Practical Application of the Accounting Theory - Assignment Example

Name: Course instructor: Course: Institution: Date: Part A: Explanation of differences in disclosure between sections Disclosures in the annual reports of different companies compare and differ on various things. The disclosures can be similar due to the approach taken to the subject by each company, similarity of the methods used in writing the annual reports and on the area of emphasis for both companies (Deegan C.2009, pp 5). Companies that emphasize on a similar issue in the writing of their annual reports tend to have similar disclosures while those that emphasize on different things tend to have different disclosures in their annual reports. The differences seen in the disclosures of different companies are also as a result of the activities that the company might find worthy disclosing. This occurs because two similar companies might differ in the disclosing of the company’s operation. In addition, the disclosures can also differ because of the statutory provisions and the government standards and regulations that determine accounting and disclosure. The disclosures found in a company’s annual report depend on the necessity of that disclosure in the company’s business operation. The differences in financial reporting practices in different companies also contribute to the differences in disclosure in their annual reports. Financial statements of different companies can compare on the way they are prepared but still contain different disclosures due to the differences on the need for disclosure for each of the companies (Deegan C.2009, pp 7). Each of the company will have to adhere to the rules and regulations of the government regarding financial reporting and this may cause differences or similarities in the disclosures found in the annual reports. Part B: Critical evaluation of information source The journal article on the use of stakeholder theory in analyzing corporate environmental performance as seen in Australian listed companies is a good example of the application of stakeholder theory in business reporting. This journal article shows that the stakeholder theory is largely used to address the shifting needs in the vibrant business world (Evangeline E.2007, pp 164). The article shows a study that aimed at using the stakeholder theory in analyzing commercial environmental performance in the listed companies in Australia. The study adopted a three dimensional framework that comprised of strategic posture, economic performance and stakeholder power. The use of the three dimensional framework led to the development of common least squares. In addition, the study used three different measures of stakeholder strength which include the creditor’s power, the shareholder’s power and the power of the state. The journal article also shows that the strategic posture was represented by the rank of environmental concern from by the management as well as the financial performance as depicted by the returns from the company’s assets. The models used in this study helped to test for the presence of any considerable connection between financial environmental act and the three parts of the framework. This journal shows that the study found out that the level of the spread of ownership and the sensitivity of the industry marked by the rise in state sanctions as well as the concern of the management of considerable factors manipulate decisions to include powerful environmental actions in financial strategic plans (Evangeline E.2007, pp 168). There is no noticeable relation between a company’s financial performance and environmental performance. In addition, the results of the study also showed that size and age may not act as superseding variables. This journal is reliable because it shows that the stakeholder theory can help a person to understand the behavior of financial entities especially in making sue of the constantly shifting financial environment in areas where environmental issues have become more crucial. Moreover, the reliability of this journal article lies on its currency since it was written in 2007. It has covered an essential topic regarding the application of stakeholder theory by showing how the theory can be applied in analyzing environmental performance of business entities such as the listed companies in Australia. The journal article has also presented accurate information because of the models used in the study that helped to come up with reliable results on the application of the stakeholder theory in comprehending the behavior of financial entities. The author of this journal article is a business student in the school of business in Swinburne University in Australia and this shows that the article is reliable because it involved a lot of research. In addition, it has made use of the listed companies in Australia and this guarantees the authenticity of the data used in the research. Part C- Practical application of the accounting theory i) detailed explanation of the stakeholder theory The stakeholder theory refers to a premise that is used in organizational management to help in addressing both morals and values that aid in organization management. The stakeholder theory ideals and controls the groups which form part of the stakeholders of a company and gives the methods that management needs to give due consideration to the interests of the stakeholder groups (Deegan C.2009, pp 15). The stakeholder theory can therefore be said to help in adopting the rule of who or what is essential in the management of a particular company. The stakeholder theory takes the assumption that the stakeholders are the company owners and thus the company has a binding obligation to put their needs above all other things in order to increase their value in the company. In order to put the needs of the stakeholders first, the company has to covert their investments into valuable goods for the customers to buy thus bringing benefit to the stakeholders. The stakeholder theory shows that a company must address the needs of its most important members who are the suppliers, customers, employees and the investors (Deegan C.2009, pp 284). However, it also shows that there are other parties who are essential in the operation of a company whose absence may make it hard to run the company. These parties are governmental bodies, prospective customers and employees, trade unions, the community and the entire public as in general. Business competitors can as well act as stakeholders in the operation of the business because they also affect its performance. The stakeholder theory combines both the resource and market view of operating a business. The stakeholder theory has the view that every group that participates in the running of a company has the major aim of obtaining benefits (Evangeline E.2007, pp 174). However, the each of the stakeholders may not have legitimate priority of interests. A stakeholder theory can be said to be descriptive because it provides an organization with a model of operation. It can also be instrumental because it can provide a framework through which the company examines the connection between usual company performance and the management of the company’s stakeholders. The stakeholder theory can also be said to be normative based on the identification of stakeholders in terms of their interests as well as considering all the stakeholders to be valuable in the running of the organization. Finally the stakeholder theory can also be said to be managerial because it recommends the practices, attitudes and structures that call for proper attention of the needs of all lawful stakeholders of the company. The stakeholder theory is widely used to address the shifting requirements in the vibrant financial environment (Evangeline E.2007, pp 179). Stakeholder theory can also be used to analyze the commercial environmental behavior by various companies. The stakeholder theory is applied in businesses by adopting a three dimensional framework that has the stakeholder power, economic performance and the strategic posture of the concerned companies. The stakeholder power uses various measures such as the power of the shareholders, the power of the creditors and the power of the government. The stakeholder theory can be used to test for the considerable relationship between financial environmental performance and stakeholder power, creditor’s power and the power of the government. The results of the application of stakeholder theory in investigating the relationship between the three dimensions of power shows that the ownership of the level of ownership and the sensitivity of the company as shown by increase in governmental sanctions are essential factors manipulating the decision to include environmental activities in financial strategic plans. The measure of financial performance shows that there is considerable relationship between the economic performance and the company’s environmental performance. Moreover, the stakeholder theory shows that the suggestions that the age and size of a firm may act as mediating variables cannot be supported by the use of the stakeholder theory. The stakeholder theory can therefore be used to help people in understanding how financial entities behave especially in adopting to the swiftly changing financial environment where the issues of the environment have turned to be greatly essential. The stakeholder theory requires every business to pay attention to all the groups that participate in the running of the business because they are essential for a good performance of the company. Stakeholders are people who are crucial for the success of any particular business. The stakeholder theory can either be normative or descriptive. Normative stakeholder theory shows how managers and stakeholders should act and view the function of the organization based on set ethical principles (Evangeline E.2007, pp 180). On the other hand, the descriptive stakeholder theory is concerned how managers and stakeholders should behave and how they perceive their actions and functions. The stakeholder theory must therefore show how managers need if they act if they want to achieve success in their actions. The stakeholder theory must be applied to make sure that the interests of all organizational members are considered in order to contribute to organizational success. ii) different types of voluntary disclosures Voluntary disclosures refer to the disclosing of information that has never been previously disclosed to the tax agencies (Scott W.2007, pp 45). Voluntary disclosure helps to avoid the liability to penalty that is associated with prior non-disclosure of the information. There are various types of voluntary disclosures. These include business data, management’s analysis of the financial information, information concerning the management of stakeholders in the company, forward looking information for the company’s opportunities and risks, the company’s background and information regarding the company’s intangible assets. Voluntary disclosures are essential because for the success of the company. This is because they increase transparency and credibility of the company by providing more information, lowering risks and uncertainties and attracting more investment. They can also help to prevent information asymmetry whereby they help in passing of information between management and investors. Voluntary disclosures also result to innovative business environment because they imply an increased and changed requirement for the company’s information. Different companies disclose different aspects of their company depending on whether they consider the aspect to be important. In addition, they disclose different aspects of their company because they have different perceptions of their company’s essential aspects and factors. In addition, the different disclosures in different companies are caused by use of different strategies in companies of the same industry. Each company is unique and this causes the differences in voluntary disclosures. Voluntary disclosures are crucial because they provide a room for each company to disclose its important aspects to its investors (Scott W.2007, pp 48). This will make investors to have more relevant information that will help in better decision making. Companies also need to disclose their intangible assets in order to attract and retain more customers. Environmental and social disclosures usually differ from one company to another. This is because; different companies consider different information worthy reporting about their social and environmental issues. In most cases, social and environmental disclosures are voluntary and this makes the companies to disclose different information. The size of a company determines the ability of that company to disclose its environmental and social issues. Environmental and social reporting in companies is determined by the corporate social responsibility of each particular company. Media attention in the operation of a company can also influence environmental reporting in that company. The mining industry provides huge economic benefits but has significant environmental and social effects. These effects include excess land use, safety issues and exhaustion of natural resources. Large mining companies report different environmental and social disclosures because each of the mining industries uses different approaches to disclose its information to the public (Scott W.2007, pp 46). For example, Exxaro mining and Hudbay minerals have different environmental and social disclosures. In addition, different environmental and social disclosures in companies can be as a result of different stakeholders for each of the companies. In most cases, insures, communities and authorities are interested with environmental disclosures of issues such as energy, water and issues of greenhouse gas emissions. Social issues such as health safety, skills development and employment are of most interest to employees. There are basically two types of environmental disclosures. These are the quantitative and qualitative disclosures. The qualitative environmental disclosure occurs when a company makes reference to a specific environmental topic in its annual report. On the other hand, a quantitative disclosure occurs when a company discloses on absolute quantity. Environmental impacts need to be disclosed for the purposes of research on each particular company. Voluntary environmental disclosures can be formal or informal. Informal disclosures can include filing late tax returns but this can be dangerous for large sums of money for the company (Scott W.2007, pp 56). Formal disclosures require the company to negotiate before disclosing the information to the public. Most companies tend to provide qualitative environmental disclosures about their performance. Environmental disclosures are essential in mining industries because of various reasons. This is because environmental disclosures ensure that the company complies with the law in order to maintain procurement initiatives (Scott W.2007, pp 58). They can also result to competitive advantage of the company hence increasing profits. The environmental and social disclosures in Hudbay Minerals show that there was environmental compliance with the law (Hudbay Minerals.2010). The management operations were certified as well as the health and safety issues of the environment. On the other hand, the environmental voluntary disclosures of Exxaro mining shows how the company manages the available resources to ensure that it does not cause environmental pollution (Exxaro mining 2010). For example, the company made a water disclosure initiative to show that it was concerned with environmental protection. The two mining companies had different environmental and social disclosures. iii) accounting reality The explanation of accounting reality is difficult to explain. This is because different companies will have various strategies to report their business operations hence making it hard to explain the meaning of accounting reality. Due to the use of various reporting strategies, different companies will have financial statements that will have confusing features of the economic condition (Beaver W.2007, pp 45). In addition, companies make choice of their financing methods hence making their financial statements different from those of other companies. This also makes the explanation of accounting reality more complicated because accounting statements differ from one company to another. The stakeholder theory can be used in explaining accounting reality. This is because; different companies have variety of stakeholder groups which differ from one company to another. The difference in stakeholder groups results to differences in voluntary disclosures from one company to another. The internal stakeholders in companies include employees, directors and managers. Companies can also have connected stakeholders who include customers, advisors, consultants, suppliers and shareholders. On the other hand, the external stakeholders are the government, pressure groups, media and the local community. Companies discuss different topics in their voluntary disclosures because of the differences in the stakeholder groups (Beaver W.2007, pp 55). In most companies, stakeholders vary in terms of interests in financial activities and their power to manipulate business decisions. This brings differences in financial statements as well as in the entire business operation. For example, the interest of shareholders is to get profit while their power and influence is in the election of directors. The differences in stakeholder groups create differences in annual reporting of the various companies. In the environmental voluntary disclosures of Exxaro mining, the company shows the measures taken in water management in order to protect the environment while in Hudbay, the company discusses its environmental and safety measures in order to protect the environment and the life of people (Hudbay Minerals.2010). The differences in stakeholder interests are therefore the major determiners of environmental and social disclosures in most companies. Moreover, companies make use of the stakeholder theory in voluntary disclosures because it helps to show the measures taken by the company to fulfill the needs of its different stakeholders. The other reason for the differences in disclosures between different companies is because companies choose what to reveal to the public and what not to reveal. The freedom of choice in environmental and social disclosures between different companies creates the differences in voluntary disclosures hence the difficulty in determining accounting reality. Environmental and social disclosures are also determined by the corporate social responsibility of a company. The definition of corporate social responsibility differs from one company to another hence the differences in social and environmental disclosures. In most cases, corporate social responsibility is taken to represent the way different companies integrate their environmental and social concerns into the company’s decision making, values and operation strategies in order to improve the entire society. Corporate social responsibility leads to sustainable financial development in the company because it makes many stakeholders to devote their efforts in achieving company success (Beaver W.2007, pp 53). Companies disclose their environmental and social disclosures because they have to take care of the interests of their stakeholders. This is because, environmental and social disclosures are concerned with environmental protection, health of the stakeholders, good ethics, the protection of human rights and human resource management in the company in order to promote proper business operation. Voluntary environmental and social disclosures differ from one company to another depending on how the company wants to portray itself. In addition, these disclosures also differ in quality and quantity depending on the kind of information that a company wishes to disclose to its stakeholders. In addition, the difference in environmental and social voluntary disclosures is also brought about by the requirements of the stakeholders in each particular company. Companies will disclose different information in order to make its stakeholders satisfied so as to enhance business performance. The stakeholder theory explains that companies will disclose different information in both quality and quantity because of the differences in the interests of the stakeholders (Beaver W.2007, pp 59). Environmental and social disclosures create accountability of the company because help to show the transparency of the company in its business operations. In this connection, accounting reality can be explained using the stakeholder theory whereby companies have different stakeholder groups who have different interests hence the differences in voluntary disclosures. References: Beaver W. Financial reporting: an accounting revolution. 2007. New York. Penguin publishers Deegan C. Financial accounting theory, 3rd Ed. 2009. Australia. McGraw Hill. Evangeline E. Applying stakeholder theory to analyze corporate environmental performance: evidence from Australian listed companies. Asian review of accounting. 2007. Vol. 15, pp 164-184 Exxaro mining. Integrated annual report. 2010. Web. Retrieved on 10th August 2011 from http://financialresults.co.za/2011/exxaro_ar2010/pr-environment02.html Hudbay Minerals. Environment, health and safety. 2010. Web. Retrieved on 10th August 2011 from http://marketbrief.com/filings/view.jsp?formid=7634738&secwatch Scott W. Financial accounting theory. 2007. New York. Penguin publishers Read More