Issues In Field Of Accounting Of Companies Essay

Question:

Discuss About The Issues In Field Of Accounting Of Companies?

Answer:

Introduction

The present study provides a clear understanding about the contemporary issues in the field of accounting of the companies. In order to carry on with the study, two-major Australian companied from energy is taken into consideration. They are BHP Billiton and Australian Worldwide Exploration Limited. BHP Billiton is one of the major Anglo-Australian multinational energy companies that is headquartered in Melbourne, Australia. The major products and services of the corporation are iron ore, coal, petroleum, copper, natural gas, nickel, uranium and others (bhp.com 2017). On the other hand, Australian Worldwide Exploration Limited (AWE) is a major Australian dynamic company and the focus of the organization is to provide oil and gas opportunities. AWE is based in Sydney, Australia (awexplore.com 2017). Both BHP Billiton and AWE are listed in Australian Stock Exchange (ASX). Different stages of this report compare and contrast various financial aspects of these two companies. There are some basic requirements that the businesses must fulfill, there are some basic rules, and regulations that the companies must complied with. This particular report has a significant role to play in highlighting all these areas for the companies.

Compliance of Annual Report with AASB

It is required for all the Australian companies to comply with all the principles and standards of Australian Accounting Standard Board (AASB). In case of BHP Billiton, it can be seen that the annual reports of the company is well complied with the rules and regulations of AASB. According to the annual report of 2016, the consolidated general purpose financial report of the company has been made in accordance with Australian Corporation Act 2001. All the financial and accounting works of the company has been done as per the norms and regulations of International Financial Regulatory System (IFRS) (bhp.com 2017).

In case of AWE, as per the latest annual report of the company, all the consolidates financial statements and general purpose financial statements have been prepared as per the principles and standards of AASB. At the time of development of all these financial statements and reports, AWE uses to follow the standards of Corporation Act 2001. The consolidated balance sheet of the company has been developed with accordance to the principles and standards of IFRS. Thus, based on the above analysis, it can be seen that both BHP Billiton and AWE follows all the principles and standards of AASB, IFRS and Corporation Act 2001 at the time of preparation of financial statements (awexplore.com 2017).

Prudence

Prudence is a major accounting concept and it is also known as conservatism principle. According to the principles of prudence, the accountants of the business organizations needs to record the liabilities and expenses at the time of their occurrence; but they need to record the revenues only after their realization (Barker 2015). In the recent years, the concept of prudence has become vastly popular among the Australian companies. The main aim of prudence is to address the disparities that can be seen in the process of corporate reporting. Thus, prudence repair the corporate reporting disparities by taking into consideration accountability and true representation of the financial information. With the help of prudence, the accountants can increase the simplicity of various financial statements and reports as it implement better understandability of the financial statements (Bauer, O'Brien and Saeed 2014). In the present situation, disparities in the annual reports have become a major concern for the business organizations as it leads to accountability and fair representation of the financial information issues. From the latest annual report of both BHP Billiton and AWE, it can be seen that both the companies have addresses the issue of prudence in the effective way. As both the companies have been able to address the issues related with prudence, all the stakeholders of these two companies have been able to get true and fare financial information. The financial statements of these two companies include all the true and fair financial information (Mora and Walker 2015).

Compare and Contrast the Annual Reports

From the 2016 annual report of BHP Billiton, it can be seen that the company did not perform well in 2016. In the year 2016, BHP Billiton had revenue of $30912 million million as compared to $44636 million in 2015. Thus, it can be seen that there is a drop in the revenue of the company. This drop in revenue affected the profit of BHP Billiton. In the year 2016, the company had a loss after taxation from both continuing and discontinuing operation of $6207 million as compared to the profit of $2878 million in the year 2015. This indicates a massive drop in the financial performance of the company. Due to this, in 2016, BHP Billiton had a net loss of $6184 million as compared with the net profit of $2742 million in 2015. It shows the decrease in financial performance of BHP Billiton (bhp.com 2017).

As per the 2016 annual report, AWE had annual revenue of $14509700 as compared with the revenue of $200297000 in 2015. Thus, a decrease in the revenues can be seen. From the annual report of AWE, it can be seen that the company has been facing financial problems for last two financial years. According to the 2016 annual report, AWE had a comprehensive loss of $371405000 as compared with the comprehensive loss of $137305000 in 2015. From this figure, it can be seen that the amount of loss has increased in 2016 as compared to 2015. It indicates the ineffective financial position of the company. This process has also affected the EPS of the company as the EPS of AWE in 2016 and 2015 were $68.94 and $43.84 respectively. Thus based on the above analysis, it can be said that BHP Billiton has a more stable and good financial position than AWE (awexplore.com 2017).

Identification of Disclosure

It is required for the business organizations of Australia to comply with all the accounting and financial rules and regulations. In this case, AASB and IASB have crucial roles to play. From the latest annual reports of both BHP Billiton and AWE, it can be seen that both these two companies aim to disclose all the details about director’s remuneration report and employee benefits. According to the AASB guidelines and principles, all the ASX listed companies have to disclose the details employee benefits and employee compensation plan on the yearly basis. It is required for the Australian companies to improve the level of accountability and integrity in terms of corporate disclosure and financial information (Lawrence 2013).

Conceptual framework helps to show the most important aspects of annual reports. Corporate disclosure takes into account the various aspects of AASB and IASB for the disclosure of financial information. According to the previous discussion, it can be seen that both BHP Billiton and AWE comply with all the principles and standards of AASB and IASB. For this reason, it is essential for these two companies to disclose all the financial information of their business operations. In the annual reports of these two companies, differ financial notes can be seen. All the financial notes include the small details related to the disclosure of the financial information. All these notes have important roles to play in the process of disclosure. Thus, based on the above discussion, it can be said that both these two companies disclose all the necessary financial information (Cai et al. 2014).

Remuneration Report

There are three major components of the remuneration of BHP Billiton’s senior executives; they are base salary, pension and benefits. Base salary is based on the specific roles of the directors. Apart from this base salary, there are Long-term Incentive and Short-term incentive plan for the directors. Incentives are provided based on performance of the directors. In order to measure the performance of the directors, the remuneration committee has adopted the strategy of Balance Scorecard. As a part of Short-term incentive, awards are provided to the directors (bhp.com 2017).

In case of AWE Limited, there are three major factors of the remuneration structure of the directors; they are fixed remuneration, short-term performance benefits and long-term performance benefits. There are some specific components of fixed remuneration; they are base salary, fringe benefits and superannuation contributions. The performance bonuses are provided based on some specific KPIs (Key Performance Measures) of the directories. The performance of the directors are assessed or measured based on these KPIs. In case of the long-term performance bonus of the director’s, the director’s performance are measured based on the ‘risk’ parameter. Thus, based on the above discussion, it can be said that both BHP Billiton and AWE have almost same director’s remuneration structure (awexplore.com 2017).

Inventories

BHP Billiton

AWE Limited

Year 2016

$3411 million

$14140 million

Year 2015

$4292 million

$7103 million

Table 1: Inventories of BHP Billiton and AWE

(Source: As Created by Author)

From the above table, it can be seen that the inventory position of AWE is stronger than BHP Billiton as AWE has more inventories than BHP Billiton does. It is essential for the companies to manage their inventories in a proper way in order to manage shortage and excess of inventories.

Accounts Receivable

BHP Billiton

AWE Limited

Year 2016

$3155 million

$16423 million

Year 2015

$4321 million

$58591 million

Table 2: Accounts Receivable of BHP Billiton and AWE

(Source: As Created by Author)

From the above table, it can be seen that AWE has more accounts receivable that BHP Billiton. It indicates that AWE has more credit sales than BHP Billiton does. Thus, it implies that the liquidity position of AWE is better than that of BHP Billiton. Hence, BHP Billiton needs to take corrective measures to strengthen their liquidity position.

PPE (Property, Plant and Equipment)

BHP Billiton

AWE Limited

Year 2016

$83975 million

$14080 million

Year 2015

$94072 million

$14540 million

Table 3: PPE of BHP Billiton and AWE

(Source: As Created by Author)

From the above table, it can be seen that the PPE position of BHP Billiton is stronger than that of AWE Limited. It implies that return from assets is more to BHP Billiton than that of AWE Limited. Thus, it is recommended that AWE Limited needs to increase the property and assets base of the company.

Total Liabilities

BHP Billiton

AWE Limited

Year 2016

$58882 million

$316086 million

Year 2015

$54035 million

$549705 million

Table 4: Total Liabilities of BHP Billiton and AWE

(Source: As Created by Author)

From the above table, it can be seen that BHP Billiton has less amount of liabilities than that of AWE Limited. It is good for the companies to have fewer amounts of liabilities as it shows the efficiency of the companies. In order to be more effective, AWE needs to reduce the amount of liabilities.

Share Prices

BHP Billiton

AWE Limited

Year 2016

$18.65

$0.83

Year 2015

$27.05

$1.21

Table 5: Share Prices of BHP Billiton and AWE

(Source: As Created by Author)

From the above table, it can be seen that there is a huge gap between the share prices of BHP Billiton and AWE Limited. The share price of BHP Billiton is higher than that of AWE Limited. It shows the popularity of BHP Billiton to their inventors.

Conclusion

From the above discussion, it can be seen that both BHP Billiton and AWE Limited follow the principles and standards of AASB and IASB at the time of preparing financial statements. Apart from this, for the reporting of these financial statements, these two companies follow the principles of IFRS and Companies Act 2001. In addition, it can be seen that both BHP Billiton and AWE Limited use to address the issue of prudence in their various financial statements and reports. It helps to include accountability and integrity in financial reporting for the companies. It can be seen that both these two companies aim to disclose all the necessary financial information regarding the remuneration of the directors and employees compensations. After that, based on the comparison of the annual reports and financial statements of these two companies, it can be seen that BHP Billiton has more stable financial position that that of AWE Limited. Thus, it is recommended that AWE needs to take corrective measures to improve their financial position.

References

AWE, A. (2017). About AWE | AWE Limited. [online] Awexplore.com. Available at: [Accessed 13 Aug. 2017].

Awexplore.com. (2017). Annual Report 2016. [online] Available at: [Accessed 13 Aug. 2017].

Barker, R., 2015. Conservatism, prudence and the IASB's conceptual framework. Accounting and Business Research, 45(4), pp.514-538.

Bauer, A.M., O'Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-217.

BHP Billiton. (2017). BHP Billiton | Our Company. [online] Available at: [Accessed 13 Aug. 2017].

bhp.com. (2017). Annual Report 2016. [online] Available at: [Accessed 13 Aug. 2017].

Cai, Y., Dhaliwal, D.S., Kim, Y. and Pan, C., 2014. Board interlocks and the diffusion of disclosure policy. Review of Accounting Studies, 19(3), pp.1086-1119.

Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.

Mora, A. and Walker, M., 2015. The implications of research on accounting conservatism for accounting standard setting. Accounting and Business Research, 45(5), pp.620-650.

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