Financial Accounting Theory Report: Analysis of Financial Issues

This report delves into financial accounting theory, analyzing various aspects of financial reporting and its implications. It begins with a case study on the Commonwealth Bank's share price decline and the regulatory actions by AUSTRAC, exploring investor behavior and market reactions. The report then examines the pressures on companies to disclose climate-related risks, particularly in the resource sector, and the role of the Task Force on Climate-related Financial Disclosures. Furthermore, it explores the influence of emotions on decision-making in finance, highlighting the importance of behavioral finance and the impact of technology on retail decision processes. The report also discusses the concept of social contracts, using the Australian gas export situation as an example of corporate social responsibility and stakeholder theory. Overall, the report provides a comprehensive overview of key financial accounting theories and their practical applications in contemporary business scenarios.

Running head: FINANCIAL ACCOUNTING THEORY
Financial Accounting Theory
University Name
Student Name
Authors’ Note

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Table of Contents
Answer to Question 1:................................................................................................................2
Answer to Question2:.................................................................................................................5
Answer to Question 3:................................................................................................................6
Answer to Question 4:................................................................................................................8
Answer to Question 5:..............................................................................................................10
Answer to Question 6:..............................................................................................................12
Answer to Question 7:..............................................................................................................13
References................................................................................................................................15

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Answer to Question 1:
The share prices of Commonwealth Bank (CBA) have steeply declined during August 2017,
in spite of a reported profit figure of nearly $9.93 billion during the closing of the financial
year 2017. Reports suggest that the profit was necessarily 8% over and above previous year
period and assisted the management of the bank to make payment of dividends of amount
$4.2 per share to their investors over the entire year on company earning of nearly $5.7 per
share. Essentially, the higher amount of gains of the bank was registered despite net interest
margin as an important dimension of profitability declining 3 basis points to around 2.1%.
The overall profitability of the bank was supported by the growth observed in more cost-
effective financing sources namely deposits of different customers that plummeted to around
$561 billion during 30th June 2017. The customer deposits are up by around $43 billion as
compared to the year ago period. Essentially, customer deposits reflect 67% of the overall
funding of the bank that particularly the bank lends to different borrowers in a bid to acquire
profit. Nevertheless, the prices of the shares have decreased sharply only after the AUSTRAC
that is the AML regulatory body alleged that the bank has failed to put into effect certain
checks that are formulated to avert criminals or else nonpayers of tax from cash depositing in
their bank (Williams 2014). This is normally carried out through Intelligent Deposit
Machines in a bid to hide diverse ill gotten profits.

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Figure: Share Price of CBA during the period of August 2017
Reports suggest that the regulatory body AUSTRAC has asked for commands for civil
pecuniary punishments against particularly Commonwealth Bank under the legal directive of
s.175 of the AML/CTF of the year 2006 and provided the serious allegations the bank could
encounter an enormous fine that could adversely affect the overall profit of the company.
Basically, the investors are selling the shares of the company as the sidelines are now
important t before considering investment in this bank. Therefore, it is no surprise that the
entire market reacted in a negative manner to the scandal of CBA where it was sued by the
court for violations of money laundering as well as terrorism financing regulations (Scott
2015). The sharp declined in the share prices of CBA and losses incurred in the energy
segment directed the way towards to a weak sitting for the entire share market of Australia,
where particularly All Ordinaries index declined by around 7.6 points, or in other words
0.13%, to nearly 5,779.1 points during the closing of the market of the market August 4. This
specific behaviour of the investors can be described as panic among the investors due to the
sudden news of the scam. Primarily, investors who are of the view that the market is going to
falter start to dump stocks in a bid to avert loss making. However, with acceleration in the
speed of the fall on the prices of the shares, the panic began to grip leading others to follow

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similar suit. In essence, as everyone begins to offload their stocks, share supply exceed the
overall demand directing the prices to further plunge deep down (Edwards 2013).
Answer to Question2:
The resource segment and the ones who invest in it encounter the pressure of disclosing the
overall risk of climate alteration. Primarily, some of the publicly listed Australian
corporations such as Woodside as well as Rio Tinto encounter changes in the way in which
they formulate, model and plan for disclosing the risk specifically from change in climate to
different investors. Essentially, they way the management of these companies react also
impact their overall ability to acquire finance from the lenders, diverse insurers along with
superannuation funds who are under tremendous pressure to carry out stress test different
investments for mainly a carbon controlled future. As per reports, the climate associated
financial disclosures are anticipated to add pressure on different publicly listed corporations
to properly formalise the risk associated to climate disclosure exercises specially by means of
scenario analysis or else risk financiers extracting finances and diverse rating agencies
presenting suppositions regarding the overall risk profile of the corporations. However, the
main purpose of the task force is to make certain that the disclosures on particularly climate
associated risks as well as opportunities are more methodical, comparable as well as
consistent (Christensen et al. 2016). Essentially, it is also a keep at bay worldwide financial
crisis style correction since the financial community handles its exposure assets that could
swiftly become redundant as limits on emissions of carbon tighten to nearly 2050. This is
well within the economic life of majority of the large scale infrastructure plans. The main
objective is to enable superior decision making by specific capital markets and finally to
make certain that the financial system is not exposed to systematic risk or else shock that
have been witnessed in the past with economic crises. The suggestions of the taskforce shall

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go to the G20 summit particularly in Hamburg. Over and above 100 business concerns with
market capitalisations of over and above US $3.3 tn as well as financial concerns accountable
for assets of more than US $24 tn have inspired the adoption of the recommendations of the
taskforce. The Paris contract implies that majority of the world has to attain zero emissions
by the year 2050 and it is clear that several businesses are not pursuing a strategy that is
consistent with this target. Nevertheless, it is not the resources segment but the ones who
necessarily invest as well as finance them, and the ones who depend upon them (Freeman et
al. 2014). However, both the oil as well as auto industry are currently coming to terms with
the outlook that the entire era of internal combustion engines may be ending much quicker. ()
asserts that the utilization of the positive accounting can be analysed in combination with
diverse social disclosures behaviour. Again, the legitimacy theory was also utilized in the
earlier period as the theoretical basis for different corporate social disclosures. Several studies
that indicate that research paradigm both the logical as well as normative reasoning were
utilized to arrive at theories of actual income.
Answer to Question 3:
There are several researches that reflect emotional influence on judgement as well as decision
making. Bodie (2013) mention that there has been revolution in particularly decision theory
at the time when bounded rationality was introduced. This is primarily a notion that calls for
the need of the existing models of specific rational or else viable choices that can include
specific cognitive as well as situational constraints (Bodie 2013). There are theories along
with evidences from specifically promising field of emotion and rational decision making that
mainly emphasizes on behavioural science, particularly psychology as against studies in
neuroscience that are comprehensively analysed. Indeed there are several psychological
scientists who suppose that emotions can be considered as the central driver of rational

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decisions. (Bodie 2013) asserts that decisions serve as the channel through which different
emotions essentially supervise and guide several attempts for averting negative feelings and
enhancing positive feelings even at the time when people lack awareness regarding the
procedures. In addition to this, at the time when the outcomes of the decisions materialize,
people often feel new emotions. To put it in simple words, emotions as well as decision
making go hand in hand. Behavioural finance is a term that changed the way managers
thought about their actions and their desire for particular conclusiveness. Theorists namely
James March, Henry Mintzberg and many others presented the foundation of the study of
specifically managerial decision making. Essentially, according to theorists, the study of
particularly managerial decision making is an integration of different intellectual disciplines
namely mathematics, economics, political science, sociology as well as psychology (Macve
2015).
However, with technological advancements the decision making process took another new
turn. Technology aided process of decision making and the internet provided retailers new
methods of forming decisions and the purchasers more power to select from a wider choice
for purchasing. The technology induced business process helped the retailers to understand
the behaviour of the consumers and undertake businesses in a new way. Managers started
using computers for coordinating retail planning for their businesses and implemented
technologically advanced procedures to specific decisions regarding investments, advertising
strategy, pricing as well as logistics and many other functionalities. However, all these
decisions made by the retailers are primarily based on their understanding of the behaviour of
the stakeholders. Bodie (2013) mention that the decision makers also prefer instinct and they
cry out for creative thoughts and synthesis that can better suit to different intuition than to
analytical findings. As such, the instincts of the decision makers are also influenced by their
emotions, patterns of thoughts, overall personality traits that in necessarily inform the

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distinctive choices made by the leaders. Several behavioural economists are of the view that
the intellect of the managers also develops both intuition as well as analysis. Therefore, it can
be hereby said that there are implications of emotions behind the understanding of the
managers regarding the market for retail (Beatty and Liao 2014). For example, it is important
for the managers to comprehend the reactions of customers to specific brochures that are
presented with pictures of models or reactions of customers to availability of mutual funds on
discounts. In this case, the emotional instincts hereby assist the retailers to understand their
customer better and frame customer centric decisions for their business. Nevertheless, the
beliefs and preferences or choices regarding the outcomes also shape the decision making
processes.
Answer to Question 4:
As rightly put forward by Bushman (2014), social contract refers to an ancient philosophical
notion that mentions about a particular individual’s ethical as well as political necessities
associated to a contract with other individuals in the society. Thus, social contracts can be
considered as tacit agreements that are unspoken as well as unwritten contract of social
agreements.
The present scenario mentions about thw Australian gas exports. The case study suggests that
the Prime Minister of Australia Malcolm Turnbull is of the opinion that the federal
government had enough power to limit exports in Australia including exports of gas.
However, he was asking for the gas corporations in place of the government to take actions to
limit their exports and help bridge the gap or shortage in Australia. Turnbull is of the view
that the management of the gas corporations are very much aware as regards advantages of a
social license from particularly the people of Australia. The shortage created in Australia due
to excessive exports of gas can be cited as a socially irresponsible act on the part of the

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companies. There has been breach or violation of the implicit as well as unwritten social and
psychological agreement that in turn reflect the ethical obligations of the employers to be
socially responsible. As rightly indicated by May (2013)stakeholder theory refers to
organizational management as well as business ethics that concentrates on morals and ethical
values involved in management of corporation. This concept indicates towards the fact that
there are social responsibilities of business that encompasses socio-econnomic, legal as well
as discretionary expectations that the community has of the businesses. It is implicit or else
an unwritten contract that making diverse contributions to the community in which the
business operates will be considered as social good that might go beyond firm’s interest.
Essentially, this assists a corporation in gaining social license to carry out their function.
However, it is important to stress that corporate social responsibility can be considered as a
situation where firms have the need to go beyond compliance and participates in acts that can
enhance the social good and that is beyond the interests of the corporation and is required by
the law. In this case, there has been unwholesome development in the gas companies in
Australia. These companies failed to reflect positive corporate behaviour that led them to
export gas in a way that created shortage of gas in Australia. There is clear condemnation of
the federal government as is clear from the statement of the prime minister and the
government wants the corporations to take into consideration the unwritten social contract
and operate in a socially accountable manner. The management of the firms need to take into
consideration the new reporting practices that require ethical disclosure necessities. The
disclosures can help in maintaining transparency of the business operations and is founded on
appropriate, professional and ethical code of conduct of the companies (Pratt 2016). This can
reflect that intents of the management of the firms to be honest in their behaviour and provide
the requisite information and enhance adherence to different professional as well as ethical
considerations as well as standards that in turn can eliminate chances of ethical violation.

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Thus, the ethical disclosure policy in the annual reports of the gas companies in Australia can
help in the process of truth telling by the companies and assist users of the information to
understand their intention to stick to the unwritten social contract.
Answer to Question 5:
Report presented by EY mentions that the inconsistent application of the regulations of
International Financial Reporting Standards IFRS essentially undermines its overall value as
a set of worldwide standard. The nations that are adopting IFRS need to avert national or else
local variants of IFRS. There is need for disclosures in areas where adoption of the standard
is incomplete or else there is divergence from particularly full set of regulations of IFRS as
declared by the IASB (Beattie 2014). The entire process of transformation of the (IFRS) into
a single set of worldwide language of financial assertions is very much under way and faces
difficulties owing to inconsistent application from one nation to another, however with
negative outcomes for the international comparability of financial assertions. It can be hereby
observed that the flexibility of different provisions of IFRS, that in turn is unavoidable in
several cases, amendments for their amalgamation into national regulatory structures and the
multiplicity and unequal efficacy of national instruments for its enforcement and the process
of supervision of execution becomes the main reasons of inconsistent accounting
exercises. As rightly put forward by Kaya (2017), regulators of national financial reporting
have the need to enhance their engagement as well as coordination particularly among
themselves. In addition to this, International Accounting Standards Board (IASB) also has the
need to make added efforts, that should mainly be concentrated on the worldwide promotion
of the elementary basis of the standards of IFRS. As per reports of EY IFRS just as GAAPs)
permits firm’s management to decide on accounting methods and select between two or more
methods of accounting that in turn can deliver a faithful representation. However, there are

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cases in which IFRS does not spell out a specific accounting concept and principle. for itself,
management have the need to utilize informed as well as sound judgement in order to
determine the policy of accounting that suits appropriately with diverse facts as well as
circumstances. Nonetheless it is probable that in certain cases, two different conclusions can
be reached for identical scenarios. For instance, IFRS does not detail the process accounting
for different control business blend. Therefore, business entities might select to utilize the
method of pooling of interests, whilst some other entities might select to apply the acquisition
mechanism. Nevertheless, once a process has been selected, the concern have the need to
apply that process steadily for all similar kind of business transactions, otherwise it might
lead to inconsistency in application. In addition to this, following regional variants of the
standards of IFRS by the nations adopting IFRS also have inconsistency in application
(Rutherford 2016).
On the other hand, there are participating nations that reaffirms commitments to the process
of adoption of IFRS identifying certain jurisdictions that is attained through the procedure of
convergence. Nations adopting IFRS also have appreciation for the efforts of the IASB for
conduction of a thorough as well as comprehensive consultation of the upcoming agendas.
Essentially, the participating nations also work towards the process of adoption of the set of
internationally accepted accounting principles and notions. In addition to this, regulators also
function together with not only with the international accounting standards board but also
with different setters of national regulations and standards together with the regional standard
setting units in order to better align regional policies. Thus, this removes the possibility of
inconsistency in the process of adoption of the standards of IFRS. () mentions that the
integration of the requirements of specific standards into regional framework is considered as
the key to the process concluding the mandate of G20 for a single standard set that is
internationally acceptable standard of accounting (Chan et al. 2016). This in turn can help in

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the process of enhancement of communication as well as collaboration between different
stakeholders. Again, it is acknowledged that the standards of IFRS are properly endorsed that
in turn makes it globally acceptable and this in turn helps in the process of implementation,
audit and enforcement on a constant basis. IFRS provides thereby provides avenues for
different standard setters, regulators as well as policy makers to share practices as well as
difficulties encountered in respective areas. The forum sessions helps in setting strategic
directions, governance framework along with the work plan in the consultation process. This
comprehensive consultation process also helps regulators and markets worldwide to work
together with the IASB and to deal with the process of adoption of IFRS .This in turn helps in
lessening inconsistencies and proper application of the standards worldwide. However, since
IFRS is essentially principle based structure of accounting that calls for the need of utilization
of judgement, any incompatible application can surely undermine its entire value as a single
set of common standard that is acceptable internationally. Particularly in this regard, this
forum discusses the outreach efforts of the IASB and adopts expanded approach for
interpretation. In order to curb inconsistency in application, educational initiatives are
undertaken and experiences are shared by different preparers as well as analysts that in turn
can form a strong foundation for application of IFRS (Laughlin 2014).
Answer to Question 6:
As per the given case the chief executive as well as founder of Telit resigned after a London
listed technology corporation substantiated his involvement in an alleged mortgage scam in
the United States 25 years ago. An arrest warrant was also issued against Oozi Cats, however
he was never detained in the case by the federal court documents observed by Reuters.
Essentially, historical indictments were never divulged to the board or any of the previous
board members. The board members have come to know about the fact and made aware

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regarding the existence via different third parties. This incident led to the fall in the prices of
the shares of the company. However, Telit declared that there necessarily no substance
behind this kind of speculation over the financial condition and health of the company. As per
reports presented in the case, there has been a violation of a debt covenant that was
particularly set by one of the banks and that was just eight weeks after the incident of raising
39 million pounds from financiers.
A rightly indicated by Laughlin (2014), positive accounting theory makes attempts to arrive
at good predictions of different realm world incidents and translate the same to diverse
accounting transactions. However, on the other hand, normative theories intend to present
suppositions regarding what needs to be done. As per the notions of this theory, the more
closer a firm is to violation of accounting based covenants of debt, the more probable it
becomes for the firm manager to adopt a practice of accounting that can shift the registered
earnings of the firm from the upcoming period to the present period. In doing this, the
management of the firm can enhance the overall bonus for the present year. With the increase
in the current income or earnings of the firm, the company becomes less likely to breach the
debt covenants and the administration of the business concern minimizes different constraints
that run the corporation. Therefore, the debt covenant can be registered as a basis of the
predictions regarding the real incidents that have taken place that in turn led to the negative
speculation over the company’s engagement in a bankruptcy (Beattie 2014). In addition to
this, efficiency perspective of the positive accounting theory can be referred to in this case.
This can help in illustrating the way managers of the company Telit chose diverse methods of
accounting that can reflect the true replication of the overall performance and financial health
of the firm. It can be hereby mentioned that accounting practices of different corporations are
normally illustrated based on the presentation of the financial performance of the
corporations (Beatty and Liao 2014). The opportunistic perspective of the positive accounting

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theory also helps in understanding the case of Telit. Opportunistic perspective of the notion
mentions that managers as well as other agents of the corporation act in their own self interest
and select the accounting policies that permit them to gain. The debt covenant in this case
indicates financial contracting of the firm Telit and helps in understanding the when debt
covenants are particularly violated.
Answer to Question 7:
The political environment also exerts influence on the standard setting processes. The general
purpose financial reporting do not and always cannot deliver all the required information that
different existing as well as potential financiers, lenders as well as different creditors require,
however the users have the need to take into consideration diverse pertinent information from
diverse sources. For instance, general economic conditions as well as expectation, different
political events as well as political climate, industry as well as outlook of the company
(Beatty and Liao 2014). Therefore, it can be hereby said that the conceptual framework of the
general purpose financial reports provides the provision of integrating information from
diverse sources regarding the political environment in their financial reports. Thus, the
conceptual framework helps in informing about the political affairs affecting the reporting
entity to a large extent as the financial reports cover the information regarding the effects of
different transactions as well as other events that alter the economic resources of the business
entity as well as claims. Thus this intricate information regarding the political events that
affect the economic resources deliver useful insight regarding the provision of resources to
the business entity. Essentially, the political environment of the business entity that have the
capacity of altering the economic resources as well as claims of the business concern affect
the financial performance of the firm (Kaya 2017). The alterations in the events come from
diverse political events or else transformed business transactions namely debt policy, taxation

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policy as well as use of financial instruments. All together these events can have an effect on
the cash flows of the company in the upcoming period. As per paragraph 1.15 of the
conceptual framework, in a bid to asses company’s prospect for flow of cash in the future and
stewardship of the management of the resources of the entity, the financial information users
have the need to distinguish between different alterations. As per paragraph 1.21, a reporting
business entity’s various economic resources as well as claims might also alter owing to
reasons other than financial performance (Beatty and Liao 2014). Thus, it can be seen that the
conceptual framework helps in incorporating the information in the financial statements that
occur due to reasons other than financial circumstances. According to the conceptual
framework, this kind of information is necessity for users to get a comprehensive
understanding regarding the economic resources of the firm. For instance, the developing
nations follow the developed nations in their process of adoption of different international
financial reporting principles for standardizing and harmonizing worldwide accounting
regulations. However, the political environment of the nations directs them to create certain
variants to the accounting methods as per the requirements of specific nations for adoption of
the standards. Therefore, theoretically the conceptual framework needs to drive the overall
development and setting of accounting standards and make amendments as per requirement
(Kaya 2017). In practice, political factors along with other socio-economic factors are said to
play a dynamic role and exert influence on the directives presented by the standards. The
obligations of capital markets, regulators along with reactions of the public to diverse
scandals of accounting shall continue to have influence on the entire process of standard
setting and amendments of standards.

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