Exploring the Impact of Positive Accounting Theory on Qantas Airlines

The study explores how Positive Accounting Theory (PAT) explains the behavior of individuals in accounting settings at Qantas Airlines. It analyzes instances from the annual report, such as executive remuneration practices, auditor relationships, and debt covenants, to illustrate how PAT elucidates managerial actions. The findings suggest that executives may engage in manipulative practices influenced by contractual arrangements, which are evident in financial reporting patterns. Additionally, the study highlights potential conflicts of interest with auditors due to additional non-audit fees, aligning with PAT's predictions about auditor behavior under economic incentives. Finally, debt covenant compliance indicates possible managerial strategies to optimize financial ratios. Overall, Positive Accounting Theory provides a valuable framework for understanding these behaviors in Qantas Airlines.

ANSWER
For the purpose of this study, two peer reviewed articles have been considered namely “Half a
defense of Positive Accounting Research” written by Paul V Dunmore and “Positive Accounting
Theory and Science” written by M. Humayun Kabir. The organization that has been selected for
the purpose of completing the study is Qantas Airlines. The company is registered in Australia
and listed in the Australian Stock Exchange. The company is the largest domestic and
international airline company and is one of the leading brands of Australia.
Paul V Dunmore has stated that the positive accounting theory explains the behavior of the
humans involved in the accounting settings (Ghanbari, 2016). The theorists have highlighted the
relationship of the auditor and the auditee so as to explain the behavior of the auditor and auditee
in the account settings. In the given case of the Qantas Airlines Company, the relationship of the
officials employed at the top management of the company and those involved in the accounts
department have been detailed with the detailed analysis of the annual report of the company
(Christensen, 2016; Williams, 2012).
In the annual report of the company for the year ending 30th of June 2017, the positive
accounting theory hypothesis has the great impact on the valuations and the presentation of the
financial statements.
The remuneration report of the company has laid down the following major heads on the basis of
which the remuneration of the management officials of the company is decided which includes
Directors, Chief Executive Officer, Chief Financial Officer of the company:
- Short Term Incentive Plan - It is the part of the annual incentive where the executive of
the company is rewarded with the mixture of the cash bonus and the shares in the
restricted manner. These are rewarded only when the performance as planned by the
board is achieved by the individuals employed at the higher positions. The company has
used the following formula for calculation of the short term incentive award:
Base Pay X Target X Scorecard Outcome X Performance factor of each individual.
Each of the part has its own significance and is directly related to the remuneration of the
chief officials of the company. The performance measures are totally dependent upon the
profit before tax. Profit before tax has been regarded as the budgetary control item for the

performance of the chief officials. The scorecard balance consists fifty percent from the
profit before tax figure and the remainder balance of fifty percent depends upon the other
financial and non financial measures.
- Long Term Incentive Plan – This plan includes an award which is upfront for a fixed
number of rights. For calculation of the long term incentive plan, the following formula
has been used by the company (Company Official Website, 2017) :
Base pay X Target X Fair Value of Right
Each part of the formula has its own significance. The target pay varies from fifty to eight
percent of the base pay. In case the performance marks are as per the budgeted figures
and that continues for over the three year period then their vested rights will
automatically convert into the shares of the Qantas Airlines. The one of the major
condition for the performance measurement that has been defined by the company is that
the performance will be compared to Australian Stock Exchange 100 companies and an
Airline Peer group. The share price in the market of the company is compared so as to
come at the conclusion for the remuneration of the chief officials (Company Official
Website, 2017).
Now, the concept of positive accounting theory has come into place. The chief officials of the
Qantas Airlines are feeling motivated to indulge themselves in the practices which will help in

increasing the share price of the company. It is because their remunerations are linked directly
with the share price of the company and for this they might themselves engaged in entering into
the manipulative practices or genuine practices to either increase the figure of the revenue of the
company or decrease the expenses of the company so as to have the higher profit for the
company which in turn will lead to increase in the share price of the company (Trang and Thao,
2016). The screenshot of the statement of profit and loss account is given below:
The remuneration report of the company has laid down the change in the policy of the
remuneration from the period beginning from the year 2017 and accordingly it can be seen from
the above screen shot that again in the future year the chief officials will have the higher
remuneration.

It is a big example for ascertaining the effect of the positive accounting theory in the financial
statements of the company.
The next disclosure made by the company is the Independent Auditor’s Report.

The auditor of the company has disclosed the key audit matters in accordance with the new
auditing standard seven hundred and one on communicating the key audit matters in the
Independent Auditor’s report. The report given by the company has considered the following
three key audit matters:
- Revenue recognition - Passenger
- Revenue recognition - Frequent flyer
- Accounting for financial instrument - derivatives
In all the three key audit matters, the auditor has not given any form of the qualified opinion or
the disclaimed rather has disclosed the audit procedures of the auditors. Simultaneously the
auditor’s remuneration consists of the part which is different from auditor remuneration and
statutory matters and included in the other heads. The other non audit services head counted for
the amount of $402000 in the financial year ending 2017 as compared to $52000 in the financial
year ending 2016. It is depicted that the additional amount that has been given to the auditor may
for suppressing the observations that have been noticed and observed by the company. The
theory has helped in explaining the behavior of the auditee company with the auditors of the
company (Kabir, 2011; Hauschild and Reimsbach, 2015).
The third instance is the debt covenant which can be seen from the annual report. The debt
covenant is that the ratio of debt to EBITDA (earnings before interest tax depreciation and
amortization) is within the limit as prescribed by the financial institutions.

From the above table, it is very much clear that there might be the chances that the company
officials might have engaged in practices which will lead to increase in EBITDA or decrease in
Debt.
Positive accounting theory helps in explaining the casual behavior of the individuals involved in
an organization relating to account settings. Many instances have been cited where the chief
officials might have got themselves engaged in the manipulative practices and the same has been
evidenced through the annual report of the company. In order to conclude the report, the positive
accounting theory has important role in every organization in explaining the human behavior.
REFERENCES
Company Official Website, (2017), “Annual Report” available on https://www.qantas.com/au
accessed on {25/01/2018}
Christensen, H.B, (2016). “Accounting information in financial contracting:The incomplete
contract theory perspective” Journal of Accounting Research, 54, 388-434.

Kabir H, (2011), “Positive Accounting Theory and Science”, available at
https://www.google.co.in/url?
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Ghanbari, M., (2016), “PAT (Positive Accounting Theory) and Natural Science” available at
http://www.irjabs.com/files_site/paperlist/r_2849_160224091446.pdf accessed on
{25/01/2018}
Hauschild B and Reimsbach D, (2015), “Testing vs Building accounting theory with
Experimental Research: Insights from management research”, Journal of Behavioral Accounting
and Finance, Vol.1, 83-89
Trang T and Thao P, (2016), “Positive Accounting – An effective trend for Vietnamese
Accounting in the New Area”, available at
http://www.rusnauka.com/29_PMN_2015/Economics/7_198718.doc.htm accessed on
{25/01/2018}
Williams P, (2012), “The Logic of Positive Accounting Research”, Journal of Accounting
Organizations and Society, Vol. 14, 5-9