The Global Financial Crisis and Accounting Standards - Assignment Example

Assignment On The Global Financial Crisis (GFC) Part One Introduction Australian Accounting standards board is a government agency that was made under an act in 2001. The main functions of this board are to ensure that standards are met in financial reporting of all the sectors in the Australian economy and to develop financial reporting standards globally through talent and good leadership (Australian Government). These standards are vital in assessing the financial reports of the different economic sectors. There are several sub sections of these standards as they focus on different areas and sectors within the economy. In this essay, we are going to look at the subsections: AASB 116: Property, Plant & Equipment, AASB 128: Investments in Associates, AASB 136: Impairment of Assets, AASB 138 Intangible Assets, and AASB 139: Financial Instruments: Recognition and Measurement. These sub sections focus on different areas and we are going to utilize them in the assessment of Macquarie bank. Assessment AASB 116 deals with property, plant and equipment which are categorized as assets. According to these standards, an asset is that which has probable future benefits and its value can be measured reliably. The value of these assets can be measured at either cost or fair value level. This is dependent on the nature of the asset or class for example land, machinery, building and motor vehicle. Depreciation method is utilized in determining the pattern in which an entity will consume the assets future benefits. This can be determined through various methods for instance straight line method, diminishing balance method and units of production method. The straight line method is the one used when there is no change in the residual value of an asset. Macquarie Bank has used this method in the financial report of the 2008. This method is not very applicable to all kinds of assets as postulated in their report. They used it on the following assets furniture and fittings, leasehold improvements, computer equipment and plant and equipment. This is in contrast with the AASB 116 because equipment like computer should have used the diminishing balance method. Computers and other such equipments decrease their charge over the useful life. AASB 128 deals with investment in associates. An entity (enterprise), including an unincorporated entity such as a corporation under which the investor has significant influence through investee and that is neither a subsidiary nor an interest in a joint venture. Associates are investees over which the investor has significant influence. Investee is an entity in which another entity has a possession interest. Investor is an entity person that has an ownership interest in another entity. AASB 136 states that long lived assets have a form of recoverable amount. The carrying amount of that particular asset should not exceed the recoverable amount of that particular asset. If by any chance the carrying amount of an asset exceeds the recoverable amount, the asset is called an impaired asset. In this case, the carrying amount should be reduced to be equal or less than the recoverable amount. This standard covers a relatively larger area including current and non current assets, for profit and not to profit entities and assets at cost and assets at fair value. This standard requires that an assessment be carried out and indicate or report if there are any indications that an asset is impaired. Macquarie bank followed to the letter the specifications of this standard. According to their financial report, they recognize that there are chances of having impairment loss. This arises when the carrying amount exceeds the recoverable amount of an asset. This bank groups assets in the lowest levels from which cash inflows can be identified and are dependent of other assets. Assets including the intangible ones that suffered impairment are assessed and reviewed for possible reversal of the impairment before the reporting date. The AASB 138 is used for the intangible assets in Australia except those that are specified in other Australian standards. These assets are those that can be in a physical entity such as discs and films. They are used for the functionality of other physical and tangible entities for instance the computer. A computer can not operate without software which is considered as an intangible asset. An intangible asset is recognized if it is probable of future benefits expected and are attributable to the asset and if its cost can be measured reliably. According Macquarie, goodwill and tangible assets have an indefinite use and are tested every year for impairment. They are tested for impairment more frequently if there are changes in circumstances and there are suspicions that the carrying amount is higher than the recoverable amount. Licenses, trading rights and other intangible assets are taken as costs less all the impairment losses. These assets are also known to have an indefinite useful life. Managerial rights have finite useful life and are calculated when impairment losses and amortizations are subtracted from cost. Amortization can be calculated using the straight line method to assign the cost of management in excess of useful life. This discussion shows that the Macquarie bank follows the standard as required. AASB 139 requires all the liabilities and assets of an organization to be included in the balance sheet. The categories of financial assets are four while the one for liabilities are two. All assets and liabilities should be categorized according to these categories. Financial assets and liabilities are measured at fair value. Variations in the assets and liabilities should be recorded appropriately depending on the class they fall. Decreases and increases in assets and liabilities determine whether a profit or a loss is incurred. When there is evidence that a financial asset has impaired, the necessary tests can be done to determine the impairment. In the balance sheet of the 2008 financial year, Macquarie had indicated the total number of assets including the current, non current, tangible and intangible assets. Liabilities are also recorded accordingly according to the AASB 139 standard guidelines. The techniques for measuring the financial instruments for instance fair value and amortized tests are used. This bank had therefore met the AASB 139 guidelines. Part Two Abstract Macquarie bank is based in Australia. As a financial institution, it is obliged to meet the standards outlined by the Australian Accounting Standards Board (AASB). This organization that operates under the government provides an outline on the basic components of a financial institution including assets, liabilities and some ways of determining their values. All institutions are expected to meet these standards and they should report them while submitting their annual financial statements. Sometimes some organizations do not follow or meet these standards. These institutions come up with ways in which they hide their self image by presenting another image or reputation to the government and the general public. Michael West realizes that some of these malpractices were done by the Macquarie bank and that is why he is not a strong supporter of the management and preparation of this bank’s accounts. Statement Macquarie prepared their account in manner that is not standard in some ways. Michael West does not support their accounts’ preparation as he realizes there are much deviations and miscalculations in the accounts. Macquarie uses any approach that would work towards their expected outcome. This bank prepared their accounts basing on the outcome they would like to achieve. The outcome based accounting is seen being used by this bank. Some assets are not recorded in the right manner as the bank would like to maintain a good reputation to the public. Even though they are not making profits, they come up with strategies such as recording some accounts in the profits and loss accounts instead of recording them somewhere else where they should be recorded. The outcome of this approach is high profits or higher returns on capital. In the case by Michael, the company exaggerated their profits with a large margin because their accounts are not recorded in the right manner. Also, some steps are skipped in the accounting process. This is evident in the case where this bank records some intangible assets as financial assets and therefore records them in the profit and loss account. In the normal way, the intangible asset should have first been recorded in the amortized account and later to the P&L account. It is realized that the roads they owned in the proportions of between 22.5% and 50% were recorded as financial assets through fair values. In a normal case, they would have been treated as equity accounted. By treating intangible assets as financial assets, the bank does not prevent itself from undergoing losses. In the instance where the bank treated the toll collected from the roads as financial assets, they prevented the occurrence of an early share of losses. In other words they were trying to manage themselves in such a way that they would not incur losses. Michael sees that the roads have high initial start up costs, there is slow build up of traffic and high depreciation in the first years and therefore the bank created a self market. This was a strategy by the bank not incur any losses. Discounting cash flow methodology was used by this bank. This methodology is based on the principle that the lower the discounts the higher the greater the fair value and the higher the fee. The bank treated some of its investments as financial assets through the profit and loss account. This translated to that no debt was consolidated accordingly and therefore no debt was recorded on the balance sheet. In all these factors, the financial assets are treated as fair value without considering other economic factors that need to be considered. Economic melt down can have an influence on the assets treated this way. Discounting cash flow is usually theoretical after removal of some expenses such as capital expenditure, financing costs and taxes. Macquarie bank adopts theoretical model which might not be practical in the real sense. It has been getting a lot of profits from but they are not recorded accordingly in the balance sheet. The figures provided in the balance sheet vary from the actual values. Profits are therefore altered by especially increasing their value while their actual value is less than the value postulated. In the cases aforementioned, the bank assumed that there were no economic meltdowns and they were not legible to be printed. The bank assumed that there was no change in value of its assets as seen in the financial report. Of course this is not logic as some of the assets and equipments have to change in value with time. They either appreciate or depreciate. These variations are intangible assets and they should be amortized. In the case of Macquarie, they treated these intangible assets as financial assets through fair value and therefore recorded them in the profit and loss account. This had an effect on the reporting of the financial report as some of these factors could not be accounted for. Also, the company was assumed to be making profits whereas there were possibilities that losses could have been incurred. Conclusion Standards are important in the determination of the value of a particular company or organization. These standards should be followed to the letter and they should not be tampered with. This can lead to the alteration of the figures in the balance sheet which is capable of giving the wrong information of the company to the public and the standards board. It is the responsibility of all institutions especially the financial ones to embrace this practice accordingly. References Australian Government: Australian Accounting Standards Board. About AASB. Viewed 12 September 2009, http://www.aasb.com.au/About-the-AASB.aspx Australian Accounting Standards Board. AASB 116: Property, plant and equipment. Viewed 12 September 2009, http://www.cpaaustralia.com.au/cps/rde/xbcr/SID-3F57FECA234C1B4B/cpa/AASB116_factsheet_property_180208.pdf. Chartered Accountants 2009. AASB 128: investments in associates. Viewed 12 September 2009, http://www.charteredaccountants.com.au/financial_reporting/analysis_of_aasb_standards/summary_of_standards/A121989045 Australian Accounting Standards Board. AASB 136: Impairment of assets summary. Viewed 12 September 2009, http://www.dtf.wa.gov.au/cms/uploadedFiles/aasb136_dec31.DOC. Michael West 2008. Australia’s most impressive Financier. Viewed 12 September 2009, www.thiage.com.au Clarke, F. L., Dean, G.W., Oliver, K.G 2003. Corporate collapse: accounting, regulatory and ethical failure. 2edn. Cambridge University Press, Cambridge. Mills, D., Call, W., Drew, A 2000. Foundations of accounting. 9 edn. UNSW, Sydney. Walton, P., Haller, A., Raufounnier, B. 2003. International Accounting. 2 edn Cengage Learning EMEA. Dagwell, R., Wines, G., Lambert, C. 2007. Corporate accounting. UNSW, Sydney. Read More