Accounting Theory and Current Issue | Assignment

Accounting Theory and Current Issue 1
Running Head: Accounting Theory and Current Issue
Accounting Theory and Current Issue

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Executive Summary
AMP is an Australian company which provides financial advice, superannuation products,
investment products, insurance, and banking products including savings accounts and home
loans. The headquarters of the company are situated in Sydney, Australia. The foundation
director of AMP limited was David Jones. Amp limited was founded in 1848. During 2010,
AMP merged with AXA Asia pacific holdings.

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Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Section 1: Accounting Policies Disclosure of AMP..................................................................5
Section 2: Flexibility of Accounting policies.............................................................................5
Section 3: Accounting Strategy Evaluation...............................................................................7
Section 4: Disclosure of the Quality of Financial Statements...................................................8
Section 5: Potential Red Flags of AMP...................................................................................10
Section 6: Annual Report of the Company..............................................................................10
Conclusion................................................................................................................................15
References................................................................................................................................16

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Introduction
This report is based on AMP limited. This report describes the accounting policies followed
by the company and the accounting strategies. The report also contains two years annual
audited data of AMP limited. The annual report of AMP includes the consolidated financial
position, consolidated income statement , consolidated statement of changes in equity and
consolidated cash flow statement. This report clearly describes the procedure of preparation
of financial statements. This is a three step process and consists of the examples related to the
preparation of cash flow statement, trading and profit & loss account, and balance sheet
(Parker and Northcott, 2016). The two theories of financial accounting i.e. positive and
normative are also discussed in this report.

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Section 1: Accounting Policies Disclosure of AMP
Australian Accounting Standards Board (AASB) has issued certain guidelines for the
preperation of financial statements. At the time of recording the values in the financial
statements, these values are rounded to the nearest million dollars ($m). Accounting policies
are the policies which are applied by the company at the time of making financial sttaements.
These policies includes the value at which the assets and liabilities are recorded by the
company. The assets and liabilities related to investment contracts and life insurance
contracts are measured on a fair value basis and all the other assets and liabilities are valued
on the basis of historical cost. There are some amendments in the AMP accounting policies in
the year 2015 (Francis, et al., 2016). The amendments were AASB 2014-9 which was related
to the method of equity in separate financial statements and AASB 2015-5 which was related
to the investment entities. The person who is responsible for accounting estimates is the
management itself. The material misstatement risk of accounting estimates depends upon the
subjectivity and complexity associated with the process, the number and significance of
assumptions that are made, the availability and reliability of relevant data and the probability
of uncertainty associated with the assumptions (Kvaal, 2017). The accounting policy of AMP
related to inventories includes that inventories should be included in the financial statements
at the cost of inventory or its net realisable value whichever is lower. In case of intangible
assets, only those costs are being carried forward which creates future benefits for the
company. The critical factors related to accounting estimates are that the methods of
conducting business, circumstances of the industry in which the company is operating, other
external factors and new accounting pronouncements.
Section 2: Flexibility of accounting policies
The accounting flexibility differs from firm to firm. AMP is following the accounting policies
as per the Australian accounting standards board. So, members are not having enough power

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to assess the accounting policies and estimates (Howieson, 2017). The accounting flexibility
of AMP is under the management. So, managers are only required to follow their guidelines.
If the power of flexibility is less with the managers then the accounting data will be less
informative. If managers are having high flexibility then the accounting information will
become more informative. Positive theory of financial accounting: Accounting gives the
investors and managers a standardized system to record the financial transaction of a
company in a consistent, transparent and informative way. Today's accounting systems
provides accurate methods for representing a company's performance by carefully applying
the accounting theories. Flexibility in accounting policies helps the managers to take
decisions immediately. The company is required to allow managers to change the accounting
policy as per the need of the organization. The two major theories of accounting are positive
accounting and normative accounting. Positive accounting theory is also known as PAT.
Positive accounting theories are based on observing particular phenomena. The aim of this
theory is that by observing a number of things the person will be able to predict the future.
Positive accounting theory was developed with a view to identify the best accounting theory
for the company from the various theories used by other companies (Loyeung, et al., 2016).
Some of the examples of positive accounting theories are stakeholder theory and legitimacy
theory. The main aim of Watts and Zimmerman’s positive accounting theory is based on the
aim of identifying the relationship between the individuals which are responsible for the
output of the firm. The relationship should be between the managers and the debtors of the
firm or it might be between the managers and the owners. According to positive accounting
theory, the organization should be aligned in such a way that it can integrate the interest of
owners and managers of the firm (Ward and Lowe, 2017). In PAT, the persons who are
having the authority for the preperation of financial statements are the managers (Lukka and
Modell, 2017). The cost occurred in establishing bond between the managers for the