Financial Accounting Theory Report: Accounting Issues and Analysis

This report delves into current financial accounting issues, focusing on two key areas. The first section examines an article discussing the credit impairment of AMP, a financial services company. The analysis explores the reasons behind AMP's financial distress, including misconduct and capital raising efforts, and the implications of these events. The second section reviews an exposure draft issued by the FASB regarding financial instruments and credit losses. It outlines the major issues covered in the draft, such as targeted transition relief and fair value options, and presents various views expressed in comments letters from organizations like KPMG, Moody's Analytics, and Grant Thornton. The report highlights agreements and disagreements on the proposed updates, providing a comprehensive overview of the current accounting landscape.

Running Head: FINANCIAL ACCOUNTING THEORY
FINANCIAL ACCOUNTING THEORY
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..................................................................................................................................2
Article Review.......................................................................................................................2
Question 2..................................................................................................................................5
Major Issues Covered in Exposure Draft...............................................................................5
Presentation of Views in Comments Letter...........................................................................6
Assessment of Comments Letter............................................................................................8
Interpretation of Action of Comments Letter Action.............................................................9
Reference..................................................................................................................................11
Appendix..................................................................................................................................15

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Question 1
Article Review
The article published on dated August 8, 2019, has attempted to highlight the issues in
the relation to impairment of the credit. The occurrence of the impairment of the credit is
when there is deterioration in individual’s or the organizational creditworthiness. This is
reflected usually by the lower credit rating. In case of the individual or the reduction in the
assigned rating of credit to the organization or the issuing of debt by the lender or the rating
agency. The borrower for whom the impairment of the credit is done will be having less
accessibility to the facilities of the credit as well as will be required for paying higher rate of
the interest on the loans (Curcio & Hasan, 2015). These impairments of the credit can be the
temporary situations, which can be reversed or it can be the early sign, which borrower would
be facing major potential financial distress. The impairment of the credit is the outcome of
the financial stress that is brought on by the change in the circumstances that might get
decline in case of deterioration of the financial position over time because of the weak
economy or the increased competition or the poor management. In each of the case, the
impairment of the credit would be the outcome of the internal forces or the self-inflicted
wounds. At times, the external factors plays major role that is out of the control of the
management or the individual (Gizaw, Kebede & Selvaraj, 2015).
The greatest example of the credit loss is of AMP. The article published on the
Sydney Morning Herald is on the raising of capital by AMP after the loss of $2.3 billion.
AMP is the financial services company in the Australia as well as New Zealand for providing
the investment and superannuation products, banking products and financial advices as well
as insurances (Amp.com.au. 2019). The company was involved in choosing for prioritizing
the short-term profit by the AMP at expense of the best interest as well as compliance with

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law. The senior executive of the company was involved in misconduct in spite of staffs raised
the concerns and they were having the knowledge of the actions was in breach of the licensee
duties (Manab, Theng & Md-Rus, 2015).
The article has raised the issue that how the troubled wealth manager of AMP has
launched the massive raising of capital for underpinning the new look structure for
controversial sale of their business of the life insurance after posting of the loss of $2.3
billion for first half during the financial year. The company has revealed that there is massive
business restructure advice, which will be saw the slash numbers of financial planners by as
much as a third as well as substantially reducing what it pays for departing the advisors for
buying the books of the clients (Siekelová, 2017). The shares of AMP was halted so for
raising the amount of $650 million in the heavily discounted raising of capital from the
current institutional investors. The raising of capital was fully underwritten by the Credit
Suisse and UBS. There was extension of the bids window that indicated pressures of some
prices. The raising of the capital was priced at the discount of 15.7 per cent to the five-day
volume of the company that weighted the average price of $1.78 (Lalon, 2015).
The article has highlighted that the first half loss of AMP, which was because of the
swingeing impairments of $2.35 billion on the financial planning arm of AMP. This
impairment was consists of the write-down of $1.5 billion on goodwill of the wealth
management business of AMP in wake of the banking royal commission of last year in which
it was accused of the array of the misconduct. However, the company is planning for re-
setting as well as drawing the bright new future for company (Schmock, 2017). The company
states that the crisis as well as shocks is having short-term impact but now, the company is try
for repositioning their business for gaining the trust of the clients. The company for funding
the cost for compensating their customers has set the amount of $778 million aside. The
provisions has also been made of $ billion to the amount of $1.3 billion for funding the future

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restructuring of the wealth arm. It was because of the misconduct, the operating profit was
declined by 22 percent on the previous year that was $309 million. The company will not be
able for paying the interim dividend as the earnings of the wealth management operations
was reduced from $49.5 percent to $1.3 million. Moreover, the company suffered by the large
net outflows as well as there was record of $3.1 billion in the net outflows (Elnahass, Izzeldin
& Abdelsalam, 2014).
The company’s wealth manager would be using the cash in order to re-cut their deals
for selling their insurance arm to group of UK/Bermudan Resolution life for $3 billion that is
far less than the original resolution of the offer $3.3 billion for business. The company’s new
deal has resulted into receiving the new deal to getting cash of $2.5 billion and the amount of
$500 million of the equity interest of Resolution life Australia (Bluhm, Overbeck & Wagner,
2016). In this deal, AMP would be holding no interest in matured business, which it is going
to sell to the Resolution life. It was planned originally for retaining the stake of 40 per cent in
the mature business of cash producing. This particular re-deal was welcomed by the
executive chairman of Resolution life Clive Cowdery, who said that he is delighted because
now the resolution is present in New Zealand as well as in Australia (Sun & Zhang, 2017).
However, the article has also raised the issue that AMP has received more criticism
for their new deal with the Resolution that it was forced for re-cutting after there was refusal
of the Reserve Bank of New Zealand for approving the deal over the concerns of the local
policy holders, which would not be paid out of their policies. Although, AMP had copped the
flaming from their investors over the deal with the resolution with the various shareholders
that has thought that the business of AMP would be sold too cheaply. The results of the
problem faced by the company have raised the question regarding the recut deal significance
for satisfying the Reserve Bank of New Zealand concerns. The chief financial officer John
Patrick would not be taking position in AMP, despite of the fact that he was appointed in the

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month of May 2019. The new chief financial officer James Georgeson would be taking the
new role (Danckert, 2019).
Therefore, it can be concluded from the article that the impairment of the credit
requires major changes to the procedures or the operations for alleviating the financial stress
that leads eventually towards improving the conditions of the balance sheet. These type of
changes includes reduction of the expenses; selling of the assets as well as using the cash
flow for paying down the outstanding debt for bringing it to the manageable level (Iyer &
Purkayastha, 2017).
Question 2
Major Issues that is covered in Exposure Draft
The exposure draft has been issued by FASB on June 2, 2019 on the “Financial
Instruments Credit Losses, Proposed Standards of Accounting Update on Targeted Transition
Relief for the Topic 326”. There has been request of various agenda to FASB in order for
taking the request regarding the amendments of transition guidance for 2016-13 update. The
organizations who have submitted the letter of agenda has stated that there are some financial
statement preparers who are doing planning to elect fair value options for purchasing of the
financial assets (Edwards, 2016). Although, those particular organizations measures the
financial assets on the historically based cost of amortization. In addition, in absence of the
amendment that is made by the FASB, the organizations would be requiring maintaining dual
measurement methodologies. This would result in the non-comparison of the financial
statements to the users. Moreover, this particular amendments would be providing with the
relief of transition targeted that are intended for increase the information comparability of
financial statements for certain business organizations that otherwise would help in
measuring same financial instruments with the help of other methodologies. Moreover, it

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decreases the costs of financial statements preparers and it strives for enhancing the users to
take decisions based on the useful information (Lisowski, 2014). Following are some of the
major issues that are covered in the proposed update by the FASB, for which comments on
every matters are invited by the individuals as well as organizations:
 The organizations to be provided with option to irrevocable elect fair value in the
subtopic of eligible instrument. It is based on the assumption that it should be within
area of 326-20 subtopic that is except of the debt securities that is held to the maturity,
which is upon its adoption.
 There is requirement that the amendments proposed needs the options of the
irrevocable election of the fair value that is applied based on instruments by the
instruments.
 The board decisions in relation to providing the organizations with option to continue
fair value measurement for financial assets that the measurement of the raw material
at fair value with the net income. However, the application of the guidance in
measurements is given in 325-30 subtopic.
 There is need of additional disclosures to amendments proposed, which is beyond
disclosures requirements of 250 topic, 825-10 and 820-10 subtopics as well as
changes in accounting and the error corrections.
 The organizations who have adopted 326 topics earlier, board of company require
effective date as well as the transitions for the amendments, which are being proposed
(Fasb.org. 2019).
Presentation of Views in Comments Letter
The exposure draft that is issued by the FASB have invited comments letter from
various individual as well as various organizations, which has brought number of agreements

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as well as disagreement of the individuals as well as organizations. The glimpse of the same
is as follows:
 KPMG- The statement made by KPMG is in favor of the FASB. As per them, the
proposal made would be able to increase the fair value measurement of the amount of
loan. It would be easier for allocating the fair value of gains or losses of financial
assets in presentation of separate interest income. It is considered vital measurement
for financial institutions investors (Frv.kpmg.us. 2019).
 MOODY ANALYTICS- The statement provided by the Moody Analytics is also in
the favor of the proposed agenda. As per them, this proposed exposure draft would be
providing transition ease for standards of credit losses through providing options to
measure the assets of particular type by the method of fair value. The amendments
made by FASB can be applied in every reporting organizations, which are within
scope (Moodysanalytics.com. 2019).
 Grant Thorton- The statements provided by Grant Thorton has showed disagreement
on the exposure draft published by FASB. The statement given by Grant Thorton has
stated that this particular amendment has the requirement for adoption of 2016-13
ASU in fiscal year that is after beginning of December 15, 2021 for all the reporting
company, except public business organization. Further, during fiscal years that are
interim period, which is after the period of December 15, 2021, there is having no
impact of 2018-19 ASU of effective date requirements for public business
organizations. Moreover, operating leases receivables are excluded from the scope of
326-20 ASC, which should instead accounts for impairments of receivables, which
results from the leases of operating, under guidance of the ASC 842
(Grantthornton.com. 2019).

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 Ernst & Young- The statement made by the Ernst & Young has also indicated that
they are in favor of the proposed exposure draft. As per them, the proposal provides
relief in the election of the fair value options. It would be helping board for addressing
the issues on timely basis (Ey.com. 2019).
Assessment of Comments Letter
The public interest theory is defined as the theory of the regulator that is described as
the theory, which provides benefits and it helps to protect public at large. In this particular
theory there is aim to allocate the resources in the best way to the individuals and the
collective purposes. The regulations that are made in the public interest employ the legal
instrument for the aim of the implementation of policy of the socio-economy. The
government regulation uses the instrument that aims to overcome any kind of limitations of
undesirable results of market, unbalanced market, imperfect competition as well as missing
market. This particular theory helps in providing welfare to economy. This results into
maximization of the social welfare and the regulation framed by the government helps in the
cost benefit analysis (Koutanaei, Sajedi & Khanbabaei, 2015).
The behavior that is displayed in the proposal of the exposure draft prepared by FASB
is justified to be in accordance with the public interest theory. Moreover, the reason for this
type of behavior is that with the help of this amendments in particular proposal, FASB has
made an for addressing the major concerns of stakeholders by help of providing options to
elect options of the fair value irrecoverably for certain financial assets, which is earlier
measured, based on the cost of amortization. The target relief of transition will be helpful for
increasing comparability information of organizational financial statements of the by the help
of providing the alignment options of measurement methodologies for same financial assets.
Further, the relief of transition targeted would help to reduce the costs of the certain
organizations for complying with amendments that are done in the update 2016-13. Further,

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apart from reducing the costs, this amendment would be helpful for providing the useful
information of financial statements, which would be enhanced the users with the decision-
making (Dou, Ryan & Zou, 2018).
Interpretation of Action of Comments Letter Action
The regulations that are based on theory of the Public Interest help in promoting of
the welfare of general in comparison to interest of the stakeholders that are well organized.
Further, the regulations that are made in the private interest theory then it helps in
acknowledgement of the individual to the group form in order to pursue the self-interest. The
theory of private interest dominates the process of the regulatory. The regulations are
concerned more about the competition for the power rather than interest of the public.
Generally, these private groups lobby the concerned regulator for the adoption or rejection of
any particular rule. Moreover, when market for the regulation is based on demand as well as
supply, lobbying will be more for that particular standard or rules. Lastly, regulations of the
capture theory aim to manipulate the regulations in order to fit in the requirements to those
particular individuals or the organizations who are affected by the theory. This theory helps
to serve concerned industry interests over the particular period. It holds the assumptions that
the regulations are supplied in response of the demands of the groups who are interested and
who are trying to maximize the income or the interests of the members (Creal et al. 2015).
The statement provided by KPMG states that the exposure draft proposal help for
serving the needs of the investors in fair value measurements in financial statements.
Therefore, this statement justifies the theory of public interest. Further, the statement
provided by Moody Analytics on the exposure draft has stated that the amendments would be
applied in every reporting organizations, which are basically, within scope. In addition, the
statement provided by the Grant Thorton on the exposure draft has stated that this
amendments aims to meet the private organizations in comparison to the public

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organizations. It is because this particular amendment for 2016-13 ASU requires to be
adopted during the fiscal year, starting after December 15, 2021 for those organizations that
are public business organization. Lastly, the statement provided by the Ernst & Young has
stated that the proposed exposure draft helps in serving the interest of all the organizations as
well as general investors over the given period. Therefore, their statement also helps in
serving the view of public interest theory (Annappindi, 2014).
Therefore, after considering all the comments of the concerned institutions, it can be
said that these comments explains that the proposal of the exposure draft serves the theory of
the public interest. Moreover, the reason of this is that the proposed amendments helps in
meeting the welfare as well as needs of the public (Alshatti, 2015).

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Reference
Alshatti, A. S. (2015). The effect of credit risk management on financial performance of the
Jordanian commercial banks. Investment Management and Financial
Innovations, 12(1), 338-345.
Amp.com.au. 2019. loans, H., retirement, S., & hub, F.. AMP Personal Banking - Accounts,
Super, Home Loans & Insurance | AMP. Retrieved 4 September 2019, from
https://www.amp.com.au/
Annappindi, S. K. (2014). U.S. Patent No. 8,799,150. Washington, DC: U.S. Patent and
Trademark Office.
Bluhm, C., Overbeck, L., & Wagner, C. (2016). Introduction to credit risk modeling.
Chapman and Hall/CRC.
Creal, D., Schwaab, B., Koopman, S. J., & Lucas, A. (2014). Observation-driven mixed-
measurement dynamic factor models with an application to credit risk. Review of
Economics and Statistics, 96(5), 898-915.
Curcio, D., & Hasan, I. (2015). Earnings and capital management and signaling: the use of
loan-loss provisions by European banks. The European Journal of Finance, 21(1), 26-
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Danckert, S. 2019. AMP to raise capital after $2.3 billion loss. Retrieved 4 September 2019,
from https://www.smh.com.au/business/banking-and-finance/amp-to-raise-capital-
after-2-3-billion-loss-20190808-p52ezo.html
Dou, Y., Ryan, S. G., & Zou, Y. (2018). The Effect of Credit Competition on Banks’ Loan-
Loss Provisions. Journal of Financial and Quantitative Analysis, 53(3), 1195-1226.

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Edwards, G. A. (2016). Supervisors’ key roles as banks implement expected credit loss
provisioning. SEACEN Financial Stability Journal, 7(1), 1-25.
Elnahass, M., Izzeldin, M., & Abdelsalam, O. (2014). Loan loss provisions, bank valuations
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OpenElement
Fasb.org. (2019). Proposed Accounting Standards Update—Targeted Transition Relief for
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https://www.fasb.org/cs/Satellite?
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%2FDocumentPage
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standard.pdf
Gizaw, M., Kebede, M., & Selvaraj, S. (2015). The impact of credit risk on profitability
performance of commercial banks in Ethiopia. African Journal of Business
Management, 9(2), 59-66.
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4 September 2019, from
https://www.grantthornton.com/library/newsletters/audit/2018/on-the-horizon/
november/FASB-amends-credit-losses-guidance.aspx

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Iyer, K. C., & Purkayastha, D. (2017). Credit risk assessment in infrastructure project
finance: relevance of credit ratings. The Journal of Structured Finance, 22(4), 17-25.
Koutanaei, F. N., Sajedi, H., & Khanbabaei, M. (2015). A hybrid data mining model of
feature selection algorithms and ensemble learning classifiers for credit
scoring. Journal of Retailing and Consumer Services, 27, 11-23.
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Bangladesh:“A study on basic bank Ltd.”. International Journal of Economics,
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Lisowski, J. (2014). Trade credit insurance–specifity of risks.
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Malaysia. Procedia-Social and Behavioral Sciences, 172, 301-308.
Moodysanalytics.com. 2019. FASB Proposes Targeted Transition Relief for Credit Losses
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targeted-transition-relief-for-credit-losses-standard
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rating. International Journal of Accounting & Information Management, 25(1), 2-20.

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Link of the News Article
https://www.smh.com.au/business/banking-and-finance/amp-to-raise-capital-after-2-3-
billion-loss-20190808-p52ezo.html
Link of the Comments Letter
https://www.ey.com/publication/vwluassetsdld/commentletter_06005-191us_fvo-
ed_7march2019/$file/commentletter_06005-191us_fvo-ed_7march2019.pdf?OpenElement
https://www.moodysanalytics.com/regulatory-news/feb-07-19-fasb-proposes-targeted-
transition-relief-for-credit-losses-standard
https://frv.kpmg.us/content/dam/frv/en/pdfs/2019/
kpmg_comment_letter_credit_loss_standard.pdf
https://www.grantthornton.com/library/newsletters/audit/2018/on-the-horizon/november/
FASB-amends-credit-losses-guidance.aspx

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Appendix

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