Importance Of Financial Information And Accounting Standards Setting

Accounting Standard Setting

Many researches conducting in field of accounting and reporting suggested that the disclosure of financial information has become very much necessary for the businesses and the managers. Reporting of financial data in respect of a company has become significant in the last few years due to the complexity of the businesses and their operations. The management of the company communicates all the relevant and reliable information to the stakeholders through the annual reports which consists all the data in financial and non-financial aspect. The stakeholders are those people who hold some percentage of interest in company’s profits and are authorized to have all the information about the performance and position of the entity. Disclosure of financial information helps the shareholders to determine that whether the company is financially sound or not. Specifically, external stakeholders that include government, investors, creditors and other individuals who are not involved in the day to day activities of the firm require more information about the operations and activities of the business in order to assess its overall performance from all the aspects. There are various aspects which are kept in mind while analysing the financial performance of an organization. They are known as liquidity, solvency, efficiency and profitability. As far as non-financial performance is considered, factors like corporate social responsibility, sustainability reporting and compliance with standards like GRI are analysed (Campbell, 2015)

As the above paragraph reflects the importance of financial information, the regulation and management of reporting the same should be the essential function of the managers. They must disclose the accounting information voluntarily to all the stakeholders so that they do not need to develop such data which reflects false image of the entity. The objective of preparing financial information is to assess the true position or situation of the company, to determine the amount of return it could offer to its potential investors and others. In order to accomplish such motives, it is very important for the managers to regulate its financial reporting procedure on periodic basis and in an appropriate manner (Faulkender, Hankins and Petersen, 2018). It will bring harmonization and uniformity in the function by applying the various accounting standards that are relevant for the business as per its size and nature. The consistency in financial reporting will eventually help the stakeholders to understand the data easily and compare the same with the competitors. It will avoid the manipulation of the figures and misstatement of the financial statements. Voluntary disclosure and regulation will help the managers and company to avoid the possibility of falsification of accounts and will result in desirable and reliable results (Collins, Hribar and Tian, 2014)

ASX Listed Companies Analysis

Accounting standards are the authoritative standards applied at time of preparing financial reports. They are the primary source of Generally Accepted Accounting Principles (GAAP). Such standards lay down the procedures for conducting an accounting treatment of some specific business transactions and events. Australian Accounting Standard Board is a government agency formulated with an objective to develop and maintain the financial reporting standards that will be applicable to all the private and public entities operating in Australia. AASB has played a vital role in process of setting global accounting standards. The authorized body responsible for setting the global standards is the international accounting standard board (IASB) and it has collaborated with many other national accounting setting bodies to bring harmonization and consistency in the international standards (AASB. 2018).

AASB has created strategies to determine its role as a standard setter in the dynamic environment. The board has formulated its strategies in such a manner that a proper alignment can be maintained with IASB and its requirement. AASB assist IASB in identifying technical issues and it also receives the feedback from many of the Australian companies which are taken into consideration by IASB while setting the accounting standards. It submits some formal documents and statement in order to get the feedback and seek comments from IASB for getting the authority to develop such accounting standards.

Despite the worldwide acceptance, there are some countries where complying with IFRS is not mandatory and the standards are not applicable. For instance, United States was one of the original members of IASC and later IASB and many of the accounting standards are set in accordance with the input of United States. The acceptance of GAAP and IFRS is a controversial action and there are some reasons why US has not yet move towards IFRS. The foremost reason was IFRS is costly and switching to it from GAAP will be costly for the country. Another reason was that US will face the problem of comparability of financial statements and there will be no common ground for making a comparison between the companies operating in different countries. Apart from this, the IFRS standards do not have quality as the GAAP have and the statements prepared will lack that quality factor. All such are the reasons why some members of IASB have not yet applied IFRS in their process of financial reporting (Lam, 2015).

Four ASX listed companies are selected that operates in consumer staples sector of Australia. They are named as A2 Milk Company, Bega Cheese Limited, Wesfarmers Limited and Woolworths Group Limited. All of them are listed on Australian Securities Exchange and operate in the same industry. The items of equity for each company is analysed for the past four years in the below sections. The data is derived from the annual reports of the selected companies and on the basis of that the analysis has been done.

The table shows the changes in item of A2 Milk’s equity over the past four years. It can be observed that the share capital of the firm has increased from $86,264 million to $134,302 million. The capital has continuously increased due to the increased market value of the company and its good performance over the years. As the company has been focused on producing profits and improving its performance, its retained earnings have turned positive as a result along with the upsurge in its share capital

An increasing trend has been noticed in all the items of Bega Cheese owners’ equity. Along with its share capital, the reserves and retained earnings of the company has also increased over the period of past five years. In 2014, it had capital worth $103,642 million and earnings amounted to $188,356 million which rise to $224,692 million and $326,326 million in 2017 respectively. This reflected that company has enhanced its market value and is focused on keeping its financial risk low by issuing more and more capital.

The share capital of Wesfarmers has increased in 2017 as compare to the past years. In 2014, it was $22,708 million which reduced to $21,937 in 2016. Later on the capital again increased to $22,268 million last year (Wesfarmers. 2017). The same fluctuating trend has been noticed in the value of company’s retained earnings. The issue of shares under the dividend investment plan resulted in the increased share capital of the firm (Wesfarmers. 2015).

The items of equity of Woolworths have shown an upward trend in respect of share capital whereas the retained earnings have reduced in the past four years. The reason for reduced earnings is the payment of high dividends to the shareholders. The company have declared high dividends and also issued shares which ultimately increased its capital.

(Woolworths. 2017).

Items of equity are explained as follows:

• Ordinary share capital: It is the equity capital which is invested by the shareholders in the company. It is known as the issued capital of the entity which comprises of other elements also such as retained earnings, reserves and accumulated profit.

Among the four selected companies, Bega Cheese has the highest share capital with $224,692 million followed by A2 Milk Company with $134,302. Both the companies have higher share capital than Wesfarmers and Woolworths and in comparison to their past data also. When analysed, it is interpreted that Woolworth is growing at low rate in terms of share capital and may have to face high financial leverage.

• Retained earnings: The other element of owner’s equity is retained earnings which show the amount of profits retained by the company after paying all the amounts and obligations. It is that amount which is utilized for making dividend payments to the shareholders (Reid and Myddelton, 2017). Bega Cheese has the highest retained earnings among the four companies in the past four years. Its retained profits have been constantly increased over the years.
• Reserves: It reflects the amount set aside by the entities for a specific purpose. The reserve maintained by A2 Milk was $12163 million and by Bega Cheese the amount was $21656 million. The other two companies Wesfarmers and Woolworths have maintained low value of reserves. 

 The debt and equity are the parts of company’s capital structure and are required to be maintained in an appropriate proportion. All the four selected companies have maintained their debt and equity elements by keeping in mind the profitability and financial risk factor.

The debt of A2 Milk has increased constantly from the past four years. However, along with the upsurge in debt the equity also increased which keeps the ratio stable.

In case of Bega Cheese, the debt did not increased to a great extent from 2014 to 2015 as compare to the changes in its equity. However, after 2016, the ratio of the company increased to 38% from 14% showing high financial risk.

Wesfarmers’s debt portion has increased continuously till 2016 and after that it falls in 2017. The ratio was 25% in 2016 which declined to 17% in 2017. This was due to the payments of company’s net debt.

Same fluctuations is observed in case of Woolworths as its debt increased in 2015 and 2016 but reduced in 2017. However, company faces high financial leverage as the amount of its equity reduced in 2016 and 2017. This boosted up the ratio and increases the financial risk of the company (Woolworths. 2015).

Conclusion

The above report concludes that the manager must disclose all the relevant accounting information and regulating the financial reporting is very much necessary for avoiding errors and mistakes. It also suggested that the Bega Cheese has the increased and highest share capital but at the same time its financial risk is also high. While in comparison to it, the debt component of Wesfarmers has reduced in 2017 making the company less risky.

References

AASB (2018). The Standard-Setting Process. [Online]. Available at: https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx [Accessed 25 September 2018].

Campbell, J.L., (2015) The fair value of cash flow hedges, future profitability, and stock returns. Contemporary Accounting Research, 32(1), pp.243-279.

Collins, D.W., Hribar, P. and Tian, X.S., (2014) Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), pp.173-200.

Faulkender, M.W., Hankins, K.W. and Petersen, M.A., (2018) Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes. Available at: https://www.kellogg.northwestern.edu/faculty/petersen/htm/papers/faulkender%20hankins%20petersen%20cash.pdf [Accessed 25 September 2018].

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 25 September 2018].

Reid, W. and Myddelton, D.R. (2017). The meaning of company accounts. UK: Routledge.

Wesfarmers (2015). Annual Report. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4 [Accessed 25 September 2018].

Wesfarmers (2017). Annual Report. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 25 September 2018].

Woolworths (2015). Annual Report. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed 25 September 2018].

Woolworths (2017). Annual Report. [Online]. Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 25 September 2018].

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