Analysis of Accounting Theories and Exposure Draft on Onerous Contracts

This article analyses a news article on accounting theories and an exposure draft on onerous contracts. It discusses the role of big four accounting firms, auditor's independence, and the need for independence. It also evaluates the responses received and arguments for and against the exposure draft.

Running head: ACCCOUNTING
Accounting
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Answer to Question 1......................................................................................................................2
Introduction..................................................................................................................................2
Discussion........................................................................................................................................2
Conclusion.......................................................................................................................................6
Answer to Question 2......................................................................................................................7
Introduction..................................................................................................................................7
Discussion....................................................................................................................................7
Outline of Exposure Draft...........................................................................................................7
Responses Received.....................................................................................................................8
Arguments for or Against the Exposure Draft.................................................................................9
Conclusion...................................................................................................................................9
Reference.......................................................................................................................................10
Appendix........................................................................................................................................12

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Answer to Question 1
Introduction
The main purpose of this assessment is to analyse a news article which is based on
accounting theories. The article which is considered in the assessment relates to the role which is
played by the Big four accounting firms in an economy and the article further states that same
should be brought forward to Royal Commission for the purpose of ascertaining whether such
big four firms are independent in their approaches. The assessment would be linking the main
content of the article with the accounting concepts of matching, revenue recognition and cost
principle. The revenue recognition and cost principle can be maintained by the most of the
businesses if proper auditing and guidance is provided by the big four auditing firm. This would
only improve the reporting structure of the business and ensure full disclosure if all information.
The assessment would be explaining the content of the article and explain the need for the
independence of big four firms in the business environment. The assessment would be further go
into explaining the role of an auditor’s independence and how the same has an impact on the
decision-making of the users of the financial statements (Abc.net.au., 2018). The assessment
emphasizes that the role of the Royal Commission is very important as reviewing the work of the
auditing firms would only ensure that the overall quality of the audit is maintained and the
ultimate benefit is enjoyed by the users of the financial statements.
Discussion
The article which is considered for the assessment deals with the role which is played by
the Big Four accounting firms in an economy. The big four accounting firm are PwC, Deloitte,
EY and KPMG and they are engaged in providing audit and advisory services to the client
companies. The article states that the independence of such bug four firms needs to be assessed

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and that the same should be assessed by the Royal Commission. The services which are provided
by such big four businesses are most effective and genuine when the can maintain a certain
degree of independence in their process. The independence of n auditing firm is of utmost
importance as the same is related to the quality of services which is provided by the firms. The
independence of the auditing firms is a fundamental requirement while conducting a audit of a
business.
The journal article emphasizes that the independence of the auditor is an important
concept which can lead to a better quality of audit and the opinion which is generated by the
auditing firm is to the best of the interest of the users of the financial statements. The journal
articles which is considered in the assessment are considered from the point of view of a senior
investigator of Australian Securities and Investments Commission (ASIC). The auditing firm
can provide creditability to the businesses by providing them a clean report relating to the
performance of the business.
The importance of accounting profession is immense to the business point of view as they
are responsible for preparing and presenting the financial reports of the business. The matching
principle can be appropriately followed if the big four firms take extra responsibility. This would
also ensure that the financial statements which is prepared by the business are showing true and
fair view of the financial position of the business. The big four firms can also guide the
businesses in following effectively the cost and revenue recognition principles of the business.
The role of the big four audit firms are important in ensuring the financial reporting
framework followed by organization are appropriate and provides all the relevant information
and disclosures to the users of the financial statements. The review of the work of such big four
firms by the Royal Commission would ensure that the quality of audit and other services which

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is provided by the big four firms are maintained. As per one of the senior officials of Australian
Securities and Investments Commission (ASIC), reviewing of the financial services which is
provided by big four firms would reveal the risks and efficiency of the services which is
provided by such firms. The review would also reveal whether the high fees which is charged by
such audit firms actually minimises the risks or not.
The purpose of auditor’s independence is important as the same ensure that a level of
quality and bring about more effectiveness in the audit process. The auditor should be
independent from the client company, so that the audit opinion which is formulated by the
auditor will not be influenced by any relationship between them. The auditors are expected to
give an unbiased and honest professional opinion on the financial statements to the shareholders
(Tepalagul & Lin, 2015). The article clearly states that the review of the independence of the
auditor would be seen as a benefit for the users of the financial statements and also for the
auditing firms as they are able to maintain good quality audit services for the clients of the
business. As per the fundamental principles which all the auditor of the business need to follow
has a provision to maintain integrity and objectivity in the operations which are undertaken by
the auditor of the business (Dhaliwal et al., 2015). The independence of an auditor is closely
related to the principles of integrity and objectivity of a business and therefore it can be said that
the independence of the auditor needs to be maintained in order to comply with the fundamental
principles of an audit.
In certain situations, major doubts are raised regarding the independence of external
auditors and the level of trust which can be exercised on the audit reports which are generated by
auditing firms. It can be argued that unless suitable corporate governance measures are in place,
a firm of auditors may reach audit opinions and judgments that are heavily influenced by the

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wish of the management in order to maintain a good relation which the management of the
company. It is to be noted that the fees of the auditor is provided by the management of the
company and therefore, in certain situations even the big auditing firms are influenced by the
monetary fees which they are to receive for the services which is provided. In order to prevent
any situation whereby the auditor’s independence is comprised, appropriate measures must be
provided so that the shareholders of a company can rely on the reports which are generated by
the auditor of a business (Church et al., 2014). The reviewing of the independence of the auditing
firms would sent a message that the aspect of independence is being taken seriously by the
auditing firms and would also built up more reliance of the investors on the audit reports which
are generated for a business.
In many cases, the auditing firms are also engaged in providing non-audit services to the
clients which can be advisory services or maintenance of books of accounts of the business.
These services can affect the independence of the auditor of the business and thereby affect the
overall quality of audit of a business. The independence of an auditing firm has wide scale
impact on the audit process which is conducted for the business. It is important to remember that
the reports which is generated by the auditor would be judged by the users before they make any
investments in business (Ratzinger-Sakel, 2013). The confidence of the public in financial
markets and the conduct of public interest entities relies partly on the credibility of the opinions
and reports which are provided by the auditor in relation with financial audits.
The journal article which is considered for this assessment shows the reaction of one of
the big four firms which is Deloitte which is of the opinion that the work which is conducted by
it are based on certain procedures which are closely followed by the business. However, it would
be better if the activities and services which is provided by the big four businesses firms are

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closely monitored by the Royal Commission so that a level of efficiency and transparency of the
business is maintained (Kouakou, Boiral & Gendron, 2013). The Royal Commission can review
the services which is provided by the auditing firm and ensure that the quality of services which
is provided by the auditing firms are maintained at all levels. It is also of the opinion of senior
investigator of Australian Securities and Investments Commission (ASIC), that there are
certain risks which would be revealed if analysis is conducted on the financial statements of the
business. Therefore, it is very important that an appropriate level of independence of the auditor
is maintained by the auditor of the business. The independence of the auditor is closely related to
the overall quality of the audit of the business.
Conclusion
The above discussion effectively shows the independence of the auditor has an important
factor in the maintaining the quality of the auditor of the business. The journal article which is
considered deals with the big four businesses firms which are engaged in auditing and advisory
services which is provided to different companies. The journal article is from the point of view
of a former employee of Australian Securities and Investments Commission (ASIC), and the
opinion which is stated is that the services which is provided by the big four auditing firms
should be assessed by the Royal Commission in order to ensure that there is an overall level of
independence in the business. The assessment considers the role of the auditing firms in
maintaining the effectiveness of the services which is provided by a business. The Royal
Commission can effectively monitor the quality of services which is provided by auditing firms
and ensure that the same.

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Answer to Question 2
Introduction
The main purpose of this part is to analyse an exposure draft which is available on
International Accounting Standard Board (IASB). The exposure draft which is considered is
provided for the comments of the respondents. The exposure draft which is considered in the
assessment would be about amendments which can be brought about in IAS 37 Provisions,
Contingent Liabilities and Contingent Assets (Isca.org.sg., 2019). The assessment goes into
detail about Onerous Contracts—Cost of Fulfilling a contract. The assessment would be pointing
out whether the views of the respondents and whether the same are for or against the
recommendations which is provided in the exposure draft. This part would also be providing a
critical evaluation of the theories which are included in the exposure draft
Discussion
Outline of Exposure Draft
The provisions which are stated in IAS 37 defines an onerous contract as a contract in
which the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received under it. IAS 37 also states that the unavoidable costs under a
contract demonstrate the least net cost of exiting from the contract, which is the lower of the cost
of fulfilling it and any compensation or penalties arising from failure to fulfil it (Giner, 2014).
The accounting standard does not specify the costs which is required for fulfilling a contract of a
business. The main concern in such a section is in terms of the contracts which are related to

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construction. The main issues which arouse was identification of the costs in IAS 37. The IFRS
recognised that there cost treatment process was different for different businesses and therefore a
clarification was required in respect to such costs.
In order to bring about consistency in the accounting process which is followed in
different countries, amendment required to be made in the measurement and treatment of the
costs which are associated with contracts of a business (Acar & Ozkan, 2017). The amendment
which is suggested by the committee contains appropriate definition of the onerous contracts and
also methods which can be adopted by the business for measuring the costs of fulfilling the
contracts of the business.
Responses Received
The responses which are provided to the exposure draft deals mostly with the complexity
in measuring the costs of contracts and especially clarification was raised in measuring contracts
which are related construction contracts. The amendment which are made to the existing
standards should have economic benefits of the business and should improve the reporting
framework. One of the question which was raised was on the meaning of economic benefits of a
contract and the reason for bringing about such improvements in the standard. The response
further states that the new standard would impose obligations for additional costs (Capkun,
Collins & Jeanjean, 2016). The response also raised a concern on appropriate measurement of
the costs which was suggest under the two methods which is prescribed by the committee (Palea,
2013). This needs to be considered by the committee before they can take any decision to make
the amendments.
Paragraph 66 of IAS 37 requires an entity to recognise and measure its present obligation
under an onerous contract as a provision. The major concern which was raised was in relation to

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the measurement of the onerous contracts. Therefore, it can be said that the concerns which was
raised by respondents have effectively been answered by the amendments and some of the
concerns still needs some answers from the committee.
Arguments for or Against the Exposure Draft
As per the commented letter which has been received on the standard and the
improvement which is intended by the accounting board, the respondent is against the changes
which have been proposed by the accounting board. The respondent is of the opinion that the
amendment is not fully applicable as in most cases direct costs are not even allocated to a
contract by many service providers. The amendments impose an obligation on the service
provider to implement additional costing models which is not required. The respondent is also of
the opinion that the amendment would not yield any financial reporting benefits in most of the
cases.
Conclusion
The above discussion shows that significant improvements can be brought about in IAS
37 which is related to Onerous Contracts. The above discussion shows the treatment of costs for
fulfilling of contracts of the business. The provisions which have been amended is mostly related
to the treatment of costs and also measuring the same. In addition to this, the disclosures which
are provided by business would also increase and thereby this can increase the transparency in
the reporting framework of the business. The above discussion also includes responses which is
available from different respondents on the exposure draft which is formulated by the IASB. The
above discussion shows that the new amendments can be beneficial to the organization and
ensure better presentation of financial information in the annual reports of the business.

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Reference
Abc.net.au. (2018). Call for the 'big four' accounting firms to face banking royal
commission ABC News. Retrieved 16 January 2019, from
https://www.abc.net.au/news/2018-10-05/big-four-accounting-firms-should-face-royal-
commission/10339504
Acar, E., & Ozkan, S. (2017). Corporate governance and provisions under IAS 37. EuroMed
Journal of Business, 12(1), 52-72.
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on earnings
management (smoothing): A closer look at competing explanations. Journal of
Accounting and Public Policy, 35(4), 352-394.
Castoldi, S. (2015). IAS 37, Provisions, contingent liabilities and contingent assets. Advanced
financial accounting: financial statement analysis, accounting issues, group accounts.
Church, B. K., Jenkins, J. G., McCracken, S. A., Roush, P. B., & Stanley, J. D. (2014). Auditor
independence in fact: Research, regulatory, and practice implications drawn from
experimental and archival research. Accounting Horizons, 29(1), 217-238.
Dhaliwal, D. S., Lamoreaux, P. T., Lennox, C. S., & Mauler, L. M. (2015). Management
influence on auditor selection and subsequent impairments of auditor independence
during the post‐SOX period. Contemporary Accounting Research, 32(2), 575-607.
Giner, B. (2014). Accounting for emission trading schemes: A still open debate. Social and
Environmental Accountability Journal, 34(1), 45-51.
Isca.org.sg. (2019). Retrieved 16 January 2019, from https://isca.org.sg/media/2240773/ed-
onerous-contracts-december-2018.pdf

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Kouakou, D., Boiral, O., & Gendron, Y. (2013). ISO auditing and the construction of trust in
auditor independence. Accounting, Auditing & Accountability Journal, 26(8), 1279-1305.
Palea, V. (2013). IAS/IFRS and financial reporting quality: lessons from the European
experience. China Journal of Accounting Research, 6(4), 247-263.
Ratzinger-Sakel, N. V. (2013). Auditor fees and auditor independence—Evidence from going
concern reporting decisions in Germany. Auditing: A Journal of Practice &
Theory, 32(4), 129-168.
Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.

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Appendix

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