The Recent Developments in Australian Accounting Regulations Frameworks - Essay Example

ACCOUNTING THEORY: CASE STUDY ANALYSIS By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Task 1 The article: “Retailers Face Multi-billion-dollar hit from Proposed Lease Accounting Changes” as presented in The Sydney Morning Herald provides a comprehensive news review of the recent developments in Australian Accounting Regulations Frameworks. The news piece indicates that Australia’s fastest growing retailers have been exposed to an imminent challenge that will likely negatively affect their existing profit levels due to the proposed accounting rules, which will require them to now disclose more than $40 billion worth of leases onto their respective statements of financial position for the very first time. It notes that in relation to the proposed changes to lease accounting regulations as set forth by the International Accounting Standards Board, all major Australian based retailer giants like Woolworths, Wesfarmers and Myer will be required to compute their respective net present values for possible future leases and thereafter, present them as debt on their statements of financial position (Mitchell, 2015). Notwithstanding, as opposed to adhering to earlier requirements where rent payments were depicted as costs incurred, the proposed change would require them to engage in expensing theoretical amortisation and financing costs. As a result of this development, retailers will enjoy a greater level of earnings before interest, tax depreciation and amortisation but will, on the contrary, minimise amounts attributed to pre-taxes as well as net profits (Mitchell, 2015). The author notes that the minimisation of net profits and pre-tax profits will likely occur as a result of tremendous increase in rental expenses that emanate from both amortisation and financing costs especially for the fast-growing major retailers and banks who are keen to opening branches under new lease agreements (Mitchell, 2015). The article consequently argues that these leases will now be treated as assets however; as par last months’ IASBs draft proposals, these leases will be amortised faster as opposed to the capitalised commitments hence leading to a significant reduction in shareholder equity (Mitchell, 2015). In consequence, the development is set to have a relatively higher impact on these retailers since the proposition will affect the gearing levels and thereby reduce the immediate return on capital employed ratios. In fact, such major retailers like Myer, Specialty Fashion and The Reject Shop will be affected than others since they enjoy a great deal of long term level of liabilities. Certainly, the article notes that retailers that have been perceived to have enjoyed intensive level of growth by way of opening a significant number of newer stores in the recent period and thus are into immense number of lease programs like Lovisa and Super Retail Group will be affected to a greater extent (Mitchell, 2015). It is important to note that under the proposed changes all retailers will be required to engage in the capitalisation of leases preceding 12 months hence forcing more of them to employ rolling lease agreements as opposed to long term leases. Due to this, the article notes that there would be perceived increased level of gearing ratios thus requiring some companies to engage in the renegotiation of debt covenants with financial institutions. Despite most of the retail based investors being aware of these proposed changes, they however; fail to understand the extent for which the changes should be (Mitchell, 2015). Earlier on, IASB had made proposals to changing operating leases onto the statements of financial position in order to allow investors as well as creditors a clear and concise presentation of the immediate size of corporate debt levels (Mitchell, 2015). Conversely, the accounting regulation agency was forced to rethink this direction after stakeholders like Woolworths and Wesfarmers denounced it terming the changes as being costly and complex in nature. Application of the Article to Accounting Regulation and Politics Topic The arguments presented within this article are directly related to the accounting regulation and politics. It can be noted that the fundamental argument within this article rests with proposals made a significant and reliable Australian accounting body: International Accounting Standards Board. It is related to accounting regulation because it focuses on providing a sustained control as exercised by a public body over distinctive activities that are valued by a given set of stakeholders. For this case, the stakeholders involved are the retailers as well as financial institutions and shareholders who need accurate information related to gearing levels in order to establish whether to provide credit funds and invest respectively. Accounting regulation is deemed important because it facilitates the rationalisation as well as coordination of economic activities as way of reorganising behaviours in a more efficient way (Gaffikin, 2005). This can be seen in the way the proposed changes are expected to inform other affected stakeholders on the true and concise picture of a company’s liability position. Following this line of reasoning, accounting regulation and politics serves to protect the overall public interest as well as possible market failures. As opposed to earlier perceptions and debates on the true necessity of accounting regulation, others have argued that accounting regulation was not always necessary because market forces will operate to perfectly serve society as well as maximise immediate allocation of resources (Gaffikin, 2005). However, with the case at hand, it is noted that accounting regulation and politics is necessary because markets have always not operated in the perfect interest of all involved stakeholders and thus, there was always a perceived need for some level of intervention in the form of immediate regulation. In essence, accounting regulation should not be perceived on a negative perspective because it sometimes facilitate as well as enable imminent and influential activities. Apparently, the proposed changes fall under the disclosure regulation framework, which advocates for the disclosure of informational mode of regulation that is, to a greater extent, interventionists in nature (Gaffikin, 2005). An overall comprehension of regulation for such companies like Woolworths and Wesfarmers require a distinctively deeper level of evaluation of the many attributes that are linked with the underlying imposed accounting regulation. Task 2 The focus of this paper is on evaluating the comment letters related to IASB ED/2014/6 Disclosure Initiative (Proposed Amendments to IAS7). The proposed amendments were made in December 18th, 2014 as the comments from different affected stakeholders were expected by 17 April 2015. These proposals required entities to engage in the disclosure of a reconciliation of all amounts within the opening and closing balance sheet for every accounting item for which cash flows were already or were to be categorised as financing activities in cash flow statements in exception of all equity items. Furthermore, it requires the entities to disclose information that related to possible limitations, which could affect the decisions of a given entity in order to utilise cash and cash equivalent balance amounts, including such items as tax liabilities that could emanate from the repatriation of foreign based cash and cash equivalent balances whenever it was certain that the information would result to the comprehension of a firm’s liquidity risk. The paper analyses the responses made by such interest groups as European Financial Reporting Advisory Group, Deloitte, Insurance Europe and Malaysian Accounting Standards Board (MASB). Comments from Different Groups i) European Financial Reporting Advisory Group The body has not reached a consensus in regards to if the proposals in the ED are in any way useful and appropriate. In relation to the proposals made to the movements witnessed in debt levels, the body agrees on the need for providing users with distinctive net debt reconciliation as a step that can help reduce level of costs (EFRAG, 2015). However, other members belonging to the group are not in agreement since the proposals are perceived to cause significant costs as opposed to expected benefits (EFRAG, 2015). In regards to the IFRS Taxonomy that will allow future amendments to the item, EFRAG reasserts that it should not be incorporated into the IASB Standard setting process but rather be stored as a separate activity of the entire IFRS Foundation (EFRAG, 2015). This is because it might take IASB further from a principle based perspective to standard setting especially in areas of disclosures. ii) Insurance Europe Insurance Europe represents about 21 of the continent’s largest insurance companies that include the European Insurance CFO Forum. The entity is in full support of the IASB’s disclosure proposals in order to improve on the disclosures principles and thus, increase the level of information availed to the immediate users. On the contrary, the entity expects that the IASB discussion paper should not have taken to underestimate the imminent challenges that organisations are exposed to whenever there is excessive application of changes to IFRS (Insurance Europe, 2015). Unlike European Financial Reporting Advisory Group, Insurance Europe does not agree with the proposals related to the reconciliation of the cash flows from all financing based activities to balance sheet (Insurance Europe, 2015). The entity expects the IASB to reassess the immediate purpose of and utilisation of the statement of cash flows for most of financial organisations like insurers. The decision rests with the fact that most of the users of insurers’ financial information do not perceive the need to use cash flow statements as it is inadequate to portray a business approach of insurance organisations hence possesses little or no informational value (Insurance Europe, 2015). Subsequently, the entity disagrees completely with the provision of the proposed disclosures related to the limitations on cash and cash equivalents. It is argued that the existing p.48 in IAS 7 already formulated the appropriate and necessary disclosures (Insurance Europe, 2015). It is important to note that under the newer proposed changes, all entities will be required to consider on whether to present matters related to comprehension of the liquidity and entity like limitations that affect the decision of a given entity that might come up as a result of repatriation of foreign cash and cash equivalents amounts (Insurance Europe, 2015). Just like European Financial Reporting Advisory Group, Insurance Europe does not conform to the proposed changes relating to IFRS Taxonomy (Insurance Europe, 2015). The entity feels that ED on technical IFRS queries should be first focused on. iii) Malaysian Accounting Standards Board (MASB) Just like the European Financial Reporting Advisory Group, Malaysian Accounting Standards Board (MASB) has mixed reactions towards the reconciliation of cash flows proposals. Some of the members agree that it will be useful to avail distinctive insights into the period-on-period movement on net debt levels (MASB, 2015). However, other members deem it not being sufficient descriptive to avail enough information. Thus, they recommend that sufficient levels of details be provided in order to positively affect its disclosure capacities (MASB, 2015). Subsequently, as opposed to Insurance Companies, the entity agrees of the proposed changes related to the cash and cash equivalents but also ascertains that most of the members perceive the proposals being very subjective in nature (MASB, 2015). Just like European Financial Reporting Advisory Group and Insurance Europe, MASB does not conform to the proposed changes relating to IFRS Taxonomy (MASB, 2015). It ascertains that any incorporation might lead to prescriptive end results for all IFRS requirements. iv) Deloitte Tohmatsu As much as the entity supports the proposals related to reconciliation of cash flow statements and thus, net debt levels, just like MASB and EFRAG, they do not agree to the proposals since it is deemed to provide incomplete perspective of movement of items (Deloitte, 2015). The firm does not support the incorporation of IFRS Taxonomy since it does not guarantee any level of transparency and quality improvement. Public Interest Theory The public interest theory best explains this comments letters because they encourage the attainment of certain levels of public expectations which when left to the existing market structures will not be accomplished at all (Gaffikin, 2005). In fact, the regulation is set to be a product of the responses made to demand for efficient correction on inefficient and unfair market practices. References List Deloitte. 2015. Exposure Draft ED 2014/6-Disclosure Initiative (Proposed amendments to IAS7). Retrieved from http://www.iasplus.com/en/publications/global/comment-letters/2015/ed-2014-6/at_download/file/DTTL%20comment%20letter%202014-6.pdf EFRAG. 2015. EFRAG’s draft comment letter on the IASB´s ED/2014/6 Disclosure Initiative (Proposed amendments to IAS 7). Retrieved from http://www.efrag.org/Front/n1-1445/EFRAG-s-draft-comment-letter-on-the-IASB-s-ED-2014-6-Disclosure-Initiative--Proposed-amendments-to-IAS-7-.aspx Gaffikin, M, 2005. Regulation as accounting theory. Faculty of Business-Accounting & Finance Working Papers, University of Wollongong. Insurance Europe. 2015. Subject: Comments on IASB Exposure Draft ED 2014/6, Disclosure Initiative-Proposed amendments to IAS7. Retrieved from http://www.insuranceeurope.eu/uploads/Modules/Publications/joint-response-on-amendments-ias-7.pdf MASB. 2015. Exposure Draft ED/2014/6 Disclosure Initiative (Proposed Amendments to IAS 7). Retrieved from http://www.masb.org.my/images/Projects/CL/ED/CL_IASB_ED_Disclosure-Initiative.pdf Mitchell, S. 2015. “Retailers face multi-billion dollar hit from proposed lease accounting changes” The Sydney Morning Herald, Retrieved on May 11, 2015 from http://www.smh.com.au/business/retailers-face-multibilliondollar-hit-from-proposed-lease-accounting-changes-20150422-1mqjx9.html Read More