Question

Task In your accounting career you will be required to analyse current accounting issues and communicate your theoretical understanding to your professional colleagues and your clients. For this assignment assume that you are the senior accountant working for a major firm. Question 1 - 9 marks (1,500 words) The CEO has forwarded to you an interesting article and requires you to provide her with a deeper theoretical understanding of the issues discussed so that she can fully engage in the lively discourse at an upcoming conference. You are required to find a newspaper article or web page report of an item of accounting news, i.e. it refers to a current event, consideration, comment or decision that has been published after the 1st of January 2018. Your article could also come from one of the professional journals. The article should not come from an academic journal. Academic journals generally do not contain news articles or articles of less than one page and are usually only published 2 or 4 times a year. If you are having a problem ensuring that your article is from an appropriate source contact your subject coordinator. You then need to explain the article that you have found in your own words and clearly relate the concepts, ideas and facts within the article to one or more of the theories or topics that you have studied this session. Support your analysis of the assumptions and implications of the topic or theory as appropriate with reference to sources in APA 6 style. For example, this article from the Sydney Morning Herald in April 2016 could be linked to the topics of accounting regulation and measurement (and perhaps others). You must provide a copy of the article or web page, with details of the source, date and page number with your answer.

Hint For Answer

Following is the news article which needs to be considered for answering the question and has to relate with one of the accounting theory such as measurement issues in accounting, regulations of financial accounting, conceptual framework of accounting etc.

Noble to adopt more conservative accounting practices Published May 1, 2018, 5:00 am SGT Facebook Twitter Email Noble Group will try to match its profit and loss statement with its cash flow as much as possible, said chairman Paul Brough yesterday. He also said he was optimistic that the group would soon reach a consensus with perpetual bond holders and shareholders on its restructuring. He told the group's special general meeting that its ability to make money from incremental businesses is "severely restricted" because of the limited trade finance facilities it has access to. "That is why we have undertaken more conservative approach to reserving against these (coal) contracts," he added. "One of the issues we've had with complying with international accounting standards is that there is a difference between profit and loss, and cash flow. "One of our intentions is to try to match cash flow with profit and loss accounts, and that is what we expect one of management's incentives to be based upon." So if the firm makes a paper gain, it would reserve against that gain so that profit and loss and cash flow would be similar, he added, emphasising that it will adhere to international accounting standards. Noble's aggressive accounting practices were attacked by Iceberg Research three years ago. Iceberg and, more recently, Noble investor Goldilocks Investment Company have accused the firm of inflating its bottom line through overly high valuation of long-term contracts and derivatives. Mr Brough also told shareholders that they should not be surprised by the events of the past few months, saying that the "pushing and shoving" between various groups of stakeholders is par for the course in a consensual restructuring where there is no predetermined hierarchy of claims. "I believe we are close to reaching a consensual position," he said. "While we can all argue over the patient, we don't want the patient to die on the operating table as we are stitching him back up. The company cannot continue to incur costs and trade while insolvent. So I hope we can move the patient into the recovery room very soon." Asked about the remuneration for directors and chief executive Will Randall, Mr Brough said the directors and management have worked very hard over the past year. "Since I joined last May, we've had 40 board meetings... I think the directors' fees are modest in comparison to other companies' and the work they have been asked to do." The turnout yesterday was notably smaller than past shareholders' meetings. Noble had said only on Sunday that the event would continue as planned. Noble shares closed down 0.4 cent, or 4.6 per cent, to 8.3 cents yesterday.

Answer 1

Issue with respect to Accrual practice of Accounting:

With reference to the article about conservative accounting practices of Noble, published on May 1, 2018, 5.00 AM, it is implied that the group currently follows the concept of accrual system of Accounting. Under this approach, the incomes and expenses are recognised as and when they occur. As a result, the recognition of incomes and expenses differs from the inflows and outflows of cash. The revenue might have been earned, but the income in cash may be received later due to grant of credit facilities. Similar occurrence can happen with respect to expenses. As a result, the cash flows do not match with the profit and loss statement. The company intends to match the profit and loss statement with cash profit. To facilitate the same, the company calculates the difference and reserves it against the gain. The company’s practice is not prohibited by any standard. The amount that a company can transfer to its reserves is not restricted by any regulation.

The issue with accrual system of Accounting is that the profit and loss does not depict the accurate picture of cash available with the firm.

Issue with respect to measurement practices and regulation of Accounting:

With respect to the measurement practices in Accounting, the Chairman of the company, Mr. Brough has made the following statement: that ‘the shareholders should not be surprised by the events of the past few months, saying that the "pushing and shoving" between various groups of stakeholders is par for the course in a consensual restructuring where there is no predetermined hierarchy of claims.’ Noble investor Goldilocks Investment Company have accused the firm of inflating its bottom line through overly high valuation of long-term contracts and derivatives. The measurement must be made in compliance with IFRS 9 Financial instruments.

IFRS – 9 provides a guidance on classification and valuation of financial instruments. Under IFRS -9, all financial instruments are initially measured at fair value plus or minus, in case of financial asset or financial liability not a fair value through profit or loss, transaction costs. An asset is classified as financial asset initially, however, if certain conditions are met, the asset can be reclassified. All financial assets are measured at amortised cost or fair value through other comprehensive income (FVTOCI) or fair value through profit or loss (FVTPL). The statement of Mr. Brough, that the pushing and shoving is par for the course in consensual restructuring cannot be justified.

The effect of restructuring can be given in books of Accounts only after the prescribed conditions are met. If a board’s decision for restructuring is the only relevant event arising before the end of the reporting period, this is not sufficient to create a constructive obligation. The conditions for recognizing a restructuring provision require the plan to be detailed and specific, to have gone beyond the directors’ powers of recall, and to be executed without delay or significant alteration.

The restructuring provision is measured at the best estimate of the expenditure required to settle the present obligation, taking into account the risks and uncertainties of the obligation and when the time value of money is material, discounting to present value. A restructuring provision includes only the direct expenditures arising from the restructuring, which are those that are necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. The costs often incurred as part of a restructuring include employee termination benefits under a one-time termination plan, contract termination costs and costs to consolidate or close a facility. In the given article, the restructuring has not yet been finalized i.e. no consensus has been obtained on restructuring between the company, the bondholders and shareholders.

The Directors fees paid must be in compliance with the applicable rules. The companies must make some disclosures regarding payment of management remuneration. The companies must submit directors’ remuneration report including the detailed information about each director’s remuneration. The directors’ remuneration includes a value placed on share based payments and pension benefits using calculations prescribed in the regulations. The directors’ remuneration report is split into two parts. In addition to dealing with historical remuneration, there exists a policy report. This is subject to a binding shareholder vote and a company will be in breach of the law if it pays remuneration to directors outside the approved policy. The statement of Mr. Brough, ‘Since I joined last May, we've had 40 board meetings... I think the directors' fees are modest in comparison to other companies' and the work they have been asked to do." The turnout yesterday was notably smaller than past shareholders' meetings’, cannot be considered without a proper justification for conducting 40 meetings and appropriate disclosures about the agenda of the meetings and the outcome of the same.