Accounting Theory and Issues

This report assesses the accounting issues in Insurance Australia Group Limited and evaluates its compliance with the conceptual framework. It discusses the share price drop, accounting requirements, and application of accounting theories.

Running head: ACCOUNTING THEORY AND ISSUES
Accounting Theory and Issues
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1ACCOUNTING THEORY AND ISSUES
Executive Summary:
The report takes an attempt to assess the various accounting issues inherent in one of the top
ASX organisations, which is Insurance Australia Group Limited. The report takes into account
the application of various theories and identification of accounting issues within the organisation.
Finally, it sheds light on evaluating the compliance of the organisation with the different
requirements of the conceptual framework.

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Table of Contents
Introduction:....................................................................................................................................3
Critical analysis/ Discussion:...........................................................................................................4
Discussion of the issues:..............................................................................................................4
Comparison of the annual report:................................................................................................8
Application of accounting theories:...........................................................................................10
Investment decision:..................................................................................................................11
Suggestions to improve accounting practices, disclosures and reporting:................................12
Conclusion:....................................................................................................................................12
References:....................................................................................................................................13

3ACCOUNTING THEORY AND ISSUES
Introduction:
The objective of this report is to dissect certain accounting issues in one of the leading
ASX listed organisations. In order to meet this purpose, Insurance Australia Group Limited is
taken into consideration. Moreover, the report considers the discussion regarding a news article
on Insurance Australia representing the fall in the share price of the organisation.
In this regard, one significant issue for the organisation is the adherence of the
organisation with different needs of AASB and conceptual framework. All AS listed entities are
needed to conform to the doctrines and principles of the accounting conceptual framework for
preparing and presenting financial statements in a precise and accurate manner. If adequate
adherence is not maintained in relation to AASB standards and conceptual framework
requirements, there might be increase in financial errors and frauds (Aasb.gov.au 2018).
Insurance Australia Group Limited is involved in underwriting general insurance
products and it operates across Australia, New Zealand along with corporate and other segments.
In addition, the organisation provides consumer insurance products like motor vehicles, lifestyle
and leisure, home and contents, travel and insurance, income protection products and others
(Iag.com.au 2018). It has workforce of nearly 13,500 employees operating in Australia, New
Zealand, Malaysia and Thailand.
In the current times, a significant accounting issue is non-compliance with the necessary
accounting guidelines and principles for financial reporting. This might develop the opportunity
for financial frauds and even the demise of the organisations. For avoiding this issue, it is
necessary for the organisations to conform to the necessary standards of accounting. Moreover,
the report covers the evaluation of two particular theories for financial reporting of Insurance

4ACCOUNTING THEORY AND ISSUES
Australia, which mainly include stakeholder theory and positive theory with respect to the
organisation.
Critical analysis/ Discussion:
Discussion of the issues:
Issue 1: Share price drop
(Source: Motley Fool Australia 2018)
From the above extract, it is evident that the share price of Insurance Australia has
declined by 8% to $7.59 after the disclosure of its annual results. The reason might be due to the
announcement made by the management of Insurance Australia in selling its businesses in
Indonesia, Vietnam and Thailand. In addition, there has been capital reduction due to the quota
share arrangement of the organisation with Berkshire Hathaway that minimises the amount of
capital needed to be held. From the perspective of the investors, all these aspects imply that
Insurance Australia has been shrinking its business slightly along with engineering its way to
greater margins and better return on equity. The above discussion makes it inherent that this is a
significant financial issue for Insurance Australia, which is associated with financial performance
and selling intentions.

5ACCOUNTING THEORY AND ISSUES
Issue 2: Accounting requirements
Evaluation of the annual report:
After evaluation of the annual report of Insurance Australia Group Limited in 2018, it is
apparent that the organisation has developed and presented its financial reports by conforming to
the Corporations Act 2001 and AASB. At the same time, it could be seen that the organisation
has conformed to the doctrines of IASB and IFRS. Moreover, from the annual report of
Insurance Australia in 2018, it is observed that the organisation has conformed to the guidelines
laid down in ASIC Corporations Instrument 2016/191 (Iag.com.au 2018). Thus, it could be said
that adequate conformance has been maintained by Insurance Australia to the necessary
accounting principles.
Adherence to the conceptual framework:
The conceptual framework of AASB has five elements constituting of income, expenses,
assets, equity and liabilities. One requirement of the conceptual framework is that the
organisations need to adopt more than one measurement base to gauge elements such as
liabilities, assets and others. This is because following only one measurement base does not

6ACCOUNTING THEORY AND ISSUES
ensure necessary financial information to the users. The significant measurement bases for
AASB include fair value, current value, historical cost and value-in-use (Beattie 2014). The
discussion below depicts whether Insurance Australia has adhered to the measurement needs of
AASB:
It could be seen that Insurance Australia has followed the mechanism of fair value,
historical cost and present value. Additional evidences are provided as follows:
From the above extracts, it could be seen that Insurance Australia has used current value,
fair value and historical cost for gauging various conceptual framework components like

7ACCOUNTING THEORY AND ISSUES
liabilities, assets, income and others. Thus, the above discussion clearly shows the fact that the
entity has assured compliance with all AASB requirements and conceptual framework.
As per the conceptual framework of AASB, the financial statements of the business
organisations need to possess both enhancing and fundamental qualitative characteristics and the
below-stated discussion depicts the conformance of Insurance Australia with such
characteristics:
Issue 3: Enhancing qualitative characteristics
Verifiability: The financial statement users of Insurance Australia could verify the accounting
method used in the financial reports by using their independent observations as well as
accounting knowledge (Cheng et al. 2014).
Comparability: Insurance Australia represents its financial information in a way that the users
could contrast them with other entities or with varying timeframes of similar entities.
Understandability: By providing notes to the financial statements, the users could gain an
overview of the various accounting treatments of the organisation.
Timeliness: The organisation publishes the required information to the users within time with
the help of different financial statements so that they could take sound decisions.
Issue 4: Fundamental qualitative characteristics
Faithful representation: Insurance Australia discloses both theoretical as well as numerical
description of the various financial components such as liabilities, assets and others for ensuring
completeness of information (Henderson et al. 2015).

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Relevance: The financial information of Insurance Australia contains predictive value as well as
confirmatory value through which the users of the financial statements of the organisation could
project the financial results and assess the last judgements.
Comparison of the annual report:
One of the significant competitors of Insurance Australia is Suncorp, as they operate in
the Australian insurance sector. The below-stated discussion contrasts the financial performance
of Insurance Australia with Suncorp:

9ACCOUNTING THEORY AND ISSUES
(Source: Iag.com.au 2018: Suncorpgroup.com.au 2018)
From the above extracts, it is observed that both Insurance Australia and Suncorp have
experienced a slight decline in net loss in 2018; however, Suncorp is enjoying competitive
advantage over Insurance Australia, as it has higher net profit.

10ACCOUNTING THEORY AND ISSUES
(Source: Iag.com.au 2018: Suncorpgroup.com.au 2018)
After analysing the balance sheet statements of the two organisations, the total assets of
Suncorp are higher than Insurance Australia. Hence, based on the above discussion, it could be
cited that the financial position of Insurance Australia is not effective in contrast to Suncorp.
Application of accounting theories:
Stakeholder theory:

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In accordance with this theory, the stakeholders are deemed to possess intrinsic moral
worth or value. Stakeholders are the individuals or classes possessing active interest in the
operations of the business entities. Moreover, they are needed to take into account the
shareholder interest as intrinsic value and hence, all stakeholder concerns need to be addressed
(Lang and Stice-Lawrence 2015). It is noteworthy to mention that Insurance Australia has
applied this theory in its business operations by addressing the stakeholder needs. For instance,
the current and potential investors are the significant stakeholders of the organisation and they
are willing to invest in the entity for obtaining better return. Due to this reason, Insurance
Australia has addressed the stakeholder interest by delivering them with the necessary financial
information regarding their financial condition for investment decisions (Nobes 2014).
Agency theory:
This theory assumes an organisation to be an agency and it gives an association for a
group of contracts and owing to this reason, agency cost arises because of various contracts and
interests (Simnett and Huggins 2015). Insurance Australia has applied this theory as well.
According to the theory, the principal is Insurance Australia and the agent is the management of
the entity. The agents are needed to act on behalf of the principals. For Insurance Australia, the
management of the entity undertakes the needed decisions and it carries out the activities on the
behalf of the organisation (Zhang and Andrew 2014).
Investment decision:
It has been analysed from the above discussion that Insurance Australia has complied
with the necessary accounting standards and conceptual framework of AASB. In addition, the
financial reports contain enhancing and fundamental qualitative characteristics as well. However,

12ACCOUNTING THEORY AND ISSUES
the drop in the share price of the organisation and lower net income compared to Suncorp, which
pose concern for the investors. Therefore, despite the presence of accounting compliance, the
financial performance of the organisation is declining and thus, the investors should not invest in
the organisation.
Suggestions to improve accounting practices, disclosures and reporting:
As the share price of Insurance Australia has declined due to the announcement of selling
some parts of its business, it is suggested to the organisation to undertake sound financial
strategies for reviving the situation by seeking assistance from the strategic experts. In addition,
the organisation is advised to maintain conformance with the guidelines of the conceptual
framework in order to avoid accounting issues.
Conclusion:
It is observed that Insurance Australia has complied with the essential accounting
standards and guidelines of the conceptual framework as well as enhancing and fundamental
qualitative characteristics. However, the financial performance of the organisation is not sound
due to decline in share price. Finally, it has been observed that Insurance Australia has used
stakeholder theory and agency theory to conduct its business operations.

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References:
Aasb.gov.au., 2018. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 14 Dec.
2018].
Beattie, V., 2014. Accounting narratives and the narrative turn in accounting research: Issues,
theory, methodology, methods and a research framework. The British Accounting Review, 46(2),
pp.111-134.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international
integrated reporting framework: key issues and future research opportunities. Journal of
International Financial Management & Accounting, 25(1), pp.90-119.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Iag.com.au., 2018. [online] Available at:
https://www.iag.com.au/sites/default/files/Documents/Results%20%26%20reports/The-
Numbers-2018-annual-report.pdf [Accessed 21 Dec. 2018].
Iag.com.au., 2018. IAG Limited. [online] Available at: https://www.iag.com.au/ [Accessed 21
Dec. 2018].
Lang, M. and Stice-Lawrence, L., 2015. Textual analysis and international financial reporting:
Large sample evidence. Journal of Accounting and Economics, 60(2-3), pp.110-135.

14ACCOUNTING THEORY AND ISSUES
Motley Fool Australia., 2018. Results: Why I’m avoiding Insurance Australia Group Ltd
(ASX:IAG) shares for now. [online] Available at: https://www.fool.com.au/2018/08/15/results-
why-im-avoiding-insurance-australia-group-ltd-asxiag-shares-for-now/ [Accessed 21 Dec. 2018].
Nobes, C., 2014. International classification of financial reporting. Routledge.
Simnett, R. and Huggins, A.L., 2015. Integrated reporting and assurance: where can research add
value?. Sustainability Accounting, Management and Policy Journal, 6(1), pp.29-53.
Suncorpgroup.com.au., 2018. [online] Available at:
https://www.suncorpgroup.com.au/uploads/FY18-Directors-Report-and-Financial-
Statements.pdf [Accessed 21 Dec. 2018].
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical
perspectives on accounting, 25(1), pp.17-26.