Please find attached file of requirements for Assignments.
Some information from lecturer:-
1. And Please select two company (Listed in ASX S&P 300 index) from same industry.
2. Try to make table or diagram if possible.
3. Use the annual reports of the companies that will be helpful.
4. In Sec-3 write something about earning bonus. If policies changes then describes AASB
5. Sec- 4 Very important part
1) Quality of disclosure
2) Every account should have enough information on disclosure.
6. Sec 4, 5, 6 are mainly important, lecturer will consider these parts seriously.
Subject Outline and Student Handbook.
Group Assignment theme:
Recommended steps/navigation to complete the assignment project:
iii. Are these accounting policies and estimates used by their competitors?
vii. Any Red Flags/questionable number in the accounting report?
viii. Which accounting positions capture them? Why? Explain
iii. understand the possible implications of an organisation making particular accounting choices and disclosures
Section 1: Identify Key Accounting Policies
Key policies and estimates used to measure risks and critical factors for success must be identified.
Section 2: Assess Accounting Flexibility
Accounting information is more open to distortion if managers have a high degree of flexibility in choosing policies and estimates.
Section 3: Evaluate Accounting Strategy
Flexibility in accounting choices allows managers to strategically communicate economic information or distort performance.
Issues to consider include:
Section 4: Evaluate the Quality of Disclosure
Issues to consider include:
Section 5: Identify Potential Red Flags
Issues that warrant gathering more information include:
Section 6: Compliant with the Conceptual Framework
Submit the report in accordance with assessment policy stated in the Subject
Outline and Student Handbook.
Format of the Report and deliverables
Positive Theory of Accounting (PAT)
PAT seeks to explain and predict accounting-related phenomena, for example, study of capital market’s reaction to particular accounting policies; what motivates managers to select a given method of accounting; reasons for the existence of particular accounting – based contracts. It relies upon a fundamental assumption that individual action can be predicted on the basis that all action is driven by a desire to maximise wealth. It argues that selection of accounting methods can be explained by either efficiency or opportunistic arguments. So the theory provides insights into why managers favour particular accounting methods in preference to others. PAT also maintains that Accounting methods can impact on cash flows associated with debt and management compensation contracts.The use of particular accounting methods can have conflicting effects, For example, might ‘loosen debt covenants’ but increase political costs. The theory Emphasises the way in which accounting numbers are actually used throughout society and how a change in accounting methods can have implications for relationships with managers, debtholders, and the broader political environment
Normative theories of accounting
Prescribe how accounting should be practised. Argue typically that a central role of accounting theory is to provide prescription and inform about optimal accounting approaches and why a particular approach is considered optimal. Examples: Conceptual Framework Project, current-cost accounting, exit-price accounting and deprival-value accounting . It seek to provide guidance in selecting accounting procedures that are most appropriate and prescribe what should be done
The Conceptual Framework:
Other normative theories
Three main classifications
Financial statement preparation process (from Business Activities to Financial Statements) and influencing factors:
Financial statements are an important source of information to the capital markets. Quality financial reporting provides much-needed relevant and reliable information to capital market participants.
The Following features of accounting systems facilitate quality information:
Delegation of Reporting to Management
The efficiency perspective of PAT concludes that Accounting methods adopted by firms best reflect the underlying financial performance of the entity and might select the most efficient way to portray the performance of the entity.
Management is responsible for the application of accounting methods (recognition, measurement and disclosure) in financial statements. Management have some discretion in the choice of accounting policies and the estimates made in financial statements.
Management can use this discretion in revealing their private information about the firm or in distorting the accounting numbers. Distortion of accounting may reflect incentives facing managers.
It is not optimal to use accounting regulation to eliminate managerial flexibility completely. Accounting systems leave considerable room for managers to influence financial statement data. Corporate managers can choose accounting and disclosure policies to hide the true economic picture of their business and manipulate investors’ perceptions. Superior disclosure strategy will enable managers to communicate the underlying business reality to outside investors.
Accounting and Reporting Standards
Accrual accounting is subjective and relies on a variety of assumptions. Managers have incentives to use accounting discretion to distort reported profits. Accounting standards are developed to improve the quality of financial reporting. Accounting standards ensure that managers are not able to use their accounting flexibility to disguise reality for self- serving purposes.
Accounting standards try to eliminate unsatisfactory reporting practices, thereby promoting consistency and comparability. Many countries in the world are now reporting or converging to International Financial Reporting Standards (IFRS). IFRS have been described as more principles-based (rather than rules-based).
External Auditing of Financial Statements
Audits provide an independent (third party) opinion on the quality of the financial statements. Audits are required for many companies, private and public. There is a move towards international auditing standards by many countries. Audit committees enhance the auditing process
Auditing is a verification of the integrity of the reported financial statements by someone independent of the preparer. Auditor ensures that managers use accounting rules and conventions consistently over time. Auditing improves the quality of accounting data. Threat of lawsuits and resulting penalties has the beneficial effect of improving the accuracy of financial information and disclosure.
Need for accrual accounting arises from investors’ demand for financial reports on a periodic basis. Corporate financial reports are prepared using accrual rather than cash accounting. Accrual accounting distinguishes between the recording of costs and benefits associated with economic activities. Effects of economic transactions are recorded on the basis of expected and not actual cash receipts and payments.
The conceptual framework defines the following financial statement elements and the irrelation:
Assets = Liabilities + Equity Profit = Revenues – Expenses Another important relation:
Comprehensive income = profit for the period + items recognised directly in equity
Financial statement preparation process
In summary, Corporate managers acquire physical and financial resources to create value for the firm’s investors through business activities. Financial statements measure and summarise the economic consequences of business activities. Financial statements are a source of widely available data on publicly traded corporations. Accrual accounting attempts to accurately reflect expectations of economic performance, but requires careful analysis. Accounting standards and auditing ensure quality of financial reports.
Types of Financial Statements
According to the International Accounting Standards Board (IASB), a ‘complete set of financial statements’ comprises:
– Statement of financial position as at the end of the period
– Statement of profit or loss and other comprehensive income for the period
– Statement of changes in equity for the period
– Statement of cash flows for the period
– Notes (comprising a summary of significant accounting policies and other explanatory information).
Factors Influencing Accounting Quality
It is necessary to allow managers some discretion in applying accounting standards. As a result, three potential sources of noise and bias in accounting data include:
Efficiency perspective of PAT argues :
Accounting standards may not reflect the economics of the firm’s transactions. So, some flexibility in accounting required. Accrual accounting requires forecast estimates that can be incorrect.
b. Manager’s accounting choice
Managers have a number of incentives to choose accounting disclosures that are biased as suggest by Positive Accounting Theory (PAT):