Hi, This subject is financial accounting, here is a short essay type question, approximately 5 paragraphs. ''Drawing on private interest theory, what powers do you believe the Australian Accounting Standards Board (AASB) has to influence the standard setting outcomes of the International Accounting Standards Board (IASB)? Contrast that against the power that you believe the ?Big 4? accounting firms have to influence the same outcomes''. powerpoint slides will be attached. Thank you for your help, Cici

23/09/2013 Today's Menu ACCT 3011 Issues in Consolidation: Debates about the value of group accounting 11 October 2013 - Bosch Lecture Theatre 4, 1-3pm After today's lecture you should be able to: - Explain CFS and equity accounting - Articulate arguments for and against CFS - Discuss alternatives to CFS Readings: Clarke and Dean 93 - especially pp. 253-260; also pp. 260-267 re alternatives, hereafter '1993' Ramsey and Stapledon 98 - Corporate Groups in Australia Clarke and Dean 09 - Submission to AGPC 2 The Debate about CFS: Background The debate . . . : Background (cont.) As we know, ACCT3011 fundamentally looks at alternative methods of accounting for investments. All the alternative methods reflect dissatisfaction with the 'cost method'. We find that a number of qualitative and subjective principles based largely on ability to direct and voting rights help us to decide between significantly different accounting outcomes - AASB10 and AASB128 and AASB139. Recall - at the simplest level, in using the cost method the investor: - reports its investment in the investee at cost (Balance Sheet - BS) BS) The solutions developed over time have varied according to the degree of the investor's involvement, distinguishing between: - (sole) control - reports dividends from investee as revenues (Income Statement - IS) [Weeks 1-6 - CFS] - joint control and significant influence [Week 7 - EM] - Available for sale financial asset [week 11] - Joint operation In moving away from cost, all alternatives are trying to better address the relevance principle.... Try to look for better words than 'accuracy' [week 12] - Problem region (as we discovered in the equity lecture: - 20-50% voting power) 3 4 The debate . . . : Background (cont.) The debate . . . : Background (cont.) Our professional judgment is therefore critical More differences in the accounting outcomes we can discuss: The difference between strong significant influence and weak control can be very little. - the approach to fair value adjustments in each - the approach to accounting for goodwill in each; recognition in CFS (with a choice of two methods) versus acknowledgement in equity And yet if we compare the accounting outcomes (consol versus equity), they are very different: - What is disclosed? - elimination of the investment in CFS and replacement with the line by line aggregation of R, E, A and L, versus the 'one line' approach in the equity - CFS statements highly aggregated however, NCI statements highly aggregated however NCI in NPAT and equity presented. And disclosures of segment note, note detailing the names of all - the 100% approach in CFS versus just 'our share' in equity accounting... which requires a conception of 'NCI' in the former but not the latter subsidiaries etc - Equity accounting - 2 line items within the - the approach to accounting for inter-company transactions and unrealised profits in each statements and some disclosures of movements - Lets look at a practical example to illustrate.... 5 6 1 23/09/2013 Sack Goldman Ltd assignment used in 2010 SG Ltd 7 Sack Goldman Ltd - additional information 8 Part 1 and 2 of the assignment: Sack Goldman Ltd chooses to use the partial method for calculating goodwill. 1. Complete the Sack Goldman Ltd accounts by applying the equity method to account for the investment in Wall St Ltd. Sack Goldman Ltd only recognises dividends from investments when received. (Note that AASB 118.30 (c) states that dividend shall be recognised when the shareholder's right to receive payment is established). On 15 June 20X8 Wall St Ltd sold inventory to Sack Goldman Ltd for a selling price of $300,000 at a mark up of 20% on cost. The inventory was still on hand at year end. 2. You then reconsider the investment in Wall St Ltd and realised that your conclusions in part 1, above were wrong. You now realise that Sack Goldman Ltd does not have significant influence over Wall St Ltd, it actually has control. Revise Sack Goldman Ltd's accounts for 31 December 20X8. On 1 June 20X8 Wall St Ltd sold equipment to Sack Goldman Ltd for $1,000,000. The equipment had cost Wall St Ltd $900,000 and had an accumulated depreciation at the date of sale of $400,000. At that date the equipment had a remaining useful life of 2 years. Sack Goldman Ltd still owned that equipment at 31 December 20X8. The transfer to general reserve made by Wall St Ltd was attributable to profit after acquisition. The company income tax rate is 30%. The accounts on the preceding page are shown prior to the application of AASB127 or AASB128. They are also therefore shown prior to any impairment of Sack Goldman Ltd's investment in Wall St Ltd. As at 31 December 20X8, the fair value of Sack Goldman Ltd's investment in Wall St Ltd was $3,080,000. Note: The journal entries required under both methods are provided for you in a spreadsheet in the lecture 9 folder on blackboard.... So you can use this as a practice exercise. In your equity method calculations, you may credit any accumulated impairment directly against the Investment in Associate account. In your consolidation method calculations, you must impair goodwill by that same impairment loss that you will calculate using the equity method. In other words, you will need to fully complete the equity method before you can then revise as the consolidation method. In addition to its investment in Wall St Ltd, Sack Goldman Ltd also held shares in Westpac Bank Limited which have already been marked to market value at 31 December 20X8. The investment in Wall St Ltd and the investment in Westpac Bank Limited are the only 2 investments Sack Goldman Ltd held at 31 December 20X8. [The journal entry approach to allocating Direct Non-Controlling Interest (DNCI) is utilised as illustrated in section 5.4.5 of your textbook but it could also have been done as the 'memorandum' approach as we did in the tutes this semester]. The remaining 55% shareholding of Wall St Ltd was made up of many small investors, none of whom had either control or significant influence of Wall St Ltd. It is Sack Goldman Ltd's policy to record all entries required by the equity method of accounting directly into Sack Goldman Ltd's journals and ledgers. 9 10 Comparing the outcomes Questions for you to consider: How can slightly different circumstances justify two very different accounting outcomes? Is all of that subjective-ness and professional judgment (and perhaps devious behavior) best serving our fundamental accounting goals? Would it be better if AASB 10 and 128 were more rules based and we simply said that 45% was either control or significant influence? The simply said that 45% was either control or significant influence? The answer must come back to.... The purpose of accounting: - Is it to make the business look good? No! - Its about revealing 'truth' and about: - accountability - from managers to owners; and - Information useful for decision making (where I do get this from - SAC2) - Reconsider Leibler reading from week 1 11 12 2 23/09/2013 Users - But useful to whom? Just investors? No! Are we neglecting our second duty? Part 2M.3 Corporations Act 2001. Annual financial reports must: - comply with accounting standards (s 296) and - give a true and fair view (s 297) - AASB framework*: - Para 9 - \"the users of financial statements include present and potential investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public\" AASB101: - para 15 - reporting entities must 'present fairly' - para 19 - can depart from compliance if 'misleading' but - para Aus19.1 - little scope for departure - Para 9 then goes on to explain many specific needs of each of these then goes on to explain many specific needs of each of these distinct user groups The TFV requirement is not overriding (it was prior to 2002 and still is in the UK) and so detailed rules cannot be broken - Chris Nobes - this is the 'right approach.... too dangerous' otherwise - See also SAC2 para 16ff - So we have a difficult job! Our 'product' should meet the diverse needs of a diversity of users Nonetheless, we are called to consider whether compliance with AASB may not align with a true and fair view... If we feel there is more to say, we should be providing complimentary disclosures to explain *Note however, that a problem for the Framework is that it is not a mandatory consideration for reporting entities (see 'application' and 'purpose and status') [See interview with Chris Nobes on true and fair in lecture 10 folder] 13 TFV - the challenge 14 4 types of accountants Leibler - It is generally accepted that reporting entities do a good job at complying with AASB and ASX listing rules where required. But how well do we consider a TFV? Do accountants, directors, auditors, ASIC etc, largely take it that the former sufficiently addresses the latter? Which of the following perspectives do you think is a more appropriate dissection? 3 + 1 types of accountants identified by Godfrey, Hodgson and Holmes (week 8 reading): rule-makers financial report preparers rule-enforcers (and lets add accounting academics to that list) Certainly the TFV requirement is vague, and AASB compliance adds certainty to our responsibilities and lends comparability. And so I agree that T&F should not override AASB compliance. But we must invest some thought in what 'true and fair' means and consider complementary disclosures: no explanation in the Act True? A true reflection of performance, position and cash flow. 'Leading' and not 'misleading' information. Facilitating informed and 'correct' decisions. Its not about making the reporting entity 'look good' Fair? Equal utility to all users. Faithful representation. 4 types of accountants identified by Macintosh: the 'truthteller' the 'liar' the 'humbugger' the 'Bser' (Macintosh, NB (2009) Accounting and the Truth of Earnings Reports: Philosophical Considerations, European Accounting Review, 18:1 141-175) 15 16 The Case FOR CFS (cont.) NOW lets pull apart CFS - The Case FOR CFS seem to solve these problems. How? Imagine a simple case, involving parent 'P' and subsidiary 'S', where: CFS provide an overview of financial position and income; a synoptic view of 'how well' the group is being managed (perhaps we can already see a flaw - maybe its not the group that our users want) P's investment in S is one of its major assets, accounted for using the cost method P's users don't see S's accounts (although S's users can of course command accounts). economic 'substance' vs legal 'form' 'f P's BS would otherwise show the investment in S at cost year after year (ignoring AASB128 and 139) Consider the concept of control; control implies that all of these entities are acting as one; so our argument is that its meaningful to 'paint a picture' for that one 'group' entity. By showing the parent and all controlled entities as one, we see how well a collection of commonly controlled assets and liabilities have been managed by that common cohesive group of managers Dividends received from S may not reflect it's 'current year' performance, so P's Income Statement (IS) will be 'misleading' Consider also 'relevance' versus 'reliability' Both IS & BS (of P) may be distorted by 'controlled/fake' transactions between P & S (related parties!) Example - management fees 17 17 18 3 23/09/2013 The Case FOR CFS (cont.) CFS are preferable to providing the individual financial statements of all members of the economic entity - a lot to absorb and the point is that we see value in aggregating them as one - consider Woolworths The Case AGAINST CFS CFS 'are the statements of a group presented as those of a single economic entity' (AASB 10, Appendix A) 1. 2. Lets also go back to the purpose of accounting - how is consolidated data useful for decision making? For addressing accountability? P & S are separate legal entities: this has 'real' financial/commercial implications. Indeed, it underlies some motivations for forming 'groups' CFS are argued to be a 'financial nonsense' because they 'are the product of relying on the form rather than the substance' (1993 p 254) Cross guarantees provide support to all of this logic: - What is a cross guarantee? - How does the existence of a cross guarantee agreement add to the meaningfulness of consolidated financial information? 19 19 20 The Case AGAINST CFS (cont) The Case AGAINST CFS (cont) 5. 3. CFS assume that P will take responsibility for S's liabilities - but P may have no intention of doing so! CFS are an amalgam of measurement methods: 'They include assets stated at past (sometimes amortised) and present costs (money gone), some at estimated fair values (often costs to acquire assets - money wished for), cash balances (money possessed), capitalised expenses (money often long gone) tax capitalised expenses (money often long gone), tax effect debits and credits - artifacts of the accounting system (not money had in the past, guaranteed or committed in the future), debts collectible (likely money in the future); and liabilities owing (money committed)'. 4. CFS assume that P's management can 'do whatever they want with whatever they want' with S's assets - but there assets but there are limits, e.g., where there are non-controlling interests in S. See Ramsey & Stapledon, 1998 More generally, P will also be limited in its control by virtue of the impact of other managers delegated with control, technical needs and limitations, distance etc (Clarke, F and Dean G. 'Group figures the underlying ferals' in the Australian Financial Review 6 September 2010 p 59) - on blackboard 21 22 The Case AGAINST CFS (cont) 6. CFS are an amalgam of potential 'earnings management' manipulations undertaken by CFOs in cahoots with investment analysts. Opportunities for earnings management include: Subjectivity opportunism. Eg accruals, impairment. Contradictions and ambiguities in GAAP - eg between framework and standards Structuring transactions - particularly for tax accounting/avoidance ti Altering timing of sales and expenses Negotiating with auditors Appreciate - none of this necessarily implies non compliance with accounting standards... But what about true and fair? The Case AGAINST CFS (cont) 7. CFS are aggregated. As a consequence, detail is hidden. Disaggregation can be valuable as we saw in the segment lecture. However: i) the disaggregation provided in the notes to the accounts may be poorly accessed. ii) both segment disclosures and related party disclosures have segment disclosures and related party disclosures have limitations. Eg Qantas (this week's tutes), Woolworths, IBM (one segment) and Boral (as you are assessing in the assignment) . iii) 'segments' are unlikely to also equate to separate subsidiaries iv) The whole situation becomes even more confused given the possibility of existing flaws in P's & S's accounts Arguments taken from Macintosh (2009) 23 24 4 23/09/2013 The Case AGAINST CFS (cont) As a result of the elimination of transactions between group members, data is also lost. This provision can also be used to hide dubious actions. Does related party disclosures overcome that? 8. 9. The Case AGAINST CFS (cont) - PATRICK STEVEDORES 1997 Sept 97. 'Employee subsidiaries' sold their valuable assets to other group members Proceeds were used to pay debts owed to other group members and then $60-70M was used to buy back equity held by other group members Consolidation creates 'artifacts' 'on consolidation' including assets which are not therefore 'owned' by any legal entity. Result: Nothing left for employee debts Nothing left for employee debts CFS did not reveal these transactions Cross guarantees imperfect; 'closed group' was only a part of the economic entity Clarke and Dean see this as a double insult; legitimate transactions are eliminated and dubious artifacts are added. 'Good out, bad in'! Note; we are considering here 'employees' as a user group...but is the framework asking too much; in truth, are the financial statements the place that employees go to for related information? Taken from http://www.takver.com/wharfie/ce98060 1.htm 10 March 2010 25 25 26 The Case AGAINST CFS (cont) 10. 1. Ban parents from investing in wholly owned subsidiaries. Thereby force all such operations to become divisions or branches within one single legal entity CFS are of dubious value to users who are more interested in S's accounts. For example creditors of S. Although cross-guarantees (c-gs) may help. But we have seen that c-gs are of limited value if they don't Pros?: cover ALL group members. Consider note 29 to Woolworth's financial statements 11. Better able to be regulated - (Justice Owen would be pleased about that) CFS are of dubious value to NCI. Especially where there are more than 1 partly owned subsidiaries. 12. Clarke and Dean alternatives to CFS Complex groups raise 'groupthink' issues: Opaqueness of operations, director/ managerial 'schizophrenia' our financial statements will then reflect the A, L, R and E attributable to a single legal entity Eliminate scope for opportunistic intra group transactions Cons?: Corporate groups are ungovernable - see a short video of Professor Graeme Dean interviewing Justice Neville Owen at What of partly owned subsidiaries? http://sydney.edu.au/business/accounting Justice Owen is a judge in the Supreme Court of Western Australia and the former Commissioner of the Royal Commission into the collapse of HIH. A major difficulty he faced as a commercial law judge was 'seeing into' corporate groups. 13. Consider the entrepreneurial advantages of isolating distinct elements of our business within separate legal entities What of interests overseas? See (1993), pp. 261-265 27 27 28 Clarke and Dean alternatives to CFS (cont.) Clarke and Dean alternatives to CFS (cont.) 2. Market price accounting for groups [MPAG] Some features of MPAG (cont): See (1993), pp. 266-268 P's accounts are prepared on a CCE basis Some features of MPAG: P's accounts are supplemented with a summary of P's subsidiaries' accounts, also prepared on a CCE basis Comprehensive asset reporting based on current cash equivalents ('CCEs' - roughly - fair values, 'mark-to-market' - market selling prices for physical assets); with changes in CCEs included in income physical assets); with changes in CCEs included in income. A further statement of inter-entity indebtedness reveals details of amounts owed within the group; while intra-group transactions th could also be disclosed in the notes to the accounts. (Note strong emphasis in this proposal on providing a lot of detail of related party transactions and balances) Investments in listed entities are not eliminated but instead are adjusted to CCE Investments in unlisted entities reported at investor's share of investee's net assets calculated on a CCE basis [similar to equity method] Non-vendible items reported at zero 29 30 5 23/09/2013 Clarke and Dean alternatives to CFS (cont.) Clarke and Dean alternatives to CFS (cont.) Some disadvantages or difficulties of MPAG (cont): Some advantages of MPAG (cont) : The 'group' concept is retained to some degree, doesn't overcome all problems Assets are all reported on the same (contemporary) basis; CCEs can be legitimately added, subtracted, underpin financial analysis (apples and apples) Reporting at CCE counteracts 'fake' transactions within the group. Summarising the balances of all subsidiaries will also discourage 'illegitimate' movement of funds between group entities Transparency re (rather than elimination of) financial flows within the group is emphasised Unlisted investments remain problematic - Is Clarke and Dean suggesting measurement approach that is and Dean suggesting a measurement approach that is in breach of revenue recognition principles? Depends on where we put the Cr. Consider the understand-ability principle - too much data to absorb and isn't CFS a 'clever trick' for condensing all of that commonly controlled data into one entity? 31 31 32 Summary Clarke and Dean alternatives to CFS (cont.) Potential exam essay questions - Some disadvantages or difficulties of MPAG (cont): contrasting equity method with CFS CCE-based accounting has been criticised, e.g., because: your perspective on the usefulness of CFS from the perspective of specific users It 'anticipates profits'. Lacking sufficient conservatism? Not 'reliable'? (a bit like the Nobes' criticisms of equity accounting) Basic explanation of possible alternatives your perspective on professional judgment versus a more rules based/quantitative approach to AASB10 and AASB128 CCEs may not be obtainable or 'objective' in 'thin' markets Work on your writing skills - develop logical, clear structured narratives that demonstrate your perspective. In essays, marks are always given for an appropriate introduction and conclusion. Examples are often useful. Students who simply provide bullet points that do not demonstrate personal perspectives and suggestions for improvement are not well rewarded. There is no progress towards this alternative and so a reluctance to change is evident. Why aren't user's calling for this apparently 'better' information...is there anyone out there?? 33 33 34 6 29/08/2013 AASB - How they describe the standard setting process Accounting standard-setting [SS] processes ACCT 3011 Semester 2, 2013 Lecture 8 Dr. Ronita Ram BUSINESS SCHOOL http://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx# 4 Standard-setting theories: The usual suspects - PubIT, RCT, PrivIT Overview GHHT, pp. 386-393 provide an intro Introduction - where are we so far in ACCT3011 and the standard setting process Are based on mainstream economics- see standard-setting as a form of regulation, of state intervention/ interference in markets Theories of SS - the usual suspects: Public-Interest Theory - PubIT R Regulatory C t l t Capture Th Theory - RCT Each theory describes the expected roles of 3 basic categories of players: Private-Interest Theory - PrivIT Understanding 'global' SS in the IFRS era - Producers Guest speaker - Ms Judith Li, Manager BDO Sydney - Consumers Ram and Newberry's paper - Government 2 5 SS theories: The usual suspects - cont. AASB - Organisational Structure Note: - In 'accounting' settings some 'consumers' are powerful, sophisticated organisations with access to expertise p - Position of the accounting profession is ambiguous - These theories were developed pre-IFRS and so assume a 'national' SS arena with 'national' players http://www.aasb.gov.au/About-the-AASB/Organisational-structure.aspx 3 6 1 29/08/2013 SS theories (cont.): Public Interest Theory - PubIT SS theories: RCT (cont.) What is 'capture'? Acknowledges possibility of 'market failure' Market Failure occurs: - Control of regulation/the regulator - Lack of competition (monopoly, oligopoly) or barriers to entry - Information asymmetry between buyers and sellers - The public good nature of some products, where the products provision of the product to a single individual makes it equally and causelessly available to other individuals. 'Government' intervenes to deal with it - but in a rather 'passive' way - adjudicates between views of different interests - doesn't have 'its own' agenda At least some players in SS believe that their self-interests will served by acting in the 'public interest' - 'Coordinating' - i.e. aligning the regulator's activities with one's own agenda - Neutralising/debilitating the regulator - Co-opting/persuading the regulator to take one's own position (GHHT, p. ) 388) Capture is most likely when: - The number of regulatees is small - Regulator's staff have regular contact with regulatees' staff; and either have an 'industry' background or have prospects of employment by regulatee - Regulatees control the needed information - Information and 'product' are complex - Regulator is poorly resourced (GHHT, p. 389) 7 10 SS theories (cont.): Private Interest Theory - PrivIT SS theories (cont.): Public Interest Theory - PubIT Government not passive (kind of): has significant - and valuable - coercive power that can be the source of wealth redistribution If we think that the development of a particular accounting standard can be explained by PubIT, what would be expect that standard to 'look like'? Government players are aware of this point, are self-interested wealth maximisers who sell state 'power' to the highest bidder. Thus wealth will be transferred from those with less political power to those with more: you get the regulation you pay for . . - unlikely to b i the bli interest t be in th public i t t 'proof' of this theory therefore requires evidence of a transaction Examples from ACCT3011? Highest bidders likely to be 'producers' who are best organised & best able to bear the costs of lobbying & regulation Note: - Although PrivIT is more explicit, PubIT & RCT also assume an authoritative state apparatus within a defined physical territory 8 SS theories (cont.): Regulatory Capture Theory - RCT 11 Applying these theories to practice Again, government seen as a passive mediator between interests - but achievement of solution in the public interest is unlikely If we think that the development of a particular accounting standard can be explained by RCT or PrivIT, what would we expect that standard to 'look like'? Self-interest is more explicitly modelled: players will lobby until marginal benefit equals marginal cost of lobbying Regulation has wealth effects - mostly on regulatees - who have the most incentive & resources to lobby - they 'capture' the regulators by capturing the administration, implementation and evaluation of regulation Examples from ACCT3011? General public/consumers have 'small' stakes in SS and lack organisation 9 12 2 29/08/2013 SS theories in the IFRS era SS theories in the IFRS era Australia: those supporting arguments have been put by government, profession, parts of corporate sector, ASX - some Australian corporates may be happy to trade off influence over AASB for such benefits - is this compatible with RCT & PrivIT? 100+ countries now use IFRS. Europe, Oz, Sth Africa 'went IFRS' in 2005. China is moving down that path; USA, India, Japan, are negotiating - there is momentum! In GHHT's view, Australia's role in international SS post-2005 has declined, but government may be happy with this - perhaps government does have its 'own' agenda after all For eg. the Big N operated globally and want to be able to work anywhere in the world unhindered by variations in local regulations. Having one set of standards applicable everywhere is cost-efficient for them - possibly as important as the content of the standard. Australia was one of the earlier adopters of IFRS as championed by the Howard Liberal government Conversely, arguments against come largely from those who do not operate in the globalised capital market - small business, with unique accounting issues that are not well addressed by IFRS... more on this later in the lecture Arguments in support are: increased efficiency, comparability, quality; an integrated capital market is a good thing and 'one set of standards for all' is part of such a market; you have to 'be there' to be b competitive, t h titi to have access t capital, markets, etc to it l k t t 13 SS theories in the IFRS era 16 SS theories in the IFRS era GHHT pp. 380-382, 390, 392 question the utility of RCT & PrivIT to Australia post-2005 - Is it possible to capture the IASB? BUT: perhaps it's an issue of being more subtle about how the IASB can be captured (RCT) and how it can be 'bought' (PrivIT) and by whom. Analysing self-interest (and public interest) is now much more complex - Lacking a powerful world government behind the IFRS, facing a complex array of players & interests and needing the support of national governments - is it easier or harder to resist capture or being 'bought'? b i 'b ht'? Our 3 theories assume a sovereign state apparatus with coercive power. Arguably, there is no international 'government' - we are in the realm of geopolitics/international relations. - Lets now look at the IASB's standard setting process See: And complex networks of players. http://www.ifrs.org/The+organisation/How+we+are+structured.ht m 14 17 15 18 Use of IFRS around the World Blue - adopted Grey - moving towards adoption White - not considered 3 29/08/2013 SS . . . The IASB's standard setting process SS . . . IFRS: IASB members (cont.) An 'independent' body, assumed SS responsibilities in 2001 2. Independence of Board Members Staff are asked to identify, review and raise issues that might warrant the IASB's attention. In addition, the IASB raises and discusses potential agenda items in the light of comments from other standardsetters and other interested parties, the IFRS Advisory Council and the IFRS Interpretations Committee. The IASB receives requests from constituents to interpret review or interpret, amend existing publications. The IASB's discussions of potential projects and its decisions to adopt new projects take place in public IASB meetings. Before reaching such decisions the IASB consults the IFRS Advisory Council and accounting standard-setting bodies on proposed agenda items and setting priorities. Trustees must ensure that IASB is, and is seen to be independent. Full-time members must sever all employment relationships & not hold any position involving economic incentives that might threaten independence. Rights to return to an employer are not permitted (Const. 32). Exposure drafts are then developed by assigned teams and subject to public comment http://www.ifrs.org/How+we+develop+standards/How+we+develop+standards.htm 19 22 SS . . . IFRS: IASB website SS . . . IFRS: IASB (cont.) Measures taken by the IASB to protect itself from being captured. 3. Transparency and consultation process Public can attend meetings; also broadcast/archived on the IASB website 1. Wide geographical spread of IASB Members Exposure drafts (etc) are publicly available as are comment letters and the IASB's reactions thereto At present 16 members Current 16 Members: UK- 1, USA- 4, France- 1 Sweden-1, Japan- 1, China-1, Sth Africa-1 Oz/NZ-1, India/USA-1, Brazil-1, Seoul-1, German-1, Netherlands-1. IASB holds public hearings & meets extensively with preparer/user/ academic & other groups Professional competence and practical experience are the main qualifications for IASB liaises with national/regional standard-setters being an IASB member (Const. 25) Board to contain a mix of auditors, preparers, users and academics (Const. 27) IASB consults with IFRS Advisory Council (Const. 37, 44) IFRS's constitution: http://www.ifrs.org/The+organisation/Governance+and+accountability/Constitution/Constitution.htm 20 23 SS . . . IFRS: IASC Foundation SS . . . IFRS: IASB members (cont.) Geographical balance also sought. From 2012: 4. Oversight of the IASB - 4 from Asia/Oceania IASCF parent body to the IASB (although IASB is solely responsible for - 4 from Europe standards) - 4 from North America Foundation trustees appoint IASB members exercise oversight over the members, - 1 each f h from Af i & S th A Africa South America i IASB and raise funds - 2 'from any area' (Const. 26) Members must agree contractually to act in the public interest (Const. 29) Trustees must formally commit to working in public interest (Const., 6, 17) There is now a 'conflict of interest' policy (March '09), available at: http://www.iasb.org/The+organisation/Governance+and+accountabi lity/Constitution/Constitution.htm 21 24 4 29/08/2013 SS . . . IFRS: IASC Foundation SS . . . IFRS era: Issues for PubIT/RCT PubIT 22 Trustees - 6 from Asia/Oceania, 6 from Europe, 6 from North America, 1 from Africa, 1 from South Africa, 2 from 'any area subject to . . . overall - SS at national level is hard enough even if done with the 'public interest' in mind. geographical balance' (Const. 6) - Working out what is in the 'public interest' is even harder 'globally' when the 2 will 'normally' be from 'prominent international accounting firms' (Const. 7) diversity of nations/ economies/ histories is factored in! RCT Mix of trustees to 'broadly reflect world's capital markets and diversity of - While there may still be an incentive to 'capture' the IASB who could capture it geographical & professional backgrounds'; inc. auditors, preparers, users, and how? academics and 'officials serving public interest' (Const. 6-7) Trustees must now engage with a 'Monitoring Board' consisting of national & international regulators when appointing trustees, IASB, IFRS Advisory - While there may still be an incentive to 'buy' the IASB who could 'buy' it and how? - PS: 'buying' now includes not just $$ but also 'political capital', e.g., sanctioning/ enforcement of IFRS at national level Council & IFRIC members 25 SS . . . IFRS: IASC Foundation 28 Guest Speaker : Ms Judith Li The Monitoring Board 'will provide a formal link between the Trustees Please welcome our guest speaker for today: and public authorities'; replicating links between national SS bodies and such authorities (Const. 18) Ms Judith Li IASC Foundation is seeking legitimacy with national Manager, Manager BDO Sydney regulators/politicians! Former IASB's technical staff member on Financial Instruments project Current Trustees: - come from wide geographical location, - have a mix of background (Big N, SS/Regulator, prepare, user, professional body, and former politicians/senior bureaucrats) 26 SS . . . IFRS: IASC Foundation 29 A jute mill in Bangladesh - SME?? 5. Funding 2012 - around 20.03m in 'contributions', 5.32m from sale of publications. Of contributions: - 38% from Europe, 9% from Americas (mostly USA), 24% from Asia/Oceania, 29% from 'International accounting firms' - Including approx 0.67m from Australia's Financial Reporting Council and Australian Accounting Standards Board on behalf of Australian stakeholders http://www.ifrs.org/The-organisation/Governance-and-accountability/Annual-reports/Pages/2012-AnnualReport.aspx 27 30 5 29/08/2013 A small organic vineyard in Australia - SME?? Retail shops in Beijing-SMEs?? 31 34 Small retailers - SME?? Is IFRS well suited to these sorts of organisations? Note operating in international capital markets? Do users of their financial statements need complex disclosures about financial instruments, intangibles, impairment, related party transactions etc? Are the accounting needs of these different SMEs the same? 32 35 Ram and Newberry's Paper Small vendors-SMEs?? Background - Need for SME standard - IASB took on board the project of examining the need for a specific raft of accounting standards for SMEs Rationale R Ram and N b d Newberry explore th role of th IASB' d process i d l the l f the IASB's due in developing it l i its IFRS for SMEs standard. Method - Document analysis (see pages 4-5) - Interview with key players involved in this project 33 36 6 29/08/2013 Ram and Newberry's Paper Some findings: - The IASB had developed its stance \"to maintain all recognition and measurement criteria but to reduce disclosure requirements where necessary\" before the project was added to its agenda in July 2003. - Consider the tensions between the IASB's desire to maintain its stance and the primary reasons for undertaking the project. project - Due process followed in the case of the SME standard barely reflected the 'will of people' but was more included towards acting as a communicative function for the IASB without any commitment to change its stance on the SME standard. - It showed that by going beyond the information available in the public domain a better understanding of the standard setting activity can be obtained. 37 Next Week Segment Reporting and Related Party Transactions 38 7 8/10/2013 Financial instruments and hedge accounting Financial instruments and hedge accounting FIRST - request for feedback on my lectures (from all of you), and on my tutorials (from just those students in my Monday and Wednesday tutorials) - http://www.itl.usyd.edu.au/feedback/survey/ Readings: - Picker et al (2009) Australian Accounting Standards Chapter 6 Financial Instruments. - See link in week 11 lecture folder on blackboard to library copy - Sections 6.1 - 6.2 are effectively revision from ACCT2011. Revise them and focus on 6.3 (ignore impairment in section 6.3.5). Note, the reading argues that some gains and losses should be recognised in 'equity through the statement of changes in equity' (eg see 'gains and losses' section of section 6.3.5). , g g gains or losses taken to equity' which we will recognise in q y g In this lecture, we will instead refer to 'hedging g 'other comprehensive income' (because that is what AASB139 now requires). - Li - 'A new chapter in hedge accounting' - Drabsch - Submission on new exposure draft ACCT3011 Standards: Week 11 - AASB7: financial instruments disclosure Semester 2, 2013 - AASB132: financial instruments presentation Matthew Egan - AASB139: financial instruments recognition and measurement - AASB9: Financial Instruments (replaces most of AASB139 from 1 Jan 2015) - AASB121 to para 34 2 Menu for today 1. Transacting in a foreign currency - AASB121 2. 1. Financial instruments and the basics of AASB7, AASB132 and AASB139 (some of this is a recap from ACCT2011) Step 1 Step 2 AASB7 Step 3 AASB139/9 AASB121 explains how to account for transactions undertaken in foreign currency and how to translate the final trial balance of a foreign operation into another currency (for example, if an Australian parent has a foreign subsidiary) Financial instruments AASB132 Foreign exchange - AASB121 Foreign currency stuff Critical perspectives 3. We focus only on the former Hedge accounting - AASB139 Transactions undertaken in foreign currency must be: Back to foreign currency stuff What is meant by hedging? Accounting for cash flow hedge using forward exchange contracts - recognised in our ledger in our functional currency at the spot rate at the date of the transaction (para 21) and Critical perspectives and future directions 4. 5. - any gain or loss on exchange movements to reporting date and/or settlement date of the underlying monetary item to be recognised in P&L in period when it arises (para 28) Example of accounting for a cash flow hedge Summary and future directions 3 1. Spot rates and presentation of exchange rates 4 1. Which spot rate? - AASB 121 is silent on this Transacting in a foreign currency - AASB121 - Example Aust Co purchased plastics from our Chinese supplier on 23 June 2012 for 6,000,000 CNY (China Yuan). Settlement date 24 July 2012. There will generally be two prices quoted: - Bid (or buying price) and the - Offer (or selling) rate - Exchange rate on 23 June 2012: 1AUD = 6.92CNY 6 92CNY Conceptually, which of these rates is applicable will depend on whether it is to be applied to a foreign currency payable (we'll need to buy some foreign currency) or a foreign currency receivable (we'll be wanting to sell some foreign currency). - Exchange rate on 24 July 2012: 1AUD = 7.16CNY Presentation of exchange rates: - Indirect form (usual presentation) : A$1= FC x e.g., A$1 = US$0.80 - Direct form: 1FC = A$ x e.g., US$1 = A$1.25 - [note 1/1.25 = 0.8] 5 6 1 8/10/2013 1. Transacting in a foreign currency - AASB121 - Example 1. - Journal entry in our AUD ledger on 23 June 2012 Dr Inventory What if the purchase and settlement dates straddled a year end date? - we'd need to bring to account the gain or loss on exchange rate \"in the period when it arises\" (para 28) Cr 867,052 Accounts Payable 867,052 (purchase of 6M CNY of plastics on 23 June 2012 = 6,000,000/6.92 spot rate) Imagine now that Aust Co's balance date is 30 June and that the exchange rate on that date was 1AUD = 7 CNY - Journal entries in our AUD ledger on 24 July 2012 Dr Accounts Payable Cr So we would need to restate our accounts payable balance at that date at the applicable spot rate. Accounts payable at that date should now be $857,143 (6,000,000/7) and so we have to reduce the existing balance by $9,909 (867,052 - 857,143).... 29,063 Gain on exchange 29,063 (recognition of gain on exchange rate movement re monetary item = 867,052 - 6,000,000/7.16) Note; inventory is not regarded as a monetary item and so needs no similar adjustment Dr Accounts Payable Transacting in a foreign currency - AASB121 - Example Cr 837,989 Cash 837,989 (settlement of monetary item at spot rate at 24 July 2012) 7 1. Transacting in a foreign currency - AASB121 - Example 1. 30 June 2012 Transacting in a foreign currency - AASB121 - the risks Cr Transacting in a foreign currency subjects us to exchange rate volatility and so volatility in profits 9,909 Dr Accounts payable 8 What can we do to manage that volatility?: 9,909 Exchange gain (P&L) And then we must restate the balance again prior to settlement. At settlement, the rate is 1AUD = 7.16CNY and so we have to pay $837,989. Currently the balance of the account is stated at $857,143 and so we have to reduce that balance by $19,154 prior to settlement - Internal processes, - e.g., minimising foreign transactions, - l di or l leading lagging payments t minimise exposure, i t to i i i 24 July 2012 Dr Accounts payable Cr - create natural hedge, such as borrowing in same currency as exposure through assets 19,154 Exchange gain (P&L) - Use of derivative financial instruments to hedge exposure, 19,154 Now we can settle as per the last journal entry on the previous example. You will note that (of course), the total gains above (9,909 + 19,154 = 29,063) is the same at the total gains on the previous example where we assumed no intervening balance date necessitated additional restatement. - e.g., enter into a forward exchange contract to mitigate exposure from foreign currency liability (more common approach) We will focus on hedging and forward exchange contracts in the remainder of this lecture but before we do that, we need a little recap on 'financial instruments'.... NOTE - $9,909 + $19,154 is, of course, equal to $29,063 9 2. Background to development of accounting standards on financial instruments Early 1990s increased use of financial instruments, especially derivatives 10 2. Development of accounting for financial instruments Recall the three step process (from ACCT2011): Step 1. Determine presentation (AASB132) Step 2. Mandatory disclosures (AASB7) Step 3. Recognition issues - how to account for FI (i.e., do the journal entries) (AASB139/AASB9) Many derivatives \"off-balance sheet\" - simply not recognised until settlement. Concern about amounts, risk involved, and lack of information So US: FASB tried to require recognition on balance sheet of all financial instruments \"marked to market\". Strongly contested, especially by financial institutions (i.e., banks, insurance) - contested (i e banks why - volatility. Mid-1990s several major collapses/scandals related to non recognition of financial instruments: Barings Bank, Orange County; Long Term Capital Management And so AASB 7, 132 and 139 were introduced in 2004. 11 12 2 8/10/2013 2. Step 1. AASB 132 - (this is largely recap from ACCT2011) 2. Financial instrument - \"any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity\" (para 11). Steps 1 and 2: AASB132 and AASB 7 AASB 132 - Presentation - AASB132 focuses on 'presentation' - does not mean 'recognition' - simply akin to classification We can further classify financial instruments as (para 11): - 'financial assets' (eg cash, equity instrument, contractual rights to receive cash) or - Required to separately classify items as financial liabilities, assets and equity (para 15) and so there is a limited ability to offset (para 42) - so hopefully less Barings Bank problems in future? - 'financial liabilities' (eg contractual obligations to deliver cash) Alternatively, we can think in terms of (para AG15): AASB 7 - Di l Disclosure - Primary financial instruments (eg receivables, payables, shares) Disclosures are required that enable users to evaluate: - Derivative (or secondary) financial instruments derive their value from something else. Important for today - examples: - (a) the significance of financial instruments for the entity's financial position and performance; and - Option to purchase shares - where does it's value derive from? - Forward exchange contract - contract for delivery of currency at a specified date in the future at a guaranteed rate of exchange (forward rate). Value derives from exchange rate. - (b) the nature and extent of risks ... and how the entity manages those risks\" (para 1). Must disclose carrying amounts of financial assets and financial liabilities, details of hedges and data regarding the risks of exposure - In ACCT2011 you covered options associated with convertible notes and compound financial instruments - in this topic in ACCT3011 we focus on hedging and forward exchange contracts 13 2. Step 3. 14 AASB139 - recognition 2. Recognition AASB7,132 and 139 provides a good example of the realities of accounting standard setting; a lot of debate and compromise - (relate this to lecture 10) With AASB139, standard-setters tried to: - require ALL financial instruments to be recognised at market value - ban 'hedge accounting' (not hedging, just 'hedge accounting'...will be explained shortly) The interests lobbying hardest against this position seemed to be banks and other large financial institutions AASB139 - Recognition issues Recall considerable debate on recognition issues: - Valuation base: market value? historical cost? Some other amount? - When to recognise changes in value: during the course of the contract? Only on settlement? - Where to recognise changes in value: to income statement? Somewhere else (eg balance sheet)? 15 2. AASB139 - the outcome AASB139 identifies four categories of financial instruments (table 6.8 Picker et al). Measurement (AASB139 (43-46) is required as underlined: 1. 16 2. At fair value through profit and loss i. ii. Where to recognise changes in value during the course of the contract: - Class 1 (At fair value through profit and loss) - recognise gain or loss in P&L (para 55a) - Class 4 (Available-for sale) - recognise gain or loss in other comprehensive income (para 55b) - Classes 2 (Held-to-maturity investments) and 3 Loans and receivables - recognise gain or loss in P&L (para 56) Items classified as held for trading; or Designated by entity as at fair value 2. 3. 4. Held-to-maturity investments ( y (amortised cost) ) - Changes in value of financial instruments review definitions of these 4 classes in AASB139 (9) Loans and receivables (amortised cost) Available-for sale (fair value) (Note as discussed earlier, we are reflecting a recent change in accounting standard - the text is not up to date as it says that changes in class 4 should be recognised in 'equity') But hang on; what is 'other comprehensive income'? Definitions of fair value and amortised cost are provided at para 9 17 3 8/10/2013 2. What is 'other comprehensive income'? 2. Critique of AASB7, 132 and 139 Statement of Comprehensive Income AASB 101 (para 7) 'other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit and loss' Its simply the bottom half of the 'statement of comprehensive income' statement income (AASB101 para 81ff) - see example This 'other' section is intended to be understood as components taken directly to 'equity' ... so its a sort of a region of transition AASB139 is a very complicated standard Profit and Loss Sales 1000 COGS -600 G Profit 400 Other income 300 Other expenses - Sir David Tweedie (Chairman IASB) - \"if you think you understand AASB139, you need to read it again\" F th Furthermore, the 3 standards d not overcome th t d d do t concerns that published financial reports are too late and too infrequent to be very helpful to users in their decision making -150 Profit before tax - It has been called \"a dog's breakfast\" 700 ITE Net profit after tax -200 500 Other comprehensive income See Woolworths page 97 Hedging gain taken to equity Confusing? An improvement to an all inclusive P&L? What do you think? Hedging gain transferred to statement of financial position 70 -25 total other comp income total comprehensive income 45 545 20 2. Impact of accounting for financial instruments on the 2008 GFC 2. New standards coming: AASB9 and more AASB9 is in your handbook now - originally stated as applying from 1 January 2013. Now amended to 1 January 2015 because two other accompanying standards are still WIP; impairment and hedge accounting 2008 - global financial crisis Financial instruments (particularly securitised mortgages in the US) were central to explaining the erosion of liquidity. AASB9: This time the problem was complexity, particularly derivative instruments, rather than recognition Financial assets classified now on the basis of the entity's 'business model' for managing the asset and cash flow characteristics (see para B4.1.1ff for an explanation of 'business model'; akin to strategy or objectives for the assets) business model ; Many implications for accountants - marking to market now being questioned, increased monitoring and review of complex instruments Measurement at: - amortised cost if the objective is to hold the assets, and cash flows are solely payments of principle and/or interest. Otherwise, And again, we can relate this to a bigger theme for the semester; is accounting failing to meet its stated purpose? - fair value Financial liabilities measured at amortised cost with some exceptions at fair value Subsequent gains and losses fundamentally sent to P&L (para 5.7) Hedge accounting (second half of this lecture); AASB9 tells us to continue to refer to AASB139 (5.2.3, 5.3.2, 5.7.1, 5.7.3).... 21 3. Introduction - Hedge accounting Hedge accounting provides an exception to the rule that gains and losses on financial instruments can only be recognised in the P&L and in other comprehensive income The hedge accounting method allows gains and losses to also be recognised, in some cases, in a third place; within assets and liabilities So if we qualify for hedge accounting, we can end up with gains So, accounting and losses in the P&L, in other comprehensive income and also in the BS (by adjusting the carrying amount of assets or liabilities) Recall: the standard-setters tried to ban 'hedge accounting'. (Why would they be upset about recognising gains or losses in 3 different places?) 22 3. What is a hedge? Don't confuse 'hedging' with 'hedge accounting': Hedging - Taking a financial position opposite some other financial position to offset losses from one with gains from the other. Always two transactions: the underlying transaction and the hedge A hedge allows the Australian company to fix at the outset the amount of Australian dollars it will pay or receive - recall the objective here is to manage foreign currency risk and reduce uncertainty (consider the unhedged Chinese Yuan purchase at the beginning of the lecture) 23 24 4 8/10/2013 3. 3. Hedge accounting Difference between cash flow and fair value hedges Not always clear: Hedge accounting allows a qualifying entity to link these two separate transactions, and this affects the timing and recognition of reported gains/losses Using our AASB132 terminology, we call one the 'primary instrument' and the hedge the 'derivative instrument' AASB139 classifies hedges into three types (para 86): - The hedge of the foreign currency risk associated with firm commitments may be designated as either a cash flow hedge or a fair value hedge (para 87). - This is because the foreign currency risk affects both the cash flows and the fair value of the hedged item. - Fair value hedge: hedge of exposure to changes in fair value of asset or liability ... that is attributable to a particular risk AND could affect the income statement - We will look only at a cash flow hedges however, note that in the examples below, what was a 'cash flow' hedge, is considered to have become a 'fair value' hedge, after the underlying asset or liability is recognised - Eg: fixed rate loan with interest rate swap arranged to hedge by converting fixed rate to floating. - Cash flow hedge: hedge of exposure to variability in cash flows attributable to risk associated with a recognised asset or liability, or a highly probably forecast transaction that could affect profit or loss. - Eg forecast sales or purchases in a foreign currency - Net investment in foreign operation: Hedge of currency risk associated with translation of net assets of foreign operations into local currency (which comes under AASB121). 25 3. Cash flow hedge accounting method Paras 95-101 provide the hedge accounting method - a 'dogs breakfast'....lets try to and condense it into a simplified general hedge accounting rule: 26 3. The hedge accounting problem Mining industry example: \"Some companies have hedge books covering production for 10 years or more. Short-term spikes in metal prices could mask their core operating earnings. The companies might be required to revise announcements of forecast profit several times a year with each significant price movement... Many mining companies are required to put hedges in place by their financiers to guarantee the value of future production against which a loan is made \" (Charter June 2000). made. (Charter, 2000) - changes in FV of the hedging instrument must be recognised initially in a other comprehensive income (the account name that we will use here is 'hedging gains/(losses) taken direct to equity'). - If the hedged transaction (eg future purchase of inventory or equipment) results in the recognition of a non-financial asset or liability, the entity can choose to non financial either: Standard setters did not succeed in banning hedge accounting however a compromise exists such that hedge accounting is ONLY allowed under very restricted conditions - Adjust the carrying amount of the asset or liability* by the hedging gain or loss previously recognised in other comprehensive income; OR - Move the hedging gain or loss from other comprehensive income to profit and loss as a reclassification adjustment in the period when the hedged asset or liability affects profit or loss Must first meet five conditions (para 88) and two effectiveness tests (para AG105) to qualify for applying hedge accounting, and meet them throughout the period of the hedge. (* Here is the big advantage of qualifying for hedge accounting - smoothing of exchange movements by debiting or crediting them to the BS) 27 3. Five conditions for applying hedge accounting (AASB139(88)) 28 4. Example - purchase of inventory 30 June 2011, Co A orders paper from a foreign supplier. Purchase occurs on 31 March 2012 for FC100,000. Payable is due on 30 June 2012 1.At inception: formal designation & documentation of: hedging relationship; risk management objective, hedge strategy On 30 June 2011, Co A also enters FEC to receive FC100,000 on 30 June 2012 to be delivered in $A109,600 on 30 June 2012 (ie the forward rate applicable was $A1.096 for 1FC). Designated to hedge the payable that will follow from the purchase of paper. 2.Hedge expected to be 'highly effective' (App A, AG105-AG113). That is, the changes in the cash flow of the hedged item should be close to the changes in the cash flow of the hedged instrument. 'Close' is generally taken to be in a range of 80 125% 80-125% Assume the conditions are met to qualify for hedge accounting 3.Cash flow hedges: forecast transaction must be highly probable and present exposure to variations in cash flows that could ultimately affect profit or loss Policy to adjust the cost of non-financial items acquired ('basis adjustment') as a result of hedge 31 December is the reporting date 4.Hedge effectiveness can be reliably measured, i.e. both FV or cash flows of hedged item and FV of hedging instrument 5.Hedge assessed on ongoing basis and shown 'highly effective' throughout reporting periods of the hedge (modified from Picker, R, Leo, K, Loftus, J, Clark, K and Wise V 2009, Applying International Accounting Standards, example 6.6) 29 30 5 8/10/2013 4. 4. Journal entries - qualifying for hedge accounting Relevant exchange rates Spot rate 30/6/11 FV of forward contract ($A) - Forward contract 30/6/11 1.072 0 31/12/11 1.080 (388) 31/3/12 1.074 1.075 (2100) Cr 0 0 (1971) 30/6/12 Dr - Cash ($A for FC1)* - (Initial recognition of FEC) But really - no journal entry necessary 31/12/11 - Hedging loss taken to equity# Dr - Forward contract Cr 388 388 - (Adjustment for change in FV of FEC) Note - brackets imply a liability. Positive would imply an asset * - recall - this is the direct method - # terminology differs to what you see in the text on page 214 as previously discussed 31 4. 32 Journal entries - qualifying for hedge accounting 31/3/12 4. Journal entries - qualifying for hedge accounting 30/6/12 - Hedging loss taken to equity Dr - Forward contract Cr - Exch diffs (P&L) 1,583 y Payable Dr 107,400 Cr Exch diffs (P&L) Dr Hedging loss taken to equity 129 Dr Payable 107,400 - (Purchase paper at spot rate in accordance with AASB121) Paper (Inventory) 129 Cr (Recording loss of FEC between 1 Apr and 30 Jun - now debit to P&L and not the asset because the hedge is now of a recognised liability - its now become a fair value hedge) (Adjustment for change in FV of Fwd contract) - Paper (Inventory) Dr Forward contract 1,583 Cr 100 100 (Restating primary instrument at new spot rate FC100,000 x 1.075 = AUD107,500 - 107,400 = loss of $100) Cr 1,971 Payable 1,971 Dr - Cash 107,500 Cr - Forward contract (the hedged transaction has resulted in the recognition of an asset and so in accordance with AASB139, the company chooses to transfer the accumulated hedging 'loss' previously recognised in other comprehensive income to that asset - ie, as a 'basis adjustment')* Dr 109,600 2,100 (Settlement of Forward contract and payable for $109,600)) Some examples will recognise the settlement of the two instruments in two separate journal entries. In this example, we have shown 1 net cash payment of $109,600. Our approach is considered to be more accurate (as we are in fact only making that one net payment to the bank). *here's the 'advantage' of qualifying for hedge accounting; but is it an advantage for 'producers' or 'consumers' or both? 33 4. Journal entries - NOT qualifying for hedge accounting 30/6/11 Dr - Cash Cr 0 - Exch diffs (P&L) 0 Forward contract - (Initial recognition of FEC) Journal entries - NOT qualifying for hedge accounting Dr 129 Cr 129 (Recording loss of FEC between 1 Apr and 30 Jun - now debit to P&L and not the asset because the hedge is now of a recognised liability - its now become a fair value hedge) But really - no journal entry necessary Exch diffs (P&L) - Exchange differences (P&L) Dr - Forward contract 388 Cr Dr Payable 31/12/11 Cr 100 100 388 (Restating primary instrument at new spot rate FC100,000 x 1.075 = AUD107,500 - 107,400 = loss of $100) - (Adjustment for change in FV of FEC) 31/3/12 Payable - Exchange differences (P&L) Dr - Forward contract Cr Dr Cr Dr 107,500 1,583 - Cash Cr - Forward contract 1,583 (Adjustment for change in FV of Fwd contract) Payable 4. 30/6/12 - Forward contract - Paper (Inventory) 34 Dr 109,600 2,100 107,400 (Settlement of Forward contract and payable for $109,600)) 107,400 35 36 6 8/10/2013 4. Qualified for hedge accounting (ie the journal entries shown) Comparison - Y/e 31/12/11 - Profit reduced by 388 - Y/e 31/12/12 - Profit reduced by 229 (exchange diffs) - Inventory recorded at $109,371 - And higher cost of goods sold at the future point when inventory is sold Comparison (cont'd) Note: we can prove the $2100 FV at the end of the contract (109,600 - (100,000 x 1.075)). (don't try to prove the FV's during the life of the contract - they are complicated and based on market expectations. Those FVs will always be given in any exam question) We looked above at an example of the purchase of inventory. The accou e accounting advantage was that the e c a ge volatility up to g ad a age as a e exchange o a y o the date of purchase was able to be 'washed' into the cost of the inventory Note also, we did not consider tax effect journals in the above (nor will we in tutes or in in any exam question) What if it didn't qualify for hedge accounting (journal entries not shown)? - Y/e 31/12/11 - Equity reduced by 388 4. - Y/e 31/12/12 - Profit reduced by 1,812 (exchange diffs) - Inventory recorded at $107,400 - And lower cost of goods sold at the future point when inventory is sold 37 4. Tutorial for next week You'll work through a hedged purchase of a NCA in class next week (the question is in section 7 of the unit outline) Focus on understanding why we do the entries that we do and what the advantage is therefore in qualifying for hedge accounting Remember, we are not asking you to understand how to account for a fair value hedge - only cash flow hedges Group D presentation - focused on coming changes in accounting standards - 2 brief papers to read - everyone please make an effort before class! 39 38 5. Summary of the debate Hedge accounting revolves around the question of whether transactions undertaken to hedge risks should be linked for accounted purposes with the hedged item The issue comes down to whether it is acceptable to allow volatile exchange rate movements to be accumulated in, potentially a number of places and brought to the P&L subsequent to that the underlying transactions occurred; or Whether the profit and loss should reflect all period impacts (regardless or how little control you have over them) or how effectively you have hedged them. Again recall the stated purpose of accounting - is it focused on making life easier for managers or easier for users? .... An example of public interest versus capture? This debate has been going on for more than 70 years 40 5. Future directions with accounting for financial instruments Both AASB7 and AASB132 and AASB139 have been subject to changes and are undergoing further changes. - The IASB is still pushing for: - All financial instruments be measured at fair value with all gains/losses recognised in the period - Simplif or eliminate the need for special hedge acco nting Simplify accounting requirements - Whether the IASB can be successful is yet to be seen, especially now with a weak global economy and increasing questioning of the merits of fair value measurement. - So: Work in progress.....Expect continued developments and changes over coming years 41 7 16/10/2013 Accounting Honours 2014 Voluntary Social and Environmental Reporting .... Consider doing an extra honours year in 2014. Honours is an elite program designed for outstanding students. And accounting for joint operations It will allow you to: - Work closely with academics who are leaders in their field - Build strong connections with other outstanding students - Engage in advanced learning and debate about accounting - Develop a research project of your choosing For more information please go to: http://sydney.edu.au/business/futurestudents/undergraduate_studies/hono urs and ACCT3011 Week 12, semester 2 http://sydney.edu.au/business/accounting/undergraduate_studies/honours 21 October 2013 Or contact the Discipline of Accounting's honours coordinator: Matthew Egan - Chris Poullaos- chris.poullaos@sydney.edu.au. Closing date - 29 November 2013 2 Lecture outline Readings Lecture Outline: Reading: 1. The social and environmental impacts of an organisation. 1. SEA Drever, M., Stanton, P., and McGowan, S 2007 Contemporary Issues in Accounting, Chapter 7: Environmental and Social Reporting and Accounting, pp, 191-227 (in your readings pack) 2. Non mandatory reporting - social and environmental reporting (SER). 3. Case studies in SER 4. What are the advantages and limitations of SER and of disclosing in different media? p 2. Joint operations AASB11 Joint Arrangements 5. Who should do this accounting? 6. Joint Operations - method, example and evaluation Chapter 9 to section 9.5 only. (Note, ch 9 refers to obsolete AASB131. For our purposes however, the new AASB11 is largely the same. In the past, all joint arrangements were called 'joint ventures'. Ch 9 refers to 'joint venture operations' and 'joint venture assets'. Both of which are now viewed as 'joint operations'. Ch 9 also refers to 'joint venture entities' which AASB11 now views as 'joint ventures'... and we covered that accounting method in lecture 7) 7. Tute for next week 3 1. The soci