Advanced Accounting Issues: Stakeholder Theory, Political Cost Hypothesis, Legitimacy Theory and AASB 137

This article discusses the application of Stakeholder Theory, Political Cost Hypothesis, Legitimacy Theory and AASB 137 in Advanced Accounting Issues. It covers topics such as contingent liabilities, non-financial disclosures, and the impact of environmental and social disclosures on business procedures.

DEPARTMENT OF ACCOUNTING &
BUSINESS ANALYTICS
ADVANCED ACCOUNTING ISSUES (ACC5AAI)
SEMESTER 2, 2018

TABLE OF CONTENTS
Question 1..................................................................................................................................3
1..............................................................................................................................................3
2..............................................................................................................................................3
3..............................................................................................................................................4
Question 2..................................................................................................................................5
References..................................................................................................................................7

QUESTION 1
1
Stakeholder theory combines management strategies and business ethics to address values
and morals towards all stakeholders (Jones, Wicks and Freeman, 2017). Stakeholders theory
is considered too significant in the present era as companies are required to need mindful not
only in perspective of stockholders but also for remaining stakeholders such as employees,
customer, community, managerial parties and government authorities to be sustainable. By
considering the concerns of all stakeholders, the organisation will be able to create maximum
value for shareholders as wells as for financers.
In the given case situation, if managerial perspective has been considered of stakeholder
theory, then the argument can be provided that banking entity will only consider the concerns
of stakeholders having an impact on their survival or ongoing operations (Cordeiro and
Tewari, 2015). In a situation where operations of banks are not significantly affected by funds
provided by small businesses and regional business communities then their concerns have
little significance for management strategies. By considering the concept of this theory, it can
be said that bank is not significantly concerned regarding small businesses and regional
business communities as they are constantly introducing policies for their for the objective of
expansion instead of considering their development and expectations.
Although this fact is also required to be considered, this group has the capability to affect the
interest of other powerful stakeholders like regulatory authorities and media. This fact
imposes a threat to the business entity to consider the interest of small businesses as well.
Therefore, as per the approach of normative or ethical perspective mentioned by stakeholder
theory argument can be made that banking entity is required to consider the impact on all
stakeholders groups instead of mere focus on groups with influential power (Andriof et al.
2017). By applicability of stakeholder theory, it can be noticed that a banking entity is
required to consider the long-term perspective by providing importance to the concerns of
small businesses and regional communities.
2
In accordance with the political cost hypothesis, management of corporate entities will
engage in deferring reporting earnings from current to future periods by making use of
accounting policies to the extent of political costs of the firm (Plata-Díaz et al. 2014).

Application of cited hypothesis in the banking firms connects political factors in the selection
of accounting policies. It is because; firms making high profits will attract media and
customer attention and consequently this can increase their tax obligation and regulatory
responsibilities.
As per this approach this approach, claim made by the article regarding the action of the bank
is right because the theory of political cost hypothesis states that the closer an organisation is
to violating debt covenants, the more likely they are to transfer their reported profits from
future to current periods. Similarly, banks had ensured that their services are in benefit of
small business so that they do not attract media attention for non-compliance of regulation
(Kaya, 2017). Further, with maintaining a good image, they will able to avoid imposition of
further regulations. By this act, a banking entity is making an attempt to hide their Job cuts
and branch closures and replacement of staff. There was constant restructuring due to which
banks were not able to standard obligations, and senior management was afraid of the fact
that non-compliance or ineffective performance would create an additional burden on them if
same has been noticed by the federal government.
Therefore, on the basis of above analysis by applying political cost hypothesis it can be cited
that yes claim made by the article was viable to the certain extent that the banking entity is
near to the contradiction of accounting-based contracts, and as a consequence of the same,
they have to face negative implications for their technical default.
3
Legitimacy theory defines the extent to which environmental and corporate social disclosures
are affected by the regulations established by the society with the objective to appreciate and
avoid penalization by the society in which company conducts their operation (Deegan, 2014).
By considering this concept in case management turnover and closures are not as per the
expectations of the society then the bank will require to change their operational measures for
improvisation in their outcome of business procedures. If the actions of the bank will
negatively affect the community, then the federal government will impose regulatory
obligations so that the bank can meet the expectations of the community. For example in the
present case; internal restructuring in the country’s most profitable small-business lending
franchises will affect customers in an adverse manner and increase staff turnover lead to the
demise of borrowers. This will affect the interest of the community, and therefore bank
organization in promoting their policies are in interest in the small business to prevent the

attention of media to face negative implications imposed by the federal government for their
technical default. However, the current action plan of a banking entity is not as per ethical
aspects, and they are they are required to improvise their operational strategies in accordance
with the application of Legitimacy theory. This will ensure there is the outcome as per the
expectations of the community.
QUESTION 2
AASB 137 specifies the provision relating to contingent liabilities and contingent asset. As
per the provision of specified standard, a contingent liability refers to a possible obligation
which is payable only upon a future event which is not in control of entity to a significant
extent (AASB 137. Provisions, Contingent Liabilities and Contingent Assets, 2017.). It also
comprises the obligation which is not probable or sufficiently reliable in the present situation
or in accordance with the facts present relating to the situation. Non-financial disclosures can
be defined as the quantitative and qualitative information related to the strategies, policies or
activities that are practised towards business, environmental as well as social objectives
(Bertomeu and Robert 2015). Further, for the reporting of the same, the main concentration
is done on factors which are most material to the business and its shareholders.
In the present case as Common Wealth complies with the policy of being fair and open about
its activities and seek its opportunity to provide work in a transparent manner to the widest
possible audience. As per the specified facts, Gloucester Council and an investment
company named Clurname have lodged a claim against the Commonwealth Bank that it is
affianced in selling toxic investment by overlooking the request related to conservative
investment. Subsequently, the bank repudiated to comment on the arrangement, saying that
the court had to consent it, although earlier CBA had stated that the case which was filed
against them has no merit. During the practice of the case, it was disclosed that CBA had
resolved with at least 14 other CDO investors.
Paragraph 10 of AASB 137 specifies that the factors that are to be considered by the
Commonwealth Bank in the disclosure are materiality, nature of event and nature of volatility
.
Materiality: The materiality concept asserts that any information which is necessary for the
shareholder or general public in order to make their decision in an appropriate manner relating to

the transaction which the relevant company is required to be provided in the annual report in an
appropriate manner.
Nature of event: The factor implies the impact transaction on the business activities. In the
present case as the result of the claim which is filed on Commonwealth Bank cannot be
predicted due to which it will be not be included in the financial reporting at financial
parameter, and thus same is required to be disclosed as a contingent liability. The board of
members should provide disclosure and assurance relating to its risk administration goals
systems and activities in an appropriate manner. Furthermore, the board must disclose
existing provisions for recognising contingent liabilities as well as for controlling the
consequences of risk-bearing activities. In addition to this, board members should report on
internal control systems which are designed to alleviate risks. The same must entail risk
identification instruments.
Volatility: It can be referred to as the extent of predictability or reliability on the conclusion
of any transaction. A transaction can be reported on financial parameters in an annual report
only in the case when the decision is to have sufficient evidence, and same is reliable to be
evaluated or measured in figures (Hennes, 2014.). In case same cannot be evaluated on
reasonable basis than same cannot be part of the statement of affairs or profit or loss of an
organization.
Apart from this, the company have to disclose the information every year till the final
decision is passed by the Federal Court related to the case.

REFERENCES
AASB 137. Provisions, Contingent Liabilities and Contingent Assets. 2017. [Online].
Available through < http://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/
AASB137_ch05.pdf>. [Accessed on 1st October 2018]
Andriof, J., Waddock, S., Husted, B. and Rahman, S.S., 2017. Value maximisation,
stakeholder theory and the corporate objective function. In Unfolding Stakeholder
Thinking (pp. 65-84). Routledge.
Bertomeu, Jeremy, and Robert P. Magee. 2015. "Mandatory disclosure and asymmetry in
financial reporting." Journal of Accounting and Economics 59.2-3 pp. 284-299.
Cordeiro, J.J. and Tewari, M., 2015. Firm characteristics, industry context, and investor
reactions to environmental CSR: A stakeholder theory approach. Journal of Business
Ethics, 130(4), pp.833-849.
Deegan, C., 2014. An overview of legitimacy theory as applied within the social and
environmental accounting literature. Sustainability accounting and accountability, pp.248-
272.
Hennes, K. M. (2014). Disclosure of contingent legal liabilities. Journal of Accounting and
Public Policy, 33(1), 32-50.
Jones, T.M., Wicks, A.C. and Freeman, R.E., 2017. Stakeholder theory: The state of the
art. The Blackwell guide to business ethics, pp.17-37.
Kaya, İ., 2017. Accounting Choices in Corporate Financial Reporting: A Literature Review
of Positive Accounting Theory. In Accounting and Corporate Reporting-Today and
Tomorrow. InTech.
Plata-Díaz, A.M., Zafra-Gómez, J.L., Pérez-López, G. and López-Hernández, A.M., 2014.
Alternative management structures for municipal waste collection services: The influence of
economic and political factors. Waste Management, 34(11), pp.1967-1976.