Regulation Of Financial Accounting And Reporting: A Critical Discussion

Regulation of Financial Accounting and Reporting

The main purpose of this paper is do carry out a research and discuss if the financial accounting and reporting should be regulated or a manager should be allowed to disclose financial accounting information voluntarily (Botzem, 2015). The paper also gives an explanation on how the Australian Accounting Standards Board (AASB) participates in the setting process of global accounting standards and why the IFRS set by IASB is not regarded mandatory for IASB member countries. This paper also chooses four public limited companies that are listed on the Australian Securities Exchange and discusses their annual financial reports for the last four years with regard to items of equity as well as debt and equity positions (Berk & DeMarzo, 2017).

1. Corporate Regulation
2. Whether Financial Accounting and Reporting Should be Regulated

After conducting research, it has been established that financial accounting and reporting should be regulated. Managers must not be let to disclose financial accounting voluntarily. This proposition is supported by a number of arguments, as found in the research. In the absence of financial accounting reporting regulation, optimal levels of disclosure would not be generated in the financial markets as a result of the interplaying forces (Botzem, 2015). Financial instrument providers are faced with stiff competition in the capital and financial markets which are mainly populated by numerous investors with various interests and objectives. Firms whose main concern is to maximize their shareholder value often establish attractive incentives and consider it necessary make disclosures of all information which is available to them, for purposes of obtaining higher prices than those of their competitors (Ferran, Ho, & Oxford University Press, 2014). This is done mainly because firms are aware that the investors would think otherwise and make the worst assumptions regarding the company if the disclosures are not made (Geddes, 2013). This means that a firm does not disclose its financial information adequately, then interested and potential investors would end up assuming that there is some bad news or reports which are being hidden from the public. The share price of the firm would therefore be bid down and would consequentially lose value in comparison with that of the competing firms. (Botzem, 2015).

In addition, this proposition is supported by the fact that regulation of disclosure of financial information yields benefits which are both specific to the firm itself and the financial market as a whole (Botzem, 2015). It has been found out that most firms may not be willing to make voluntary disclosures of their financial accounting information since this may be in favor of their competitive advantage as information which is proprietary might be let known to their primary competitors (Frino, Chen & Hill, 2013). Such a decision of not making the disclosure are beneficial to the firm itself but is not good for the public in general since it does not have benefits which are economy-wide (Ferran, Ho, & Oxford University Press, 2014).

Participation of AASB in Setting Global Accounting Standards

In conclusion, it is agreed that managers of firms must not be allowed to voluntarily disclose financial information since they may be unwilling to make disclosures regarding some key aspects which are crucial for decision making by investors and the public at large (Weaver, 2012). Instead, the disclosure requirement must be highly regulated by the concerned financial reporting agencies and bodies (Botzem, 2015). This enables capital allocation to the projects which has the greatest yields, and enhances competition among firms thus promoting improvements in productivity as well as competition in terms of prices. For instance, making disclosures may help in revealing significant information regarding other firms within the industry, although the firm making the disclosure may not gain any benefits from the transfer of information (Brealey, Allen & Myers, 2017). This can lead to under-production of information by firms. In addition to this, when firms disclose their financial adequately, financial markets or capital markets do not need to make any efforts in collecting the information since it has been provided (Berk & DeMarzo, 2017). Therefore, regulation of disclosure would assist in preventing duplication of efforts to collect the financial information by capital markets for provision to investors and other key financial decision makers (Botzem, 2015).

1. Setting of Accounting Standards
2. How AASB Participates in Setting of Global Standards of Accounting

According to research, there are a number of ways in which the Australian Accounting Standards Board (AASB) participates in setting the global standards of accounting (Brealey, Allen & Myers, 2017). Since the AASB aims primarily at developing and maintaining financial reporting standards of high quality for all Australian economy sectors, it works in collaboration in various ways which enables it to participate in the setting of the IFRS (Ferran, Ho, & Oxford University Press, 2014). For instance, AASB is engaged in issuance of documents which seek to incorporate the discussion papers and exposure drafts of IASB with a view to encouraging all constituents in Australia to take part in the process by providing the board with useful information which can be recommended to IASB for the purpose of setting IFRS (Rana, 2010).

AASB also participates in setting of IFRS by making sure that the various changes made to IFRS by IASB are appropriately processed and adequate communication is made to all constituents in Australia (Berk & DeMarzo, 2017). The board is also engaged in implementation of the new differential framework of reporting as adopted by the IFRS established by IASB. Furthermore, AASB seeks to make an active participation in the ongoing IASB’s process of setting global standards of accounting, and making sure that the output of the standards is promoted and improved appropriately (Botzem, 2015).

1. The Reasons Why the IFRS Established by IASB are Not Mandatory For Its Member Countries

Analysis of Annual Financial Reports of Selected Companies

There are various reasons why the IFRS established by IASB are not considered mandatory for its member states or countries. For instance, companies that have foreign subsidiaries in various countries and locations over the world would find it quite difficult to adopt the IFRS established by IASB (Anil, Kumar & Mariyappa, 2010). This is because there are varying accounting standards and regulations that are adopted in various states. Therefore, IASB does not give a compulsory requirement to its member countries to adopt the IFRS (Gitman & Hennessey, 2008). In addition to this, different member countries have different regulating bodies and therefore making a compulsory requirement for IASB member countries to adopt IFRS may be very detrimental to adoption of the state regulations (Booth, Cleary & Rakita, 2016).

• Owner’s Equity

For the purpose of this section, four public limited companies which are listed on the Australian Securities Exchange (ASX) that are in the same industry have been researched. These companies are Acacia Coal Limited, Aura Energy Limited, Amour Energy Limited and A-Cap Resources Limited (Ferran, Ho, & Oxford University Press, 2014). The annual reports of these companies for the last four years have been analyzed and discussed with regard to items of equity as well as debt and equity position, in the below sections (Megginson & Smart, 2009).

1. Items of Equity

The main items of equity for each of the above mentioned four firms are issued capital, reserves and retained earnings or accumulated losses. Each of these has been further discussed below (Brealey, Allen & Myers, 2017).

• Issued Capital

Issued capital is the number of company shares which have been issued to shareholders of a company (Anil, Kumar & Mariyappa, 2010). They are shares which have been allotted and are therefore subsequently entitled to shareholders. Issued capital forms a significant part of a company’s authorized capital (Booth, Cleary & Rakita, 2016).

• Reserves

These are assets held by a company which are highly liquid or easily convertible into cash for purposes of meeting future payments of the company and other emergencies as they come up (Brealey, Allen & Myers, 2017).

Retained earnings is the aggregate net income which has been accumulated by a company from the time it was incepted or established up to the current date of financial reporting, less any amounts of dividends which have been distributed by the company over time (Berk & DeMarzo, 2017).

Accumulated losses or deficit, on the other hand, represents retained earnings which are negative. In other words, they are losses which have been cumulatively incurred by the company since its inception (Anil, Kumar & Mariyappa, 2010).

The following are the main changes that have been observed in each item of equity of the four companies over the last four years from FY 2014 to FY 2017. These have been summarized in the table below (Bevis, 2014).

Reasons for Changes in the Items of Equity for the Firms

• Issued Capital

The issued capital of the firms has increased over the financial years from FY2014 to FY 2017. This could have been led by the issuance of more shares of common stock by the companies for purposes of raising capital in order to fund their various business operations (Booth, Cleary & Rakita, 2016).

• Reserves

The reserves for the four companies discussed above have been fluctuating over the years from FY 2014 to FY 2017. The reason for the increase in the reserves is that the firms may have set more funds for meeting future uncertainties and emergencies (Joseph, 2009). However, the reserves might have decreased after being used by the companies in meeting those purposes for which they were set (Bevis, 2014).

• Accumulated Losses

For the financial years 2014, 2015, 2015 and 2017, the four firms have been incurring accumulated losses which have been increasing yearly (Anil, Kumar & Mariyappa, 2010). This is because the companies have been making loses or negative operational net profits, thus translating into accumulated losses over the years (Berk & DeMarzo, 2017).

1. Comparative Analysis of The Debt and Equity Position of the Four Firms

As per the observation from the above comparative analysis, the equity and debt position of the four companies is much favorable (Berk & DeMarzo, 2017). This is because the firms have a debt to equity ratio of more than 1:1, which is an indication that they have used less of debt financing and more of equity financing in funding their short term as well as long term business operations (Frino, Chen & Hill, 2013). Therefore, the firms can be concluded to have a stable leverage, and are not at a risk of insolvency as a result of extremely high finance costs or borrowing costs (Anil, Kumar & Mariyappa, 2010).

Conclusion

As per the above discussion, the main items of equity that are identified from the statements of financial position of the above firms are issued capital, reserves and accumulated loses (Verma, 2008). Issued capital refers to the number of company shares which have been issued to shareholders of a company (Berk & DeMarzo, 2017). Reserves are the assets that are held by the firm which are highly liquid for purposes of meeting future needs and emergencies while accumulated losses are the aggregate net losses which have been incurred by a company from the time it was incepted or established up to the current date of financial reporting (Booth, Cleary & Rakita, 2016).

From the above discussion, it can be concluded that the four firms have a favorable debt and equity position since the debt to equity ratio of the companies for the last four years analyzed does not exceed 1:1. This indicates that the companies have used more of equity financing in funding most of their business operations (Bevis, 2014). Additionally, with regard to their changes in equity items, the firms have demonstrated various trends in their issued/contributed capital, reserves and accumulated losses (Kumar, Kumar & Mariyappa, 2010). For the Financial Years 2014 all through 2017, the four firms have been making operational losses, which have consequentially translated into increasingly huge accumulated losses (Anil, Kumar & Mariyappa, 2010). The analysis has been provided above.

References

Anil, K. S., Kumar, V., & Mariyappa, B. (2010). Corporate accounting. Mumbai [India: Himalaya Pub. House.

Berk, J. B., & DeMarzo, P. M. (2017). Corporate finance. Harlow, Essex: Pearson.

Bevis, H. W. (2014). Corporate financial accounting in a competitive economy. Oxon: Routledge.

Booth, L. D., Cleary, W. S., & Rakita, I. (2016). Introduction to corporate finance: Managing Canadian firms in a global environment. Toronto: J. Wiley.

Botzem, S. (2015). The IASB. Brussels: European Union.

Brealey, R. A., Allen, F., & Myers, S. C. (2017). Principles of corporate finance. New York: McGraw-Hill Education.

Ferran, E., Ho, L. C., & Oxford University Press. (2014). Principles of corporate finance law. Oxford: Oxford University Press.

Frino, A., Chen, Z., & Hill, A. (2013). Introduction to corporate finance. Frenchs Forest, N.S.W: Pearson.

Geddes, R. (2013). An introduction to corporate finance: Transactions and techniques. Hoboken, NJ: Wiley.

Gitman, L. J., & Hennessey, S. M. (2008). Principles of Corporate Finance. Toronto: Pearson.

Joseph, T. (2009). Corporate accounting. New Delhi: Tata McGraw-Hill.

Kumar, S. A., Kumar, V. R., & Mariyappa, B. (2010). Corporate Accounting. New Delhi: Himalaya Pub. House.

Megginson, W. L., & Smart, S. B. (2009). Introduction to corporate finance. Mason, OH: South-Western Cengage Learning.

Rana, G. K. (2010). Corporate accounting. Jaipur: ABD Publishers.

Verma, K. K. (2008). Corporate accounting. New Delhi: Excel Books.

Weaver, S. C. (2012). The essentials of financial analysis. New York: McGraw-Hill.

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