Accounting and Society: IFRS, Financial Reporting & Social Contracts

This report provides a comprehensive analysis of International Financial Reporting Standards (IFRS) and their impact on financial reporting, drawing from specified articles and a case study. Section A summarizes an article discussing whether IFRS has delivered on its promise of improving financial reporting, highlighting its principle-based nature and challenges in emerging nations. It further examines the relevance of financial statements in today's business environment, comparing perspectives from US and Australian academics, and explores problems in enhancing the communication value of financial statements, including issues with line item presentation and profit/loss reporting. Section B delves into the concept of social contracts within accounting, using the example of Australian banks abolishing ATM fees to illustrate explicit and implicit terms of contracts and stakeholder motivations. It also discusses the influence of organizational legitimacy, particularly in light of regulatory pressures on the banking sector, emphasizing the need for compliance and ethical governance.

Running head: ACCOUNTING AND SOCIETY
Accounting and Society
Name of the Student:
Name of the University:
Author’s Note:
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Table of Contents
Section A:........................................................................................................................................2
Answer to Part (a):.......................................................................................................................2
Answer to Part (b):.......................................................................................................................3
Answer to Part (c):.......................................................................................................................4
Section B:.........................................................................................................................................5
Answer to Part (a):.......................................................................................................................5
Answer to Part (b):.......................................................................................................................6
Answer to Part (c):.......................................................................................................................7
Answer to Part (d):.......................................................................................................................9
References:....................................................................................................................................11

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Section A:
Answer to Part (a):
After critical assessment of the article, it is inherent most of the global nations have
adopted “International Financial Reporting Standards (IFRS)” for their financial reporting
purposes. The primary aim of IFRS is to develop a common international language in relation to
business affairs along with assisting in readability and comparability of the company accounts
(Intheblack.com 2018). The IFRS standards have been a mechanism in facilitating the flow of
debt and equity capital within and throughout the international economies. In this regard, Warren
(2016) remarked that IFRS would result in rooms to manipulate accounting numbers, since IFRS
is a principle-based set of standards. In other words, IFRS increases the creativity of the
managers in using professional judgement, which would minimise comparability, flexibility,
reliability and relevance of financial information.
The article identifies that the role of professional judgement is significant in numerous
short-term estimates that comprise of bad debt provisions, deferred revenues along with
valuations of inventory and income tax. Similarly, professional judgement is needed for long-
term estimates like impairment of assets, costs and liabilities of retirement benefits and deferred
tax. Another dominant feature of IRS is fair value accounting, which is subjective in nature.
Hence, the formulation of reliable measures of fair value could be challenging in few emerging
nations, in which the necessary information might not be readily available. Hence, it could be
stated that IFRS is yet to deliver its promise of enhancing financial reporting.
There are some suggestions laid out in the article for developing an effective financial
reporting system, which are enumerated as follows:

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 A capable and well-trained audit profession
 Segregation between corporate taxation and public financial reporting system
 Corporate governance and ownership structures promoting legitimate demand in relation
to trustful public information
 An independent legal system in order to identify and penalise fraud, failure and
manipulation to adhere to accounting and other disclosures
Answer to Part (b):
According to the provided article, it has been identified that two US academics have
stated that the usefulness of the financial information is fading for the investors. According to
their research, Tesla listed on NASDAQ stock exchange has not made any profit; however, in
2017, the investors purchased its battery visions and futuristic electric car have driven its market
capitalisation above General Motors. This is further supported on the part of Amazon, Tesla and
Google that information like balance sheets, cash flow statements and income statements have
fading benefits, since the investors could access information from other sources, which could
drive the share prices quickly (Intheblack.com 2018). Thus, traditional accounting fails to
capture the actual value of the organisation.
However, according to the research work of three Australian academics, shareholders’
equity and net income are still pertinent in order to undertake investment decisions, which would
remain constant with the passage of time. The net income and shareholders’ equity are included
into the share prices of the organisations and it has been argued that the value of an organisation
is within its strategic and value-enhancing sources (Pelger 2016). Considering the example of
Tesla, the US academics have argued that more emphasis is placed on the increased value of
intangible assets.

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However, there are certain differences between the usefulness of financial statements in
US and Australia. Firstly, in US, the calculation of shareholders’ equity and reported net income
is made with the help of US GAAP, which is adjudged in the form of rules-based standards.
However, in Australia, IFRS-based standards of accounting are used for calculating
shareholders’ equity and net income, which is termed as the principles-based standards.
Secondly, the liquidity of the US market is greater in contrast to that of Australia, since frequent
trading is carried out depending on non-accounting information (Gordon et al. 2015).
Thirdly, the Australian investors might depend on depend on shareholders’ equity and
reported net income for undertaking investment decisions, while the US investors take into
account other organisational fundamentals comprising of intangible and cash-related amounts.
Fourthly, divergence is inherent between the Australian and US investors on intangibles. The
financial reports of telecommunication industry having greater intangible asset valuations are
still beneficial for the Australian investors. Hence, based on this discussion, it could be said that
the financial statements perform a confirmatory role in the current era, which meet the
expectations of the investors.
Answer to Part (c):
As laid out in the article, some problems are inherent in enhancing the communication
value of the financial statements and the strategies to address them are described briefly as
follows:
Presentation of line items:
It has been identified that several users of the financial statements find the sub-total
operating income as highly beneficial; however, it is not clearly defined in the framework of

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IFRS. In addition, inconsistency could be observed while presenting the line items. Some
organisations take into account impairment of intangible assets for obtaining the adjusted
operating income, while this is not the case in case of other organisations (Intheblack.com 2018).
For meeting the user needs and in order to eliminate these inconsistencies, IASB aims to improve
structuring, including additional line items and sub-totals. Another concern of IASB is that the
measures of non-GAAP might be utilised for painting a flattering picture which could hide he
actual picture of the performance of the business organisations (Andersson et al. 2016).
Profit and loss issue:
According to Weetman (2017), IASB is confronted with a number of challenges. The
main issue is whether non-recurring exceptional items need to be excluded from the operating
income. However, according to the current thinking pattern of IASB, these items are preferred to
be indicated to obtain operating income. In fact, the board is taking into account to enable an
alternative for including a sub-total of adjusted operating income, while excluding the non-
recurring and exceptional items (Barth 2018).
Most of the stakeholders want IASB to describe profit or loss and other comprehensive
income. This is an issue, since in the absence of a principle describing the above-stated terms,
there would be inconsistency in segregating expenses and incomes between the two categories.
Section B:
Answer to Part (a):
As commented by Deephouse et al. (2017), social contract functions as a basic approach
for legitimating liberty in society. This contract helps in providing a suggestion on the moral

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rules to be followed and the way through which these rules are justified. Thus, it provides clear
instructions regarding the reasons for the rules to be followed, which include mutual benefit and
fear of punishment. Based on the provided case study, it could be found out that the big four
banks in Australia have decided to abolish the ATM fees that the customers are needed to incur
for withdrawing cash from their bank accounts. The intention is to minimise the expenses of the
customers belonging to other banks in cash transactions, which would help them in maintain
higher savings in their bank accounts (Deegan 2014). Since the number of ATM transactions has
been falling in Australia each year due to such fees, it could be another reason that this type of
fee is eliminated completely. Hence, this indicates the existence of a social contract between the
big four Australian banks and the community.
Explicit term of a contract could be defined as the communication, in which something is
agreed upon and implicit term of a contract takes place at the time when actions imply that
agreement to something is actually made. In the provided case study, the explicit term of the
contract is the abolition of $2 fee for each withdrawal the customers make on the part of
Commonwealth Bank of Australia (CBA). Westpac has adopted this move as well to provide
benefits to those residing in regional and rural Australia (Abc.net.au 2018). The other two banks,
Australia-New Zealand Bank (ANZ) and National Bank of Australia (NAB) have dropped the
fees to provide benefits to the overall community.
Answer to Part (b):
The various groups of stakeholders identified from the provided case study include the
customers, the banks, banking regulatory authority and the government. The customers and the
banks are the primary stakeholders in this situation, while the banking regulatory authority and
the government could be identified as the secondary stakeholders. In this case, the customers are

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motivated to make additional transactions in ATMs at free of cost. In other words, they do not
incur an additional fee of $2 for every ATM transaction in the big four banks.
The big four banks are forced to make this change owing to the governmental pressure of
the nation. Due to this move, the banks in Australia would suffer a loss of $500 million a year.
Another reason that could be identified behind the adoption of this particular strategy is to drop
the unpopular $2 fee to withdraw cash from the ATMs of other banks (Dailymail.co.uk 2018).
The benefit that is obtained from adopting this strategy is the increase in number of ATM
transactions, which has declined in the past few years. In addition, this move would signify the
move of the banks regarding the willingness of listening and acting on feedback of the
customers.
The banking regulatory authority and the government of the nation would keep close
observation on all the probable closures of ATM. In addition, it has been assured that the banks
would bear all the costs and they would not increase their other charges. The motive or strategy
of these stakeholders is to ensure that the banks do not close their ATM services due to the loss
incurred, as it would negative effects on the customers and the overall community (Cho et al.
2015).
Answer to Part (c):
In the words of Dumay, Frost and Beck (2015), legitimacy could be defined as
something, which is lawful, beneficial and ethically conducive at the same time for the parties
associated with it. Organisational legitimacy could be described as something that could be
perceived as legal and social compliance within and outside the organisation, performing social
obligations and duties and behavioural science through the advancement of resources and

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mechanisms to be used. This needs a system of internal control, effective governance
organisation-wide for protecting the assets of the organisation. This holds the system design,
which needs to be in harmony with the company values, ethics and human factors associated
with the business (Goddard et al. 2016). It needs to be pliable enough for helping the
organisation to grow at its own pace as well as for the society for obtaining both tangible and
intangible benefits.
The operating management of an organisation like supervisors or department heads are
responsible for the efficacy and effectiveness of operations. The audit reports aid operating
management in this context by identifying those areas requiring improvement along with
stimulating action in the right direction. Such outcomes might provide objective support related
to issues needing the support of higher authority. At the time of compliance audit, it is
ascertained whether the organisation has adhered to the related regulations and laws along with
industrial or professional standards or contractual obligations, which could be introduced with
the help of regulations. The management needs to have effective mechanism to identify
applicable policies, standards, processes, regulations and laws.
In the provided case study, the legitimacy of the Australian banks has been influenced
negatively due to the law imposed on the part of the federal treasurer of the nation. The banks
have been challenged of not transferring the cost of tax, which would increase $6.2 billion.
Instead, the banks need to pay attention on their annual income of $30 billion and they are
required to absorb the new levy cost. For regaining the organisational legitimacy, the banks have
started to warn that the shareholders and borrowers would be compelled to pay the tax cost,
which would be eventually transferred to the customers.

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In order to comply with this new legislation, the banks feel that they have tax enforced on
them uniquely, which is not applied to any other part of the business community. As per the
chief executive of Westpac, this levy is considered in the form of stealth tax, which would
minimise the global competitiveness of the industry. For dealing with this issue, the banks are
needed to increase their rates of interest for the borrowers, cut jobs along with minimising the
overall returns to the shareholders. In addition, the chief executive of CBA has stated that there is
lack of detail and there is no consultation regarding tax. Furthermore, the banks perceive that the
shareholders or customers are required to borne the additional costs. However, the tax rates or
interest rates have not been increased yet to deal with this specific issue.
Answer to Part (d):
According to the provided case study, it could be observed that the big four banks have
abolished fees for the customers of other banks in relation to their ATM services (Afr.com
2018). The laws of the government and the banking regulatory authority of the nation have
violated the legitimate interest of the banks by placing their business goals in danger. The
effectiveness of the banks could be enhanced by assessing the interests and needs of the
customers. The strategies of quality management could be enforced efficiently for enhancing the
overall efficacy of the banks. The client feedback could be obtained, which would enable in
enhancing the plan of quality management and accordingly, the strategy could be implemented
(Higgins, Stubbs & Love 2014).
In the current era, technology plays a significant part in the strategy of organisational
improvement. The collaboration with the professionals from different fields to enhance on the
effectiveness and quality of banks would be beneficial. In the provided case study, the legitimacy
of the Australian banks has been influenced negatively due to the law imposed on the part of the

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federal treasurer of the nation. The banks have been challenged of not transferring the cost of tax,
which would increase $6.2 billion. Instead, the banks need to pay attention on their annual
income of $30 billion and they are required to absorb the new levy cost. Hence, if the banks
decide to absorb this levy cost, they need to raise their rates of interest on the loans provided
(Hoque 2018). Alternatively, they could minimise the return on investment to the shareholders in
the form of paying lower dividends for retaining greater profits, as this move would help them to
cope up with the cost absorption related to ATM fees.

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References:
Abc.net.au 2018, 'The game is up': Big four banks drop their ATM withdrawal fees, [online]
ABC News. Available at: <http://www.abc.net.au/news/2017-09-24/commonwealth-bank-and-
westpac-axe-atm-fees-fornon-customers/8979250> [Accessed 10 Apr. 2018].
Afr.com 2018, ATM fee abolition fails to quell royal commission calls, [online] Financial
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20170924-gynlxs> [Accessed 10 Apr. 2018].
Andersson, T, Haslam, C, Tsitsianis, N, Katechos G & Hoinaru, R 2016, ‘Stress testing
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Barth, ME 2018, The Future of Financial Reporting: Insights from Research, Abacus.
Cho, CH, Laine, M, Roberts, RW & Rodrigue, M 2015, ‘Organized hypocrisy, organizational
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ATMs-withdrawal-feesremoved.html#ixzz5916PQ1eZ> [Accessed 10 Apr. 2018].
Deegan, C 2014, ‘An overview of legitimacy theory as applied within the social and
environmental accounting literature’. Sustainability accounting and accountability, pp.248-272.
Deephouse, DL, Bundy, J, Tost, LP & Suchman, MC 2017, ‘Organizational legitimacy: Six key
questions’, The SAGE handbook of organizational institutionalism, pp.27-54.

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Dumay, J, Frost, G & Beck, C 2015, ‘Material legitimacy: blending organisational and
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