Importance Of IFRS Implementation, Voluntary Disclosure, And Corporate Regulation In Financial Reporting

Corporate Regulation

This report emphasis upon the implementation of IFRS for the disclosure of financial reports of the company and the equilibrium between the capital structure which will lower down the financial leverage and cost of capital of the company. It lay down the importance of voluntarily disclosing the accounting information and suggests that the same is very much necessary for representing the true and fair view of the company’s performance and position in financial aspects. Further, it discusses the importance of regulating the procedure of preparing financial reports that will help in avoiding issues like errors and manipulations of final accounts.

Later on, the role played by AASB has also been discussed in the report stating that IASB collaborated with AASB in order to set accounting standards on global level. The board identifies some issues and provided feedback to IASB with the purpose of seeking their approval in establishing accounting standards. In addition, it highlights the reasons why some members of IASB has not yet move towards the adoption of IFRS and the same is not compulsory for them. The report also provides insights about the capital structure of four ASX listed companies for the past four years. It compares their debt and equity position and summarizes all the findings in conclusion.

Corporate Regulation

The fact that the disclosure of accounting information has become essential part of management function is proven by many researchers conducted in the field of accounting. The studies suggested that the managers and executives should voluntarily disclose all the relevant and reliable monetary data so as to provide insights about the financial performance and position of the companies. The management of the organization generally communicates such information through the financial reports which are prepared on annual basis.

The report consist both the financial and non-financial data which help the stakeholders and directs to make worthy and suitable decisions for the growth of business. Specifically, presentation of accounting information is very much useful for the external stakeholders as they do not participate in the day to day activities of the firm and are not aware about its internal functioning. These external users of report are government, creditors, potential investors and others who just invest their money in the business and do not have any substantial interest in its management and operations[1].

Disclosing the financial information will keep such individuals about the operating and financial performance of the company for the recent and past years. They can easily take important and appropriate decisions regarding their investment in a particular company and can assess the overall position of the same. The investors keep various aspects in their mind while calculating and figuring out the performance of an entity. The perspectives include liquidity, efficiency, profitability and solvency which evaluate the quantitative data and provide reliable outcomes. In context of non-financial aspect, investors go for the reports and statements that tell company’s take on corporate social responsibility, compliance with international standards and GRI benchmarks, sustainability reporting and corporate governance statement.

Disclosing Financial Information for Stakeholders

Along with disclosing the information, managers should also consider that regulation of financial reporting procedures is important in order to record the reliable and correct data. The main purpose of preparing such reports is to show the true and fair view of company’s performance and position during the specific period of time. These reports reflect the overall functioning of the company in a nutshell and therefore it is important to establish control and regulation while preparing the same. Setting up the regulations will result in harmonization and uniformity in the procedure of preparing corporate financial reports.

It brings consistency in the data and makes it comparable with other information, thus helping the shareholders and other users to properly understand it and make a suitable comparison[2]. Every business applies such accounting benchmarks according to its nature, size and types of operations it pursue. The consistency will avoid the manipulation of accounts and errors on part of reporting figures. In addition, it will remove the possibility of falsification of accounts and remove the confusion between the adoption of domestic and international standards.

On a whole, it can be said that voluntary disclosure and corporate regulation is the key element of management function as it will improve the quality of financial reports and companies do not required to implement internal control on regular basis. It will automatically establish control on the procedures and make the accountants work in accordance with the proper rules and regulations[3].

Accounting standard setting

Accounting standards are that benchmarks and rules which are applied at time of preparing financial statements and reports. They are the authoritative standards developed by board like AASB and IASB and are the primary source of Generally Accepted Accounting Principles (GAAP). These standards lay down the procedures and treatment of some specific accounting transactions and events that has taken place during a specific period of time. With a motive of creating harmonization and standardization, IASB has collaborated with AASB in order to establish the accounting standards at global level. Australian Accounting Standard Board is a government authority which was incorporated with a motive of laying down the financial reporting standards that has to be adopted by every public and private companies listed on ASX and operating in Australia.

As far as the role of AASB has concerned, it has played a vital role in establishing the accounting standards. The authorized body responsible for setting the standards at global level is international accounting standard board (IASB) which has the authority to formulate global accounting standards on the international level. The benchmarks set by IASB have to be followed by all the companies operating worldwide while preparing their financial reports. IASB has join hands with AASB and other domestic bodies for the purpose of incorporating the standards that will bring harmonization and uniformity in reporting.

Considering the role of AASB as a standard setter, the board has made some strategies which justify its role in the changing and dynamic environment. It formulates its policies and strategies in such a manner that they closely comply with the requirements of IASB. AASB identified some technical issues and received feedback from the Australian companies which are considered by IASB at the time of setting standards. The identification and feedback help IASB to a great extent and assist the board in recognizing the issues faced by Australian companies while preparing their financial reports. AASB has submitted some sort of formal documents and statements with IASB so as to got the feedback and comments from the international board with the purpose of getting approval on the developing relevant accounting standards[4].

Importance of Financial and Non-Financial Data

However, even after the worldwide acceptance of IFRS there are some member countries of IASB which do not apply to the same. Also it is not compulsory for them to go for the same. For instance, USA has not yet adopted IFRS in their accounting practices and still follows US GAAP. One of the reasons is that implementation of IFRS will be very costly for the country. Moreover, deciding between GAAP and IFRS is a controversial decision and the country will face problems while comparing the financial data of the companies operating in different part of the world. Quality factor is also the reason for not adopting IFRS. All such reasons justifies that for some members of IASB, it is not compulsory to go for IFRS[5].

Owners’ equity

The four listed companies selected for the purpose of conducting analysis are BHP Billiton, RIO Tinto, Amcor Limited and Boral Limited. The analysis is conducted for the past four years in which the equity data has been derived from the relevant sources and annual report of the companies.

BHP Billiton Limited

(AUD in millions)	2014	2015	2016	2017
Share capital	2255	2243	2243	2243
Retained Earnings	74548	60044	49542	52618
Reserve	2927	2557	2538	2400

Rio Tinto

(AUD in millions)	2014	2015	2016	2017
Share capital	9410	9053	8474	8443
Retained Earnings	23605	26110	19736	21631
Reserve	12871	11122	9139	9216

Amcor Limited

(AUD in millions)	2014	2015	2016	2017
Share capital	2885	2188	1946	1842
Retained Earnings	625	589	187	373
Reserve	-857	-95	0	-359

Boral Limited

(AUD in millions)	2014	2015	2016	2017
Share capital	2478	2362	2246	4265
Retained Earnings	868	996	1098	1156
Reserve	-50	97	99	-26

Explanation of equity items is as follows:

• Ordinary share capital: It is the amount of capital which is invested by the shareholders in the business. It is known as the amount of capital raise by issuing the shares within a period of time. All the issued and subscribed capital comprises of the whole ordinary share capital.

The share capital of BHP Billiton remains stable as the company’s number of share remains same. Rio Tinto’s and Amcor Limited’s share capital reduced as the company has buy-back the shares in past years. However, it can be observed that Boral Limited share capital increased from $2246 million to $4265 million last year. This means the firm is focusing on increasing its equity and enhancing its market value[6].

• Retained earnings: It reflect that amount which is earned or retained by the company in the business after making the payment of all the obligations. The amount basically reflects the earnings left with the company for making payments like dividend to the shareholders.

Among the four selected companies, it can be observed that BHP has the highest retained earnings but there was a decreasing trend in the same over the past years. Its earnings reduced from $74548 million to $ 52618 million due to the reduction in company’s profits[7]. Boral Limited has increased its retained earnings as the company is focusing on increasing its profitability position.

• Reserves: It reflects that amount which kept aside for some specific purposes. It is used at time when company faces a contingent liability.

Rio Tinto has maintained high reserves despite facing a decline in the amount followed by the positive reserves maintained by BHP Billiton. The other two companies Amcor and Boral has low and negative reserves in the past years[8].

Question 4

BHP Billiton Limited  (AUD in millions)	2014	2015	2016	2017
Total equity	79143	64768	54290	57258
Total Liabilities	72270	59812	64663	59748

Rio Tinto Limited  (AUD in millions)	2014	2015	2016	2017
Total equity	45886	46285	37349	39290
Total Liabilities	65139	61542	54215	49973

Amcor Limited  (AUD in millions)	2014	2015	2016	2017
Total equity	2155	1909	1056	1069
Total Liabilities	7542	9220	10636	10740

Boral Limited  (AUD in millions)	2014	2015	2016	2017
Total equity	3348	3524	3506	5441
Total Liabilities	2211	2341	2294	3873

The comparative analysis shows that BHP relies heavily on debt rather than equity as its debt to equity ratio has increased from 38% to 51% in the last years[9]. It has more liabilities than owners’ equity which reflected high financial risk for the company. On the other side, Rio Tinto’s D/E reduced from 48% to 33% due to the repayment of debts made by the company is last years. Such repayment can be reflected from the reduction in company’s liabilities[10]. Amcor has the highest D/e ratio of 1.75 to 4.24 in the past four years due to lower equity and high liabilities. Boral also reported low ratio[11].

Conclusion

From the above report it can be concluded that it is very important for the management to properly disclose about the financial accounting information and regulate the reporting procedures on periodic basis. It also concludes that acceptance of international standards will bring consistency and harmonization in the reporting procedures. The equity analysis of the companies suggested that Rio Tinto and Boral limited has performed well as the companies has low debt equity ratio and high retained earnings. Moreover, Rio Tinto has high profits and rely more on equity. Boral limited is focused on increasing profits and reducing its debts.

Amcor Ltd (2018) Morningstar

Annual Report (2017) BHP Billition.com 

Annual Report (2017) 

BHP Billiton Ltd (2018) Morningstar 

Campbell, John L., “The Fair Value Of Cash Flow Hedges, Future Profitability, And Stock Returns” (2014) 32(1) Contemporary Accounting Research

Collins, Daniel W., Paul Hribar and Xiaoli (Shaolee) Tian, “Cash Flow Asymmetry: Causes And Implications For Conditional Conservatism Research” (2014) 58(2-3) Journal of Accounting and Economics

Lam, H, Why Does The US Continue To Use GAAP And Will It Ever Converge To IFRS?(2015) CMC Senior 

Ried, W and D.R Myddelton, The Meaning Of Company Accounts (Routledge, 2017)

Rio Tinto Ltd (2018) Morningstar

The Standard-Setting Process (2018)