The Impact Of Accounting Policy Choices On Financial Results: An Essay Review.

1. Explain, with reference to the research literature, how accounting policy choices can affect financial results?

2. Why did ASIC choose to focus its investigation on material disclosures of decision useful information such as assumptions supporting accounting estimates, significant accounting policy choices? Explain your answer with reference to the research literature. 

3. Explain, with reference to the research literature, why CPA Australia, with reference to ASIC, believes that ‘a suitable revenue recognition policy’ requires the ‘appropriate application’ of ‘the timing of recognition’ therefore ‘reflecting the substance of underlying transactions’?

4. Explain and analyze the extent to which the revenue recognition criteria in AASB 118 / IAS 18 Revenue and AASB 15 / IFRS 15 Revenue from Contracts with Customers meets the ASIC and CPA requirements of an ‘appropriate application’ of ‘the timing of recognition ‘of revenue and therefore represents the substance of underlying transaction.

5. Review the annual financial reports of a company of your choice for the reporting years 2014, 2015 and 2016. Analyze how revenue was recognized in each of the reporting years, and explain any variations in the firm’s reported revenueover this period by examining the accounting policies section in the notes to the accounts with regards to AASB 118 / IAS 18 Revenueand AASB 15 / IFRS 15 Revenue from Contracts with Customers.

6. Explain the choices of accounting policies with regards toAASB 118 / IAS 18 Revenue and AASB 15 / IFRS 15 Revenue from Contracts with Customers by reference to the relevant accounting research literature on factors influencing firms’ accounting policy choice (e.g. Positive Accounting Theory). 

Accounting Policy Choice as a Tool to Affect Financial Results

This article will emphasize on the issues of choice of accounting policy with disclosure of material impact for the companies as instructed by the authorities like the Corporation Act 2001 and Australian Accounting Standard Board. The choice of accounting policy is a major issue as this choice can dictate the issue of prudence for the stakeholders. There are different identities in the form of Australian Securities Investment Commission or ASIC, CPA of Australia, etc. who are responsible for proper execution of this accounting practice as per the revised accounting standards to comply with the International Accounting Standard Board or IASB with its International Financial Reporting Standard or IFRS. In the following article different related questions are to be discussed as the research topic with reference to the latest development and subsequent actions taken by the regulatory authorities.  

Accounting policy choice as a tool to affect financial results: As per Accounting alert 2007/09 AASB 2007-4 – New accounting policy choices, reduced disclosure of May 2007 by Deloitte the discussion are made on how accounting policies can have the impact on financial results.  Australian Accounting Standard Board had introduced the concept of accounting policy choices. It is being introduced for the reason that all of the business entities of Australia have made transition to A-IFRS and that had resulted to odd consequences for them. The Australian entities had faced several restrictions to adopt the available accounting policy they wished to adopt, which were not available in transition period, unlike the overseas entities (Iasplus, 2008).

AASB standard 2007-4 had made the concept of adopting new accounting policies clear by the amendments applied as a voluntary change under AASB 108 for Accounting Policies, Changes in Accounting Estimates and Errors.  AASB 108 only allows adopting voluntary changes in accounting policies if the result of that change brings the reliability in financial reporting with more relevance in presentation of financial information of the entity, with respective performance and cash flow.  It may be easier to illustrate in some cases, but also be difficult for other cases related to respective tasks. Hence the entities who wish to change their accounting policies with the implementation of AASB 2007-4 need to be careful about this step by taking into consideration the probable alternatives and to ensure justifications for changes properly authorized with appropriate documentation (Legislation, 2007).

There are several factors to consider for justifying the upcoming change in accounting policy which include:

1. The nature of the operation and the transactions of the entity with the optimal provision of presentation of the same in the financial report;
2. Previous declaration about the available option under IFRS which is not in A-IRRS would be more appropriate approach for the entity;
3. If such other available provision of accepting approaches had been adopted by the respective entity for the reporting framework which the entity had adopted for reporting in the form of US-GAAP or actual IFRS;
4. The accounting policies, as adopted by the business entity of similar industries  , has reporting standard under IFRS globally;
5. The terminology of the relevant standards where introduction of new standards are implemented like the joint venture accounting amendments which is alternative method of existing equity accounting policies;

Reason for ASIC Investigation of Material Disclosure Assertion

The literature, Accounting alert 2007/09 AASB 2007-4 – New accounting policy choices, reduced disclosure of May 2007 by Deloitte has also opined that Deloitte does not believe that the initial views of AASB regarding the new options are not correctly applicable in the context of Australian entities with authority from the parental body which means that the basic views of AASB is to prohibit any changes in existing accounting policy of the business entities.   Lastly, the entities, willing to change their accounting policies have to assess the applicability of the same as per the continuous work program of International Accounting Standard Board or IASB. This program is running with the objective of mitigating many of the present options under IFRS. In this context the analysis of cost benefit related to changed accounting policies requires to be predicted for any upcoming changes in accounting standards, even though such changes could not be effective before 2009. The requirements of disclosure are to be made under AASB 2007-4 which is covered under AASB 108 in case of early adoption of Amending Standard or not (Iasplus, 2007).

As per the article Application of Tiers of Australian Accounting Standards published by AASB Standard with heading of AASB 1053 dated June 2010, it is mentioned in the chapter Basis of Conclusions as per Appendix BC which has formed part of AASB 1053. In that Appendix with sub-heading -Reasons for Not Adopting IFRS for SMEs covers the area of choice of accounting policies through the sub section BC 68 and BC 73.

BC 68 had emerged that there were differences in the tiers of hierarchy for determination of accounting policies under IFRS for SMEs with full implementations of IFRS in case of absences of certain requirements. It was also observed that the adoption of IFRS by hierarchy of SMEs had the tendencies to lead to dissimilarities in the area of choosing accounting policies by different entities. This is due to given precedence to the domain of Conceptual Framework over full application of IFRSs as the proper source of guidance to determine accounting policies if certain requirements were not present.  

BC 73 had discussed the role of IFRS for SMEs to assess the suitability of it’s and to meet 2 tier requirements. The research had produced reflective studies about the shortcomings of adoption of IFRS by SMEs of Australia for the below mentioned reasons as referred to flexibility of adoption of accounting policies:

1. Some of the removed accounting policies would be best suitable options for the Australian SMEs;
2. The subsidiaries of the SMEs have to opt for adjustment in accounting policies for consolidation process when the parent entity follows full IFRs(Aasb, 2010).  

Suitable Revenue Recognition Policy and the Timing of Recognition

With the above discussion referred to different literatures, it is observed that choice of financial policies has substantial ability to change the financial results when the same is in-force in the form of IFRS.

Reason of ASIC investigation for material disclosure assertion: As per 16-428MR dated 08.12.2016,ASIC has instructed the companies for making provision of information related to financial reports which should carry meaning with its usefulness to ensure before the preparation of reports for the year ended on 31.12.16. This notification had been published on 08.12.16 by ASIC.

This notification had emphasized on the adoption of realistic valuation of the assets, proper accounting policies fit for the company with provision of more efficient level of communication made of that information. This announcement is focusing on the domains of financial reports of ASX listed entities and other entities serving public services with numbers of stakeholders as ASIC was keen to know the basic areas of problems to be addressed. 

Asset Value: ASIC has emphasized on this issue with encouragement to the preparers of financial reports and subsequent auditors for ensuring careful consideration of the requirement of impairment of goodwill, inventories and other list of assets.  Special emphasis will be given on the impairment practice of asset valuation as it is observed that calculation of impairment is based on unrealistic basis of cash flows and assumptions and at the same time there are mismatch of material found between the process of testing of assets’ impairment and the cash flows.  Attribution of fair value for financial assets should also follow appropriate models along with inputs and assumptions (Asic, 2016).

It is also to emphasize to concentrate on the valuation of assets of the extractive entities and mining support services along with bvalues of assets which may get affected by digital disruption.  

Accounting Policy Choices: It is the prime responsibilities of the directors and the auditors to find out the way by which the choice of accounting policies can disturb the reported financial results. The specific factors affecting such would include off-balance sheet arrangements, recognition of revenue, featured expensing costs which should not be taken into consideration while valuating assets, accounting of tax, as well as pricing and rebates of inventory. 

Material disclosure: The surveillance of ASIC is continuing to focus in material disclosures of information which are considered useful to stakeholders like investors and others who use financial reports. Material disclosure includes the fields of assumption which support accounting estimates, choice of specific and significant accounting policies and the effect of new reporting requirements.  ASIC will not allow to pursue disclosures proved to be immaterial with unnecessary addition to confusion related to financial reports. ASIC, at the same time, encourages efforts which can do effective communication with more clarity in the financial reports. 

Extent of Revenue Recognition Criteria in AASB 118 / IAS 18 and AASB 15 / IFRS 15

The role of directors: Although it is never considered that the directors would be expert in accounting, it is also emerged at the same time that the directors should ask for explanation with necessary advice for the management of financial information to support with. At the same time they should act proactively to ensure accounting estimates should be appropriate, violation of which should be challenged along with respective treatments found in the financial reports. They should ask for the advice when any specific treatment about financial information is not at par with their understanding of the substance of an arrangement.  The related subjects are more enhanced through Sheet 183 of ASIC information related to Directors and Financial Reporting and Sheet 203 related to impairment of non-financial assets: Materials for directors.

Enhanced audit reports: The auditors of listed entities of ASX will have to issue enhanced audit reports from the financial years ending on or after 15the December, 2016.  This report will give guideline to find out key audit matters, which are significantly to be attracted attention of auditors. Preparers and directors are be mindful to ensure that those matters may related with the estimates of accounting and significant choice of accounting policies which has the addition requirement of specific disclosure in accounting report along with the matters related to the business which are to be covered in the Operating and Financial Review.  

Client monies: It is the prime duty of licensees of Australian financial services to ensure that client monies should be held in different, designated accounts of trust bank. It is also to be ensured that monies are too applied as per instruction of clients and the prerequisite of Corporation Act. ASIC also reminds auditors about the significance of audit testing to get the assurance that the balance sheet items, assets and liabilities, should be materially stated with the certification that the monies are properly dealt with and the deviation of these compliance are properly reported as per the Act and ASIC Regulatory Guide 34- Auditors Obligations: Reporting to ASIC (Asic, 2016).

CPA Australia regarding Revenue Recognition Policy: CPA of Australia has endorsed the observations and related actions suggested by ASIC by their publication 16-428MR dated 8^th December, 2016 to appreciate the belief that  ‘a suitable revenue recognition policy’ requires the ‘appropriate application’ of ‘the timing of recognition’ therefore ‘reflecting the substance of underlying transactions’. With its notification on the subject of the above, CPA has expressed their felling that the latest suggestions of ASIC to improve financial reporting is meant for covering the different focus areas which were remained on the target area for some period in recent past.  This list is inclusive of recognition of assets with their impairment, choice of accounting policies recognition of revenues and expenses and respective disclosure including disclosure of new accounting standards.

Analysis of Company's Financial Reports for Revenue Recognition

ASIC had made their notification highlighting the duties of directors regarding the information which are provided through financial reports. AISC had recommended that even if the directors need not to be accounting experts they should seek for professional advice and explanations applied in perspective of accounting treatments and estimations.

There are different AASB standards which are to be adhered to for different purposes:

• AASB 13 for fair value measurements of assets
• AASB 10 for consolidated financial statements
• AASB 11 Joint Arrangements
• AASB 12 for Disclosure of Interests in other entities
• IFRS 15 for treatment of recognition of Revenue from Contracts and customers

It is the duty of the preparers and auditors that they should give due attention for the above issues as per guideline fixed by respective AASB standards for different aspects.  In order to help the stakeholders understanding the financial presentation of reporting, ASIC has taken initiatives as per  global evolvement of reducing the unnecessary complexity of the reporting and had taken sterns steps to  mitigate the scope of unwanted confusion in this aspect.

Being a responsible partner of the entire activity, CPA Australia has endorsed the steps and instructs its members to comply with the necessary requirements as prescribed by ASIC (Cpaaustralia, 2016).   

Revenue Recognition – Old and Latest Standards: Refer to criteria of revenue recognition with erstwhile AASB 118 and present version of AASB 15, IASB has introduced the new standard of revenue recognition from contracts and customers on 28^th May, 2014 as IFRS 15. After assessing the implication of IFRS 15, AASB had introduced new standard for revenue recognition through its new standard AASB 15 in December 2014 which will replace the erstwhile standards AASB 118 –revenue, and AASB 111 – construction contracts with other interpretations related to revenue. This new standard is to be implemented from 1^st January, 2017 with the effective date of 1^st July, 2017 for the entities whose annual closing of accounts take place in June. AASB has not modified IFRS 15 for its application and incorporated it with the inclusion of certain disclosure requirements for the business entities who are applying for Reduced Disclosure Requirements to the Australian Accounting Standard.  This AASB 15 can be applicable with early adoption.

ASIC has recognized its prime focus area in this aspect for 31^st December, 2014 and has urged that it is the primary and obligatory duty of the directors and the auditors to ensure disclosure of the effect of future requirements for recognition of revenue.  It was also stated that entities should make proper assessment of the impacts of application related to AASB 15 in their concerned industries from a contract with customer. These observations are endorsed by CPA Australia so far proper recognition of revenue with customer and contracts are considered. There are certain areas of concern about the implication of AASB 15 related to manufacturing industry which are under strong vigilance of ASIC:

• Volume discounts
• Volume rebates
• Set up fees
• Payments to customers
• Payments received in advance(Deloitte, 2015).

Factors Influencing Accounting Policy Choice

1. Review the annual financial reports of a company of your choice for the reporting years 2014, 2015 and 2016. Analyze how revenue was recognized in each of the reporting years, and explain any variations in the firm’s reported revenue over this period by examining the accounting policies section in the notes to the accounts with regards to AASB 118 / IAS 18 Revenue and AASB 15 / IFRS 15 Revenue from Contracts with Customers.

Adaption of Revenue Recognition- Academies Australasia: Refer to review of annual report of ASX listed company regarding application of AASB 118 and AASB 15 for recognition of revenue from contracts with customers, ACADEMIES AUSTRALASIA GROUP LIMITED has been selected to analyze its financial reports for the Financial Year 2014, 2015 and 2016. The outcome is as follows:-

2014

In the part of Significant Accounting Policies as per declaration by the Board, implication of AASB 118 had been found for recognition of fair value of assets and liabilities as per financial guarantees as per cumulative amortization. Revenue in the form of guaranteed fee is also recognized as per AASB 118 (Academies, 2014).   

2015

The consolidated entity has gone for early adoption of AASB 15 from 1^st July, 2014 for recognition of income as per the standard. This change of standard follows analysis of the contracts of the group with the customers refer to the obligation and rights related to these contracts with the detection of possible risk related to subsequent payments comprising the revenue generation of the group. This adoption has direct impact in the comprehensive income of the group with reduction and increment under different heads resulting to attributable profit decrement in Profit and Loss Account with subsequent decrease in owners’ equity for 2015 (Academies, 2015).

2016

Since 2015 the consolidated entity had adopted AASB 15 for recognition of their income from contracts with customers. This change is instrumental to follow the analysis of contracts of the group with its customers related to different areas which they have to consider for right application of this standard. The applications are in the fields of general contractual services with performance obligations with assessment of recognition of revenue from tuition fees with the cases for which fees are to be refunded for some technical difficulties.  The nature of tuition fees are recognized as fees received for training. This adoption of AASB 15 has made provisions for more relevant information related to delivery of service and transfer of respective risk related to service and this early adoption has not impact on cash flow statement of the company (Academies, 2016).  

Accounting policy choice – Revenue from Contract with Customers: For compliance of recognition of revenue, assets and liabilities as per AASB 15 replacing erstwhile AASB 118, AASB notification of July 2015 has defined the need of change in accounting policy may be required to ensure a third statement of financial position as at the start of the preceding financial period along with minimum comparative financial statements as per requirement depicted in the paragraphs 40A to 40D, 41 to 44 in case of following situations:

40A

• Application of retrospective restatement of items or reclassification of items in the financial statement;
• The retrospective restatement or the reclassification proves its material impact regarding the information in the statement of financial position at the start of the preceding period.

40B

These situations generates requirement of presentation of three financial statements of financial position related to time period as at the end of the present period, at the end of the preceding period and the beginning of the preceding period.

40C

In case of requirement of presentation of additional statement of financial position as per 40A, compulsory disclosure of information is needed as per paragraphs 41 to 44 and AASB 108 with the exception of not presenting the opening statement of financial position as at the beginning of the preceding period.

40D

The date of opening statement of financial position should be at the beginning of the preceding period irrespective of presentation of comparative information of financial statement for earlier periods.

41

In case of change of accounting policy choice, reclassification is needed for comparative statement if not the same is impracticable.  Reclassification is to be complied with including as at the beginning of the preceding period:

• The type of reclassification
• The amount of reclassified items
• The reason for the reclassification.

42

In case of impracticability of reclassification of comparative amounts, necessary disclosure is required for:

• Reason behind non classification of the amounts
• Probable nature of adjustments in case of reclassification of amounts.

43

It is to ensure enhancement of inter-period comparability of financial information for perfect economic decision to get the best result of predictions.

44

AASB 108 is taking care of the adjustments to comparative information which are needed in case of change of accounting policy or for correcting any error.

Keeping the above in consideration, change of accounting policy related to adoption of AASB 15 from AASB 118 is to be strictly followed as per guideline specified by AASB (Aasb, 2015).

Conclusion

From the above discussion it was concluded that the regular amendment of accounting standards globally and regionally are made in order to ensure more securities to the stakeholder. It is the duty of the authoritative entities to ensure that proper compliance of the standards are to be made in order to ensure prudence of financial reports as specified in the standards. This article had emphasized on the critical issues of the accounting practice of Australia with the role of ASIC and CPA to ensure that the business entities are following the same in respect of accounting policy choice, revenue recognition and material disclosure with featuring the same in the annual financial report.

References: 

Aasb, 2010. Application of Tiers of Australian Accounting Standards. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB1053_06-10.pdf [Accessed 19 May 2017].

Aasb, 2015. Presentation of Financial Statements. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 19 May 2017].

Academies, 2014. Annual Report. [Online] Available at: https://www.academies.edu.au/Annual%20Reports/2014AnnualReport.pdf [Accessed 19 May 2017].

Academies, 2015. Annual Report. [Online] Available at: https://www.academies.edu.au/Annual%20Reports/2015AnnualReport.pdf [Accessed 19 May 2017].

Academies, 2016. Annual Report. [Online] Available at: https://www.academies.edu.au/Annual%20Reports/2016AnnualReport.pdf [Accessed 19 May 2017].

Asic, 2016. 16-428MR ASIC calls on preparers to focus on useful and meaningful financial reports. [Online] Available at: https://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-428mr-asic-calls-on-preparers-to-focus-on-useful-and-meaningful-financial-reports/ [Accessed 19 May 2017].

Asic, 2016. 16-428MR ASIC calls on preparers to focus on useful and meaningful financial reports. [Online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-428mr-asic-calls-on-preparers-to-focus-on-useful-and-meaningful-financial-reports/ [Accessed 19 May 2017].

Cpaaustralia, 2016. Familiar look to ASICs focus areas for 31 December financial reports. [Online] Available at: https://www.cpaaustralia.com.au/media/familiar-look-to-asics-focus-areas [Accessed 19 May 2017].

Deloitte, 2015. Assurance & Advisory Services. [Online] Available at: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-monthly-roundup-090115.pdf [Accessed 19 May 2017].

Iasplus, 2007. New accounting policy choices, reduced disclosure. [Online] Available at: https://www.iasplus.com/en/binary/au/2007-09.pdf [Accessed 19 May 2017].

Iasplus, 2008. Financial Reporting. [Online] Available at: https://www.iasplus.com/en/binary/au/0712whatsnew.pdf [Accessed 19 May 2017].

Legislation, 2007. AASB 2007-4 - Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments - April 2007. [Online] Available at: https://www.legislation.gov.au/Details/F2007L01669/Explanatory%20Statement/Text [Accessed 19 May 2017].