Accounting Theory and Issues: Financial Analysis of Westfield Corp.

This report delves into accounting theories, including normative and positivism, and their practical applications. It examines the limitations of these theories and the pressures influencing accounting methods, such as creative accounting and financial statement preparation. The report analyzes the a...Read More

Accounting theory and issues

Table of Contents
Accounting theories: Normative & Positivism............................................................................1
Limitations of accounting theories...............................................................................................1
No single unified theory of accounting........................................................................................1
Pressures and motivation of accounting method..........................................................................2
Creative accounting......................................................................................................................2
Financial statement preparation and influencing factors.............................................................2
Accounting framework................................................................................................................3
ASSESS ACCOUNTING POLICIES AND ESTIMATES OF WESTFIELD CORPORATION..3
Accounting policies and estimates...............................................................................................3
Flexibility assessment..................................................................................................................4
Competitors accounting policies and estimates...........................................................................5
Comparative evaluation...............................................................................................................5
Agree or disagree.........................................................................................................................5
Presenting accounting strategy.....................................................................................................5
Red flags......................................................................................................................................5
Accounting position.....................................................................................................................6
CRITICAL EVALUATION OF ACCOUNTING QUALITY........................................................6
Political pressure of accounting standard setting environment....................................................6
Disclosure requirements...............................................................................................................7
Investigation report......................................................................................................................7
REFERENCES................................................................................................................................9

Accounting theories: Normative & Positivism
Accounting is a standardized system that presents the detailed informative picture of
company’s financial transactions undertaken in a given year. In current era, company’s
accounting system can be seems to a carefully constructed theories by which firms tend to
represent the best performance. There are two theories which are highly popular, normative and
positive. First is based on application of theoretical principles that accountant must use like
current cost accounting, deprival –value accounting and exit-price accounting. It begins with
theoretical underpinning and then move towards designing specific accounting policies hence,
regarded as deductive approach (What Are the Differences Between Positivism and Normative
Accounting?, 2015). For instance, before crisis, there were no need of assets revaluation, whilst,
following the period of crisis, with the coming of marked to market approach, revaluation
become necessary.
However, later view entire company as a total of all the contracts that it had made in a
reporting period. By this way, efficiency is the core key driver behind company’s success which
believes that firms can gain high value only by reducing contractual cost (Deegan, 2013). Thus,
it evaluates real life happening events and examine that how companies accounted such
occurrence.
Limitations of accounting theories
The key criticism of normative theory is that it does not clarify that which accounting
principle must be used in different situations and contract type has a significant impact over the
selection of accounting method (Coetsee and BUYS, 2016). For instance, it does not clarify that
whether cost and benefits from a contract should be recognized immediately or over the time.
However, PAT is based on prediction which might prove wrong in dynamic era. Besides
this, Bazrafshan and Talebnia (2016), criticized it because it avoid and undermine theoretical
aspects. For instance, financial institutions accounted their financial securities in such a manner
that hid change in material which was persistent to their day to day operations.
No single unified theory of accounting
Examining PAT & NAT, it becomes clear that first is highly practical whereas later is
more theoretical. PAT is an individual self-interest driven approach and in this, individual acts
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opportunistically for wealth maximization. Its efficient perspective works on minimizing their
agency cost. Hence, loyalty and morality notions are not covered (Cao, Chychyla and Stewart,
2015). However, NAT seeks to facilitate in selecting most appropriate policy by providing
conceptual framework. Both the method has their own drawbacks henceforth, none of the theory
can be considered as a unified approach.
Pressures and motivation of accounting method
Managing threatening real life events encourage and motivate accountant to use
positivism theory for the self-benefit because it have an opportunistic perspective that aims at
driving efficiency through cost minimization. However, in order to promote morality, NAT is
considered appropriate because it focus on theories.
Creative accounting
Providing misleading financial information by exploitation of accounting loopholes so as
to present favorable performance is called creative accounting. Although, in this, firms follow
accounting laws, principle and rules, still, they do not support the key aim which the standard
intend to achieve by giving false information. Earning management is the most popular way of
CA in which, firms deliberately present higher return from their operations to mislead their
stakeholders. For instance, if a firm excessive loss then in order to satisfy shareholder, it will use
EM so as to build confidence among investors that their investment is safe. This in turn, they will
retain their fund in the corporation so as to gain good return. Thus, companies use CA in order to
create good market impression, stay competitive and build confidence among stakeholders, more
importantly, shareholders.
Financial statement preparation and influencing factors
 Initially, business records all the business transaction into journal on the basis on double
entry book keeping system.
 Afterwards, all the journal entries are posted into ledger which provides details on each
individual account.
 After ledger, trial balance is constructed to know arithmetical accuracy either following
total method or balancing method (Cao, Chychyla and Stewart, 2015).
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 Lastly, annual accounts i.e. profitability statement, balance sheet, cash flow statement,
statement of change in equity and retained earnings are prepared to know financial health
and profit position of an enterprise.
Factors affecting financial statement preparation
 Accounting laws, rules and regulations i.e. GAAP, IAS, Corporation Act 2001
 Reporting standards like IFRS
 Business structure i.e. sole proprietor, partnership, companies (Private & Public)
 Stakeholder information requirements (Wang, 2014)
Accounting framework
Accountant record all the historical transactions in accounting books following relevant
accounting rules mentioned under GAAP. It comprises standards set out by the domestic
accounting regulatory body in Australia. Besides this, multi-national companies who are
operating in more than one country needs to follow international accounting standards (IAS)
while they also need to prepare the statement in standard format through following IFRS
(International Financial Reporting Standard) (Weil, Schippes and Francis, 2013). Afterwards,
they need to organize its audit to make sure that their statement present true & fair picture of
profitability and financial position, so as to publish credible information to various stakeholders.
ASSESS ACCOUNTING POLICIES AND ESTIMATES OF WESTFIELD
CORPORATION
Accounting policies and estimates
Investment properties:
- Initial recognition: Cost inclusive transaction cost
- Subsequent years: Fair value recognition
Listed & Unlisted investment:
- Listed: Fair value consider market value
- Unlisted: Fair value considering WestField Group’s interest in the assets
- Movement in fair value: Revaluation gain or loss
Money measurement principle:
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Domestic transactions: US dollar
Foreign currency transaction: Converted to domestic currency, US dollar using exchange rate of
the transaction date
Revenue & expenditures: Accrual accounting policy
Inventory: Lower of Cost or net realizable value (NRV)
Financial liabilities
1. Payable: Amortized cost
2. Interest bearing liabilities:
- Initial recognition: Fair value of received consideration
- Subsequent recognition: Amortized cost following effective rate of interest method
Merger: AASB 3 Business Combination
Change in accounting policies in 2016
AASB 2014: 3 Amendments in AASB for reporting interest acquisition in Joint venture
AASB 2014: 4 amendments - clarification on accepted method of D&A (Depreciation &
amortization)
AASB 2014:9 amendments – Equity method
AASB 2015: 1 amendment – Annual improvement
AASB 2015 – 2 amendments – Disclosure initiatives
AASB 2015 – 3 amendments – Withdrawal of AASB 1031
Accounting estimates: Firm used managerial estimates considering historical experience
and other reasonable factors in different circumstances. Westfield Corporation used estimates for
direct market comparison and in such case, where comparable transactions are not easily
available. Managers used estimation for valuation of investment properties at fair value
(Westfield’s annual report, 2016). In this, they used estimates of discounting rate, rental income
and estimated yield considering RICS appraisal & valuation standard for net income
capitalization and discounting of potential cash flows.
Flexibility assessment
There is flexibility exists with regards to corporate restructuring in which, provisions
provide flexibility to enable underlying securities to be restructured without vesting.
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Competitors accounting policies and estimates
Yes, Westfield’s competitors, SIMON property Group, GGP Group and other also
follows same accounting policies and estimates for preparing their annual reports.
Comparative evaluation
Similar to Westfield corporations, Simon Property Group Inc record their investment
properties at cost and in the subsequent period, assets are recorded at fair value. Westfield did
not provide any information how their assets are being depreciated, however, Simon Group used
straight line method of depreciation (Simon annual report, 2016). Likewise, both the firms take
into account cash & short-term deposits with 90 days maturity or less for cash & cash
equivalents.
Agree or disagree
Yes, I agree on with the used accounting policies and quality of estimates for the
shopping centre property valuation purpose because considering auditor unqualified report,
Westfield had successfully complied with the policies consistently throughout the period.
Moreover, using the external market data gathered by specialists of real estate, prediction
estimates were founded justifiable (Westfield Corporation’s annual report, 2015). Auditors also
supported the appropriateness of accounting policies used by the organization. Furthermore,
group budget forecasting and property development cost and revenue were founded accurate.
Estimates were made by the qualified valuers following RICS standard and mandatory standards
of professional Appraisal practice.
Presenting accounting strategy
Reviewing Westfield annual reports, it become clear that its accounting strategy is based
on disclosing true and fair picture of their financial transactions and annual report. Accounting
strategy reveals all the necessary information and presents it to the stakeholders very clearly.
Red flags
Although there are sufficient details provided by Westfield Corporation in their notes to
account, still, there are several red flags exists. Firm did not provide any details about their
current and non-current receivables in their annual report. Besides this, there is no information
disclosed regarding inventory balance which is increased from $21.5 US million from $40.9m in
2016. Thus, it affects the quality of accounting disclosure. Looking to the 2015 income
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statement, sudden increase in property development and project mgt revenue from $185.3m to
$595.7m is a sign of potential red flag. It can be seen that company’s net loss of $215m suddenly
grown up to $2323.5 which showcase possibility of earning management under creative
accounting so as to mislead investors by presenting impressive return (Westfield’s annual report,
2016). Besides this, there is no information about the applied depreciation method used for the
assets which may leads to accounting discrepancies. In the SOCI, there is no separate heading for
depreciation & amortization and the amount is incorporated in any other heading.
In despite of this, poor cash flow pattern as in 2015, it reached from $308.5m to
$1,106.8m and again in 2016, dropped to $292.1m is an indicator of potential cash difficulties in
future. Besides this, other information i.e. interests bearing liability, segmental revenue and
others assets and liabilities are properly disclosed and accompanied in the footnotes. Lowy
Institute is considered as related party transaction because entity is being under the group control
(Westfield Corporation’s annual report, 2015). Following AASB 124, it had properly disclosed
its relevant party transactions in note 43 and transaction was recorded on arm’s length basis.
Auditor gave unqualified reports and accepted the truthfulness and validity of the information
presented in the financial accounts along with the estimates used for valuation. As per the auditor
report, company adequately followed relevant legislation and standards, GAAP, Corporation
Act, 2001 and other rules.
Accounting position
Company must disclose detailed information following relevant accounting legislation
and standards for reporting inventory, receivables and payable. Besides this, revenue and
expenditures from property development and management operations must be fully disclosed so
as to avoid any discrepancies in the accounting results (Pratt, 2013).
CRITICAL EVALUATION OF ACCOUNTING QUALITY
Political pressure of accounting standard setting environment
Political pressures have a significant impact on the accounting standards setting such a
setting new standards; introduce amendments and reporting standard as well. After FASB
formulation, every standard setting procedure goes into different stages i.e. memorandum
discussion, issuance of exposure draft, inviting comment letters from different accounting bodies
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at international level etc (Saunders and Cornett, 2014). Nevertheless, standard-setting framework
does not only rely on the FASB, indeed, accounting bodies, corporations and others also
influence it by providing their views on issuance of potential standard or amendments through
publishing comment letters. Moreover, it does not only rely on the FASB but SEC also
influences it. It is because, setting standards is a part of regulatory system and it is the base for
maintaining a stabilized economy.
Disclosure requirements
According to the accounting standards and reporting requirements, company has to
prepare their annual accounts and thereafter publish the audited statements so as to provide
information to their users. Under the mandatory disclosure, they need to disclose necessary
details regarding their accounting policies, convention, rules and regulations in the footnotes.
Besides this, firm may also provide other information in their notes to final accounts voluntarily
(Jollands and Quinn, 2017). For instance, Westfield Corporation had disclosed statutory
remuneration details, at the same time, information regards to cash remuneration is also
disclosed voluntarily without any mandatory requirement.
Investigation report
To: Managers
From: Accounting Analyst
Date: 25th September 2017
Subject: Accounting strategy and reporting strategy choices
Section 1: Key accounting policies
- Accrual method of accounting
- Historical cost
- Fair value accounting
- Equity method
- Inventory: Lower of cost or NRV
Section 2: Assess accounting flexibility
There is flexibility exists with regards to corporate restructuring in which, provisions
provide flexibility to enable underlying securities to be restructured without vesting.
Section 3: Evaluate accounting strategy
Westfield Corporation’s accounting strategy is based on present detailed information in
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their financial statements so as to provide complete set of information to assists their
stakeholders, more importantly, investors.
Section 4: Evaluation of disclosure quality
Although, no-doubt, firm disclosed essential information in footnotes and followed
accounting and reporting standards along with Corporation Act, 2001, still, there are some
areas where its disclosure quality is considered questionable. In its annual reports, no details
were founded regarding inventory, method of depreciation, receivables and their property and
project mgt revenues as well as expenditures (Küpper and Pedell, 2016). Although, Firm had
disclosed sufficient segmental revenues, still, sudden profitable results reflected in the income
statement indicates earning management through creative accounting. Used GAAP reflects key
performance indicators i.e. profit after tax, fund from operations, earning per share and others.
Section 5: Potential red flags
- Mountaining receivables’
- Increasing inventory balance
- Unstable cash flow pattern
- Earning management under creative accounting
Section 6: Compliance with conceptual framework
Accepting the compliance with the accounting conceptual framework, auditor issued
unqualified report in both the year that proves that its final accounts covering SOCI, SOFP and
SOCI disclose true and fair picture of their financial health. Auditor did not discover any
discrepancies in their annual accounts. Moreover, estimates regarding rental revenues,
discounting factor and estimated yield also founded as appropriate and reasonable. They also
complied with the RICS appraisal & valuation standard for valuation of property.
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REFERENCES
Books and Journals
Brochet, F., Jagolinzer, A.D. and Riedl, E.J., 2013. Mandatory IFRS adoption and financial
statement comparability. Contemporary Accounting Research. 30(4). pp.1373-1400.
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons. 29(2). pp.423-429.
Coetsee, D. and BUYS, P., 2016. DOCTRINAL RESEARCH AS A MEANS TO RECOVER
NORMATIVE THINKING IN ACCOUNTING. Studia Universitatis Babes-Bolyai,
Philosophia. 61(3). pp. 12-39.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Jollands, S. and Quinn, M., 2017. Politicising the sustaining of water supply in Ireland-the role
of accounting concepts. Accounting, Auditing & Accountability Journal. 30(1).
Küpper, H.U. and Pedell, B., 2016. Which asset valuation and depreciation method should be
used for regulated utilities? An analytical and simulation-based comparison. Utilities
Policy. 40(12). pp.88-103.
Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education.
Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill
Education,.
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research. 52(4).
pp.955-992.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Online
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Bazrafshan, M. and Talebnia, G., 2016. Challenges Positive Accounting Theories. [PDF].
Available through: < http://www.isicenter.org/fulltext/paper-30062016171033.pdf>.
[Accessed on 25th September 2017].
Simon annual report. 2016. [Online]. Available through:
http://media.corporate-ir.net/media_files/IROL/11/113968/Simon%202016%20Annual
%20Report%20with%20Form%2010%20K_High%20Res.pdf. . [Accessed on 25th
September 2017].
Westfield Corporation’s annual report. 2015. [Online]. Available through:
http://192.168.1.18/projectfiles/internal_chat_attatchment/AR16WestfieldCorpFinancials
_D9474c90164f11505819446.pdf. [Accessed on 25th September 2017].
Westfield’s annual report. 2016. [Online]. Available through: <
http://192.168.1.18/projectfiles/internal_chat_attatchment/AR15WestfieldCorpFinancials
_D8_FINAL1b03e09016e1505819461.pdf>. [Accessed on 25th September 2017].
What Are the Differences Between Positivism and Normative Accounting?. 2015. [Online].
Available through: https://www.fool.com/knowledge-center/differences-between-
positive-normative-accounting.aspx. [Accessed on 25th September 2017].
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