Accounting and Society 4 Report: IFRS, Loans, and Social Contracts

This report, prepared for an Accounting and Society course, delves into three key areas: International Financial Reporting Standards (IFRS), loan services within financial institutions, and the concept of social contracts using the James Hardie asbestos case as an example. The IFRS section discusses the adoption of global accounting standards, their benefits, challenges, and the reasons behind the US's delayed adoption. The loan services section explores debt covenants, challenges faced by banks, the role of accounting in mitigating lending risks, and agreements guiding loan transactions. Finally, the social contract section examines the agreement between James Hardie and the Australian government and communities regarding asbestos-related health issues, including the impact on stakeholders and organizational legitimacy. The report analyzes the implications of these topics on financial reporting, corporate governance, and societal well-being. It highlights the significance of accounting standards and ethical considerations in financial practices.

Accounting and Society 1
ACCOUNTING AND SOCIETY
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Accounting and Society 2
ACCOUNTING INTERNATIONAL STANDARDS TO FINANCIAL REPORTS.
SECTION A
 A. International guidelines is a necessity to vast organizations with auxiliaries in
various nations by embracing comparable overall models to disentangle bookkeeping
systems enabling them to utilize one bookkeeping report dialect all through and get
financial specialists and reviewers with a strong perspective of accounts. As indicated
by (Hagen and van, 2002) a few explanations behind reception of global money
related announcing gauges included;
 Markets
Markets expenses and contracts was one reason for selection to extend the amount of
universal exchanges in the majority of the business sectors investment by general society
enterprises.
 Corporate governance
IFRS adoption had an aim through several channels to improve corporate governance by
bringing in managers with information that is precise more accurate to create improvements
in decision making.
 Cost of capital to public corporations
Decrease in the cost of money to open organizations was a generally and related touted
advantage of IFRS making a less dangerous condition prompting a lower come back from
contributing.
 Asset markets

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IFRS additionally had a few procedures on the advantage markets to lie value and obligation
showcases by expanding budgetary proclamation straightforwardness for a higher data
quality and diminish data dangers to banks and furthermore to the investor
IFRS adoption expanding worldwide had some critical status (Walker, 2010.) which include;
 Allowing greater comparability as businesses had to use similar standards in
preparation of financial statements.
 Creation of more flexibility as philosophy based on principles rather than rules was
used thus the set of standards having a goal to arrive at a reasonable valuations.
 It turned into a valuable to new and little financial specialists by helping new and
little speculators to make standard reports enhancing quality and getting to be plainly
less difficult.
Adoption of IFRS also had some challenges during implementation which included;
 High cost necessity as extensive or private companies would feel an effect if a nation
receives IFRS. For the most part the little organizations would have less assets to
actualize the change.
 Not acknowledged all inclusive having a few nations out like US, having a
consistency issue.
 Prone to control as each business utilizes the strategies they wish to create budgetary
articulations that demonstrates the coveted outcomes which can prompt benefit
control.
Professor Ray Ball is one of the world’s smartest professor in accounting academe. (Hope,
Jin and Kang 2006) IFRS has led efficiency in the markets by providing investment strategies
when it comes to financial managements. Empirical evaluation in the firms stating financial
statements are simple to understand or interpret improving firm resources allocation systems.

Accounting and Society 4
B.
More than 100 nations have received or got their own specific manners to show
money related revealing models (IRFS) in future. (Haverty, 2006.) The storage room political
partners and all the more imperatively the US exchanging accomplices which incorporate
Japan, Canada and Mexico chose to surrender their national bookkeeping benchmarks for
IFRS abandoning US as one of those created economy without this bookkeeping models
framework for household traded on an open market organizations having the SEC dropping
its long standing prerequisites for remote issues exchanging US capital markets
accommodating their monetary proclamations with US GAAP. For a long time US
controllers, standard setters and professionals have been taking a shot at any probability of
securities backers supplanting the utilization of US GAAP with IFRS. (Road and Linthicum,
2007) Providing a few connects to permit US multinationals to utilize IFRS for their outside
backups has shown a moderate move in appropriation of the IFRS. A few organizations have
effectively changed over to IFRS making broad utilization of its focal points where some are
laying anticipates how to change over to IFRS framework.Some of the reasons why US did
not adopt the IFRS as their financial reporting framework included (Barth, 2008);
 The US Regarded the GAAP as a rule based while IFRS was principle based
considering the principle based concept to generate issues that are more complicated
for a preparer to defend its position in case of litigation.
 Initially GAAP was principle based but they shifted to rules over time with respect to
US legal environment concluding that IFRS would lead to some risks by following
the same path.
 The US organization avoided the risk of having the standard setter become less
independent on controlling their accounting standards.

Accounting and Society 5
 Transition cost and length are regularly presented as a noteworthy obstacle generally
in this muddled financial condition. Change trouble and their cost will depend
generally upon the consummation of the meeting.Teams’ readiness was a reason as
auditors, preparers and users had no skills and knowledge about the IFRS.
Since financial reporting standards and requirements vary from one country to another there
is creation of inconsistencies in financial reporting. It creates a prevalent problem seeking
companies to follow accounting standards and financial reporting to provide workable
solution to handle the existing conflict (Brown, 2011) confusion and complexity created by
inconsistency and of clear accounting standards in financial reporting. A number of
constituents, involving stock markets, corporate management, accounting standards setters,
investors and agencies would benefit due to streamlined simpler standards, practices and
rules applied to all countries and followed worldwide. Also the investors will tend to acquire
some more skills and knowledge through the new internationally accepted standards. Quality
of international accounting standards would impact to quality financial reports as their goals
and efforts is to achieve a fair, liquid and efficient capital markets.
SECTION B
A. Making loans and receiving deposits is a license offered to banks as a financial
institution. (Mueller, 1976) They provide financial services, such as safe deposit boxes,
currency exchange and wealth managements. Focusing on loans services the bank must
have a debt contractual promise to prove statements a lender can rely on when deciding to
lend. A covenant is a promise in lending articles or debt agreement in a formal manner
that states whether certain activities should be carried out or not. In financial matters
covenants mostly relates to financial contracting terms including documentation of loan
showing the maximum or the minimum the borrower can further lend. (Daley and

Accounting and Society 6
Vigeland, 1983) They protect themselves by avoiding financial actions detrimental from
borrowers’ defaults. Despite having the debt covenant the banks faces some challenges
resulting from economy nature, bank managements or the customers. Some of the
problems include;
 Regulatory requirements creating much pressure as it continue to increase, requiring
the bank to incur some expenditures largely on some parts of their discretionary
budget compliant hence coming up with processes and systems to maintain feasible
requirements.
 Low returns is also a problem having optimum profit gains objective the banks tend to
make low returns on equity than what the shareholders requires.
 Financial technology companies increasing competition as they are based on using
software in provision of their financial services hence increasing their popularity
which disrupt the normal means in bank operations. A quick adjustments to attain the
latest technology always becoming a big challenge when it comes to their bank
operations.
 Expectations from the customers urging for easy and accessible means when it comes
to loans agreements. This create a lot of pressure to bank lending officers whereby the
customers lack information and experience in loan services frameworks.
Accounting financial statements plays a major role when it comes to loans services in the
bank. (Chava and Roberts, 2008) Accounting helps lending officers avoid some risks by;
 Lending officers can know the borrowers leverage ratio so that he can identify loan
intentions thus the borrower need to observe leverage ratio by paying off their debts
or increase their cash borrowing without borrowing.

Accounting and Society 7
 Accounting states the debt service coverage ratio assisting the lending officer on how
many times you can make loan payments with your net income. The capability to
make loans payment through net income increases the chances of getting the loan.
 Accounting also provide loan to value ratio where most lenders require your
collateral appraised value to be higher than the loan amount.
B. Company management been involved in loans transactions are supposed to be guided
by several agreements when transacting loan services. (Hertzberg, Liberti and Paravisini,
2010) Debt covenant are agreements which can help the company in the following ways;
 Having a global market standards due to efficiency in loan services as they are
guide by well stated agreements creating trust whereby the firm become widely
known worldwide.
 They bring in syndication where by the lenders and the agents can form an
organization and sell part of their debt to other financial institutions if the loans
are drafted based on debt covenants. The process benefits the potential borrower
have an easy access to the bank loans.
 Cost reduction is also an advantage to the company through debt covenants as it
creates less time and energy during negotiation which potentially impact the
amount a corporate is needed to pay in legal fees and also enabling them to
devote more time on commercial aspects of a deal. Financial savings are also
created due to efficiency of loan transactions.
 Transparency is also an added advantage whereby the debt covenants provide
standards holding financiers to account thus lenders and borrowers negotiates
their position on key points.
SECTION C

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A. A social contract is an agreement involving mutual benefit between the government or
an individual or group or community as whole. James Hardie is well known for
having a wide market in Australia in manufacturing building materials such as
asbestos which were more susceptible to fire leading to diversification. (Haigh, 2006)
However during their production processes the workers were encountered by some
diseases such as lung cancer due to dust and other chemicals involved in production
lung cancer becoming a huge blow to Australian communities. The government had
to come in whereby a social contract between James Hardie and the communities was
created. The following are some of the terms implied in the social contract;
 Improvement of the principle deed agreements for provision of long time fund
to Australian victims resulting from exposure to materials produced by James
Hardie group subsidiaries. (Tilt, 2009) The contract was all about funding
agreement under legally set basis to provide fund to the victims. The agreement
included compensation to asbestos sufferers by establishing SPF due to claims
against James Hardie group subsidiaries. Annual actuarial assessment of
expected claims under rolling cash and annual contribution was also met in the
contact. Satisfaction of James Hardie with the tax treatment was also a proposed
term and also receiving the approval of its lenders and shareholders.
Due to disease outbreaks some negativities were impacted on several stakeholders since
James Hardie industry involved a larger number of communities in the country.
(Nehme, 2009) The stakeholders who were affected by this cause included;
 The employees and the customers are some of the victims who suffered a lot as
they would spend most of their time in operations and making sure the processes
were well done exposing them to lung cancer where most of them died due to

Accounting and Society 9
damaged breathing systems as the asbestos contained harmful dust and
emissions.
 The management officials due to the harmful outbreaks a lot of criticism and
humiliation from the public created a lot of pressure to the management on how
to rectify the problem whereby the executives were penalised seeking them to
come to agreements on compensation to the affected communities.
 The government was also affected by James Hardie actions as individuals could
aid assistance from the government thus it had to come in and create solutions
on the actions.
 Financiers as they had to use a lot of money in compensating the victims of the
harmful asbestos substances.
B. Organisational legitimacy is the compatibility an organization demand bringing in
social values associated by their activities in the larger social systems with norms of
acceptable behaviour. (de Govrik, 2012) James Hardie officers and directors are in
ruin having an immense reputation damage. They damaged their reputation by not
providing frank and full disclosure to the board and to the stock exchange. Having
well laid strategies the officers and directors of James Hardie would have made the
right decisions guided by well stated principles. (Nakra, 2000) Some of the strategies
they would use to build up their reputation are;
 Making quality leadership by working with basic regulations with the urge of
shaping their industry and social practices in the policy sphere i.e. James Hardie
having an immediate identification of the problem in the company would stop
the action from taking place by creating safety to the workers.

Accounting and Society 10
 Having a transparency and accountable ways of operation i.e. James Hardie
would have a good relation with the stock exchange unions and come up with
platforms on the matter.
 Protecting the environment and future generation by producing products which
under well controlled measure to avoid any harm to the society i.e. the industry
would have provided the correct safety to the workers and also make sure the
harmful asbestos substances are eliminated from the products.
 Making their society value friendly i.e., James Hardie would have treated the
workers in a better way as we are told most of the workers in that industry were
slaves and it is only in Christmas they were treated by been offered one beer per
person.
 The safety, quality and type of the product and services should be delivered
consistently i.e. the industry would have made materials free from harmful
asbestos substances in order to provide healthy safety in the environment.
C. Corporate governance is where companies are controlled and directed through
practices, rules and processes in systematic ways.(Hargovan, 2009) The essentiality of
the corporate governance is to balance the interest of the company whereby
stakeholders, such as management, customers, suppliers, financiers, community and
the government provide a framework toward company’s objectives.
James Hardie corporate administration had a few shortcoming which likewise added to
the harm of their notoriety. (Comino, 2014) Having ruptured the partnerships
demonstration by putting forth false expression about the therapeutic research and pay
establishment they were indicted by the Australian securities and venture commission.
James Hardie poor corporate administration drove the organization to at long last face
arraignment and open embarrassment. Testing the guidelines of corporate

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administration techniques in Australia and business morals through common activity
James Hardie administration stayed away from its obligations in repaying previous
clients and workers who had fallen sick by utilizing their items. The administration
additionally stayed away from its asbestos liabilities by exchanging every one of their
benefits seaward into a Dutch holding organization. The administration additionally
deceived Australian courts by giving out bogus data of having enough supports
accessible in the Medical Research and Compensation Foundation to remunerate all
grievances about asbestos claims.
The failures of James Hardie corporate governance creates some ethical considerations
whereby a company should have effective and transparent external and internal
procedures the executives can work with to efficiently control and monitor the actions
of the managements. (Baxt, 2005) For credibility to incur there must be clear decision
making and management actions as good governance doesn’t necessary create a good
company hence company strategies is what matters most. James Hardie executive
failure was as a result of inappropriate corporate governance processes and having a
board which was ineffective.
D. Some suggestion came up on how to improve James Hardie corporate governance and
business ethics which included (Becht,, Bolton and Röell, 2003);
 Board’s role clarification strategy as the board got a key role to play when it
comes to adoption and formulation of business operations. Strategies raised
should be approved by all executives in the board to ensure appropriate
development in the firm.
 Organizational performance should be monitored bringing in essentiality
functions within the board and also providing a legal compliance. Monitoring
will also provide consistency when it comes to decision making setting the firm

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at optimum level of producing quality products which are harmless to the
society. i.e., the executives of James Hardie should have monitored the senior
executives while giving the information about the financial status to compensate
the victims.
 Always recognize that the governance of risk is a board responsibility as they
are required to establish systematic means when it comes to risk oversight and
management. i.e. the board of James Hardie failed in their responsibility due to
lack of effective risk management to provide better decision making as effective
risk management develops a deeper insight toward the common risks all firms
come across.
 Building and maintaining an effective governance infrastructure so that specific
policies supposed to guide the firm depict reliability. Having develop policies in
relation to delegations generates a cohesive responsibility between the
management and the board hence encouraging policy development by the board
through relation with delegations. Poor communication and poor internal
procedures can lead to a poor access to information creating high level of
dissatisfaction among directors.
 Also building a skill based board was also a suggestion as it will bring in skilled
and experienced labour that will ensure appropriate firm statements are
presented to the directors.