Disclosure in Accounting - Essay Example

Running Header: Disclosure in Accounting Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction Financial information should be transparent in order to ensure that decisions and actions are made in an understandable, accessible and visible manner to all the interested parties. This requires the financial information to be disclosed to the interested parties in an open and timely method. According to International federation of accountants (2011, p. 9) financial reporting has evolved in order to meet the changing needs of the users of the financial information. Capital markets and businesses have become more challenging with immense complexity occurring in business models, sources of uncertainty and risk as well as the increased difficulty in managing risk. The evolution has occurred with an aim of making the financial statements to be more relevant to the users. This essay aims to analyze the impacts of carbon tax on BHP Billiton financial statements using the Hines (1988) concepts of accounting Hines (1988) Accounting Concepts Hines (1988, p. 252) states that revenue is recognized when it is realized. Revenue is considered to be realized or recognized at the point of sale and that is when goods leave an organization or are conceived to have left the organization. Revenues are recognized when goods are partly or partially completed, when the customer is invoiced, when orders are placed or when a customer is billed. According to Hines, accounting creates reality and thus accounting reports and numbers can be molded and shaped as well as measured without obstruction. Therefore, when most people hold the conception of reality, then accountants must reflect it so as to ensure that the people maintain faith with the accounting information. Nevertheless, Hines states that organization assets are measured by considering their costs to the organization. This means that people see reality when they see the real measurement and that is when they hold confidence and agree with the information presented. Therefore, the communication perspective, information perspective and measurement perspective of accounting should be constructed to reflect reality. The information presented by accountants should be constructed in such a way that it plays a role of communicating social reality. Carbon Tax the New Social reality According to KPMG (2011, p.1) the carbon tax legislation in the country aims at supporting the government towards transforming Australia to a low carbon economy. Hines (1988, p. 254) states that accountants should communicate and create reality in accordance to the social conception of reality. This will enable the society to maintain faith with the company and the financial information presented. The new carbon tax represents potential costs which businesses must incur in order to move towards a low carbon economy. These costs are both direct and indirect hence the need for accountants to construct financial statements so as to show the cost reality associated with the carbon tax. Furthermore, the carbon tax has a potential accounting implication as it requires companies to purchase permits which will lead to creation of new assets for the companies and liability in ration to the expenditure that will be incurred. The current lack of accounting standards and guidelines relating to accounting of emission permits means that the carbon tax represents a new social reality that accountants must construct in the financial statements. CPA Australia (2011, p. 2) notes that the carbon tax has a potential impact on the asset impairment testing. This means that asset impairment measurements will be affected by the carbon tax. Thus, the carbon tax represents a new social reality which is associated with measuring impairment of assets and this requires accountants to come up with means of constructing financial statements in order to show the reality in assets impairments. Moreover, carbon tax has no profit concept as compared to other forms of taxes. Therefore, accounting for this tax represents a new social reality that accountants must communicate to the society. How the Carbon Tax will be reported in the Financial Statements According to CPA Australia (2007, p .7) under AASB 137 provisions, contingent assets and contingent liabilities, an entity should accrue tax payable as emission takes place during the reporting period. The emissions should be measured at the price used to extinguish the tax emission obligation. Australian accounting Board (2011, p. 2) states that if the carbon tax is considered as a cost incurred in bringing inventories of goods that have been produced to their present condition and location then the cost should be included in the cost of inventory when reporting it. On the other hand, when the carbon tax is considered as a cost incurred in delivering a service then it should be recognized as an operating expense in the financial statements. Moreover, in case the goods produced by a firm are used to facilitate its own activities, then carbon tax should be capitalized and this should be in accordance to the AASB 116Property, plant and equipment. Firms emitting carbon and engaged in non-production activities should report the carbon tax as an expense. BHP Billiton BHP Billiton is a leading global producer of copper, aluminum, iron core, energy ore, uranium magnesium and silver as well as other natural resources. The company emits and discharges a lot of carbon and other green house gases to the environment while producing, processing and developing its products (l BHP Billiton 2011, p. 1). Therefore, the company is required to pay the carbon tax in order to motivate it to reduce its carbon emissions. According to Siriwardana, Mend and McNeil (2011, p. 14) mining industries are regulated by the greenhouse and energy reporting act. The act provides guidelines for reporting and disseminating information that is related to greenhouse gas projects, green house gas emissions, energy consumption and energy production. Reeves and Westcott (2009, p. 7) state that the national Green house and Energy Reporting Act 2007 require companies that exceed certain thresholds of carbon emissions and energy production and consumption to report their carbon emissions to the regulator. Thus, BHP Billiton will be affected by the act as it will be required to report to the regulator about its carbon emission. According to Thornton (2011, p. 2) the Greenhouse and Energy Reporting Act 2007 will affect how BHP Billiton assets are impaired. AASB 136 requires companies to asses’ recoverable amount of their assets when significant changes occur in their operating environment to which the asset is devoted (Nelson at el 2011, p. 156). The directors of BHP Billiton will be required to disclose and recognize the impairment as a loss if the carbon tax event will be an adjusting event. In case the carbon tax will not result in a non-adjusting event then the company can disclose these notes on the financial statements and not in the financial statements. BHP Billiton balance sheet will recognize and disclose the permit asset at its carrying amount value. On the other hand, the company income statement should disclose expense incurred in purchasing the asset (Reeves and Westcott (2009, p. 21). Furthermore, the tax will impact the amount disclosed in BHP Billiton cash flow statement. This is in relation to the cash outflows incurred in purchasing the permits less the cash inflows that the company will recover from its customers. Additionally, the company will be required to disclose in its financial statements the taxable income in relation to its permits. This will involve considering the difference in the value of its permits at the beginning of the year and at the end of the year (Thornton 2011, p. 2). Impacts of the Disclosures on the Users of BHP Financial statements According to Kothari, Li and Short (2009, p. 1642) the disclosure of the carbon tax will have an implication of improving the credibility and reliability of financial statements presented by the company. The presented information will also meet the materiality requirements hence this will assist investors in deciding whether to invest with the company. Furthermore, the disclosures will assist lenders in assessing the liquidity position of the company by assessing the company assets and debts. Lenders will be able to obtain reliable information regarding the impairment of the company assets hence evaluate its value more accurately. This will enable the lenders to determine whether to offer credit to the company. Ascui and Lovell (2011, p. 979) state that carbon accounting enables the society to recognize the real implications of carbon tax and the problems associated with climate change. Thus, disclosing issues related to carbon tax in the financial statements reflects and constructs the economic reality that surrounds a firm that is affected by the carbon tax. The financial statements reflect how the company accounts for its emissions and these acts as a means of conveying information on the reality of the carbon tax. This in turn enables the users of financial statements to maintain faith with a company’s financial statements because of the fact that it reflects the reality. Bowen and Wittneben (2011, p. 1023) note that the disclosures required in carbon accounting describe the evolving nature in relation to the disclosures in the financial statements. This in turn shapes a particular interpretation of social reality(Schaltegger , Bennet &Burnitt). Conclusion In conclusion, changes in the environment have necessitated the need for disclosure in financial statements to evolve in order to reflect and create the economic reality surrounding a firm. This is in accordance to Hines accounting concepts which require that the financial statements of a company should show reality in agreement with the perceived reality held by the society. The introduction of carbon tax has changed the way companies account and disclose accounting information in their financial statements. Companies must disclose permit costs, amortization expenses and carbon tax in their financial statements. This in turn acts as a means of reflecting the economic reality that is associated with the carbon tax. References Bowen, F & Wittneben, B 2011, ‘Carbon Accounting: Negotiating accuracy, Consistency and Certainity Across Organizational Fields’, Accounting, Auditing & Accountability Journal, vol.24, no. 8, pp. 1022-1036. BHP Billiton 2011, ‘DIsharge and Emissions’, In BHP Billiton, pp. 8-20. CPA Australia 2007, ‘AASB 137 Provisions, Contingent Liabilities and Contingent Assets’, In Australian Accounting Standards, pp. 1-8. CPA Austraria 2011, ‘Fact Sheet: Carbon Price and Financial Reporting’, In CPA Austraria Ltd, pp. 1-3. Hines, H 1988, ‘Financial Accounting: In Communicating Reality, We Construct Reality’, Accounting Organization and Society, vol. 13, no. 3, pp. 251-261. 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