Analysis And Evaluation Of A Certain Accounting Issue In Orica Limited
Discussion of the Issue
The main aim of this report is the analysis and evaluation of a certain accounting issue in one of the top 100 Australian Stock Exchange (ASX) listed companies. For this report, Orica Limited is taken into consideration.
This report also takes into consideration the discussion about a news article about Orica Limited that shows that drop of the share price of the company.
In this context, one major issue for the company is the compliance of the company with various requirements of Australian Accounting Standard Board (AASB) and Conceptual Framework. It is the prime responsibility of the business organisations under ASX to comply with the standards and principles of accounting conceptual framework with the aim to prepare and present the financial statements on the true and correct manner. Chances of financial frauds and errors increase in case the companies do not comply with the standards of AASB and conceptual framework (aasb.gov.au 2018).
Orica Limited is a multinational company based on Australia and is the world’s largest provider of commercial explosives along with the blasting system for mines, oil, gas, construction and others. The company has a workforce of around 11500 and it has customer base more the hundred countries all over the world (orica.com 2018).
In the recent years, one major accounting issue is not to comply with the required accounting standards and principles for financial reporting. This aspect creates chances for financial frauds along with the collapse of the companies. In order to avoid this, the companies must comply with relevant accounting standards. In addition, this report also involves in the analysis of two specific theories in relation to the financial reporting of Orica Limited. These theories are positive theory and the stakeholder theory in relation to the company.
It can be seen from the above news that the share price of Orica Limited crashes close to three months low due to the untimely acquisition of a brand new ammonium nitrate facility in Western Australia, inadvertent maintenance and plans to the record close to $300 million of impairments as well as provisions on the other business parts. However, after this, the management of the company announced that the operation of the new plant would not be started until 2018. Based on the above, it can be said that it is a major financial issue for the company that is related to the financial performance as well as unplanned acquisition.
Analysis of the Annual Report
It needs to be mentioned that the annual report of Orica Limited is for publishing the information of the company and its controlled entities for the year ended 30 September 2018 (orica.com 2018). It needs to be mentioned that the general purpose financial statements of Orica Limited has been prepared as well as presented as per the standards of Australian Accounting Standards and the Corporations Act 2001; at the same time, the company has complied with the principles of International Financial Reporting Standards (IFRS) and International Accounting Standard Board (IASB) (orica.com 2018). At the same time, it can be observed from the 2018 Annual Report of Orica Limited that the company has followed the principles of ASIC Corporations Instrument 2016/191 (orica.com 2018). Thus, it can be observed that the company has complied with the required principles for accounting.
There are five elements of AASB conceptual framework; they are assets, liabilities, equity, expenses and income. In case of the measurement requirements, AASB conceptual framework has put certain obligation on the ASX listed companies. As per the conceptual framework, companies should not adopt only one measurement basis for measuring the elements like assets, liabilities and others and the reason is that it fails to provide the relevant financial information to the users. There are four measurement mechanism for the companies as per AASB conceptual framework; they are Historical cost, current value, Fair Value and Value in use. The following discussion shows whether Orica Limited has complied with the measurement requirements of AASB or not:
It can be seen from the above image that Orica Limited has adopted the mechanism of both historical cost and fair value for the measurement of their assets and liabilities. Further evidence can be obtained from below:
It can be observed from the above images from the annual report of Orica Limited that the company has used both the fair value and historical cost method for the measurement of different elements of conceptual framework such as assets, liabilities, income and others. Hence, it can be seen from the above discussion that Orica Limited has made compliance with all the requirements of AASB and conceptual framework.
According to the AASB conceptual framework, financial reports of the companies must have the fundamental as well as enhancing qualitative characteristics; and the following discussion shows the compliance of Orica Limited with these characteristics.
Relevance: Orica Limited provides relevant financial information to the users of the financial statements for decision-making purposes that include both the confirmatory and predictive value. The users of the financial statements can predict the financial outcome along with the analysis of previous judgments (Callen, Khan and Lu 2013).
Compliance with the Conceptual Framework
Faithful Representation: Orica Limited provides both the natural description as well as numerical description of their different financial elements like assets, liabilities and others with the aim to make the information complete. Neutral and free from errors.
Comparability: Orica Limited presents the financial information of their business in such a manner so that the users can compare them with another company or with the different timeline of the same company.
Verifiability: The users of the financial statements can verify the used method of accounting in the financial statements with the help of accounting knowledge and independent observation (Gebhardt, Mora and Wagenhofer 2014).
Timeliness: Orica Limited provides the necessary information to the users at timely basis through various financial statements for their decision-making process.
Understandability: With the assistance of the notes to the financial statements, the users can understand the financial statements of Orica Limited.
One of the major competitors of Orica Limited is BHP Billiton as both of them operate in the mining industry of Australia. Following discussion compares the financial performance of Orica Limited with BHP Billiton:
The above images of the income statements of Orica Limited and BHP Billion shows that Orica Limited registered net loss for the year 2018 where BHP Billiton registered huge profit for the same period.
From the analysis of the balance sheet of these two companies, it can be seen that the total asset position of BHP Billiton is stronger than that of Orica Limited. Thus, on the basis of the above discussion, it can be said that the financial performance of Orica Limited is not as good as compared to its major competitors.
It is the responsibility of the management of Orica Limited to take into consideration the preparation as well as presentation of their general purpose financial statement with the aim to provide their users with the required information for the purpose of investment decisions. Thus, the requirement is to prepare all the required financial statements. It can be seen from the annual report of Orica Limited that the company has prepared the required financial statements such as income statement, balance sheet, change in equity and cash flows along with the necessary notes to the financial statements as a part of the requirement of general purpose financial reporting.
Positive Theory of Agency Theory: According to the concept of this theory, business organization is an agency and it provides a relationship for a complex set of contracts and for this reason, there is the generation of agency cost due to different interests and contracts (Bosse and Phillips 2016). The application of this theory can be seen in the operation of Orica Limited. As per this theory, Orica Limited is the principal and the management of Orica Limited can be considered as the agent of the company. As per the agency theory, the agents make decision on behalf of the principals. It can be seen in case of Orica Limited that the managements of the company makes the required decisions and performs the tasks on behalf of the principle that is the company (Dawar 2014).
Comparison of the Annual Report
Stakeholders Normative Theory: According to the concepts of stakeholder theory, all the stakeholders have intrinsic moral value or worth. Stakeholders are the persona or groups having legitimate interest in the activities of the business organizations. In addition, the companies need to consider the interests of all the stakeholders as intrinsic value and thus, the need to address the interest of all the stakeholders (Hasnas 2013). It needs to be mentioned that Orica Limited has applied this concept of stakeholder normative theory in their business operations by addressing the needs of their stakeholders. For example, existing investors and potential investors are the major stakeholders of Orica Limited; and they are interested in investing in the company for getting high return. For this reason, Orica Limited has addressed their interest by providing them with all the required financial information about the financial performance and position for the purpose of their investment decision-making (Harrison, J.S. and Wicks 2013).
At the time of investment, the investors considers the financial performance of the companies and whether the companies have any accounting issues or not (Levy 2015). It can be seen from the analysis of the annual report of Orica Limited that the company had made all the required compliance with the needed standards, regulations and principles of AASB, Corporations Act 2001 and Conceptual Framework. In addition, financial statements of Orica Limited includes both the fundamental as well as enhancing qualitative characteristics. However, it needs to consider that the company has registered net loss in the current financial year. At the same time, Orica Limited has not performed in better manner as compared to their competitors like BHP Billiton. Thus, in spite of the absence of accounting issues, financial performance of the company is a concern for the investors. For this reason, the investors should not invest in the company (Xu 2015).
Conclusion
As per the above discussion, Orica Limited has followed all the accounting principles and standards of conceptual framework along with complying with the fundamental and enhancing qualitative characteristics of financial reporting. However, the financial performance of the company in the current year is not effective due to the presence of net loss. In addition, Orica Limited has applied the concepts of agency theory and stakeholder theory in their business.
References
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Australian Financial Review. (2018). Orica hit by Burrup problems and impairments . [online] Available at: https://www.afr.com/business/mining/orica-hit-by-burrup-problems-and-impairments-20180301-h0wtnk [Accessed 15 Dec. 2018].
Bhp.com., 2018. Annual Report 2018. [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2018/bhpannualreport2018.pdf [Accessed 14 Dec. 2018].
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of Management Review, 41(2), pp.276-297.
Callen, J.L., Khan, M. and Lu, H., 2013. Accounting quality, stock price delay, and future stock returns. Contemporary Accounting Research, 30(1), pp.269-295.
Dawar, V., 2014. Agency theory, capital structure and firm performance: some Indian evidence. Managerial Finance, 40(12), pp.1190-1206.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.
Harrison, J.S. and Wicks, A.C., 2013. Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(1), pp.97-124.
Hasnas, J., 2013. Whither stakeholder theory? A guide for the perplexed revisited. Journal of business ethics, 112(1), pp.47-57.
Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty. Springer.
Orica.com. (2018). Orica – About Us . [online] Available at: https://www.orica.com/About-Us#.XBORV3QzbIU [Accessed 14 Dec. 2018].
Orica.com., 2018. Annual Report 2018. [online] Available at: https://www.orica.com/Investors/annual-report#.XBORNnQzbIU [Accessed 14 Dec. 2018].
Xu, Z., 2015. Uncertain multi-attribute decision making: Methods and applications. Springer.