Compliance of Orica Limited with Conceptual Framework and Accounting Theories

This report analyzes the compliance of Orica Limited with the requirements of conceptual framework and accounting theories. It also discusses an issue related to the company and tests its compliance with qualitative characteristics of financial reporting. The report involves the analysis of certain accounting theories in respect to the company.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting Theory and Contemporary Issues
Name of the Student
Name of the University
Author’s Note

1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Executive Summary
It is the responsibility of the companies to comply with the requirements of conceptual
framework for the preparation and presentation of their financial statements. At the same
time, the companies are needed to comply with the measurement requirements of the
conceptual framework. This report analyses various aspects of the compliance of Orica
Limited with the requirements of conceptual framework. In addition, this report also takes
into consideration the discussion of an issue related to the company. At the same time, this
report also tests the compliance of the company with both the fundamental and enhancing
qualitative characteristics of financial reporting. The report also involves in the analysis of
certain theories in respect to the company.

2ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Table of Contents
Introduction................................................................................................................................3
Discussion of the Issue...............................................................................................................4
Analysis of the Annual Report...................................................................................................5
Compliance with the Conceptual Framework............................................................................5
Enhancing Qualitative Characteristics.......................................................................................7
Comparison of the Annual Report.............................................................................................8
Preparation of General Purpose Financial Statements...............................................................9
Application of Accounting Theories........................................................................................10
Investment Decision.................................................................................................................10
Conclusion or Summary...........................................................................................................11
References................................................................................................................................12

3ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Introduction
The main aim of this report is the analysis and evaluation of a certain accounting issue
in one of the top 100 Australian Stock Exchange (ASX) listed companies. For this report,
Orica Limited is taken into consideration.
This report also takes into consideration the discussion about a news article about
Orica Limited that shows that drop of the share price of the company.
In this context, one major issue for the company is the compliance of the company
with various requirements of Australian Accounting Standard Board (AASB) and Conceptual
Framework. It is the prime responsibility of the business organisations under ASX to comply
with the standards and principles of accounting conceptual framework with the aim to
prepare and present the financial statements on the true and correct manner. Chances of
financial frauds and errors increase in case the companies do not comply with the standards
of AASB and conceptual framework (aasb.gov.au 2018).
Orica Limited is a multinational company based on Australia and is the world’s
largest provider of commercial explosives along with the blasting system for mines, oil, gas,
construction and others. The company has a workforce of around 11500 and it has customer
base more the hundred countries all over the world (orica.com 2018).
In the recent years, one major accounting issue is not to comply with the required
accounting standards and principles for financial reporting. This aspect creates chances for
financial frauds along with the collapse of the companies. In order to avoid this, the
companies must comply with relevant accounting standards. In addition, this report also
involves in the analysis of two specific theories in relation to the financial reporting of Orica
Limited. These theories are positive theory and the stakeholder theory in relation to the
company.

4ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Discussion of the Issue
(Source: afr.com 2018)
It can be seen from the above news that the share price of Orica Limited crashes close
to three months low due to the untimely acquisition of a brand new ammonium nitrate facility
in Western Australia, inadvertent maintenance and plans to the record close to $300 million
of impairments as well as provisions on the other business parts. However, after this, the
management of the company announced that the operation of the new plant would not be
started until 2018. Based on the above, it can be said that it is a major financial issue for the
company that is related to the financial performance as well as unplanned acquisition.

5ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Analysis of the Annual Report
It needs to be mentioned that the annual report of Orica Limited is for publishing the
information of the company and its controlled entities for the year ended 30 September 2018
(orica.com 2018). It needs to be mentioned that the general purpose financial statements of
Orica Limited has been prepared as well as presented as per the standards of Australian
Accounting Standards and the Corporations Act 2001; at the same time, the company has
complied with the principles of International Financial Reporting Standards (IFRS) and
International Accounting Standard Board (IASB) (orica.com 2018). At the same time, it can
be observed from the 2018 Annual Report of Orica Limited that the company has followed
the principles of ASIC Corporations Instrument 2016/191 (orica.com 2018). Thus, it can be
observed that the company has complied with the required principles for accounting.
Compliance with the Conceptual Framework
There are five elements of AASB conceptual framework; they are assets, liabilities,
equity, expenses and income. In case of the measurement requirements, AASB conceptual
framework has put certain obligation on the ASX listed companies. As per the conceptual
framework, companies should not adopt only one measurement basis for measuring the
elements like assets, liabilities and others and the reason is that it fails to provide the relevant
financial information to the users. There are four measurement mechanism for the companies
as per AASB conceptual framework; they are Historical cost, current value, Fair Value and
Value in use. The following discussion shows whether Orica Limited has complied with the
measurement requirements of AASB or not:

6ACCOUNTING THEORY AND CONTEMPORARY ISSUES
(Source: orica.com 2018)
It can be seen from the above image that Orica Limited has adopted the mechanism of
both historical cost and fair value for the measurement of their assets and liabilities. Further
evidence can be obtained from below:
(Source: orica.com 2018)
It can be observed from the above images from the annual report of Orica Limited
that the company has used both the fair value and historical cost method for the measurement
of different elements of conceptual framework such as assets, liabilities, income and others.

7ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Hence, it can be seen from the above discussion that Orica Limited has made compliance
with all the requirements of AASB and conceptual framework.
According to the AASB conceptual framework, financial reports of the companies
must have the fundamental as well as enhancing qualitative characteristics; and the following
discussion shows the compliance of Orica Limited with these characteristics.
Fundamental Qualitative Characteristics
Relevance: Orica Limited provides relevant financial information to the users of the financial
statements for decision-making purposes that include both the confirmatory and predictive
value. The users of the financial statements can predict the financial outcome along with the
analysis of previous judgments (Callen, Khan and Lu 2013).
Faithful Representation: Orica Limited provides both the natural description as well as
numerical description of their different financial elements like assets, liabilities and others
with the aim to make the information complete. Neutral and free from errors.
Enhancing Qualitative Characteristics
Comparability: Orica Limited presents the financial information of their business in such a
manner so that the users can compare them with another company or with the different
timeline of the same company.
Verifiability: The users of the financial statements can verify the used method of accounting
in the financial statements with the help of accounting knowledge and independent
observation (Gebhardt, Mora and Wagenhofer 2014).
Timeliness: Orica Limited provides the necessary information to the users at timely basis
through various financial statements for their decision-making process.

8ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Understandability: With the assistance of the notes to the financial statements, the users can
understand the financial statements of Orica Limited.
Comparison of the Annual Report
One of the major competitors of Orica Limited is BHP Billiton as both of them
operate in the mining industry of Australia. Following discussion compares the financial
performance of Orica Limited with BHP Billiton:
(Source: orica.com 2018 and bhp.com 2018)
The above images of the income statements of Orica Limited and BHP Billion shows
that Orica Limited registered net loss for the year 2018 where BHP Billiton registered huge
profit for the same period.

9ACCOUNTING THEORY AND CONTEMPORARY ISSUES
(Source: orica.com 2018 and bhp.com 2018)
From the analysis of the balance sheet of these two companies, it can be seen that the
total asset position of BHP Billiton is stronger than that of Orica Limited. Thus, on the basis
of the above discussion, it can be said that the financial performance of Orica Limited is not
as good as compared to its major competitors.
Preparation of General Purpose Financial Statements
It is the responsibility of the management of Orica Limited to take into consideration
the preparation as well as presentation of their general purpose financial statement with the
aim to provide their users with the required information for the purpose of investment
decisions. Thus, the requirement is to prepare all the required financial statements. It can be
seen from the annual report of Orica Limited that the company has prepared the required
financial statements such as income statement, balance sheet, change in equity and cash flows
along with the necessary notes to the financial statements as a part of the requirement of
general purpose financial reporting.

10ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Application of Accounting Theories
Positive Theory of Agency Theory: According to the concept of this theory, business
organization is an agency and it provides a relationship for a complex set of contracts and for
this reason, there is the generation of agency cost due to different interests and contracts
(Bosse and Phillips 2016). The application of this theory can be seen in the operation of Orica
Limited. As per this theory, Orica Limited is the principal and the management of Orica
Limited can be considered as the agent of the company. As per the agency theory, the agents
make decision on behalf of the principals. It can be seen in case of Orica Limited that the
managements of the company makes the required decisions and performs the tasks on behalf
of the principle that is the company (Dawar 2014).
Stakeholders Normative Theory: According to the concepts of stakeholder theory, all the
stakeholders have intrinsic moral value or worth. Stakeholders are the persona or groups
having legitimate interest in the activities of the business organizations. In addition, the
companies need to consider the interests of all the stakeholders as intrinsic value and thus, the
need to address the interest of all the stakeholders (Hasnas 2013). It needs to be mentioned
that Orica Limited has applied this concept of stakeholder normative theory in their business
operations by addressing the needs of their stakeholders. For example, existing investors and
potential investors are the major stakeholders of Orica Limited; and they are interested in
investing in the company for getting high return. For this reason, Orica Limited has addressed
their interest by providing them with all the required financial information about the financial
performance and position for the purpose of their investment decision-making (Harrison, J.S.
and Wicks 2013).
Investment Decision
At the time of investment, the investors considers the financial performance of the
companies and whether the companies have any accounting issues or not (Levy 2015). It can

11ACCOUNTING THEORY AND CONTEMPORARY ISSUES
be seen from the analysis of the annual report of Orica Limited that the company had made
all the required compliance with the needed standards, regulations and principles of AASB,
Corporations Act 2001 and Conceptual Framework. In addition, financial statements of Orica
Limited includes both the fundamental as well as enhancing qualitative characteristics.
However, it needs to consider that the company has registered net loss in the current financial
year. At the same time, Orica Limited has not performed in better manner as compared to
their competitors like BHP Billiton. Thus, in spite of the absence of accounting issues,
financial performance of the company is a concern for the investors. For this reason, the
investors should not invest in the company (Xu 2015).
Conclusion or Summary
As per the above discussion, Orica Limited has followed all the accounting principles
and standards of conceptual framework along with complying with the fundamental and
enhancing qualitative characteristics of financial reporting. However, the financial
performance of the company in the current year is not effective due to the presence of net
loss. In addition, Orica Limited has applied the concepts of agency theory and stakeholder
theory in their business.

12ACCOUNTING THEORY AND CONTEMPORARY ISSUES
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].
Australian Financial Review. (2018). Orica hit by Burrup problems and impairments .
[online] Available at: https://www.afr.com/business/mining/orica-hit-by-burrup-problems-
and-impairments-20180301-h0wtnk [Accessed 15 Dec. 2018].
Bhp.com., 2018. Annual Report 2018. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf [Accessed 14 Dec. 2018].
Bosse, D.A. and Phillips, R.A., 2016. Agency theory and bounded self-interest. Academy of
Management Review, 41(2), pp.276-297.
Callen, J.L., Khan, M. and Lu, H., 2013. Accounting quality, stock price delay, and future
stock returns. Contemporary Accounting Research, 30(1), pp.269-295.
Dawar, V., 2014. Agency theory, capital structure and firm performance: some Indian
evidence. Managerial Finance, 40(12), pp.1190-1206.
Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of
IFRS. Abacus, 50(1), pp.107-116.
Harrison, J.S. and Wicks, A.C., 2013. Stakeholder theory, value, and firm
performance. Business ethics quarterly, 23(1), pp.97-124.
Hasnas, J., 2013. Whither stakeholder theory? A guide for the perplexed revisited. Journal of
business ethics, 112(1), pp.47-57.

13ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty.
Springer.
Orica.com. (2018). Orica - About Us . [online] Available at: https://www.orica.com/About-
Us#.XBORV3QzbIU [Accessed 14 Dec. 2018].
Orica.com., 2018. Annual Report 2018. [online] Available at:
https://www.orica.com/Investors/annual-report#.XBORNnQzbIU [Accessed 14 Dec. 2018].
Xu, Z., 2015. Uncertain multi-attribute decision making: Methods and applications. Springer.