Role Of The Australian Accounting Standards Board In Setting IFRS And Why It Is Not Compulsory For IASB Member Countries

Corporate Regulations

Every company must make proper disclosures in the financial reports of the company as this information influence the decisions taken by the users of such financial reports. In the current situation, it has been seen that needs of the users of financial reporting are not fulfilled by the principles of disclosure (Berry, 2009). There are two sets of people in this environment. One of such sets of people is convinced with the information with which they are provided and the other set of people remain unsatisfied with this quantum of information and they want to get more such information about the financial reports of the company. Therefore, a regulation should be set up in which the management is provides more information about the company and its financial statements. An organisation cannot disclose all the information to the public because if it discloses all the information it can hurt the managerial framework of the company. So, we can say that the company cannot voluntarily disclose all the information and this information are of no use to the investors.

There is a common approach that has to be adopted by the companies that are falling in the same industry in regards to the type of disclosures. The managers of the company must avoid making any kin o immaterial disclosures in the financial reports as it may lead to losses to the company. It is the responsibility of the auditor to help the company in identifying the disclosures that should be added and should also stop the company from providing disclosures that not of any material use. There should be an existence of a structured financial accounting system which will provide the managers of disclosing the facts in the financial reports voluntarily. Such regulations enable the users to compare two or more companies lying within the same industry (Donanldson, 2012). In order to obtain reliable sources for the purpose of making disclosures there should be a presence of Regulation of control. The managers of the company must ensure that the disclosures made by the company are based on the requirement of the users and the disclosures are not made by the managers voluntarily. The primary objective of financial reporting is to provide the information about the financial statements transparently. Therefore, we can say the financial reporting is an idealistic process and all the companies should have a limit on the disclosures that are made by them. Transparency in financial reporting means that the users must be given the information about the company which would influence their decision but they must not convey unnecessary information. If the company provides information which is not of any use to the investors then it can damage the objective of financial reporting.

IFRS stands for International financial reporting system.  This system helps the company to procure the data that has to be presented under the regulations of AASB (Australian accounting standard board). IFRS comprises of strategic implementation which is looked after by the FRC and AASB.  This makes the companies to report under the Corporation Act, 2001. It also ensures that the financial reports are prepared under the guidelines of AASB or not (Edwards, 2014). There is a neutral policy that is adopted by AASB which states that all the events must be recorded in the books of accounts whether it belongs to profit or non profit sector of the organisation.

Accounting standard setting

For the fulfilment of the guidance policy created by the financial reporting council, AASB has been adopting the various accounting standards in the Australian accounting standards. It is considered to be very important because of the fact that all the companies lying in the industry has adopted the IRFS system that has been issued by IASB in Australia. The reason behind this is the nature of principle that is required in the process of accounting, If IFRS is adopted by the accounting sector of the companies then the international market will be strongly impacted (Girard, 2014).

The companies that are already using IASB are not required to implement IFRS compulsorily because there are major changes that have to be made in the financial sector.  It is very difficult to make such changes because there has been a diverse reach of these applications. Therefore, there is no compulsion on the countries following IASB to follow IFRS. However, if the companies adopt the IFRS system then it will not have a favourable impact on the economy but will also prove to be beneficial for the company. There are certain companies that are following GAAP, they should also try so that uniformity in the accounting system is maintained and the idea of convergence proves to be successful. Therefore, we conclude that it is not compulsory for the companies to adopt the IFRS system but it should be encouraged because of the uniformity that can be maintained (McLaney & Adril, 2016). 

There are three factors that are comprised in equity. They are-

• Contributed Capital
• Reserves
• Retained earnings

Let us now understand these terms in details.

Contributed Capital: The share capital of the company as well as the shares of the company that is held in trust by the organisation is said to be the contributed capital. It shows the amount of capital that the company owns (Taillard, 2013). Shareholders are considered to be the owners of the share capital and we observe an increase in the share capital when new share are issued. When the company issues new shares it raises money from the public in order to carry out its operations and in return shareholders ae given shares of the company. Sometimes the company also issues bonus shares to the existing shareholders of the company.

Reserves: There are various types of reserves that are created by the company. Few of them are remuneration reserves, hedging reserves, general reserves and translation reserves for foreign currencies. If there is any gain or loss because of any derivative instrument then it is adjusted in the hedging reserves. The amount of remuneration that is yet to be paid is kept in the remuneration reserve (Menifield, 2014). However, the exact amount is not calculated. There lies an inaccuracy because of a constant increase and decrease in the remuneration. An asset revaluation reserve is also created by the company in which any fluctuation in the prices because of any environmental concerns of the assets is treated. General reserves are created by the company to provide money at the time of need so that it is able to carry out is operations smoothly and efficiently.

Owners Equity

Retained earnings:  The management of the company keeps certain funds aside from the profits that are earned. The main objective for keeping this money aside is to enhance the operations of the company and having available funds at the time of urgencies. This method of keeping aside the profits is also known as ploughing back of profits. It is considered to be a safety reserve (Siciliano, 2015).  

BHP Billiton

As we can see from the above table, there has been a decline in the overall business of the company over the past years. The reason behind this decline is the employee share awards that the company exercised. The reserves of the company was utilised to a great extent and also there was a transfer made for the purpose of employee share awards which led to the decline of the reserves (Paul, 2014).

Orica Limited

It was seen that the components of equity has been falling in the previous years. The total stockholders equity amounted to 4263 in 2014 but it fell down to 2962 in 2017. The reason for such drastic fall is the material costs that are incurred on the existing contracts of the organisation. Although the stockholder’s equity was falling over the years but the retained earnings were managed well by the managers (Scott, 2014).  

Rio Tinto

Rio Tinto had sufficient retained earnings in its financial statement and also it was observed that there was an accumulated as well as comprehensive financial statement. The company earned huge profits in the past years because of which the company has sufficient and high retained earnings (Pratt, 2009). The business was conducted very strongly by the management of the company and therefore, there was high accumulated and comprehensive income in the financial statements of the company.

Fortescue

On analysing FMCG (Fast moving consumer goods), it was observed that common stock of the company was increasing but the overall level f equity was falling. There were certain problems in the mining fields and other business which resulted in deficiency in of the accumulated comprehensive income of the company (Rogers, 2015).  

Debt evaluation

From the analysis that is carried out above, we can see that the debt- equity ratio of the fast moving consumer goods is quite high which will have an adverse impact on the operations of the company and there may also arise a problem in fulfilling the objectives of the company (Schroeder, 2014). There is a requirement of more point towards the interest payment (Rogers, 2015). It has been observed that the debt to equity ratio for BHP Billiton is in equilibrium which depicts the efficiency by which the management plans its financial structure. Orica is having huge debt in the balance sheet and if tries to expand its business then the financial risk of the company may also increase. Rio Tinto has a high debt equity ratio but the financial risk is not very aggravated because of the retained earnings of the company. So, the company can use its retained earning when it wants to fulfil its obligations. There is a growth opportunity for the company and therefore, there is a chance that the company might recover in the long run.

Conclusion

From the data that has been stated above, we can say that the management of the company must disclose relevant information in the financial statements as it would help the users to take correct decisions. The disclosure of the information should be regulated and the company must not disclose any information which is immaterial. We have conducted analysis of 4 companies that are engaged in mining industry and this analysis has helped to us to know the importance of maintaining an equilibrium in the debt to equity ratio as it might affect the functioning of the organisation (Rosenfield, 2009). 

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