Like many other theories, Accounting theories keep evolving gradually. Accounting practitioners keep refining the theories to incorporate new methods of accounting and to promote its usefulness. This ensures that the practice of accounting or bookkeeping becomes better and easier to use and follow. The end goal of studying accounting theories and current issues is to make the practice efficient and seamless.
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To address this assignment, our accounting subject matter expert researched and read various positive and normative financial accounting theories from different text books and other credible literature. After gaining an in-depth insight on accounting framework our expert proceeded to assess accounting policies and estimates of the selected company. Our expert then proceeded to critically evaluate accounting quality by assessing accounting policies and framework. The final investigative report on Manager’s accounting strategy and reporting strategy choice was prepared keeping the above assessment in mind.
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HI6025 Accounting Theory and Current Issue
Evaluate accounting quality, for a company of your choice, by assessing accounting policies
and estimates and prepare an investigative report on Managers’ Accounting and Reporting Strategy Choice
a. Download Annual Reports (for 2 years at least) and explore
b. Assess accounting policies and estimates of your selected ASX listed company
i. Which accounting policies and estimates used by the firm?
ii. Are there any flexibilities of accounting policies and estimates used by the firm?
iii. Are these accounting policies and estimates used by their competitors?
iv. Show a comparison of accounting policies and estimates used by the firm with one of its rival company.
v. Do you agree with the policies and estimates?
vi. Is accounting strategy hiding or revealing
vii. Any Red Flags/questionable number in the accounting report?
viii. Which accounting positions capture them? Why? Explain
c. Critically evaluate accounting quality by assessing accounting policies and estimates
i. consider the various pressures, many of which are political in nature, that influence the accounting standard-setting environment
ii. consider the implications of organisations making particular accounting disclosures, whether voluntarily or as a result of a particular mandate
iii. understand the possible implications of an organisation making particular accounting choices and disclosures
d. Prepare an investigative report on the Managers’ Accounting Strategy and Reporting Strategy choices on the basis of the above evaluation. The report should have following sections for minimum:
Section 1: Identify Key Accounting Policies
Key policies and estimates used to measure risks and critical factors for success must be identified.
Section 2: Assess Accounting Flexibility
Accounting information is more open to distortion if managers have a high degree of flexibility in choosing policies and estimates.
Section 3: Evaluate Accounting Strategy
Flexibility in accounting choices allows managers to strategically communicate economic information or distort performance.
Issues to consider include:
• Norms for accounting policies with industry peers
• Incentives for managers to manage earnings
• Changes in policies and estimates and the rationale for doing so
• Whether transactions are structured to achieve certain accounting objectives.
Section 4: Evaluate the Quality of Disclosure
Issues to consider include:
• Whether disclosures seem adequate
• Adequacy of footnotes to the financial statements
• Whether notes sufficiently explain and are consistent with current performance
• Whether GAAP reflects or restricts the appropriate measurement of key measures of success
• Adequacy of segment disclosure.
Section 5: Identify Potential Red Flags
Issues that warrant gathering more information include:
• Unexplained changes in accounting, especially when performance is poor
• Unexplained transactions that boost profits
• Unusual increases in inventory or receivables in relation to sales revenue
• Increases in the gap between net income and cash flows or taxable income
• Use of R&D partnerships, SPEs or the sale of receivables to finance operations
• Unexpected large asset write-offs
• Large fourth-quarter adjustments
• Qualified audit opinions or auditor changes
• Related-party transactions.
Section 6: Compliant with the Conceptual Framework
This report presents a comprehensive investigation on accounting policies and accounting method of listed company in Australian Stock Exchange. The report has emphasised on identifying the key accounting policies of Boral Limited. The policies of recording and presenting the accounting data are compared with other ASX listed companies, which are competitors to Boral Limited. The purpose of this report is to investigate manager’s accounting strategy as well as selection of reporting strategies. In this context, the evaluation on accounting flexibility for choosing the policies is conducted to understand the level of incentives for the managers. Further, this report has emphasised on assessing the quality of disclosure of the accounting information. The report has also find the issues, which might look conspicuous in nature and other parties might ask for more explanation on such issues. The concept framework of the accounting is also evaluated for Boral Limited. The theoretical conception of accounting starts with positive accounting and normative theory. Both of these accounting theories are opposite to each other. The first one states to conduct the accounting analysis on basis of historical information. Further, this method focuses on making conclusion of accounting analysis on basis of information present in hand (Deegan, 2013). However, normative theory of accounting states to test the future activity of the company by providing suitable judgement on accounting practice. This theory focuses on the future events of the business by estimating the future situation rather than observing the past data (Gaffikin, 2014).
Section 1: Identification of key accounting policies
Key accounting policies of Boral Limited
The annual report of Boral Limited is evaluated to find the key accounting policies, which are applied by the management for preparing the financial statements and accounting information of the company for 2016. The annual report of the company has clearly stated that the company has not changed much of the accounting policies of the company since 2015. However, there are some changes made in 2016 due to regulatory amendments. Moreover, the management has not changed their viewpoint of 2015 in the current year and the basis of accounts preparation is discussed in the annual report of 2015 thoroughly. The operation of Boral is based on Australia. Hence, the basis of accounting preparation has followed the Australian Accounting Standards and Companies act. Further, the company has prepared the financial statements complying with IFRS as the company has foreign operations too (in USA). Both the functional and principle currency of this accounting data is Australian dollar whereas the company has to make transaction in several other currencies for foreign transactions.
The accounting disclosure of Boral states that all the information regarding the financial statements is prepared on basis of historical cost except for some of the items. Financial instruments, asset held for sale in any subsidiary, equity securities and share-based payment to the employees are measured in fair value rather than in actual value. The company has also disclosed that carrying amount of the hedged assets is recorded with the risk-adjustment in hedged fair value. The company has presented comparison of accounting data of current year for maintaining the consistency with previous year. The recorded account is presented in rounded off to the nearest one hundred thousand dollars for meeting the guideline of ASIC Class Order 98/100 (Boral.com, 2017). The basis of preparation has provided with the management of Boral by maintaining the positive accounting theory by preparing the financial statements with historical cost. Further, the accrual basis of accounting is applied for recording some of the items such as receivables and payables for incorporating the current transactions. Hence, the prediction and accounting analysis of the company has maintained the positive accounting theory by predicting the fair value of the assets (Jaggi, 2015).
The normative accenting theory is also applied for preparing the financial statements of Boral Ltd. The management has declared that significant level of judgement and assumptions are associated for estimating assets, liabilities, income and expenses. Such judgements and assumptions have affected the application of accounting policies. The judgements are based on the historical experience and various other factors, which are considered as reasonable at that point of view. The actual value of assets and liabilities might differ from the presented value in the accounting statement as significant level of judgements are applied for presenting the carrying amount of those items. The management has judged the value of goodwill and intangible assets of the business for acquiring a new business. The judgement on value of intangibles is based on the amount of cash is generated for recovering throughout the life. The provisional measure for environmental rehabilitation is estimated on basis of assumption of closure date of various sites.
Hence, the presented provisional cost of such activity is uncertain and it might vary in future. The measurement of deferred tax of several units are based several judgements of future events. Hence, the estimated deferred tax might vary due to change in several business circumstances. The share-based payment is calculated on basis of fair value deterring from actual value of such payments. The management has revealed that Monte Carlo Simulation of option-pricing model is used for determining the fair value of the share-based payments. The historical experience of the accountants is used for determining the useful lives of various assets. Thereby, it is examined that Boral has used significant level of judgement and assumption to prepare the accounts, which is the application of normative accounting theory (Bonin, 2013). The management of the company has prepared the financial statements with appropriate level of judgment as well as logical flow, which is aligned with the concept frame of accounting.
Section 2: Assessment of accounting flexibility (Significant accounting judgments)
The flexibility of preparing accounting statement is considered as the application of judgement in preparing accounting information in a financial statement (Katmon and Al Farooque, 2017). The recognition of sale of goods is done after the rewards and significant risks are transferred to the buyers. The management has confirmed that recognition of sale of goods is done considering no involvement of the company with the goods. Thus, the revenue
can be measured with reliable amount as well as possible return of goods. The management has considered adding the sale of goods on pro-rata basis of stage of executing the contract whereas any expected loss is recognised as expense with immediate effect. The revenue of sale is recognised after rendering the service to the customers without any chance of continuation of any service obligation further.
Hence, the revenue recognition policy shows that the management of Boral has significant level of flexibility in recognising the expenses of contract. The judgement on receivable indicates that the management has applied their experiences for determining the doubtful debt. The estimation of receivable is based on the recoverability and collectability of trade receivables. Further, the useful lives of fixed assets are measured on basis of experience of the management. The useful lives are adjusted when such action is necessary. Therefore, it can be said that both doubtful receivables and useful lives of fixed assets are determined on basis of the experience of the management. The management has obtained the flexibility to determine the value of intangible assets whereas the amortisation rate is considered from 5 – 20% for having indefinite life (Boral.com, 2017).
The management has made significant judgement over estimating the carrying value of goodwill and intangible assets. The estimation of the carrying value is conducted through projected of cash flows on basis of expected sales growth, operating expenses, capital expenditure and cash flows. In this case, the management has used its experience for judging the future market position of the business. The discounted rate is assumed from the weighted
average cost of capital market input and risk adjustment. The management has applied the judgement on changing and operational condition. In such case, the projected impairment of assets might vary for actual cash flows. The provisions of operating assets and liabilities are measured through judgement of the management as provision might not provide any certain amount of expenses required for the business in future. The management has worked on
estimating the current tax and deferred tax assets of the business. However, these measures are based on several external as well as internal factors such as tax rate, growth in operating income in future. On the other hand, the fair value of current share price of the company is considered by evaluating the price volatility of the underlying assets (Boral.com, 2017).
AASB 2015-1 Amendments to Australian Accounting Standards
Annual Improvements to Australian Accounting Standards 2012-2014 Cycle
AASB 2015-2 Amendments to Australian Accounting Standards
Disclosure Initiative: Amendments to AASB 101
AASB 2015-3 Amendments to Australian Accounting Standards
Withdrawal of AASB 1031 Materiality
AASB 2015-4 Amendments to Australian Accounting Standards
Financial Reporting Requirements for Australian Groups with a Foreign Parent
AASB 2015-5 Investment Entities
Applying the Consolidation Exception
AASB 1057 Application of Australian Accounting Standards, AASB 2015-9 Amendments to Australian Accounting Standards
Scope and Application Paragraphs
(Source: cimic.com.au, 2017)
However, these new standards have increased the disclosure requirement of the company without affecting the accounting policies of the group. Further, the management has explained that accounting estimates and judgements are based on historical experience of the management. This company has changed some of the accounting items with significant level of judgement such as determining the stage of completion, estimating contract revenue and expenses, probability of customers approval, expected date of completion and productivity of the project. Hence, the carrying value of construction and mining project is adjusted with the judgement of the management. The significant application of assumption and judgement are used in related party disclosure, trade and other receivables and trade payables. CIMIC group has also applied the joint arrangements under AASB 11 for its joint operations and joint
ventures. This company has not applied the unrealised gains or losses of its joint ventures for ensuring consistency. The revenue recognition of CIMIC group has followed the same path as of Boral. However, CIMIC has some other business segments, which shows more revenue recognition through contract in construction and mining. Further, this company has recognised all the revenue on accrual basis. All the losses are recognised after realising the same in effect for the company. CIMIC Group has used the similar type of accounting treatment and judgements for recognising the income tax payment and deferred tax asset of the company. The company has disclosed that amount received for any contract debt after 12months of billing is discounted with suitable interest rate (cimic.com.au, 2017). Further, the management has indicated the doubtful debts after 60 days of billing when recoverability of such debtor becomes uncertain in practice. The management of CIMIC has used their judgement on measuring the amortisation of interest bearing liabilities, which presents the far value to recognise such liabilities in the accounting report. The change in the position of derivative instruments is recognised at fair value rather than at actual value. Asset held for
sale item is recognised after deducting the cost to sell from the fair value and carrying amount of such assets. CIMIC Group has applied straight-line method of depreciation for freehold building for an useful life of 40 years (cimic.com.au, 2017). The leased buildings are also depreciated with same formula and the useful life of such buildings has not exceeded 40 years.
CIMIC has three different types of intangible assets – brand name, customer contract and IT systems. The management determines the useful lives of different brands by using their experiences. This judgement is made on basis of considering the finite useful lives of those brands. The customer contract is considered to have finite lives and management does not amortise. Hence, an impairment test is conducted over every year for these contracts over the useful lives as estimated through the judgement of the management. The IT system is estimated to have 7 years of useful lives, which is derived through the experience of the management (cimic.com.au, 2017). The share-based payment to the management is estimated at fair value of share options. This company has not disclosed any technique to determine the option price of share-based payments.
Section 4: Evaluation of the quality of disclosure
The disclosure of accounting items is considered as one of the most important activity of the management. Gaffikin (2014) has stated that the large companies disclose more objects for proving the materiality of the accounting information in practice. A listed company in ASX has to disclose the materiality of income, cash flows, economic information, basis of preparation of judgements for estimating some of the accounting data. In this context, Boral has provided ample numbers of disclosure such as revenue recognition as well as basis of income. Further, the management has provided all the mandatory disclosure such as preparing process and the accounting policies of the company for every year. It is also observed that the company has provided notes to the accounts so that creditors and investors might find the essential for analysing the financial position of the business (Cazier et al. 2015). The quantity of disclosure is considered as a level of transparency as well as quality of the notes (). Many researchers have believed as providing details information in notes to the accounts would display the financial condition of the business openly. However, the opposite doctrine also states that quality of information is not related with the quantity of notes provided with the financial statements (Barker and Penman, 2016). Hence, Cassell et al.
(2015) have stated that providing the information within time is a measure of quality of disclosure in practice. There are three types of disclosure exist such as adequate disclosure, fair disclosure and full disclosure. However, Cazier et al. (2015) have categorised disclosure as mandatory and voluntary disclosure system. Both of the categories are important for the shareholders and creditors of the company to know the financial and business practice of a period. The full disclosure might enhance the confidence of the shareholders on a company’s operation whereas adequate level of disclosure might not make the creditors happy. Cassell et al. (2015) have observed that creditors and lenders might request for more information on credit condition of the company and the management has to provide more disclosure about the calculation method of fair value of various assets. In this context, Boral has provided adequate level of disclosure as it has provided all the mandated notes to the accounts in its final report.
Further, the company has voluntarily disclosed various loans, business segments and test of impairment for intangible assets in the annual report. Such disclosures are part of the voluntary disclosures. The information from those disclosures has helped to know about the company’s position as well as income generated from the intangible assets. Further, the disclosure has indicated the movement of the carrying value of equity accounted investments, which shows the investment policy of the company. The management has provided other disclosures for complying with the accounting standards. It is observed that Boral has maintained the continuous disclosure policy for providing consistent information to the shareholders and creditors under the ASX listing rules (asx.com.au, 2017). The disclosure of the company is prepared on basis of three principles – for materiality checking of the financial condition, to understand the financial performance of the company and improving some of the presentations. Hence, it can be said that Boral has not provided full disclosures about its financial performance. However, it is observed that the company complied with ASX listing rules by providing the adequate and mandatory disclosure of accounts.
Section 5: Identification of potential red flags
The accounting information of Boral has indicated that the company has provided all the relevant information to current financial year. The management has explained the changes in accounting policies as well as the future mandatory change, which would happen in future. There was no significant change happen in 2016 for Boral’s accounting policy as stated in the annual report of the company (Boral.com, 2017). The annual earnings report does not show any unusual transaction or unexplainable profit margin of the business. The report shows that profit of the business and cash flow – both are in line with the performance of the business in the current year. The balance sheet of the company shows that there was no such unusual change happen in inventory or receivable position of the business in 2016, which can change the profit margin. The company has disclosed the related party transactions such as joint venture in notes to the accounts. However, Boral has not published any details about expenses for in-house R&D as well as partnership of such activity with third party. Hence, it can be considered as an issue with the financial statements of the company currently.
Section 6: Compliant with the conceptual framework
The conceptual framework of Boral’s accounting information has followed the standard throughout the report. The annual report has provided the business activities for explaining the business environment and strategy of the company for running the operation. The accounting system of the business is explained with discussing on accounting environment and strategy of the business (Macve, 2015). The accounting strategy has explained the policies considered to prepare the accounts with illustrating the mandatory accounting standards followed by the company. Financial statements of Boral follow the illustration of accounting system and business activities maintaining the standard accounting framework (Boral.com, 2017).
The report has provided with the information that the company has maintained all the accounting information as well as disclosure in practice. Further, the significant accounting policies adopted by the management are discussed in the annual report. In this context, it is also observed that Boral has maintained the standard accounting framework for presenting the financial statements in 2016.
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