Financial Accounting Theory Assignment

Financial Accounting Theory

TABLE OF CONTENTS
Question 1........................................................................................................................................4
Question 2........................................................................................................................................6
Question 3........................................................................................................................................7
Question-4........................................................................................................................................8
Stakeholder Theory......................................................................................................................8
Social and Economic Consequences of Accounting Social Contract..........................................9
Question 5......................................................................................................................................10
question- 6.....................................................................................................................................11
Positive Accounting Theory (PAT)...........................................................................................11
Normative Accounting Theory..................................................................................................12
Question -7.....................................................................................................................................12
References......................................................................................................................................14

List of Figures
Figure 1: Graph representing fall in share value of CBA in last five days......................................4

QUESTION 1
The CBA (Commonwealth Bank of Australia) has diminished its share price from 1.5 percent to
76.60 (Sean, 2017) percent since shareholders were taking in the news that ARPA (Australian
Prudential Regulatory Authority) banking regulator might glance at the company.
ARPA is the body based on overseeing the superannuation, insurance and loan sectors of
Australia. It has substantial authority and recently ordered banks to slow down their activities of
providing loans to the property investors .Commonwealth bank and ARPA has declared that
supervisor shall introduce a free panel in order to examine several issues which have concerns
about the structure and exercises held in accountability, ethics and governance in commonwealth
bank group, and have ruined the reputation of the bank and public standing.
ARPA stated that bank is financially strong and capitalized. Further, the
investigation is based on the internal financial workings of CBA. The
objective of this damage is to determine any shortage and is inclusive
of assessing if or of not the organizational framework of group,
governance, accountability, financial goals and remuneration is
contradictory against the compliance results and risk management.
CBA has been a point of attraction because of its various scandals regarding the GFC. Recently,
it faced money laundering claims, wealth and life insurance scandals. Nonetheless, ARPA
announced that the panel would not make any decisions on issues which are present prior to the
cited court. Further, the investigation will be general and assess aspects of conflicts of interest (in
which the incentives overrule the best interest of consumers). CBA is bearing investigation costs,
however they are not likely to be significant regarding the company.
Finance experts who believe that CBA is a well-meant organization in its best interest to
consumers. On the other hand, the involvement of banking operations with regulators is usually
tame and typically engages a polite backwards and forward (Reddy and Wong, 2016). ARPA
contains the authority to impose changes. However, weak company culture and authority can be
complex to measure and hence, difficult to alter tangibly. Consequently, in accordance with the

above discussion ARPA investigation is not significant however there is a rapid increase in
regulatory risks at the leading banking companies.
Figure 1: Graph representing fall in share value of CBA in last five days
(Source: Commonwealth Bank of Australia. Share Price, 2017)
An Australian firm of law officially filed a class action lawsuit in opposition to CBA of Australia
in lieu of shareholders on Monday, condemning it to fail to reveal the breached rules of anti-
money laundering. The lawsuit filed by the firm (Maurice Blackburn) in opposition to the
world’s largest lenders is pursued by the federal agency AUSTRAC, which laid blame on it of
doing more than 53,000 breaches regarding the rules of anti-money laundering. That resulted in
billions of dollars of penalty.

The lawsuit, which had been formerly labelled by the law firm and lawsuit financier, stated that
shareholders had confronted a considerable share fall on account of AUSTRAC’s accusations.
Maurice Blackburn statement did not mention a number of compensations required. Further, the
action provoked CBA shareholder to join from 2015 to 2016.
Commonwealth Bank has not discussed that is practised hundreds of thousands of illegal
transactions but claimed about the breaches, were mainly held because of software fault and
dispute regarding the extent of responsibility. In the annual report, the bank stated that it planned
in order to protect itself from the class action lawsuit.
The stock of bank faced the loss of approximately 8.5%, as the AUSTRAC declared its lawsuit
in opposition to the commonwealth bank. Shares of CBA took a rise by 0.5 percent on next day
in line with the broader market (Commonwealth Bank of Australia. Share Price, 2017).
QUESTION 2
Business investors usually gather the useful yet effective information by considering the
environmental risks via direct interactions with the executives of company or surrogate
engagement firms (Bell, Filatotchev and Aguilera, 2014). Nonetheless, the information is kept
private and is not disclosed. Presently, a difficulty arises while considering the environmental
commitments, lack of reliable reporting, avoiding inspection by widespread public and
comparison amongst peers in the listed companies. For addressing this matter, the task force has
been established regarding the climate financial disclosures by the Board of Financial Stability in
order to plan the guiding principles for disclosures for managing them according to the climate
risks. Universally known CDP3 studies numerous companies yearly, putting questions regarding
the framework, action and governance on the environmental changed. Nevertheless, it is
restricted by its reliance on the indented participation.
During the 2016 assessment of companies internationally, the CDP got only 86 responses from
the Australian corporate. Moreover, the reports of CDP at the gross level (nationally or globally),
hence restricting the accessibility of information in relation to private corporations. ACSI which
stands for Australian Council of Superannuation Investors considers the Australian corporate
sustainable reporting practices on a yearly basis. Bollen and et al. assessed that (2015), neither
the climate risk is taken into consideration nor the listed private company commitments are

compared. In fact, the guide aims at companies to promote disclosure and to notify the
expectations of institutional investors in the market. The development of specified companies in
dealing with the climate risk offers a helpful strategy to consider the engagement financial
activities of investors (Epstein and Buhovac, 2014).
Australia has insufficient regulatory guidance and the collapse of institutional investors to wield
their impact on corporate (Mügge and Stellinga, 2015). These investors are required to exhibit
their engagement in managing carbon relating to their portfolios and must make use of Oxford
Martin Principles. First is to adopt and reveal a structure and timeframe for timely engagement
with the companies of fossil fuel. Then they are required to take disciplinary measures in
opposition to companies that do not comply with the framework, for example, voting not in
favour of remuneration reports. Next is to getting rid of those companies which are not able to do
progress. It has been assessed that a few company assessed their Energy sector in order to
reduce their emission in the long term. Moreover major of the companies do not make
submissions to the CDP (Carbon Disclosure Project) and lack of progress.
Specified the level by which Australians are bared to fossil fuel corporate by their funds of
superannuation, the widespread public has the right to know the exposure of companies to
environmental which are managing the same and assessing the actions of these funds to ensure
the firms have invested in a diminishing climate changing risks.
QUESTION 3
A stock market is a place where trading of stock is done. From the economic aspect, apart from
acting on behalf of a resource of financial investment, the stock market also acts as a function for
indicating a mechanism to executives about the decisions on investments as well as a mechanism
for company governance. On the other hand, the stock market is well-known for its most useful
channel for raising the capital of the company. Individuals are likely to trade in stocks because of
its long-term capital and dividend growth and evade against the slow inflation and spending
power (Coates IV, 2014). Another aspect that makes the stock market a key attraction is its
liquidity. Most of the individuals make an investment in stocks because they are willing to
become the owner of the company, by which they can get the benefit when the company makes
payment of dividends, or there is an increase in the price of the stock. However, individuals
purchase stock with the intention to take control over the business. On a regular basis,

shareholders are required to have a specific degree of shares to the board for making better
decisions and planning directional strategies for the business.
The problem with the statement: in the traditional theory of finance, investors are alleged to be
reasonable maximizes of finance, following the fundamental rules based on strategies of
investment on the assessment of risk-return, since the factors are likely to impact the decisions
on investment. Macve, (2014) asserted that the controversial area of this study has diversified
finding provided by the analyst.
For example, researchers asserted that expected profits, dividends and financial performance of
firm are considered as crucial investments for private investors. Sadgrove (2016), determined six
factors which are: dividends, speedy growth, an investment meant for the purpose of saving,
rapid profits by buying and selling, specialized investment management and continuing growth
influencing private investors regarding their investment decisions.
Researchers have suggested that investors are required to carefully examine the factors and
applying the best of business knowledge while investing on investment. Investors must have
potential to understand the economic and industrial signs, as they impact the performance of
market share. Hence, they must assess each variable in the climate rather than just assessing
single variable. In addition to this, investors must branch out their investments into diversified
companies via developing investment portfolio in order to eliminate risk and maximize profits.
QUESTION 4
Stakeholder Theory
Many theories related to stakeholders have developed over time identifying and explaining the
nature of the interaction between the firm and the stakeholders. Wennersten, Sun and Li, (2015),
specifies that the Stakeholder Theory initiated by Freeman was intended to provide an
understanding of the unification of various categories of stakeholders. Freeman recognized that
“any category of stakeholder theory is not complete without the other”.
Sullivan (2017) , stated that a number of researchers had recognized the need for the “unwritten
Social Contract” which reflects the managerial and normative decision-making related to
stakeholder theory that may aid in the analysis of the interaction between firm-stakeholder.
The social contract is an implied contract between a company and the related

stakeholders. In the twentieth century, moral responsibilities of a company regained
philosophical momentum in the form of social contract theory. The social contract of a gas
company offers a more inclusive viewpoint on corporate social disclosure by clearly recognizing
that all the companies are bound by the social contract; according to which they agree to carry
out various activities that are socially desired by the society in return for approving their
objectives, which guaranty their successful sustained existence. In this case, the export of gas
which may not leave any scope of local consumption may be against the contract. Corporate
social responsibility involves reporting of the social and environmental variable of the company.
The concept was first introduced by MNCs, to recognize their responsibility towards
environment and society (Fullan, 2014).
Social and Economic Consequences of Accounting Social Contract
Recently, many theorists have different perspectives and criticisms of the social contract.
In particular, they have argued that the social contract is an incomplete picture of the moral lives.
The motivations that could potentially influence management’s interaction with stakeholders are
offered by these theories that reflect into in the managements’ decision regarding information to
be reported about the activities of the firm activities. The two important economic consequences
of social contract are
 The resources spent on reporting of such kind which is other than the economic goals are
a waste of resources because many of the times they are contradictory to a firm's
economic and financial goals (Geneva Association, 2014).
 On the other hand, the proponents of social contract encourage this ides by emphasizing
that the reporting of the social contract comes along with certain other social benefits that
may outweigh the economic costs associated with its reporting. Thus, engaging in social
and environmental responsibility is necessary for business, for the sake of its long-term
existence and a better goodwill in the society (Abbott, 2014).
The social contract reflects the view that company’s moral or regulatory obligations are
dependent upon a social contract or agreement executed by them among the society in which
they operate. However, the social contract is in the form of a theory which is associated with the
contemporary moral and political theory. The social responsibility and economic goal of the
company must go simultaneously with each other for better results. The managers in a gas

Company could justify the expenses of the social contract to the shareholders not only due to the
moral quality of the company’s operation but also with reference to the economic benefits
achieved by the business in the long run. Similarly, investors will not be concerned about the
trade-off between maximum ROI on the one hand, and on the other, the ethical considerations of
the company they invest in (Rickards, Wiseman and Kashima, 2014).
QUESTION 5
Wright and Nyberg, (2015) asserted that a financial reporting system that is supported by high-
quality standards, strong governance and resonance regulatory frameworks are a key to the
growth of any company. Indeed, financial reporting based on high-quality standards of
accounting, auditing and ethics strengthen investor trust placed in financial and nonfinancial
information. Thus consistent financial reporting standards play a fundamental role in
contributing to economic growth and financial stability of any company. As globalization occurs
in more and more countries to open their avenues of foreign investment and to expand their
business beyond geographical borders, both the public and private sectors have increasingly
recognized the benefits of having a financial reporting framework that is commonly understood
and supported by strong globally accepted standards (Seto and et.al, 2016). There are many
advantages to such reporting frameworks like greater comparability of financial information, the
greater readiness of investors to invest beyond borders; more efficient method of allocating
resources on the basis of international benchmarks.
However, achieving an international convergence like this requires more than theoretical
support. It requires reaching a consensus as to what international standards should be used which
serves as the base for global financial reporting and auditing and also to determine the ways in
which the adoption of these standards can be facilitated. The major challenge in this regard is-
 Understanding the connotation of International Convergence.
 Conversion of the local standard into international Standards.
 Complexity in the structure of International Standards (Allen, 2015)
 Frequency and volume of changes in the International Standards.
 Potential Knowledge Shortfall.
All these major problems have led to an inconsistent IRFS system which has undermined all the
benefits associated with a common reporting. The translation of the international standards is a

major challenge faced by many countries which leads to inappropriate adoption and
implementation of the standards (Siddique, 2015). There are also huge discrepancies in the
meaning of “adoption”. There is no single definition of adoption of standards. The participants of
the IFRS are of the viewpoint that the international standards have become longer and much
more complex and rules-based. This complex structure of the standards is adversely affecting
their adoption and implementation (Aboutorabifard, 2016).
Thus for the purpose of promoting consistent reporting framework globally, it is
recommended that the setter of international standard become more attuned to the challenges in
adopting and implementing the international standards. In particular, the setters must develop
standards that are principles-based and not complex, and a flexible structure which lends itself to
incorporation and implementation.
QUESTION 6
Positive Accounting Theory (PAT)
Positive Accounting Theory is an effort in making better estimations of the real world
events and interprets them to accounting transactions. El-Masry and Kamal (2013), asserted this
theory is in contrast with the normative theory that only suggests what should be done; the
positive theory is based upon explanation and prediction of events. The positive theory covers
areas such as which accounting policy will the firm choose given the problem and variables. It
also measures firm’s reaction to the newly proposed accounting standards. The overall purpose
of this theory is to recognize and predict the choice of accounting policies available with firms
(Iatridis and Schroeder, 2016). It also recognizes the economic consequences which exist in
relation to every accounting policy. With the help of PAT, firms maximize their survival
prospects, so they can organize themselves proficiently. In relation to PAT, the firms aim at
minimizing their contract costs like negotiation, renegotiation, and monitoring. The firm tends to
choose the accounting policies that are best suited to their needs. PAT recognizes the changing
situation that requires managers to apply a flexible approach in choosing accounting policies
(Dodge and Akbari, 2017). This highlights the problem of “opportunistic behaviour”. This
happens when the management actions are in their own personal interests. Thus, positive
accounting theory reflects the best set of accounting policies which are an optimal compromise
between minimizing contract costs and providing flexibility.

Normative Accounting Theory
Another relevant accounting theory is Normative accounting theory which provides guidance
relating to the manner of selecting the most appropriate accounting procedure and prescribe what
should be done (Elijido-Ten and Tjan, 2014). As per normative theory the ratio of debt to total
tangible assets should be below the specified limit, and in case the quantum of debt exceeds
either the assets inflates or liabilities decrease. In case contractual safeguards are not provided
then it is assumed that the holders of debt will have to pay the higher cost of interest for
compensating towards higher risk. Thus, this theory assists in ascertaining the appropriate
procedure in order to reduce the amount of risk and loss relating to debt component.
QUESTION -7
A distinguishing feature has been assessed by the authors to assess the manner in which political
and legal setting influences the shape of regulatory space relating to the development of the
standard. Jacobsen, (2013) stated that the reason behind the same is that role of political factors
in standard-setting is most sophisticated. The influence of political factors on setting standard
can be said as an objected intervention in the standard-development process by an economic
entity with the aim of influencing the outcome of the procedure in order to enhance the entity
economic value, eliminate accounting alternative in order to decrease the impact of additional
flexibility provided through same.
Conceptual framework provides assistance to AASB for developing and evaluating the
accounting standard (Klettner, Clarke and Boersma, 2014). AASB is responsible for the
development of Australian Accounting Standard, and the same is necessarily required to be
applied by entities in the preparation of financial reports. The conceptual framework can be
specified as a practical tool with an assist in developing consistent accounting policies in the case
when no accounting standard applies to particular transaction or event (Bodie, 2013). Even
assistance is provided in the case when a standard allows a choice of accounting policy and also
in interpreting the standard. Thus, it can be concluded that conceptual framework helps in
developing and modification of standard as they assist in interpreting the same in an appropriate
manner. Through same, the need for modification or necessity of new accounting standard is
ascertained, and the manner in which same should be applied is also ascertained. The main

objective of the conceptual framework is to enhance the financial reporting for providing a
clearer and update set of concepts.

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