Corporate and Financial Accounting

This report provides an overview of corporate regulation, accounting standard setting and owners’ equity from a global perspective. It evaluates the necessity of regulating financial accounting and reporting, the role of AASB in setting international standards, and the debt-equity position of BHP Billiton, Rio Tinto, Orica Limited and Fortescue Metals Group.

Running head: CORPORATE AND FINANCIAL ACCOUNTING
Corporate and Financial Accounting
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1CORPORATE AND FINANCIAL ACCOUNTING
Executive Summary:
The primary aim of this report is to provide a brief overview of the corporate regulation,
accounting standard setting and owners’ equity from the global perspective. It has been found
that the managers might not be willing to disclose the internal financial information to all users
of the financial statements. Hence, regulation in financial accounting and reporting is necessary.
It has been further evaluated that all nations have their own accounting standards; however, for
bringing comparability and standardisation, the organisations like IASB have made attempts to
develop a single standard acceptable for maximum countries. Finally, it is found out that Orica
Limited is placed in a better position in the Australian mining sector in terms of debt and equity
compared to BHP Billiton, Rio Tinto and Fortescue Metals Group.

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Table of Contents
Introduction:....................................................................................................................................3
Corporate Regulation:......................................................................................................................3
Answer to Question (i):...............................................................................................................3
Accounting Standard Setting:..........................................................................................................5
Answer to Question (ii):..............................................................................................................5
Owners’ Equity:...............................................................................................................................6
Answer to Question (iii):.............................................................................................................6
Answer to Question (iv):.............................................................................................................8
Conclusion:....................................................................................................................................10
References:....................................................................................................................................12

3CORPORATE AND FINANCIAL ACCOUNTING
Introduction:
The report is prepared with the intent of providing a brief overview of the corporate
regulation, accounting standard setting and owners’ equity from the global perspective. The first
section would provide a brief overview of the necessity of regulating financial accounting and
reporting along with providing power to the manager in voluntary disclosure of financial
accounting information. The second section would emphasise on the role of the “Australian
Accounting Standards Board (AASB)” in setting the international standard setting process,
which is identified as IFRS. Moreover, it would discuss the reasons that IFRS is not mandatory
for the member nations of IASB. Finally, the report would shed light on selecting four public
listed firms in ASX and evaluation would be made in relation their owners’ equity position as
well as debt-equity position.
Corporate Regulation:
Answer to Question (i):
Favourable points for regulation of financial accounting and reporting:
There is need to regulate financial accounting and reporting due to a variety of reasons.
Firstly, if it is not regulated, the information published by the business organisations might be
selective and it could be manipulated by the individuals accountable to send the same into the
market (Henderson et al. 2015).Therefore, the organisations are need to fulfil various criteria for
aligning with the public interest of the current as well as potential investors. The regulating
authorities formulated the criteria for assuring information quality at minimal or no cost for
shielding the public from misleading, fraudulent and hidden disclosures. Secondly, the demand

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for actual and true accounting information is on the increasing scale from the prospective
investors. When investments are made in the business entities, it is necessary for the regulating
authorities to intervene into the matter for ensuring that the formats of accounting and reporting
fulfil the investors’ needs by answering to their questions.
When an organisation finds its shares listed in the stock market, it would be proper when
such information is published in standardised formats. This would help in comparing the same
with the financial performance of the peers for ensuring that both shareholders and insiders have
equal knowledge of information (Beatty and Liao 2014). Therefore, it could be said that the
necessity of regulation is important for increasing the standard of the profession.
Favourable points for voluntary disclosure of financial accounting and reporting:
When managers are provided with the opportunity of disclosing voluntary financial
information, they would conduct the work in a fair and responsible manner as suitable agents of
their owners or shareholders. Since the managers have knowledge about internal activities of the
organisations, they have more knowledge about the actual financial conditions. This would assist
them in to provide certain non-standardised financial information to the market (Jehu and
Ibrahim 2017). This could be considered as signalling theory, in which the concerned
organisations have the unique benefit of transferring significant information like likely dividend
in the form a signal to the market regarding their growth tendencies. When such information is
disclosed by the managers of the business organisations, the share price would increase
significantly and the business outsiders would be ensured about the financial conditions.
However, the managers might not be willing to disclose the internal financial information
to all users of the financial statements. Instead, they might distort such information to the

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investors for gaining more funds due to the fear of losing their jobs. Moreover, all information
should not be made public, as per the demand of the regulations (Page 2014). Hence, regulation
on financial accounting and reporting is preferred over voluntary disclosure of financial
information in order to avoid manipulation and frauds in the financial reports of the business
organisations.
Accounting Standard Setting:
Answer to Question (ii):
Process through which AASB participates in the global standard setting process:
AASB has the vision of enhancing its reputation in the form of a leading national standard
setter for gaining recognition in the international centre of excellence. This would be ensured by
formulating and maintaining greater quality standards of financial reporting for all the Australian
economic sectors by contributing through talent and leadership in order to develop international
standards of financial reporting (Bamber and McMeeking 2016). AASB takes part in the global
standard setting process in the following ways:
 The accounting standards as well as standard amendments made by IASB are in line with
the legislative drafting protocols of Australia and the requirements of “Federal Register
of Legislative Instruments”.
 The accounting compilations or standards are filed on the “Federal Register of
Legislative Instruments” and they are disclosed on the website of AASB within three
days after they are finalised (Erb and Pelger 2015).
 The responses are made to all the important drafts of IPSASB and IASB.

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Reason that IFRS is not compulsory for the member countries of IASB:
The IASB is a private and independent group, which formulates and approves IFRS. It
functions under the oversight of the foundation of IFRS. The IFRS Foundation is involved in
overseeing the operations conducted by IASB. The formulation of IASB dates back to 1901 for
replacing the ‘International Accounting Standards Committee (IASC)”. At present, IASB has 14
member nations and in accordance with the Constitution of the IFRS Foundation, IASB has full
accountability for all technical aspects of the foundation. These include complete discretion to
form and pursue its technical goal, which is subject to consulting needs with the public and the
trustees (Erb and Pelger 2015). Moreover, it takes into account the formulation and issuance of
IFRS as well as exposure drafts following the due procedure mentioned in the constitution.
Finally, it considers the issuance and approval of interpretations developed from the end of the
Committee of IFRS interpretations.
All nations have their own accounting standards; however, for bringing comparability
and standardisation, the organisations like IASB have made attempts to develop a single standard
acceptable for maximum countries. Despite such attempts, it is not mandatory for the member
nations to converge into IFRS, since they have their own groups of accounting standards. Hence,
the IFRS convergence is not occurring in phases (Pelger 2016).
Owners’ Equity:
The four organisations that are selected for this section include BHP Billiton, Rio Tinto,
Orica Limited and Fortescue Metals Group.

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Answer to Question (iii):
In the statement of financial position of an entity, three significant items are apparent, out
of which is equity is one of them. As per this statement, the main items of equity include share
capital, reserves, treasury shares and retained earnings. Issued capital is considered as equity of
the business organisations (Benson et al. 2015). From the annual report of BHP Billiton, the
issued capital of BHP Billiton has fallen from $2,052 million in 2014 to $2,043 million in 2015,
which has remained constant in both the years 2016 and 2017. The issued capital of Rio Tinto
has fallen from $224 million in 2014 to $220 million in 2016, which has increased again to $224
million in 2016 and further to $230 million in 2017. For Orica Limited, the issued capital has
fallen from $1,975 million in 2014 to $1,954.4 million in 2015; however, it has increased to
$2,025.3 million in 2016 and $2,068.5 million in 2027. In case of Fortescue Metals Group, the
issued capital has risen from $1,289 million in 2014 to $1,294 million in 2015, which has
increased to $1,301 million in 2016 with further decline to $1,289 million in 2017. The variation
in issued capital is the outcome of the motive of maintaining an optimal capital structure for all
the business organisations.
The next item of equity for all the four organisations includes reserves. For BHP Billiton,
Rio Tinto and Fortescue Metals Group, the trend is fluctuating; however, the reserves of Orica
Limited seem to carry a negative amount. In the words of Marshall (2016), reserve is considered
as a part of equity obtained in excess of basic share capital. The main reason that Orica Limited
has negative reserves is due to the fact that it has accumulated business losses.
The final item of equity is considered as retained earnings. It signifies the earnings and
losses of an organisation from its establishment after paying out dividends to its shareholders
(Hoskin, Fizzell and Cherry 2014). The retained earnings for Orica Limited, BHP Billiton and

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Rio Tinto have declined over the years and the only exception could be observed in case of
Fortescue Metals Group where an increase could be witnessed over the years.
Therefore, it could be said that BHP Billiton accumulates more funds through equity
followed by Rio Tinto, Fortescue Metals Group and Orica Limited, since its asset base is the
largest among the four organisations operating in the mining industry of Australia.
Answer to Question (iv):
In order to evaluate the debt and equity position of the four chosen organisations, debt-to-
equity ratio is used. With the help of debt-to-equity ratio, it is possible to gain an overview of the
capital structure of an organisation regarding its optimality (Horngren and Harrison 2015). The
debt-to-equity ratio of these organisations is represented briefly as follows:
(Source: BHP 2018)
As per the above table, an increase in debt-to-equity ratio could be observed from 2014 to
2015 followed by an increase in 2016 with increase again in 2017. A ratio until 0.5 or below 1 is
considered as an optimal capital structure (Collier 2015). In this case, the ratio is below 0.5 in all
the years. This implies that the financial leverage of BHP Billiton has not been high over the
years due to focus on raising more funds through issuance of equity shares in the market.

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(Source: Riotinto.com 2018)
In accordance with the above table, it could be noticed that the debt-to-equity ratio of the
organisation has fallen over the years and it is well below the ideal standard of 0.50 in all the
years. This denotes that the organisation is reliant on its shareholders for raising funds. However,
it is to be borne in mind that raising maximum funds through equity minimises the decision-
making power of the management.
(Source: Orica.com 2018)
The above table clearly makes it evident that there has been fluctuation in the ratio of the
organisation, in which it has been above the ideal standard until 2016; however, it has managed
to maintain optimality in 2017. This implies that Orica Limited maintains a balance in the mix of
debt and equity while raising funds for future investments.

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(Source: Fmgl.com.au 2018)
It is apparent from the above table that the debt-to-equity ratio of the organisation has
remained almost identical in both 2014 and 2015 with significant decline observed consecutively
in the later two years. This implies that Fortescue Metals Group has started to raise maximum
amount of funds from its shareholders for minimising its financial leverage or overall financial
risk.
Based on the above evaluation, it could be stated that Orica Limited is placed favourably
in terms of solvency in the Australian mining industry in 2017, since its ratio is near to the ideal
average of 0.50.
Conclusion:
The above discussion makes it prominent that financial accounting and reporting is not
regulated, the information published by the business organisations might be selective and it could
be manipulated by the individuals accountable to send the same into the market. Moreover, when
managers are provided with the opportunity of disclosing voluntary financial information, they
would conduct the work in a fair and responsible manner as suitable agents of their owners or
shareholders. However, the managers might not be willing to disclose the internal financial
information to all users of the financial statements. Instead, they might distort such information
to the investors for gaining more funds due to the fear of losing their jobs.

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It has been further evaluated that all nations have their own accounting standards;
however, for bringing comparability and standardisation, the organisations like IASB have made
attempts to develop a single standard acceptable for maximum countries. Despite such attempts,
it is not mandatory for the member nations to converge into IFRS, since they have their own
groups of accounting standards. Finally, it is found out that Orica Limited is placed in a better
position in the Australian mining sector in terms of debt and equity.

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References:
Bamber, M. and McMeeking, K., 2016. An examination of international accounting standard-
setting due process and the implications for legitimacy. The British Accounting Review, 48(1),
pp.59-73.
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Benson, K., Clarkson, P.M., Smith, T. and Tutticci, I., 2015. A review of accounting research in
the Asia Pacific region. Australian Journal of Management, 40(1), pp.36-88.
BHP., 2018. BHP | Reports and presentations. [online] Available at:
https://www.bhp.com/media-and-insights/reports-and-presentations?q0_r=category%3DAnnual
%2BReports [Accessed 24 Sep. 2018].
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Erb, C. and Pelger, C., 2015. “Twisting words”? A study of the construction and reconstruction
of reliability in financial reporting standard-setting. Accounting, Organizations and Society, 40,
pp.13-40.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting.
Pearson Higher Education AU.
Horngren, C. and Harrison, W., 2015. ACCOUNTING: BSB110. Pearson Higher Education AU.

13CORPORATE AND FINANCIAL ACCOUNTING
Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective.
Wiley Global Education.
Jehu, P. and Ibrahim, M.A., 2017. Accounting Regulation and Financial Reporting Quality: Pre-
and-Post IFRS Nigeria Evidence. Indian-Pacific Journal of Accounting and Finance, 1(3),
pp.24-34.
Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education.
Orica.com., 2018. Annual Report . [online] Available at: http://www.orica.com/Investors/annual-
report#.W6iGCvkzbIU [Accessed 24 Sep. 2018].
Page, M., 2014. Business models as a basis for regulation of financial reporting. Journal of
Management & Governance, 18(3), pp.683-695.
Pelger, C., 2016. Practices of standard-setting–An analysis of the IASB's and FASB's process of
identifying the objective of financial reporting. Accounting, Organizations and Society, 50,
pp.51-73.
Riotinto.com., 2018. Results & reports. [online] Available at:
http://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed 24 Sep. 2018].
Fmgl.com.au., 2018. Announcements and Reports | Fortescue Metals Group Ltd . [online]
Available at: http://www.fmgl.com.au/investors/asx-announcements [Accessed 24 Sep. 2018].

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