Case Study: Financial Accounting Theory and Practice (ACCT6007)

This case study, designed for ACCT6007 Financial Accounting Theory and Practice, delves into three key tasks. Task 1 examines the qualitative aspects of financial statements, including relevance, faithful representation, and enhancing characteristics, emphasizing their importance in depicting a company's financial position and the need for trade-offs in certain situations. Task 2 explores Positive Accounting Theory, analyzing how it can be applied to predict user reactions to accounting disclosures, using a scenario involving a company's declining profit and increasing gearing ratio. It also discusses the Australian government's stance on CSR, the role of market forces, and the importance of environmental disclosures, referencing a controversial coal mine project. Task 3 addresses the capture theory, where regulatory agencies favor the industry they regulate over public interest, analyzing the ripple effects of corporate social and environmental responsibilities and referencing the Australian bushfires and Amazon rainforest.

Task-1
Qualitative Aspects of Financial statements
Two fundamental qualitative
characteristics
 Relevance
Faithful representation
Four Enhancing qualitative
characteristics
Comparability
Verifiability
Timeliness
Understandability

Relevance Faithful representation
formation must be material provided to
financial statement for decision making.
The recognition norm of any compo
financial statement i.e. Account bala
class transaction. is fulfilled or met,
record the component in order to be
user who is actually depends on info
showing in financial statement.
ormation provided is capable of making a
st for the user in decisions making if it is
tive value, or confirmatory value.
Faithful representation has three at
complete, neutral and free from err
ial fact and figures have predictive data if
help user to use a various inputs to
ses employed to predict subsequent
mes or upcoming cash flows.
onfirmatory value (or feedback value)
net income value which help the
olders to assess the subsequent cash
f organization. The financial information
onfirmative value only when the
ation about the about organization prior
mance will improve the decision maker
to forecast the future outcome.
•complete includes all fact and figur
for a stakeholders to understand, in
every necessary explanations and d
• Neutral is without biasness in the
presentation of financial informatio
the financial statement.
•Free from error means without err
omissions. However, it does not mea
accurate and complete in all respec

 Both the above Fundamental qualitative characteristics provide
different approach in presetting the Financial reporting and the
information shown in financial statements could be provided in such a
way which can depict its real term without getting being into difficulty
and complexity. Suppose, Fire broken out into factory at the time of
closure of the books but before issuance of financial report, could be
really important for the stakeholders to know about the expected
impact on the upcoming or subsequent performance of the business
and sentiment of the shareholder. On the another hand, estimate of
such loss would also be required to be calculated, at the time of signing
or approving of financials. So, both are equally important component of
financial statement.
 In few cases, a trade-off between the fundamental qualitative
characteristics required to be made in with respect to achieve the aim
of financial reporting, which is to give important useful fact and figures
about economic activity. For instance, the most important information
about a company activity can be a highly uncertain estimated figure. In
some instances, the occurrence level of measurement figure with
uncertainty involves that the estimate may be so high and reasonable
that it can provide question whether the estimate would provide a
sufficiently faithful representation of that fact and figures.
.

Task-2
Positive Accounting Theory attempt to make forecast of real possible
world events & turn them to accounting fact and figure i.e. perhaps
how different users will react to particular accounting disclosures
In the given fact
Profit and loss accounts
(In millions)
Expenses Income
Total exp. 100 Gross profit 189
Net profit 89
Balance sheet
(In millions)
Liability & Equity Asset
Equity and reserves 100 Total Assets 440
Loan 340
Total 440 Total 440

In the given Fact, Previous year net profit is $89 million and
gearing is maintained under 3.5 times of EBITDA. In the current
year, profit fall by 10% of Previous year net profit $8.9 million
which will bring down the current year profit to $80.1 million. The
gearing ratio will start increasing for future years. As per the
market analysts believe that if revenues continue to deteriorate,
gearing of above three times EBITDA could trigger a breach of
banking covenants.
In the current scenario:
Profit and loss accounts
(In millions)
Expenses Income
Total exp. 100 Gross profit 180.1
Net profit 80.1
Balance sheet
(In millions)
Liability & Equity Asset
Equity and reserves 100 Total Assets 400
Loan 300
Total 400 Total 400

As per above the table, our gearing ratio is 3 times and banking authority has fixed
the gearing ratio to 3 times of EBITDA. If amount of loan exceed then there will
a breach of covenants.
So, bank can apply the Positive Accounting Theory to any company to reduce the
sanction amount of loan and saving the bank from the various breach of
covenants and it bring real intention of company to show a better intention and
liquidity asset position to provide the interest amount and principal amount of
the debt outstanding they have piled up for the business.

As per the fact, the Australian Government decided not to amend Corporations Act with
specifically to include particular social and environmental responsibilities within the Act. But,
To help company to initiate CSR responsibilities by ‘market forces’ and with the provision of
public interest theory is that the economic rule and regulation that is generated due to demand
of public to reach desired goal. The domestic and global markets cannot regulate itself.
Thereafter, the government need to take every possible steps to regulate such markets and to
educe or eliminate the inefficiencies in market places & every inequitable practices. Social
egulations include regulatory body to regulate various child labour and human rights whereas,
& environmental regulations includes regulations on animal rights etc. Environmental
egulation requires inclusion of various disclosures from every company for every effect that
hey are occurring on the environment whether its positive or negative. Where companies tend
o put all the positive effect on environment on its annual report however, not to mention any
negative effect on the environment. Afterward, All the repercussion faces by the society as a
whole. Nowadays, companies has begin an CSR cell to spend an amount on social and
environment activities; where they have highlighted all the possible steps for the CSR
spending. However, as mentioned above, they do not declare any list of harm provided to
environment But they do not disclose the harm they have done to the environment For
Example: One of the industrialist from India, proposed 17.5 billion dollars deal for coal mine
project, but environmental supporters mentioned the impact on the Great Barrier Reef. It also
concerns to climate change. However, contrast from the government point of view is, where it is
bringing lot of revenue to the system but it is creating lot of issue to the environmental factors.
Which is the threat to the reef and these thing required to be mentioned in the companies
prospectus.
The purpose of rules and regulations not to enable a well stable & livable society but to
provide sustainable environment for future generation. Every possible entity shell be held
esponsible for the footprint to have impact on the environment. Although the effect of not
amending corporation act can easily be judged from the possible effects on the mothers’ earth.
Task 3:

Dilemma arise when a regulatory system agency acts in the favor
of the industry rather than working for public interest. When a
governmental regulating agency has been formed to control an
industry for the interest of society acts rather than the industry it
is regulating, it has been “captured” by the industry. In the short
period of time, there is considerable upgrade and betterment of
the condition of the environmental but once the capture theory
established, the regulator and the regulated conspire and intrigue,
in the long period of time, it will not considered as good picture
from the environment and social point of view. As the main agenda
is to save the public interest however, regulating industry and
companies afterward manage to takeover the regulating agency. In
the given below diagram , we can see that every company have
ripple effect to great extent with market force on the social and
environmental responsibilities . To save environment with things
like Australian bushfire and amazon rainforest
Task 3: Conti……

Organisations Ripple Effect

References:
 2020. [online] Available at:
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2020].
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journalCode=lpad20

References:
 Prasad, R., 2020. Adani Gives Final Approval For $4 Billion
Australia Coal Mine Project. [online] The Economic Times.
Available at:
<https://economictimes.indiatimes.com/industry/indl-
goods/svs/metals-mining/adani-gives-final-approval-for-4-
billion-australia-coal-mine-project/articleshow/
59011141.cms?from=mdr> [Accessed 9 April 2020].
 Positive Accounting Theory (PAT). (2020). Retrieved 11 April 2020,
from
https://www.accountingscholar.com/positive-accounting-theory.html
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-accounting/
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<http://bschool.huji.ac.il/.upload/Seminars/Faithful
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April 2020].