HA2032: Corporate and Individual Assignment - Financial Reporting

This assignment explores key aspects of financial accounting and reporting, including the debate on voluntary disclosure by managers and the Australian Accounting Standards Board's role in global standard-setting. It examines the implications of mandatory IFRS adoption and presents a case study analysis of four Australian pharmaceutical companies: Adalta Limited, Actinogen Medical Limited, Acrux Limited, and Aft Pharmaceuticals Limited. The analysis focuses on equity items within their financial statements, such as ordinary shares, preference shares, and reserves. Furthermore, the report includes a comparative analysis of the debt-to-equity ratio for these companies, assessing their financial risk based on the proportion of debt financing relative to equity. Desklib provides a platform for students to access similar solved assignments and study resources.

HA2032 CORPORATE AND FINANCIAL ACCOUNTING
INDIVIDUAL ASSIGNMENT
WORD COUNT 1993

Contents
EXECUTIVE SUMMARY...........................................................................................................2
Introduction....................................................................................................................................2
Decision whether to allow manager to disclose financial accounting information voluntary 2
Australian accounting standards board involvement in global accounting standards.....................4
Case study companies....................................................................................................................5
Comparative analysis of the debt and equity position...............................................................8
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

EXECUTIVE SUMMARY
This assignment discusses whether financial accounting and reporting should be left for
managers to decide whether to disclose or not to disclose it also explains how the Australian
accounting standard board takes part in global accounting standard. It further explains why it is
not mandatory for countries from where members of international accounting and standard board
(IASB) to apply IFRS. In this assignment also Adalta Limited, Actinogen Medical Limited,
Acrux Limited and Aft Pharmaceuticals Limited (Asx, 2018) has been chosen as case study of
equity items and lastly an analysis of the debt equity ratio done on the four companies.
Introduction
There has been a debate om Financial reporting, on whether to be left to the managers to decide
on whether to disclose financial information or not, this assignment explains areas to consider if
such a decision has to be made. It also explains how Australian accounting board gets involved
in global accounting standard setting. And finally, an analysis of equity items in the financial
statement of four companies that are listed in Australia stock exchange are explained.
Decision whether to allow manager to disclose financial accounting information voluntary
accounting standards are all inclusive
Before an accounting standard is set, procedures to be followed. This ensures that all the relevant
bodies are consulted and their views incorporated in it, so by making it compulsory for managers
to disclose financial information it is the best decision because it is required by other users of the
financial statements this includes the investors, government and other interested parties. (Ifrs,
2017)
Information prepared by on the financial statement is mostly for the stakeholders and any
potential investors. The shareholders are able to see whether wealth is being generated for them
and if they can be able to get back their investment in form of dividends, without being directly
involved in the running of the company so the directors should always disclose all the required
information in the annual financial report.

When left for managers to decide what to disclose and what to leave they would only disclose
what favors them and thus portraying a picture that does not reflect the state of the company.
(Kieso, D.E., 2010)
These regulations are set in a way to encourage transparency when preparing the financial
statement. But if that choice is left to the directors they may disclose only the information that
portrays that the business is doing well and in real sense there are other issues that maybe
affecting the business negatively.
When right procedures are followed in preparing the financial report it eases the
understandability and it is easy to interpret for all the stakeholders. Otherwise the managers may
prepare something that cannot be understood by anyone but them. (Van Greuning, H., 2011)
When this information is set it saves the company a lot of other unnecessary expenses that may
result in legal expenses through wrong decision made by investors upon relying on information
provided by the managers that may be incorrect.
On other hand this information is available to everyone that includes a company’s competitor
and they use this information to create even a stiffer competition for the market share. So, to
protect a company from such unnecessary competition it would be good to withhold such
information.
When such information is released if the company did not do well financially it directly affects
the share price in the stock market thus causes a series of negative effect on the company which
could have been avoided if the information was not disclosed. Also, the share price would
remain stable instead of declining which is often the case.
To prepare such documents it is an expensive exercise, so if a company was not doing well
financially and it goes ahead to prepare such documents, cost would be incurred which would
otherwise have been used to improve the business.
Therefore, I can conclude that if the manger has the best interest of other users in mind on
making the decision on whether to disclose financial information they can choose not to disclose
otherwise they should follow the regulation already set and disclose all the necessary financial
information.

Australian accounting standards board involvement in global accounting standards
The process which IASB Takes before setting up any standard is very rigorous with a very vast
public consultation even up to a period of four month which gives the AASB as well as other
accounting body in the world a chance to make their contribution in developing global
accounting standards. (Ifrs, 2017)
When the AASB sets their own accounting standards they are done in a way that even if any
country in the world adopt the same standard they would meet most of the IFRS standards that
has been set.
Already they have a governing body in the country
As a result of this not all standard set by the IFRS maybe followed because a country is governed
by its own accounting board and so the companies in that country have to adhere to the set rules
and regulations as set by the body in their country.
Information prepared may be just for local market
Information prepared by these companies may not be intended for other international market so it
would be unnecessary to use IFRS which is not mandatory.
Superior Standards
The member country may feel they have superior accounting standards thus adapting IFRS
standards will like downgrading, so it would be better they maintain their own standards
Switching from a country standard to the IFRS is a costly affair which needs to be executed with
proper planning, as a result of this it is not mandatory because a country may not have allocated
the funds to train its work force, have system changes and other expenses that maybe directly
related to it.
Though IFRS brings a common global ground for understanding and interpreting financial
information, from the study that has been done, though a market liquidity increases where IFRS
are mandatory it is not measurable as the sole source of the observed market effect so

discouraging some member states from mandatory effecting the IFRS as no much positive
changes will be brought to the country economy. (Barth, M.E.,2007)
The IFRS may have some flaws which may make a country to maintain their own standards
instead of following IFRS.
IASB in its establishment it came up to harmonize accounting standard that were already there
that meant it was left for a country to make their own choice whether to adopt the standard or
continue using their system depending on how suitable the standard fitting them and how those
standards improved the already set standards. (Eng, L.L.,2003)
Case study companies
The following companies have been used in this study,
 Adalta limited
 Actinogen medical limited
 Acrux limited
 Aft pharmaceuticals limited
These companies are all dealing with pharmaceuticals.
The following items are listed in the equity part of the income statement of the above companies;
Ordinary shares
This is the most common type of shares; these kinds of shares have no privileges or preferences
and they present a portion of ownership by any given shareholder. When it comes to dividends
they are only given dividend when the directors of the company decide so and the company has
made enough profits. And incase of wounding up they are the last to be repaid back.
These are common in all the four firms.
Preference shares

These are shares that have a fixed dividend rate and have preferential rights this means that after
tax they will be first to be paid dividend at the fixed rate and incase of the company being wound
up they are paid before the holders of ordinary shareholders. This type of shares has been issued
in Adalta Limited.
Share based payment reserve
These arises when a company receives goods or services but instead of making the payment in
cash it is made by issuing of shares or other equity instrument at their price as per the entity
prices. These types of shares were issued by Adalta Ltd.
Convertible note
This is a short-term debt. When matures instead of an investor getting their money back plus
interest, they are given shares in the company, which maybe fixed from the beginning or will be
confirmed at the maturity period of the debt. Adalta Ltd has this type of shares.
Vested employees share option
This is a case where employees of a company are given the option to purchase shares at a
discounted price in the company but they can only do that after a given period of time has
expired this is to discourage employees from exercising such rights then reselling them and even
moving out of the company. Such shares have been offered by Acrux Limited.
Reserves
These are profits that has been set aside to grow the financial position of a business
Retained earning
These are net earnings that has remained after paying dividends and are available for re-
investment.
Cash flow hedge reserve

This is a caution taken by a company to eliminate or reduce dangers that arise from changes in
cashflow of a financial statement this maybe caused by change in interest rates and other items.
Foreign currency translation reserve
Because books of accounting have to be presented in the parent company currency any gain from
its subsidiary is recorded as an equity in the balance sheet as a foreign currency translation
reserve.
Acrux Ltd
There is change in accumulated losses
There is increase in accumulated losses this is because though the company made profit after tax
all of it was distributed as dividend thus the increase in in accumulated losses.
Reserves
This has increased due to reserve made for the employees who may exercise they share option.
ACTINOGEN LTD
Contributed equity is increasing because of the following reasons
Shares issued during the year and because of the cost that was incurred in raising the capital
Accumulated losses
This increased due to research and development expenses and also because of share based
payments expenses that were recognized.
Reserves
These are made up of share-based reserve which are incurred as a result of share-based payment.
ADALTA LTD
There is increase in issued capital this is because of exercising of convertible notes to fully paid
shares.
There is accumulation of losses continually this is because the company has been making losses
for the last four years.

AFT PHARMACEUTICALS LIMITED
Share capital has increased due to the issuance of new preference shares.
There is a decrease in retained earnings because the company has been making losses
Foreign currency translation reserve
This is a new item that arose that brought increase to the equity
Comparative analysis of the debt and equity position
Acrux Ltd
Using the
Debt ratio = total debt / total equity
Acrux Ltd
item/year 2014 2015 2016 2017
total debt 11164 7870 9482 3381
total equity 42057 40625 43889 43925
debt ratio in
percentage
26.544927
1 19.37231 21.6045 7.697211
This company has a low debt ratio, these means only a small percentage of its total equity is
financed by debt thus this is a low risk. It had the highest debt ratio of 26.5 % in 2014 but by
2017 it had reduced to 7.7 %.
ACTINOGEN LTD
item/year 2014 2015 2016 2017 2018

total debt 49927 222640 824203 844259 768253
total equity 1211812 15356608 12125350 9365766 17257911
debt ratio in
percentage 4.12002852 1.449799 6.797354 9.014308 4.451599
This company has a low debt ratio, these means only a small percentage of its total equity is
financed by debt thus this is a low risk. It had the highest debt ratio of 9 % in 2017 and lowest at
1 % in 2015.
ADALTA PTY LTD
item/year 2014 2015 2016 2017 2018
total debt 286947 261181 215199 344512 366317
total equity 172816
-
172504 1167888 7745378 4072631
debt ratio in
percentage 166.041917
-
151.40
6 18.42634 4.447969 8.994603
Though Adalta ltd started as a high-risk company with a high debt ratio it has been able to
overturn that from a company fully financed by debt to only 9 % financed by debt
AFT PHARMACEUTICALS LIMITED
item/year 2014 2015 2016 2017 2018
total debt 22345 31192 37074 38761
total equity 25393 33213 65304 58231
debt ratio in
percentage 87.996692 93.91503
56.7714
1 66.5642
AFT can be considered a high-risk company because mostly is being financed by debts. (Bragg,
S. 2011).

Conclusion
In conclusion we can say that for the best interest of the investors it is better for the managers to
always disclose financial information. Also, Australian accounting body gets involved in making
global accounting standards and finally companies should always check their debt ratio to avoid
being a high-risk company.

Reference
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