Importance Of International Regulation In Financial Accounting

Role of AASB in setting international accounting standards

This report is made with an intention of providing a brief account of the owners equity, corporate regulation and accounting standard from the international perspective. The first section would provide a brief account of the importance and necessity of regulation in financial accounting . It also provides a brief account of the voluntary disclosure of financial accounting information. In the second section of the report it would emphasise on the role of AASB and its helpfulness in setting the international standard setting process which is called the IFRS. It would also discuss the reasons why IFRS is not compulsory for the member nations of IASB to follow. Finally the report would shed some light on selecting four companies from the companies that are listed in ASX and an evaluation would be made in relation their owner’s equity position as well as the equity debt position of these companies.

Favourable points for regulation of financial accounting and reporting

There exists a basic need so that it can regulate financial reporting due to numerous reasons. First of all if the information is not regulated, the information published by the business organisation might be selective. It could be manipulated by the individuals accountable to reveal the same information to the public. Hence the organisations need to fulfil various requirements for aligning the public interest of both current and potential investors. The regulation authorities formulated the criteria for assuring information quality at minimal or zero cost . It helps in shielding the public from hidden, fraudulent and misleading disclosures(Leuz and Wysocki  2016 ) Secondly there is an increasing demand for actual and true accounting information  for prospective investors. When business entities make investments, it becomes necessary for the regulating authorities to intervene . They intervene to make sure that the formats f accounting and reporting fulfil the investors needs by answering their questions.

When an organisation finds that its shares are listed in a stock exchange . It wold be appropriate for the organisation to publish such information in standardised formats. This would help in evaluating whether both shareholders and investors have equal knowledge of information or not(Goodhart, et al. 2013). Hence from the overall discussion it can be said that the necessity of regulation is increasing the standard of the profession.

Favourable points for voluntary disclosure of financial reporting and accounting

When managers are given the chance of disclosing voluntary financial information , they would conduct the work in a fair and responsible manner . Managers have knowledge about internal activities of the organisations. Hence they have knowledge about actual financial conditions as well. This would help them in providing a certain non standardised financial information to the market. When such information is revealed by managers of companies , the share price of these companies would increase n a substantial manner . Businesses outside would also be ensured about the financial conditions(Beatty and Liao 2014)

Evaluation of owner’s equity and debt position of selected companies

The  managers  may be unwilling to disclose the internal financial information to all users of the financial statements. They might distort such information to the investors for maximising  their profits  because they fear that they could lose their job. As per the demand of the regulators, the information should not be made more public. Hence regulation on financial information and reporting is preferred over voluntary disclosure of financial information. This is done in order to avoid manipulation and frauds in the financial reports.

The process through which AASB participates in the global standard setting process

The AASB has the vision of magnifying its reputation in the form of a leading  national state setter for gaining recognition in international excellence setting. This would be made sure by maintaining greater quality standards of financial reporting for all Australian economic sectors by contributing enough talent and leadership(Al-Janadi, Rahman and Omar 2013). AASB takes part in the setting process as follows:

• The standard amendments as well as accounting standards made by IASB are in line with the legislative drafting protocols of Australia
• The accounting compilations or standards are file on “ Federal registration Legislative instruments” and are disclosed on the website of AASB.
• The adequate responses are made to all the important drafts of IASB and IPSASB(Allegrini and Greco 2013).

Reason as to why IFRS is not compulsory for the member countries of IASB

The IASB is a private and independent group. It formulates and approves IFRS. This group functions under the direct supervision of the IFRS foundation. It is involved in overseeing the operations  conducted by IASB. The IASB was established way back in 1901 to replace the” International Accounting Standards Committee” . Currently, the IASB has fourteen member nations and in accordance with the constitution of the IFRS foundation. IASB has full accountability for all technical aspects of the foundation(Brüggemann, Hitz and Sellhorn 2013). These include complete discretion to pursue its technical goal , which is subject to  needs with the public and the trustees. It takes into account the issuance and formulation of IFRS as well as exposure drafts following the due procedure that is mentioned in the  constitution. Finally, it considers the issuance and approval of interpretations. This is developed from the end of the committee of IFRS interpretation.

All nations have their respective accounting standards. This  helps in bringing  comparability and standardisation . The IASB have made attempts to develop a single acceptable standard that is acceptable for most countries. Inspite of such attempts , it is not compulsory for the nations to converge into IFRS. This is because the IFRS have their own groups of accounting standard(Brochet, Jagolinzer and Riedl 2013) . Hence the IFRS convergence is not occurring in phases.

The four organisations that are selected for this section include ANZ bank , Bank  of Queensland , Commonwealth Bank and ASX limited.

Significance of voluntary disclosure of financial accounting information

iii.In the statement of financial position of an entity, the three significant items are apparent and the equity capital is one of them. According to this statement, the main items of equity include share capital, reserves and retained earnings. The issued capital is part of the equity capital of the business organisations. From the annual report  of ANZ bank , the issued capital of the company has risen from $ 28, 765  million to $ 29,088 million between the years 2014 to 2015. It has remained constant in both years 2016 to 2107. The issued capital  of the Commonwealth bank has fallen from 36,218 $ million to 34217 $ million  in the yaers 2014 to 2015 but  has risen to $36817 to 37920 $ million  in the years 2016 to 2017. For bank of Queensland , the issued capital has risen from  $4213 million to $4516 million in the years between 2014 and 2015. It also reduced in the years 2016 and 2017. They were reported at  $4266 million and $ 4210 million in the years 2016 and 2017. The issued capital of ASX limited has risen from  $ 2907 million to $ 3013 million between 2014 and 2015.  It again decreased to $ 2971 million to $ 3027 million in the years 2016 to 2017.

The next item of equity that is included in this report is retained earnings. This amount reflects the additional earnings of an organisation  that is available to an organisation after paying out dividends to its shareholders (Sytnik  2014). The retained earnings of the company ANZ bank  has been found to be in decline for the years . The same would be witnessed for the companies for bank of Queensland and ASX limited. The retained earnings for the company Commonwealth bank has been found to show an increasing trend over the years. Therefore from this it can be interpreted that the company Commonwealth Bank accumulates more equity than all the three companies , since its net assets base is the most  among the four organisations in the banking sector of Australia(Babalola  and Abiola  2013).

iv.To get a better understanding of the debt and equity position of the four chosen organisations, debt to equity ratio is used. With the help of this ratio, it is possible to gain an insight into the capital structure of an organisation in relation to its optimality. The debt equity ratio of these organisations  is briefly represented as follows:

Reasons why IFRS is not compulsory for member nations of IASB to follow

(Source: Anz.com 2018)

As per the above table, a decrease in debt to equity ratio could be observed from 2014 to 2015, followed by an increase in the year 2016 and with an increase in 2017. A ratio with 0.5 or lower is considered to be the optimal situation for capital structure. In this case the ratio is less than 0.5 for all the years.  This implies that the financial leverage of ANZ Bank has not been that high because it shows that it has shifted its focus on raising more funds through issue of equity shares in the market.

( Source: Commbank.com.au 2018)

In accordance with the table , it could be noticed that the debt equity ratio has  shown more or less a standard pattern over the four years, except it shows a  steep reduction in debt equity ratio to 0.2 in the year 2014. It is also below the ideal standard below 0.5. This signifies the organisation relies on  equity investments from shareholders.

(Source: Boq.com.au 2018)

The above table shows that although there has been a fluctuation in the debt equity ratio in the years 2014 to 2018, it is still below the prescribed industry standard of 0.5.This signifies that the firm raises its finance from  equity shareholders as well.

(Source: Asx.com.au 2018)

From the above table, the debt equity ratio of the organisation has fluctuated much in the years from 2014 to 2018.  There was a significant drop in the years 2016 and then further made a steep rise in the year 2017. This implies that the company has raised its finance from equity to debt in the year 2017 , after a drop in 2016. Hence it tries to maximise his financial leverage(Ajide and Aderemi 2014)

Based on the above analysis, it can be said that ASX limited is placed favourably in terms of solvency in the Australian banking sector , since the ratio is near to the ideal average of 0.50.

Conclusion

The above discussion makes it clear that reporting and financial accounting is not regulated. The information published by the business organisations might be selective and could be manipulated by individuals for their own unselfish purposes. When  managers are provided with the opportunity of disclosing voluntary financial information, they would conduct the work in a fair and responsible manner. However the managers might not be willing to disclose the internal financial information to all users of the financial statement. Instead they might distort such information to secure their own jobs.

It has been further assessed that all nations have their respective accounting standards. This is done in order to facilitate comparability and standardisation. Organisations like IASB have made a lot of efforts to develop a single standard. This single standard would likely be applicable in all countries. Despite of such measures, it is not compulsory yet for member nations to converge their own accounting standards with that of IFRS. Finally it is found that ASX limited is placed in a better position in the Australian banking sector in terms of its debt and equity.

References:

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Al-Janadi, Y., Rahman, R.A. and Omar, N.H., 2013. Corporate governance mechanisms and voluntary disclosure in Saudi Arabia. Research Journal of Finance and Accounting, 4(4).

Allegrini, M. and Greco, G., 2013. Corporate boards, audit committees and voluntary disclosure: Evidence from Italian listed companies. Journal of Management & Governance, 17(1), pp.187-216.

Anz.com. 2018. Annual Report / Annual Review | ANZ Shareholder Centre. [online] Available at: https://shareholder.anz.com/annual-report-annual-review [Accessed 25 Sep. 2018].

Asx.com.au. 2018. Shareholder report. [online] Available at: https://www.asx.com.au/about/asx-shareholder-reports.html [Accessed 25 Sep. 2018].

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Brüggemann, U., Hitz, J.M. and Sellhorn, T., 2013. Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), pp.1-37.

Commbank.com.au. 2018. Annual reports. [online] Available at: https://www.commbank.com.au/about-us/investors/annual-reports.html [Accessed 25 Sep. 2018].

Goodhart, C., Hartmann, P., Llewellyn, D.T., Rojas-Suarez, L. and Weisbrod, S., 2013. Financial regulation: Why, how and where now?. Routledge.

Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.

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Sytnik, O.E., 2014. Comparative analysis of the guidelines for the preparation of financial statements in accordance with IFRS and formed the Russian accounting rules. ??????? ??????? ?????? Sworld, 27(2), pp.27-31.

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