Corporate and Financial Accounting: Equity and Debt Analysis Report

This report provides a comprehensive analysis of corporate and financial accounting, focusing on the regulation of financial reporting and the roles of the Australian Accounting Standards Board (AASB) and the International Financial Reporting Standards (IFRS). It examines the debate over voluntar...Read More

CORPORATE AND FINANCIAL ACCOUNTING 1
CORPORATE AND FINANCIAL ACCOUNTING
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CORPORATE AND FINANCIAL ACCOUNTING 2
Executive Summary
According to research, it has been found out that financial accounting and reporting
should be regulated. Managers must not be let to disclose financial accounting voluntarily. It has
also been established from research that there are a number of ways in which the Australian
Accounting Standards Board (AASB) participates in setting the global standards of accounting.
These have been discussed in detail in the sections below.
Four public limited companies which are listed on the Australian Securities Exchange
(ASX) that are in the same industry have been researched. These companies are Acacia Coal
Limited, Aura Energy Limited, Amour Energy Limited and Adx Energy Limited. The research
findings indicate that the four firms have a favorable debt and equity position since they have
used more of equity financing in funding most of their business operations. Furthermore, there
are various changes in their items of equity such as issued/contributed capital, reserves and
accumulated losses. However, it has been noted that for the Financial Years 2014 all through
2017, the four firms have been making operational losses, which have consequentially translated
into increasingly huge accumulated losses. The analysis has been provided in the various
sections below.

CORPORATE AND FINANCIAL ACCOUNTING 3
TABLE OF CONTENTS
CONTENT PAGE
Introduction....................................................................................................................................................4
Corporate governance....................................................................................................................................4
i. Whether Financial Accounting and Reporting Should be Regulated……………………………...4
Setting of accounting standards..............................................................................................................…...6
i. How AASB participates in setting of Global standards of accounting…………………………….6
ii. The reasons why the IFRS Established by IASB Are not mandatory for its member countries......7
Owners’ equity...............................................................................................................................................7
i. Items of Equity..................................................................................................................................7
 Issued Capital………....………………………………….…………………..8
 Reserves……………………………………………………………..……….8
 Retained earnings and Accumulated losses…….………..…………………..8
ii. Changes in items of equity and reasons for changes.......……………………………………….....9
iii. Comparative analysis of the debt and equity position of the four firms……...…………………..10
Conclusion...................................................................................................................................................12
References....................................................................................................................................................13

CORPORATE AND FINANCIAL ACCOUNTING 4
Introduction
The main purpose of this paper is do carry out a research and discuss if the financial
accounting and reporting should be regulated or a manager should be allowed to disclose
financial accounting information voluntarily (Vernimmen, Quiry, Dallocchio, Le Fur and Salvi
2014, pp. 22). The paper also gives an explanation on how the Australian Accounting Standards
Board (AASB) participates in the setting process of global accounting standards and why the
IFRS set by IASB is not regarded mandatory for IASB member countries. This paper also
chooses four public limited companies that are listed on the Australian Securities Exchange and
discusses their annual financial reports for the last four years with regard to items of equity as
well as debt and equity positions.
A. Corporate Regulation
i. Whether Financial Accounting and Reporting Should be Regulated
After conducting research, it has been established that financial accounting and reporting
should be regulated. Managers must not be let to disclose financial accounting voluntarily. This
proposition is supported by a number of arguments, as found in the research. In the absence of
financial accounting reporting regulation, optimal levels of disclosure would not be generated in
the financial markets as a result of the interplaying forces. Financial instrument providers are
faced with stiff competition in the capital and financial markets which are mainly populated by
numerous investors with various interests and objectives (Whittington 2008, pp. 495). Firms
whose main concern is to maximize their shareholder value often establish attractive incentives
and consider it necessary make disclosures of all information which is available to them, for
purposes of obtaining higher prices than those of their competitors. This is done mainly because

CORPORATE AND FINANCIAL ACCOUNTING 5
firms are aware that the investors would think otherwise and make the worst assumptions
regarding the company if the disclosures are not made (Vernimmen, Quiry, Dallocchio, Le Fur
and Salvi 2014, pp. 22). This means that a firm does not disclose its financial information
adequately, then interested and potential investors would end up assuming that there is some bad
news or reports which are being hidden from the public. The share price of the firm would
therefore be bid down and would consequentially lose value in comparison with that of the
competing firms (Zeff 2012, pp. 807).
In addition, this proposition is supported by the fact that regulation of disclosure of
financial information yields benefits which are both specific to the firm itself and the financial
market as a whole. It has been found out that most firms may not be willing to make voluntary
disclosures of their financial accounting information since this may be in favor of their
competitive advantage as information which is proprietary might be let known to their primary
competitors. Such a decision of not making the disclosure are beneficial to the firm itself but is
not good for the public in general since it does not have benefits which are economy-wide
(Whittington 2008, pp. 495).
In conclusion, it is agreed that managers of firms must not be allowed to voluntarily
disclose financial information since they may be unwilling to make disclosures regarding some
key aspects which are crucial for decision making by investors and the public at large. Instead,
the disclosure requirement must be highly regulated by the concerned financial reporting
agencies and bodies. This enables capital allocation to the projects which has the greatest yields,
and enhances competition among firms thus promoting improvements in productivity as well as
competition in terms of prices. For instance, making disclosures may help in revealing
significant information regarding other firms within the industry, although the firm making the

CORPORATE AND FINANCIAL ACCOUNTING 6
disclosure may not gain any benefits from the transfer of information. This can lead to under-
production of information by firms (Whittington 2008, pp. 496). In addition to this, when firms
disclose their financial adequately, financial markets or capital markets do not need to make any
efforts in collecting the information since it has been provided. Therefore, regulation of
disclosure would assist in preventing duplication of efforts to collect the financial information by
capital markets for provision to investors and other key financial decision makers (Georgiou
2010, pp. 101).
ii. Setting of Accounting Standards
i. How AASB Participates in Setting of Global Standards of Accounting
According to research, there are a number of ways in which the Australian Accounting
Standards Board (AASB) participates in setting the global standards of accounting. Since the
AASB aims primarily at developing and maintaining financial reporting standards of high quality
for all Australian economy sectors, it works in collaboration in various ways which enables it to
participate in the setting of the IFRS (Whittington 2008, pp. 495). For instance, AASB is
engaged in issuance of documents which seek to incorporate the discussion papers and exposure
drafts of IASB with a view to encouraging all constituents in Australia to take part in the process
by providing the board with useful information which can be recommended to IASB for the
purpose of setting IFRS (Georgiou 2010, pp. 103).
AASB also participates in setting of IFRS by making sure that the various changes made
to IFRS by IASB are appropriately processed and adequate communication is made to all
constituents in Australia. The board is also engaged in implementation of the new differential
framework of reporting as adopted by the IFRS established by IASB. Furthermore, AASB seeks

CORPORATE AND FINANCIAL ACCOUNTING 7
to make an active participation in the ongoing IASB’s process of setting global standards of
accounting, and making sure that the output of the standards is promoted and improved
appropriately (Ghosh 2011, pp. 109).
ii. The Reasons Why the IFRS Established by IASB are Not Mandatory For Its
Member Countries
There are various reasons why the IFRS established by IASB are not considered
mandatory for its member states or countries. For instance, companies that have foreign
subsidiaries in various countries and locations over the world would find it quite difficult to
adopt the IFRS established by IASB (Morais and Curto 2008, pp. 103). This is because there are
varying accounting standards and regulations that are adopted in various states. Therefore, IASB
does not give a compulsory requirement to its member countries to adopt the IFRS. In addition to
this, different member countries have different regulating bodies and therefore making a
compulsory requirement for IASB member countries to adopt IFRS may be very detrimental to
adoption of the state regulations (Georgiou 2010, pp. 102).
iii. Owner’s Equity
For the purpose of this section, four public limited companies which are listed on the
Australian Securities Exchange (ASX) that are in the same industry have been researched. These
companies are Acacia Coal Limited, Aura Energy Limited, Amour Energy Limited and Adx
Energy Limited. The annual reports of these companies for the last four years have been
analyzed and discussed with regard to items of equity as well as debt and equity position, in the
below sections (Whittington 2008, pp. 499).
i. Items of Equity

CORPORATE AND FINANCIAL ACCOUNTING 8
The main items of equity for each of the above mentioned four firms are issued capital,
reserves and retained earnings or accumulated losses. Each of these has been further discussed
below (Tirole 2010, pp. 31).
 Issued Capital
This is the number of company shares which have been issued to shareholders of
a company. They are shares which have been allotted and are therefore
subsequently entitled to shareholders. Issued capital forms a significant part of a
company’s authorized capital (Schroeder, Clark and Cathey 2009, pp. 78).
 Reserves
These are assets held by a company which are highly liquid or easily convertible
into cash for purposes of meeting future payments of the company and other
emergencies as they come up (Maynard 2017, pp. 13).
 Retained Earnings and Accumulated losses
Retained earnings is the aggregate net income which has been accumulated by a
company from the time it was incepted or established up to the current date of
financial reporting, less any amounts of dividends which have been distributed by
the company over time (Lee 2009, pp. 140).
Accumulated losses or deficit, on the other hand, represents retained earnings
which are negative. In other words, they are losses which have been cumulatively
incurred by the company since its inception (Deegan 2013, pp. 114).
The following are the main changes that have been observed in each item of equity of the four
companies over the last four years from FY 2014 to FY 2017. These have been summarized in
the table below.

CORPORATE AND FINANCIAL ACCOUNTING 9
I. Changes in items of Equity
a. Aura Energy
Limited
Item 2017 2016 2015 2014
Issued Capital
$
39,558,943
$
32,784,203
$
31,311,388
$
27,935,558
Reserves
$
841,671
$
1,029,542
$
901,252
$
1,238,119
Accumulated Losses
$
(23,503,501)
$
(19,973,039)
$
(18,451,415)
$
(16,474,803)
b. Acacia Coal
Limited
Item 2017 2016 2015 2014
Contributed Capital
$
40,412,015
$
38,492,606
$
38,492,606
$
38,492,606
Reserves
$
3,198,599
$
3,059,055
$
2,954,258
$
2,822,378
Accumulated Losses
$
(42,058,420)
$
(39,587,441)
$
(29,610,551)
$
(29,396,989)
c. Armour Coal
Limited
Item 2017 2016 2015 2014
Issued Capital
$
91,301,423
$
87,435,000
$
83,880,979
$
83,709,877
Reserves
$
5,188,617
$
(638,474)
$
571,896
$
1,520,269
Accumulated Losses
$
(47,439,025)
$
(35,964,333)
$
(17,090,406)
$
(10,515,331)

CORPORATE AND FINANCIAL ACCOUNTING 10
d. Adx Coal Limited
Item 2017 2016 2015 2014
Issued Capital
$
68,083,114
$
65,859,376
$
64,161,036
$
64,161,036
Reserves
$
6,246,647
$
5,959,450
$
5,960,243
$
5,606,829
Accumulated Losses
$
(73,256,419)
$
(71,087,085)
$
(69,173,585)
$
(67,477,677)
Reasons for Changes in the Above Items of Equity
 Issued Capital
The issued capital of the firms has increased over the financial years from
FY2014 to FY 2017. This could have been led by the issuance of more shares of
common stock by the companies for purposes of raising capital in order to fund
their various business operations (Brealey, Myers and Marcus 2012, pp. 48).
 Reserves
The reserves for the four companies discussed above have been fluctuating over
the years from FY 2014 to FY 2017. The reason for the increase in the reserves is
that the firms may have set more funds for meeting future uncertainties and
emergencies. However, the reserves might have decreased after being used by the
companies in meeting those purposes for which they were set (Brealey, Myers &
Allen 2011, pp. 447).
 Accumulated Losses
For the financial years 2014, 2015, 2015 and 2017, the four firms have been
incurring accumulated losses which have been increasing yearly. This is because

CORPORATE AND FINANCIAL ACCOUNTING 11
the companies have been making loses or negative operational net profits, thus
translating into accumulated losses over the years (Baker, Singleton and Veit
2011, pp. 12).
ii. Comparative Analysis of The Debt and Equity Position of the Four Firms
a. Aura Energy
Limited
Particulars 2017 2016 2015 2014
Total Debt (Liabilities)
$
743,356
$
716,095
$
583,024
$
758,184
Total shareholders’
Equity
$
16,897,113
$
13,840,706
$
13,761,825
$
12,698,874
Debt to Equity Ratio
$
0.04
$
0.05
$
0.04
$
0.06
b. Acacia Coal Limited
Particulars 2017 2016 2015 2014
Total Debt (Liabilities)
$
278,424
$
120,335
$
328,246
$
398,835
Total shareholders
‘Equity
$
1,552,194
$
1,964,220
$
11,836,551
$
11,917,995
Debt to Equity Ratio
$
0.18
$
0.06
$
0.03
$
0.03
c. Armour Coal
Limited
Particulars 2017 2016 2015 2014
Total Debt (Liabilities)
$
42,683,877
$
26,955,892
$
2,149,934
$
688,069

CORPORATE AND FINANCIAL ACCOUNTING 12
Total shareholders’
Equity
$
49,051,015
$
50,832,193
$
67,362,469
$
74,714,814
Debt to Equity Ratio
$
0.87
$
0.53
$
0.03
$
0.01
d. Adx Coal Limited
Particulars 2017 2016 2015 2014
Total Debt (Liabilities)
$
256,186
$
422,249
$
185,769
$
673,122
Total Shareholders’
Equity
$
1,073,342
$
731,741
$
947,694
$
2,290,188
Debt to Equity Ratio
$
0.24
$
0.58
$
0.20
$
0.29
As observed from the above analysis, the equity and debt position of the four companies
is much favorable. This is because the firms have a debt to equity ratio of more than 1:1, which
is an indication that they have used less of debt financing and more of equity financing in
funding their short term as well as long term business operations. Therefore, the firms can be
concluded to have a stable leverage, and are not at a risk of insolvency as a result of extremely
high finance costs or borrowing costs (Brown, Beekes and Verhoeven 2011, pp. 105).

CORPORATE AND FINANCIAL ACCOUNTING 13
Conclusion
As discussed above, the main items of equity that are identified from the statements of
financial position of the above firms are issued capital, reserves and accumulated loses. Issued
capital refers to the number of company shares which have been issued to shareholders of a
company. Reserves are the assets that are held by the firm which are highly liquid for purposes
of meeting future needs and emergencies while accumulated losses are the aggregate net losses
which have been incurred by a company from the time it was incepted or established up to the
current date of financial reporting. From the above discussion, it can be concluded that the four
firms have a favorable debt and equity position since the debt to equity ratio of the companies for
the last four years analyzed does not exceed 1:1. This indicates that the companies have used
more of equity financing in funding most of their business operations (Brown, Beekes and
Verhoeven 2011, pp. 105). Additionally, with regard to their changes in equity items, the firms
have demonstrated various trends in their issued/contributed capital, reserves and accumulated
losses. For the Financial Years 2014 all through 2017, the four firms have been making
operational losses, which have consequentially translated into increasingly huge accumulated
losses (Hillier, Grinblatt and Titman 2011, pp. 21). The analysis has been provided in the above
sections.

CORPORATE AND FINANCIAL ACCOUNTING 14
References
Baker, H.K., Singleton, J.C. and Veit, E.T., 2011. Survey research in corporate finance:
bridging the gap between theory and practice. Oxford University Press.
Brealey, M. and Myers, S.C., Allen. (2011). PRINCIPLES OF CORPORATE
FINANCE. Principles of Corporate Finance, p.447.
Brealey, R.A., Myers, S.C. and Marcus, A.J., 2012. Fundamentals of corporate finance.
McGraw-Hill/Irwin.
Brown, P., Beekes, W. and Verhoeven, P., 2011. Corporate governance, accounting and finance:
A review. Accounting & finance, 51(1), pp.96-172.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Georgiou, G., 2010. The IASB standard-setting process: Participation and perceptions of
financial statement users. The British Accounting Review, 42(2), pp.103-118.
Ghosh, T.P., 2011. Accounting standards and corporate accounting practices. Taxmann.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy (No.
2nd Eu). McGraw Hill.
Lee, T.A., 2009. Financial accounting theory. The Routledge Companion to Accounting History,
pp.139-161.
Maynard, J., 2017. Financial accounting, reporting, and analysis. Oxford University Press.

CORPORATE AND FINANCIAL ACCOUNTING 15
Morais, A.I. and Curto, J.D., 2008. Accounting quality and the adoption of IASB standards:
Portuguese evidence. Revista Contabilidade & Finanças, 19(48), pp.103-111.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2009. Financial accounting theory and
analysis: text and cases (p. 82). John Wiley & Sons.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.
Whittington, G., 2008. Harmonisation or discord? The critical role of the IASB conceptual
framework review. Journal of Accounting and Public Policy, 27(6), pp.495-502.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance:
theory and practice. John Wiley & Sons.
Zeff, S.A., 2012. The Evolution of the IASC into the IASB, and the Challenges it faces. The
accounting review, 87(3), pp.807-837.