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Capacity to adapt in Continuous Contemporary Accounting

Q1:Chambers' theory of accounting, Continuously Contemporary Accounting, relies on the notion of the ‘capacity to adapt’. What is the capacity to adapt and how is it determined

Q2: In 2006 the Australian Government established an inquiry into corporate social responsibilities with the aim of deciding whether the Corporations Act should be amended so as to specifically include particular social and environmental responsibilities within the Act. At the completion of the inquiry it was decided that no specific regulations would be added to the legislation, and that instead, ‘market forces’ would be relied upon to encourage companies to do the ‘right thing’ (that is, the view was expressed that if companies did not look after the environment, or did not act in a socially responsible manner, then people would not want to consume the organisations ‘products, and people would not want to invest in the organisation, work for them, and so forth. Because companies were aware of such market forces they would do the ‘right thing’ even in the absence of legislation).

You are required to explain the decision of the government that no specific regulation be introduced from the perspective of:

(a)public interest theory  

(b)capture theory  

(c)economic interest group theory of regulation 

ANZ denied yesterday it was overcharging customers after reporting a 71 per cent increase in credit card profits.The bank, which only last week responded to critics by announcing a new customer charter, also reported a 93 per cent profit rise from mortgages.For the first time the public gained an insight into the profitability of a leading bank's separate divisions. This was because ANZ disclosed its results in a more detailed way.

The overall net profit for the March half was $895 million, a record for the bank and a pointer to more record-breaking profits by the big four banks this year.ANZ said the rise in credit card profits to $58 million for the half year was due to slightly higher margins, increased market share and new fees. In mortgages, the almost doubling of profits to $112 million reflected growth in sales and better margins in an environment of falling interest rates.

The result comes just a week after the bank unveiled a plan to tackle community concern about banking standards, including a new customer charter, fee-free over-the-counter banking for people over 65 and the appointment of a senior customer advocate.ANZ's chief executive, Mr John McFarlane, defended the credit card profits.He said profits would come under pressure as a result of the Reserve Bank plan to cut fees charged to merchants.In the mortgages arena, consumers could not complain because competition meant profit margins were a fraction of what they were years ago.‘The reality is these are fair businesses for the community. These are not unfair businesses and we are not getting unusual levels of returns,’ he said.

Mr McFarlane admitted the banks had been slow to recognise the depth of community concern, but the ANZ had ‘got the message’ and he hoped re-regulation of the banks was not required.‘It is true that politicians of all flavours have been concerned about banks and I think it has taken quite a while for that to hit us fair and square,’ he said.‘Whether we are going to be regulated or not we are going to have to do things differently.‘When you look at the policy positions of both parties we are almost operating in line with everything in these.‘If we behave properly, it should not be necessary but we understand the forces at work.’

The executive director of the Financial Services Consumer Policy Centre, Mr Chris Connolly, said: ‘The banks really are scrambling and the ANZ's actions have been great for some groups of consumers. But it's guaranteed we would not have got that if it was not an election year. If [consumers] are going to get any wins in banking it's going to be in the next 12 to 18 months.’The national secretary of the Finance Sector Union, Mr Tony Beck, said income from fees and charges had hit an all-time high and ANZ customers were paying more for fewer services.

‘Record bank profits are based on higher fees and fewer staff, so ANZ customers pay more for less service,’ he said. Year on year, ANZ's staff numbers fell by about 6000. There are now the equivalent of about 23 000 full-time staff members.The general banking operations, which manage all ANZ transaction accounts and deposit products, saw a small rise in earnings to $191 million as a result of higher fee income.

Required:

After reading the case study above, answer the following questions (be specific about the theories you are using when providing your answers)

(a)Why do you think the bank ‘unveiled a plan to tackle community concerns’

(b)What do you think motivates the government to take action against the banks

(c)The bank's reported profit seems to be an issue of concern. Do you think that community concern about the actions of the bank would be as great if the bank was not so profitable

 (d)Do you think that community concerns about the profits made by banks might motivate the banks to adopt accounting policies that reduce their reported profits Explain your answer. 

Capacity to adapt in Continuous Contemporary Accounting

Continuous contemporary accounting is a system that measures the value of organizational assets and liabilities by considering the current and fair cash price. This accounting system incorporates determination of company’s profit and loss with respect to the changes in transaction value in accordance with the present value. During the initial period, the accountants based on the historical cost method were using the concept of traditional accounting assuming the constant value of purchasing power and constant time value of money (Tudor and Mutiu 2016). However, in the recent and modern years, affect of inflation rates, instability in the exchange rates or price levels, technological advancements and social evolution challenged the accuracy of traditional accounting principles. Accordingly, several economists, accountants and business theorists incorporated development in the accounting principles to consider the changes as per the current price level (Bhopal 2016).

Continuous Contemporary Accounting, which was basically forwarded by the researcher and economist Raymond Chambers stated that the purchasing power of money involves continuous change as per the present financial economy. It has been stated that value of money is not constant but it changes constantly due to the various factors of economy that is inflation rates, exchange rates and time value (Rutherford 2016). Similarly, purchasing power of the money associates with constant change by considering time value of value since the value of money today is less than the value of money tomorrow. As the financial statements of an organization represent financial performance and financial position of the business activities during the current financial year, it is essential to incorporate the transaction values at fair and current value. The concept of continuously contemporary accounting theory relies on the notion of the ‘capacity to adapt’ the present changes related to the financial economy (Carmona, Ezzamel and Gutiérrez 2016).

‘Capacity to adapt’ refers to a system that incorporates adoption of changes in the existing system with respect to the changes in environment in which the system exists. Adaptive capacity associates with the functions of ecological systems, social systems and financial systems that provides current information and updated values to determine the appropriate position of the organizations. It is essential to incorporate the respective values to the systems and organizations to receive the successful value of changes in the climate by considering the resources and technologies (Guthrie and Parker 2016). While incorporating the accounting principles to prepare the financial statements and financial records it is essential to consider the updated factors so that the outcomes represents true and fair information. ‘Capacity to adapt’ changes as per the continuously contemporary accounting theory is determined by considering current economy structure, current inflation and exchange rates as well as the factor of present interest rates in relation to the investments (Christensen, Nikolaev and Wittenberg?Moerman 2016).

(a) Public interest theory 

Public theory incorporates an assumption of fragile economic market factors having a tendency of inefficient operation in favor of individuals by ignoring significance of the society. Accordingly, it has been noticed that in order to monitor the markets of the economy and financial values, intervention of the government is required. The public interest theory had been developed in the year 1932 with a belief to prepare the accounting regulations for the benefit and interests of public to eliminate the inefficient practices (Raj and Roy 2016). Accordingly, it has been noted that the government provides banking regulations for the benefit of society together with the efficient allocation of the resources. The government stated the introduction of specific regulation for considering the organizational values in order to disclose the relevant business information with respect to financial, economical, environmental and social factors (Müller 2014).

Australian government's decision not to amend the Corporations Act for social and environmental responsibilities

Capture theory incorporates regulations of government in connection with the industry it is associated with such regulations. As per the concept of capture theory, government contended the introduction of regulations as per the laws and economies so that the principles provide social benefits to the industrial sector. The purpose of capture theory involves protection to the public and society from the industrial actions so that the organizations can act for the best interest of the society as well as industry (Lee, Bishop and Parker 2014). Corporate social responsibility has been a major business factor that every organization is required to follow which indicates the presentation of financial information in true and fair view. It can be said that if there are no governing regulations, it may happen that organizations fail to provide relevant disclosures and transactional values that affect the accountability and transparency of the business information.

This theory involves accounting regulations together with the policies that are controlled and affected by the demand and supply factors within the economy. Considering the economical factors, it has been noted that the government is concerned for regulation on economical supply factors whereas the group of interests regulates the economical demand factors. Accordingly, it can be said that the government introduced specific regulations for industries with respect to the recognition of transactional values; subsidies and other price variables so that the economical goals can be achieved. Therefore, in view of the economical benefits and advantages of regulatory standards, government introduced specific regulations to maintain the corporate social responsibility (Nobes, 2015).

(a) Unveiling of plan by the bank to tackle community concerns

The present case involves denial of ANZ bank for overcharge to the customers post its reporting the increase of profits from credit cards valued to around 71% together with the rise in profit of mortgages by 93%. Accordingly, the community concern came out with the factors of unfair business means, return levels and re- regulation of banking norms. It was noted that the overall net profit of the bank revealed $895 million for the semi- annual period ended in March. However, the bank contended that increase in the profit margin in the credit card account was because of the higher margins as well as increase in the market share.

Considering the given situation, it can be said that the bank unveiled a plan in order to tackle the concerns of community to present the factors in more positive way. The services that are offered by the bank associates with essential factors that provides opportunities resulting in customer’s exploitation. Further, it has been noted that the regulations of banking services deal with the consumer levels that associates with high- level factors which results in making large profits. One of the major factors of the banking service incorporates fluctuation of interest rates that exist between high level and low level that are associated with the inflation rates controlled by the government (Gans and Ryall 2017). It has been observed that the governmental regulations have been constituted to manage the overall economy to consider inflation rate and not for the individual banks since the objective of government aims to provide benefits to the society.

ANZ's reported profit and community concerns about banking standards

In the given case, ANZ bank reflected profits with higher margin in terms of credit card transactions and overall banking services. The chief executive of ANZ bank contended that the reason for high profit margin was due to the declined rate of fees charged to the industrial merchants under the regulations of Reserve Bank. Moreover, factors of interest rates fluctuations between high and low level, the banking organization developed bad reputation towards the public and society. It has been stated that the voluntary disclosure made by the bank to the society the bank tried to “win over” the customers in an attempt to demonstrate their concerns. The situation covers the concept of positive accounting theory that involves explanation and prediction by organizational group to make interactions with each other (Koopman, Mitchell and Thierer 2015). Therefore, the bank unveiled the plan to eliminate the issues of political costs and other regulations that are imposed on the banking organization.

As the primary objective of government for constituting specific regulations is to provide benefits to the society and industrial sector, it is significant to monitor the organizational actions in terms of financial and non- financial factors. It is essential for the companies to disclose the necessary business information for the use of stakeholders including government that helps in taking business and investment decisions (Rowley, Tollison and Tullock 2013). In the present case, it has been observed that the ANZ bank reflected increased net profit with high profit margin that included high profits from credit card transactions. Accordingly, the concerned community monitored the business structure of the bank along with the financial information recognized in the books of accounts.

Further, it has been noted that a large number of public vote involves business deal or investment in at least one big Australian bank that is Commonwealth, NAB, ANZ or Westpac. In addition, it has been observed that several banking regulations incorporate external political costs that are imposed on the bank industries. In the present situation, chief executive of ANZ bank contended that the reason for higher profits is due to declined fees structure for the merchants, which assist in receiving higher business transactions and consequently higher profit margin. On the contrary, as per the opinion of society it has been noted that due to high profit margin, baking services reflected negative impression while the political groups tries to target the business of banking sector.

The situation involves a concept of economic interest group theory since the involvement of political and economical factors regulate the demand and supply variables and eventually affect the profit margin of the organization. In case of ANZ bank, it was noted that the bank incurred unexpected profit margin reflecting sales growth as well as better margin during economic period when rate of interests representing declining value.

Therefore, in order to monitor the business activities of ANZ bank, with respect to the appropriate recognition of asset values, incomes and business costs. The government in this case took action against the bank to measure the correctness of applicable accounting regulation so that the correct amount of profitability can be determined. As the banking sector reflects higher profitability, large number of consumers experience major financial burden with respect to the services on mortgage, loan and other financial services (Ekelund Jr and Hébert 2013). Therefore, the financial imbalance structure within the present economy motivates the government to take actions against the bank for reporting profits at higher margin.

The primary objective of any organization involves earning profits by maintaining sustainability growth as per the current market structure. However, the primary objective also involves maintaining the corporate social responsibility, which associates with the operation of business activities for the benefit and interests of social and public individuals. Therefore, several accounting regulatory bodies have constituted principles and standards to recognize and report the business transactions considering the economical factors on inflation rate, exchange rate, purchasing power of money (Radebaugh 2014). Accordingly, in the present case, ANZ bank reflected higher profit margin constituting the overall business as well as the credit card business transaction, which stood a record compared to the profit margin earned by other banks of the country. The primary objective of government regulations is to determine the transparent representation of financial information indicating whether the organization has reflected correct value of profit.

Therefore, as the profit margin of ANZ bank reflected unexpected higher balance as compared to the other banking sector, it can be said that there may be several misrepresentations present in determination of profit amount. Considering the concept of capture theory, regulation of government relates to the specific industry that is associated with the economic system, it can be said that profit margin of ANZ bank reflects high profit, which is not in line with the profit of banks in the same sector. Therefore, in order to verify the correctness of the financial information recognized, it is essential to check the appropriate application of accounting principles and relevant disclosures as per the regulatory standards.

On the contrary, in case the profitability of the bank reflected lower margin that is in line with the profit balance of other banking organizations, then the actions of community concern might not have been as great. This is because the community concern would have assumed that the presentation of financial information of the bank and necessary disclosures are correct as well as per the regulations of accounting standards (Hermanson, Ivancevich and Edwards 2016). When the profit margin is in line with the economical interest rate and inflation rate, it becomes easy to monitor the appropriateness of the accounting disclosures and financial information.

Accounting policies are detailed principles, procedures, rules and regulations required to be implemented by the management of the company to prepare the financial statements. The procedures of accounting records involve methods, systems of measuring accountability and process of presenting accounting disclosures for the benefit of users. Accounting polices refer to the process and manner in which the company perceives the regulations and accounting principles (Storozhuk 2016). The objective and primary goal on adopting the accounting principles associates with the recognition and presentation of financial information provide true and fair view for the benefit of stakeholders. Therefore, it is essential for the organizations to record the financial information to determine the financial performance and position in transparent and accountable manner for the interests of the users (Craig, Smieliauskas and Amernic 2014).

Considering the present case of ANZ bank, community concern monitored the banking regulations and reported information as the profit margin has been very high. The community concern contended verification and examination on respective fees, bank charges and other financial charges. However, the chief executive officer of the bank stated that increase in profit margin was due to lower fees and interest charges by Reserve Bank towards the merchants. On the contrary, on applying the verification and monitoring process, it has been noted that the reported profit of the bank was high compared to that of the profits of other banks in the same industry.

In view of the public accounting theory, it has been observed that it is essential to incorporate financial information, asset valuation and liability valuation as per fair and current market structure (Dong, Lan and Zhong 2014). Accordingly, adoption of accounting policies requires recognition of financial information by considering the prudence level, going concern and fair market value for the benefit of stakeholders. Therefore, in the present situation, the community concern involves the factors of public interest as the reported profit of the bank was high while the profit margin of other banks reflected relatively lower margin. Hence, it can be said that the disclosure of appropriate performance information will be determined by considering the accounting principles and policies that would include reduction in reported profits.

Reference List

Bhopal, R.S., 2016. Concepts of epidemiology: integrating the ideas, theories, principles, and methods of epidemiology. Oxford University Press.

Carmona, S., Ezzamel, M. and Gutiérrez, F., 2016. Accounting history research: traditional and new accounting history perspectives. De Computis-Revista Española de Historia de la Contabilidad, 1(1), pp.24-53.

Christensen, H.B., Nikolaev, V.V. and Wittenberg?Moerman, R., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of Accounting Research, 54(2), pp.397-435.

Craig, R., Smieliauskas, W. and Amernic, J., 2014. Assessing conformity with generally accepted accounting principles using expert accounting witness evidence and the conceptual framework. Australian Accounting Review, 24(3), pp.200-206.

Dong, M., Lan, T. and Zhong, L., 2014, September. Rethink energy accounting with cooperative game theory. In Proceedings of the 20th annual international conference on Mobile computing and networking (pp. 531-542). ACM.

Ekelund Jr, R.B. and Hébert, R.F., 2013. A history of economic theory and method. Waveland Press.

Gans, J. and Ryall, M.D., 2017. Value capture theory: A strategic management review. Strategic Management Journal, 38(1), pp.17-41.

Guthrie, J. and Parker, L.D., 2016. Whither the accounting profession, accountants and accounting researchers? Commentary and projections. Accounting, Auditing & Accountability Journal, 29(1), pp.2-10.

Hermanson, R.H., Ivancevich, S.D. and Edwards, D., 2016. Accounting Principles: A Business Perspective (Financial) Chapters 1-8.

Koopman, C., Mitchell, M.D. and Thierer, A.D., 2015. The sharing economy and consumer protection regulation: The case for policy change.

Lee, T.A., Bishop, A. and Parker, R.H., 2014. Accounting history from the Renaissance to the present: A remembrance of Luca Pacioli. Routledge.

Müller, J., 2014. An accounting revolution? The financialisation of standard setting. Critical Perspectives on Accounting, 25(7), pp.539-557.

Nobes, C., 2015. Accounting for capital: the evolution of an idea. Accounting and Business Research, 45(4), pp.413-441.

Radebaugh, L.H., 2014. Environmental factors influencing the development of accounting objectives, standards and practices in Peru. The international Journal of Accounting Education and Research. Urbana, 11(1), pp.39-56.

Raj, S.K. and Roy, S., 2016. Accounting Theory: An Ethical Perspective of Real Life Scenarios. International Journal of Business and Social Research, 6(10), pp.47-55.

Rowley, C., Tollison, R.D. and Tullock, G. eds., 2013. The political economy of rent-seeking (Vol. 1). Springer Science & Business Media.

Rutherford, B.A., 2016. Articulating accounting principles: Classical accounting theory as the pursuit of “explanation by embodiment”. Journal of Applied Accounting Research, 17(2), pp.118-135.

Storozhuk, T., 2016. Accounting Policies of Parent (Holding) Company and Its Subsidiaries. Accounting and Finance, (3), pp.38-42.

Tudor, A.T. and Mutiu, A., 2016. Important stages in the development of Romanian accounting profession (from 1800 up to now). De Computis-Revista Española de Historia de la Contabilidad, 4(6), pp.183-199.

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