Current Development in Accounting Thought

This article discusses the current development in accounting thought and its impact on the financial reporting system. It explores the major accounting issues related to climate risk disclosure and their linkage to accounting theories. The article also highlights the role of regulatory bodies in implementing changes in accounting standards.

1
Current Development in Accounting Thought

2
Solution to Question 1:
Introduction
This section of the report is developed for undertaking an analysis of a selected article in
relation to the accounting news that is having an impact on the financial reporting system of
business corporations. The overall analysis is done for providing insights into the key accounting
issues discussed within the selected article with the use of relevant theoretical framework. The
article selected for the analysis purpose is ‘Climate Risk Disclosure can no longer be avoided’
published in Australian Financial Review (AFR) in the year 2019.
Description of Major Accounting Issues in Article
The selected news article has presented discussion about the need of including climate
risks disclosures within the financial reports. As per the article, climate risk is not only a
sustainability issue but it also requires a disclosure within the financial reports of it meets the
definition of ‘materiality’. The Australian Accounting Standards Board (AASB) and the
Auditing and Assurance Standards Board (AUASB) are jointly involved in developing the best
practices in application of mandatory definition of materiality in relation to the climate risks. The
main objective of the proposed changes it to limit the ability of the companies to avid voluntary
disclosure regarding their climate risk that could have a significant impact on their operational
activities (Poljak, 2019).
This type of risk is difficult to quantity in terms of their financial impact but need to be
disclosed within the financial reports because of its impact on the expected returns of an
investor. The climate risk such as occurrence of a natural disaster, changes in technology,
markets, rules and regulations can have a large impact on the future financial performance of a
company. Also, in the case when the business operations are not exposed to any risk and as such
there is no impact on the materiality of the financial information disclosed then it is necessary or
disclosing the assumptions that are being used in measuring the impact of the climate risk son
the future performance of an entity. These types of disclosures would have a large impact on
enriching the quality of financial information in terms of its fair value, impairments, provisions
for restoration and estimates and judgments used (Ellison, 2019).
The changes are being made for protecting the interests of the investors after they have
stated regarding the impact of climate-related risks on the investment decisions. The inability of
the financial reports to address this risk is having a negative impact on their mind regarding the
accountability and integrity of the business operations. The issue has become largely important
after the emergence of legal claim against Commonwealth Bank of Australia (CBA) by
Environmental Justice Australia. The claim is on the basis of inadequate disclosure by the bank
in relation to its climate risk that had a significant material impact on its financial performance.
As such, it ahs breached the Corporations Act 2001 by not providing a true and fair view of its
financial position to its customers. CBA in response has included a detailed discussion related to

3
its climate risk within its annual report for withdrawal of the case. As stated in the given article,
the AASB and AUASB have jointly developed a bulletin for guiding the preparers and directors
regarding the ways of providing disclosures regarding their climate-related risks. The Bulletin,
that is, Assessing financial statements materiality using AASB practice statement 2, has
presented the materiality definition of climate-related risks. The statement has required that
businesses cannot only consider the climate risks only an issue related to their CSR (Corporate
Social Responsibility) but as a significant risk impacting the materiality of their financial
statements. According to this standard, the businesses are required to provide sufficient
information bout the clime risks for determining whether could have an impact on its future
performance and thus guiding the investor’s decisions (Poljak, 2019).
As stated in the given article, the Australian bodies are regarded as having the
primary regulator bodies to link the mandatory definition of materiality on the basis of
international standards and its subsequent interpretations as per the practice statement 2. The
statement has been developed mainly for providing assistance to the developers about applying
materiality judgments and ensuring that the disclosure of climate related information would have
an impact on the decisions of primary users. In addition to this, the international guidelines has
also been released by the Australian Securities Exchange (ASX) governance council as per the
Taskforce Climate related financial disclosures (TCFD) for guiding the listed companies on ASX
in relation to climate related risks. The Reserve Bank of Australia (RBA) has also stated the
Australian companies to disclose the associated economic and financial risks associated with
their climate risks Climate Disclosure Standards Board, 2018).
Linkage of major issues in article to the Accounting Topics or Theories
The selected article has presented the major issue of need of including the information
about climate related risks in the annual reports of Australian companies for protecting the
interests of investors. The changes within the financial reporting system of companies by
including the disclosures about the climate related risks are intended to improve the governance,
risk management and financial reporting. As featured in the Australian Financial Review, The
AASB and AuASB have issued a joint statement regarding the implementation of climate-related
risks within the financial statements. The main aim of developing such statements is to improve
the quality of financial reporting by ensuring that all type of materialistic information is
disclosed within the annual reports of a corporation. The inclusion of climate related risks will
help the businesses to effectively comply with the conceptual accounting framework principles.
The conceptual accounting framework has presented qualitative principles that need to be
followed by ASX listed entities to disclose all required and materialistic financial information to
the end-users (Zabeti, 2019).
The conceptual accounting framework has provided the following qualitative principle
that need to be followed by developers for ensuring that they provide quality financial
information within the financial reports. The two major fundamental qualitative principles

4
include relevancy and faithful presentation while the remaining four enhancing theoretical
principles provided by the conceptual framework are understandability, comparability,
verifiability and timeliness. The implementation of all these qualitative characteristics in the
financial reports is required by the companies as per the international standards of IASB. The
compliance of all these qualitative principles is required to meet the objective of general purpose
financial reporting that is guiding the economic decisions of the investors by providing them
accurate financial information. In this context, the inclusion of climate-related risk would
enhance the quality and integrity within the annual reports by disclosing the impact that such risk
could have on their future performance. This is because climate-related risk could have an
impact on the asset impairment, change in the useful life on asset, impacting the fair valuation of
assets, future provisions and contingent liabilities due to fines. Therefore, it is necessary to
include the information about the risks related to climate for providing true and fair view of the
financial position of a firm to its investors (Uyeda, 2010, p.491).
The narrative is required mainly in the operating and financial review of the company so
that investors can gain an insight into the climate related risk that is relevant to estimating
accounting materiality assessments. In context of the qualitative principles provided by the
conceptual accounting framework, the inclusion of such type of information would improve the
decision usefulness of the annual reports. The development of materiality definition in context o
climate related risks is designed for guiding the application of professional judgment for
determining the acceptable levels of information disclosure within the annual reports of business
entities (Professional, 2017, pp.1-13). Thus, the inclusion of subject of materiality within the
climate risk reporting would facilitate the investors to understand the impact of such risks on the
future performance of firms. The information provided in reference to the climate risks and
opportunities could impact the investment decisions of the current and potential investors. As
such, it would help in achieving the major objective of developing the financial reports by
business entities as per the IASB standards. Also, in accordance with the qualitative principles of
conceptual accounting framework the inclusion of such information would help in improving the
relevancy and faithfulness of the information provided within the annual report. Also, the
adoption of international guidelines as per the TCFD framework and joint statement of the
AASB and AuASB would help in enhancing the understandability and verifiability of the
information disclosed in relation to climate related risks (Climate Disclosure Standards Board,
2018).
Conclusion
The overall discussion ahs inferred that there is increasing pressure on companies for
disclosing their financial risk from climate changes and stating the impact of the issue on
businesses. The inclusion of information related to climate risk is required to provide true and
fair view of the expected performance of a firm to the end-users such as investors or creditors.

5
Solution to Question 2:
The purpose of this section of the report is to evaluate the purpose of introducing the
exposure draft and make use of theories of regulation to review the intention of regulating body
and entities who have provided their comments on exposure draft. It is essential to select the
current exposure draft that has issued by the regulating body to introduce the new standard or to
modify the old standard. IFRS Foundation has undertaken the maintenance project to make
changes in the accounting standard IAS37 on provision, contingent liabilities and contingent
assets.
Note: Exposure Draft has been provided on IFRS Foundation Website with name ED/2018/2:
Onerous Contract-Cost of Fulfilling a Contract. Comment letters are invited on this exposure
draft by 15 April, 2019 (IFRS Foundation (IASB), 2018).
Section 1: Issues that has been covered in the exposure draft (Accounting Changes that
have been introduced by the selected exposure draft)
It has been mentioned in the exposure draft (Onerous Contract: IAS37) is introduced to
make specific changes in the accounting standard IAS37 after the recommendation received
from the IFRS Interpretation Committee. The specific purpose of selected exposure draft to
provide the detailed information on various costs to be included while estimating the “Cost of
Fulfilling” a contract to check whether the contract under the category of Onerous Contract or
not (IFRS Foundation: Project-About, 2019). Definition of Onerous Contract has been defined
under IAS37 and according to that definition- Onerous Contract refers to the contract where the
unavoidable cots (Cost that will incur to complete the contract) exceed the total value of
economic benefits flowing under such contract. In order to make this definition more specific
unavoidable costs is defined as the least cost expenses that have to be paid to complete the
contract and it must be lower of cost to fulfill the contract and penalties incurred in case of
failure to complete the contract. Definition on onerous contract is clear and properly applicable
where is required but when it comes to calculate the cost of fulfill the contract noting has been
mentioned in the definition and IAS37 (In Brief: Onerous Contracts, 2018).
Many requests have been generated to the IASB and IFRS interpretation committee to
review the definition on Onerous Contract and provide information regarding the costs that can
be included while the value of cost of fulfilling the contract. It has been seen that major requests
has been received from the construction companies as there are major cases of contract to be
declared as onerous. IFRS Interpretation Committee reviewed the request and recommended to
the IFRS Foundation to make the required changes so that ambiguity in the accounting standard
can be removed (IFRS Foundation (IASB), 2018).
Section 2: Use of public interest theory to judge the behavior of regulator for introducing
the selected exposure draft

6
Public interest theory refers to the regulation theory that explains regulators must work
for the public interest. The regulatory framework of public interest theory proposed by the
legislatures is to promote and protect the consumer interest. As per the public interest theory, it
has been assumed that regulators work for the interest of the public and will introduce only those
regulations that will provide benefits to the public at large. Regulators must introduce only those
regulations that are in interests of public and benefits arose to the public is greater than the cost.
It means regulators are not allowed to introduce the regulations that are defined for the interest of
particular entity or group and also regulators are not allowed any benefit from regulation for
their self interest (Deegan, 2014, pp. 45-47).
In Australia, Australian Accounting Standards Board (AASB) is the independent
government body that governs the financial reporting requirements applicable on all private and
public sectors companies. AASB also takes active participation together with IASB in
development of global financial accounting standards. Functions and powers of AASB have
been set out under Australian Securities and Investments Commission Act 2001which means it
has to act as this law and must work for the public interest.
Similarly, IFRS Foundation is set up as the not for profit organization to work for the
public interest and its main role is to look after the requirements of global financial market and
cross border economic activities. IFRS Foundation has been founded within the global securities
regulators and must work for the interest of public and does not provide benefit to any special
class of society (IFRS: How we work in the public interest, 2019). The governance structure of
IRFS Foundation is strong and ensures that process of standard setting remain independent and
must not affected by any commercial interest of any of the specific entity or stakeholder group.
So it can be said that exposure draft introduced by IFRS Foundation is in public interest as it will
not benefit any specific entity or group (Deegan, 2014).
Section 3: Views presented in the comment letters and areas of agreement & disagreement
with the selected exposure draft
Comment letters are invited by various public and private organizations to comments on
the three questions mentioned in the exposure draft. Many comment letters have been received
answering all these questions and among these comments letters, four letters have been selected.
Comment Letter 1: CPA Ireland
Screenshot

7
Figure 1: Exposure Draft ED/2018/2 - Onerous Contracts - Cost of Fulfilling a Contract
CPA Ireland (Roxburgh, 2019)
Institute of Certified Public Accountants in Ireland agrees with the proposed amendment
in the IAS37 as provided in Exposure draft. CPA Ireland agrees with all three questions with no
specific additions (Roxburgh, 2019, p 1).
Comment Letter 2: Financial Reporting Council (FRC)
Screenshot:

8
Figure 2: Exposure Draft ED/2018/2 - Onerous Contracts - Cost of Fulfilling a Contract
Financial Reporting Council (FRC) (George, 2019)
FRC agrees with main idea to introducing the clarification about the cost to be considered
while determining the whether the contract is onerous. FRC also agrees with point of exposure
draft on providing the choice for selecting the cost approach (directly related cost approach) will
be more consistent and goes with the requirement of other IFRSs. FRC further clarifies that
IAS37 has failed to make distinction costs that should be considered while checking contract is
onerous and costs that should be considered while determining the amount of provisions made in
respect of such contract. It means FRC agrees with the proposal to amend the IAS37 but with
some more clarification and changes mentioned (George, 2019, pp. 1-3).
Comment letter 3: Grant Thornton International Ltd
Screenshot:

9
Figure 3: Exposure Draft ED/2018/2 - Onerous Contracts - Cost of Fulfilling a Contract
Grant Thornton International Ltd (Miller, 2019)
Grant Thronton agrees to the question 1 asked in the exposure draft related to specify in
para 68 of IAS37 to consider the costs that directly related to contract while estimating the cost
of fulfilling the contract. Further Grant Thronton contented that while considering the items
listed in paragraph 68A-68B some of the entities will face challenges while following with
consistency and quality (Miller, 2019, pp. 1-3).
Comment Letter 4: McCain Foods Limited
Screenshot:

10
Figure 4: Exposure Draft ED/2018/2 - Onerous Contracts - Cost of Fulfilling a Contract
McCain Foods Limited (Burton, 2019)
McCain Foods Limited agrees with the all proposed changes in the exposure draft and
provided that cost of goods sold comprises of both cost of purchases and cost of conversion with
clarification on costs that should be in included in the cost of conversion (Burton, 2019, pp. 1-2).
Section 4: Use of regulation theories to provide what has been explained in the comment
letters
There are three theories of regulation and they are public interest theory, private interest
theory and capture theory. Public interest theory has been explained in detail in section 2 and it
can be referred from there. Private interest theory points out that regulators and entity supports
for only those matter that are for their self interest and benefits them if it such provision is
applicable. Lastly capture theory provides that regulators primarily intend to act in the public
interest and when regulation passes they intends to maximise their self interest for personal
benefits ((Deegan, 2014).
It has been found that public interest theory and private interest theory best explains the
opinions provided in the comments. CPA Ireland and Financial Reporting Council (FRC) work
for the public interest and they have provided the comment for the sake of benefit that will

11
realize by the general public. While the listed companies such as Grant Thornton International
Ltd and McCain Foods Limited have provided their comments or opinions only to maximise
their own self interest.

12
References
Burton, R.N. (2019, 11 April). Onerous contracts - cost of fulfilling a contract. Retrieved on May
14, 2019, from
http://eifrs.ifrs.org/eifrs/comment_letters//527/527_25350_RichardNBurtonMcCainFood
s_0_Onerouscontractscostoffulfillingacontract.pdf
Climate Disclosure Standards Board. (2018, 9 January). Challenges in determining materiality of
climate disclosures. Retrieved from https://www.cdsb.net/task-force/757/challenges-
determining-materiality-climate-disclosures
Deegan, C. (2014). Financial Accounting Theory (4th Ed.). McGraw-Hill: Sydney.
Ellison, M. (2019, March 14). New developments impact climate change related risks. Retrieved
from https://www.lexology.com/library/detail.aspx?g=50626d36-bc64-499a-a649-
7c32653891d5
George, P. (2019, 5 April). Onerous contracts - cost of fulfilling a contract. Retrieved on May
14, 2019, from
http://eifrs.ifrs.org/eifrs/comment_letters//527/527_25322_AndrewLennardFinancialRep
ortingCouncilFRC_0_IASBLetter_20190405.pdf
IFRS Foundation (IASB). (2018, December). Exposure Draft ED/2018/2: Onerous Contracts-
Cost of Fulfilling a Contract. Retrieved May 11, 2019, from
https://www.ifrs.org/-/media/project/onerous-contracts-cost-of-fulfilling-a-contract-
amendments-to-ias-37/ed-onerous-contracts-december-2018.pdf
IFRS Foundation: Project-About. (2019). Onerous Contracts—Cost of Fulfilling a Contract
(Amendments to IAS 37). Retrieved May 11, 2019, from
https://www.ifrs.org/projects/work-plan/onerous-contracts-cost-of-fulfilling-a-contract/
#about
IFRS: How we work in the public interest. (2019). Public Interest. Retrieved May 11, 2019, from
https://www.ifrs.org/about-us/the-public-interest/
In Brief: Onerous Contracts. (2018, December). Onerous contracts: Proposals to clarify IAS 37
Provisions, Contingent Liabilities and Contingent Assets. Retrieved May 11, 2019, from
https://www.ifrs.org/-/media/project/onerous-contracts-cost-of-fulfilling-a-contract-
amendments-to-ias-37/ed-onerous-contracts-factsheet-dec-2018.pdf
Miller, S. (2019, 5 April). Onerous contracts - cost of fulfilling a contract. Retrieved on May 14,
2019, from
http://eifrs.ifrs.org/eifrs/comment_letters//527/527_25327_STEPHENMILLERGrantTho
rntonInternational_0_GTILcommentletteronED201802OnerouscontractsIAS37.pdf

13
Poljak, V. (2019, 12 March). Climate risk disclosure can no longer be avoided. Australian
Financial Review. Retrieved from https://www.afr.com/business/accounting/climate-risk-
disclosure-can-no-longer-be-avoided-20190311-h1c97g
Professional, B. (2017). ACCA Approved - P1 Governance, Risk and Ethics (September 2017 to
June 2018 exams), pp. 1-13. Australia: Becker Professional Education Ltd.
Roxburgh, D. (2019, 12 March). Onerous contracts - cost of fulfilling a contract. Retrieved on
May 14, 2019, from
http://eifrs.ifrs.org/eifrs/comment_letters//527/527_25305_MAUREENKELLYTheInstit
uteofCertifiedPublicAccountantsinIrelandCPAIreland_0_OnerousContractsresponse.pdf
Uyeda, C. (2010). Australian Master Environment Guide, p.491. Australia: CCH Australia
Limited.
Zabeti, S. (2019, 12 February). Climate risk disclosures & financial reporting. Retrieved from
https://www.accru.com/2019/02/climate-risk-disclosures-financial-reporting/