HA3011 Advanced Financial Accounting Online Tutoring

Unit Code: HA3011
Unit Name: Advanced Financial Accounting
Online Tutoring: Tutorial Questions Online Tutoring 1
Due: 11:30pm 15th May 2020
Weighting: 25%
Total Online Tutoring Marks: 50 Marks

Purpose:
This assignment is designed to assess your level of knowledge of the key topics covered in this unit

Unit Learning Outcomes Assessed:
1. Understand the various theoretical models of accounting
2. To apply knowledge and understanding to specific financial reporting issues unit to AASB
Accounting standards
3. Discuss the theoretical constructs of contemporary financial accounting
4. Evaluate and explain the need for the development of a conceptual framework for
Accounting, and discuss the influence of such a framework on accounting practice.
5. Understand the Australian accounting regulatory framework and the conceptual framework
6. Be able to understand how to account for assets, non-current assets and liabilities
7. Be able to calculate for revaluations and impairments of non-current assets, and then journalize
8. Account for leases for both lessees and lessors.
9. Account for company income taxes
10. Accounting for the extractive industries

Description: Each week students were provided with three tutorial questions of varying degrees of difficulty. These tutorial questions are available in the Tutorial Folder for each week on Blackboard. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions from weeks 1 to 5 inclusive and submit these answers in a single document.

 

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Solution

Week 1: Disclosure

Some researchers believe that even in the absence of regulations, there is an incentive present to provide credible information about the operations and position of the entity to external parties in form of lower costs to the entity’s operations.

This view is based on the assumption that stakeholders of the entity who are not actively engaged in managing the entity, will assume that the managers are operating the business for personal benefits, in the absence of information about the entity’s performance for a period (Solomon, 2007). This belief supports the idea that lesser the amount of information available, the more risk the external parties will associate with the investments in the entity and thus will require higher returns on the amounts contributed, thus manifesting as higher cost of capital for the entity solely because of non-disclosure of the operational performance  (Solomon, 2007).

This disincentive to withholding information about the operation of the entity will encourage the managers to voluntarily provide credible and optimal amount of useful information of the entity’s performance  (Solomon, 2007). More amount of information will result in higher confidence of investors.

Another basis of this belief is that managers’ remuneration is based on past performance of the entity, and thus to command a higher amount of remuneration, they will try not only to adopt strategies that will improve the entity in short and long term periods but will also highlight this information through adequate disclosures to interested external parties (Brunelli & Carlo, 2019).

Carrying on with the market related incentive to providing information, an entity that Is silent about its operations is more likely to be underperforming and thus is under a risk of being taken over by another entity that will likely replace the presumed ineffective management with more efficient one  (Brunelli & Carlo, 2019).

Thus, even in the absence of regulation, the managers will be encouraged to disclose both good and bad news about the entity, which may sound counter-intuitive but the market will assess a silent entity as an entity that has very bad news to disclose  (Brunelli & Carlo, 2019).

Another perspective to take into account is that the reputation of the managers and the entity that withholds bad information which is subsequently opened to the public Is likely to deteriorate, with little to no possibility of recovery  (Brunelli & Carlo, 2019).

This belief system presents these arguments to prove that the entity with above mentioned characteristics will be likely to have a higher cost of capital than others.

 

Week 2: Conceptual Frameworks

Conceptual frameworks, in general, organize the premises and concepts that underlie corporate accounting, particularly financial accounting (Pounder, 2009). It offers a conceptual basis for accounting standards and, as a result, is expected to help provide a better understanding of these standards and enhance foreseeability in their interpretation.

For this reason, the conceptual framework themselves have no force of law. However, the ASIC act allows the AASB to make accounting standards under the force of law under section 334 of the Corporations Act  (Pounder, 2009).

The accounting standards themselves dictate that when a specific standard is not available on a particular matter or the existing standards do not provide sufficient guidance regarding that matter, the conceptual framework is to be used in a prudent manner to work out a reasonable solution to the problem which does not contradict the guidance of another standard  (Pounder, 2009).

Thus the accounting standard AASB 108, which has the force of law pursuant to the Corporations Act , requires management to refer to the IASB/AASB conceptual framework where a specific issue is not addressed in a particular accounting standard (Mills, 2017). That is, in the absence of a specific accounting standard to address an issue, reporting entities must be guided by the IASB/AASB conceptual framework.

 

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Week 3: Agency Cost

Agency Cost of Equity

The agency cost of equity arises because of the difference in interests between the shareholders and the management. As long as the management’s interests diverge from that of the shareholders, the shareholders will have to bear this cost  (Cater-Steel, 2008). Management may be tempted to take suboptimal decisions that may not work towards maximizing the value for the firm. Any measures implemented to oversee and prevent this will have a cost associated with it. So, the agency costs will include both, the cost due to the suboptimal decision, and the cost incurred in monitoring the management to prevent them from taking these decisions  (Cater-Steel, 2008).

 

Agency Cost of Debt

The agency cost of debt arises because of different interests of shareholders and debt-holders. Assume that the management is in favour of the shareholders (Cater-Steel, 2008). If so, the management can in many ways transfer the wealth to the shareholders and leaving debt-holders empty handed. Anticipating such activities, the debt-holders will take various preventive measures to disallow management from doing so. The debt holders may do so in the form of higher interest rates to protect themselves from the losses. Alternatively, they may impose restrictive covenants  (Cater-Steel, 2008).

No, all opportunistic actions cannot be eliminated/reduced. The opportunistic perspective  relies upon the assumption that individuals are always motivated by their own self-interest (at the possible expense of others) and once they enter contractual arrangements they will subsequently capitalize upon any flexibility within the contracts to cause any related pay-offs to be more favourable to themselves (again, at the expense of others)  (Cater-Steel, 2008). Because it is not practical to attempt to write ‘complete contracts’, there will always tend to be some degree of flexibility in most agreements and it anticipated that the opportunistic manager will uncover such flexibility  (Cater-Steel, 2008).

Moreover, the cost to benefit analysis reveals that efforts to completely reduce all opportunistic actions come with a considerable amount of cost and even so, fail to successfully cover all loopholes and exploits that may exist in said contracts. For this reason, it is not possible nor feasible to fully eliminate all opportunistic behaviors in an entity  (Cater-Steel, 2008).

 

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