the company as those companies which has higher proportion of debt than the equity proportion have to face high financial risk (solvency risk) in relation to those companies which have lower debt proportion as compared to equity proportion in the overall capital structure. The proportion of debt in the capital structure signifies that quantum of debt financing used by the company to finance its assets and other operations. Debt financing is the external source of funds which requires payment of principle as well as interest at the fixed intervals. The failure to repay any debt obligation adequately and on timely basis casts material insolvency risk on the company (Tracy, 2012).

Australian Accounting Standards Board and IFRS

In the present report, the capital structure of Whitehaven Coal Limited is most strong because its debt proportion constitutes merely 17.01% of the total capital structure. It can be observed from the annual reports of Whitehaven Coal for the financial year 2017 that the company is highly relying on the equity financing and other internal sources of finance for its business operations and asset acquisition. Hence, Whitehaven faces no financial risk.

The second strongest capital structure is held by Woodside Petroleum Limited because it finances its operations and assets from debt sources of 37.48% of total capital structure and 62.52% of its capital structure from the equity sources. Hence it does not have to face financial risk but its capital structure is not as firm as that of Whitehaven (Whitehaven, 2018).

The capital structure of Caltex Australia Limited holds 3^rd rank among the four chosen corporations and it is facing insolvency risk due to the fact that it is holding more debt than the equity. Hence it has high financial risk. It is riskier than both Whitehaven and Woodside (Annual Report, 2017).

Origin Energy holds the weakest capital structure among all the four companies selected for the purpose of this report because it has highest proportion of deb in its total capital structure. The heavy reliance on the debt-financing imposes high risk of insolvency on the Origin Energy. Therefore, the financial leverage of Origin Energy is higher than Caltex Australia, Woodside Petroleum and Whitehaven Coal.

Conclusion:

It can now be concluded that financial reporting function must be highly regulated and it must not be left to the discretion of managers to decide as to which information is to be disclosed and which is not be disclosed. The companies must comply with all the provisions of relevant act while preparing and presenting the financial reports. Also, the companies must adopt use of IFRS to improve the quality of the financial information that is to be provided to their stakeholders. From the above analysis it can also be said that in terms of solvency, Whitehaven Coal is performing best in the industry and it has strong financial position.

References:

AASB GOV. 2005. Available at: https://www.aasb.gov.au/admin/file/content102/c3/Background_to_AASB_adoption_of_IASB_standards_by_2005.pdf Accessed on: 28.09.2018

AASB. 2014. Statement of Intent – The Australian Accounting Standards Board. Available at: https://static.treasury.gov.au/uploads/sites/1/2017/06/AASB_Statement_of_Intent.pdf Accessed on: 28.09.2018

 AICPA. 2018. Available at: https://www.ifrs.com/ifrs_faqs.html#ftnt1 Accessed on: 28.09.2018

Australian Government. (n.d.). The Standard-Setting Process. Available at: https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx Accessed on: 28.09.2018

Caltex Australia. 2016. Annual Report: 2015. Available at: https://www.caltex.com.au/our-company/investor-centre/annual-reports-and-reviews   Accessed on: 28.09.2018

Caltex Australia. 2018. Annual Report: 2017. Available at: https://www.caltex.com.au/our-company/investor-centre/annual-reports-and-reviews   Accessed on: 28.09.2018

Origin Energy. 2016. Annual Report: 2015. Available at: https://www.annualreports.com/HostedData/AnnualReportArchive/O/ASX_ORG_2015.pdf

Origin Energy. 2018. Annual Report: 2017. Available at: https://www.originenergy.com.au/content/dam/origin/about/investors-media/annual%20review%202017/AnnualReport_FY2017.pdf Accessed on: 28.09.2018

Tracy, A. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.

Whitehaven Coal. 2018. Annual Report: 2015. Available at: https://www.whitehavencoal.com.au/wp-content/uploads/2015/10/Annual-Report_29Sep2015.pdf Accessed on: 28.09.2018

Whitehaven Coal. 2018. Annual Report: 2017. Available at: https://www.whitehavencoal.com.au/wp-content/uploads/2017/09/WVN_223766_Annual-Report-2017_FA4-web.pdf Accessed on: 28.09.2018

Woodside Petroleum. 2016. Annual Report: 2015. Available at: https://www.woodside.com.au/Investors-Media/announcements/Documents/17.02.2016%202015%20Annual%20Report.PDF Accessed on: 28.09.2018

Woodside Petroleum. 2018. Annual Report: 2017. https://woodsideannouncements.app.woodside/14.02.2018+Annual+Report+2017.pdf Accessed on: 28.09.2018

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