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Economy and Consumer Protection Regulation

Question:

Discuss about the Economy and Consumer Protection Regulation.

Answer:

Introduction:

The current paper demonstrates the analysis of the chosen article on accounting issue by clearly relating to the ideas, facts and concepts. The chosen article intends to evaluate how the accounting has lost its relevance by the way accounting issues are addressed by International accounting standard board. An item of accounting news in relation to the accounting disclosure and accounting treatment of items of Virgin Australia has been taken into account. Such report has been published on the website australianaviation.com.au on 29th August, 2018. The web page report is about the underlying financial performance of Virgin Australia that illustrates how the accounting measures have impacted the organization’s statutory performance. Analysis of the report would help in analyzing how the accounting treatment impacts the performance of company and it sometimes makes the standard lose its relevance.

The web page report says that Virgin Australia has suffered statutory loss of $ 681 in the financial year 2016-2017 resulting from several accounting adjustments, charges incurred for restructuring and write downs. It was ascertained that the amount of loss recorded by company is attributable to recording of non cash items.

It is required by reporting entity to make the reporting of cash flows from operating activities by using direct and indirect methods. The indirect method takes into account the adjustment for effect of transactions that is of non cash nature. Determination of net cash flow from operating activities using indirect method is done by making adjustments to loss or profit for the effects on non cash items such as provisions, depreciation, unrealized gains or loss from foreign currency, deferred tax, provisions, non controlling interests and undistributed profits of associates (Mura et al., 2015). In relation to the non cash transactions, the accounting standard outlines that the financial and accounting transactions that do not require making use of cash and cash equivalents should not be included in cash flow statement.  However, such transaction should be disclosed somewhere else in the financial statements that provides relevant information about the financing and investing activities. The current cash flow is not directly impacted many financing and investing activities, although the structure of assets and capital is affected by such activities. The objective of cash flow statement is consistent with the exclusion of non cash transactions from statement of cash flow (Beattie, 2014). Some of the examples of non cash transactions include an entity acquisition by means of equity issue and assets acquisition by means of financial lease and making assumption about direct related liabilities.

Therefore, the loss reported by Virgin Australia was largely due to recording of non cash items. However, such non cash recording does not affect the fundamentals driving profitability and the performance of cash flow. An improvement in underlying loss was generated in year 2017-2018 of underlying profit of $ 109.6 million.

Theory on unused tax losses:

The recognition criteria for deferred tax assets arising from carrying forward the tax credits and unused tax losses is same as deferred tax recognition criteria arising from deductible temporary differences. However, the evident of unavailability of deferred tax assets is provided by the evidence of unused tax losses existence. Therefore, in event of a reporting entity having a history of recent losses, a deferred tax assets is recognized by such entity from tax credits and unused tax losses to the extent that there is availability of sufficient taxable profits against which the entity will utilize the unused tax credits or unused tax losses differences or there is availability of sufficient taxable temporary differences (Johnston & Kutcher, 2015). In such circumstances, it is required by reporting entity to make a disclosure of amount of deferred tax assets along with the evidence that supports the recognition as per paragraph 82. The criteria of separately recognizing the accounting of business combination might not be satisfied due to the potential benefits of income tax loss carry forwards of the acquires. The criteria’s that is required to be considered by reporting entity in making the assessment of taxable profit profitability against which the utilization of unused tax credits and tax losses are done (Cazier et al., 2015). Such criteria are as follows:

  • Whether the entity will have taxable profits prior to the expiry of unused tax credits and unused tax losses.
  • Whether the unused tax losses that is unlikely to occur is due to identifiable reasons.
  • Whether there is existence of sufficient taxable temporary differences  
  • Whether there is availability of tax planning opportunities that will lead to creation of taxable profit that can lead to utilization of unused tax credits and unused tax losses (Yasseen et al., 2016).

The financial accounts of Virgin Australia lodged with the ASX depicting that the accounting measure impacted the accounting results for derecognizing the $ 451.9 million of deferred tax assets (australianaviation.com.au, 2018). A company is allowed to reduce its taxable income in future years by presenting deferred tax assets on the balance sheet. For all the deductible temporary differences, recognition of deferred tax assets are done to the extent that there will be availability of taxable profit against the temporary differences that is deductible. When a part of liability owing to the deferred tax assets is used for determining the taxable profit by allowing as deduction, then such deferred tax is deductible is recoverable in future period.  The accounting standard AASB 12 recognition and carrying forward of deferred tax assets is done to the extent that the assets will be utilized against the availability of future taxable profit (Hoque et al., 2015). Therefore, deferred tax assets are recognized by reporting entity for benefitting from the tax payment reductions by earning sufficient taxable profits. In case of Virgin Australia, losses have been incurred for six consecutive years. Hence, the deferred tax asset in case of Virgin Australia has arrived because of occurrence of loss for consecutive years. The probability of recovery of deferred tax assets arising from resulting tax losses is determined using convincing evidence test required by Australian accounting standard (australianaviation.com.au, 2018). Such tax losses is attributable to wide range of factors such as relevant business risk, forecast operating performance, reasons of past losses and new market future growth.

It has been found that the history of losses of the group can be verified objectively as a great degree of subjectivity is involved in it. Furthermore, there have been derecognition of the deferred tax assets in relation to tax losses using a prudent approach by the group and such derecognition is done to the extent that there do not exist any deferred tax liabilities for offsetting. Such approach for derecognizing deferred tax assets have been employed because of increased uncertainty in forecasting resulting from increasing fuel prices, reasons for past loss and competitive activities impact in international sector (Chytis, 2015).

It has been identified by the accounts of Virgin Australia that there would be recognition of unrecognized losses that can be used later after the generation of profit. The amount of tax losses available to the group would help in reducing the amount of tax that is paid in future (Vernimmen et al., 2014). Such activities acts as shield against taxation and is regarded as accounting adjustment. The fundamentals of underlying business were not impacted by any non cash measures.  

The above web page report published focuses on the accounting treatment concerning deferred tax assets in event of any unused tax losses that is being carried forward from previous year.  It was reported by the chief executive officer that it was prudent to consider the accounting loss issue on board. The company would be able to take the advantage of unused tax losses that is intended to be utilized for making the company return to profitability in early next year. It is expected that the revenue of group will grow by at least seven percent based on market conditions. The growth plan of company has long term benefits as the group has confident in their underlying business. In the later year, derecognition of deferred tax assets still exist for offsetting future tax liabilities of group. The major accounting adjustments have affected the loss generated following the review of asset value of group in accordance with the Australian standard (Müller, 2014). In addition to this, the restructuring changes have also impacted the statutory results However; all the adjustments related to noncash items did not impact the business fundamentals.

The report on case of Virgin Australia reporting the losses in previous years due to their accounting treatment owing to treatment non cash transactions and deferred tax assets have been presented. However, an improvement in leverage and cash position of the group was recorded due to the performance of cash flow. Therefore, the report presents the accounting adjustments related to deferred tax assets and non cash transactions impacting the profitability position of company. Furthermore, the treatment of unused tax losses by company was also used to take the advantage in terms of lowering the future amount of tax payable or taxable profits. Furthermore, the growth of Virgin Australia is also reflected by impairment charge and restructuring charge.

The main aim of this report is the analysis and evaluation of the situation of the post implementation period of IFRS 13: Fair Value Measurement. This report covers major issue related to the implementation of IFRS 13. At the same time, this report takes into account the analysis of the comment letters of four different respondents related to the exposure draft of IFRS 13.

Major Issues in Exposure Draft

It needs to be mentioned that there are some major issues associated with the exposure draft of IFRS 13: Fair Value Measurement and all of these issue can be found in the RFI (Request for Information) document of International Financial Reporting Standard (IFRS). It needs to be mentioned that RFI covered four major issues and they are discussed below:

  1. According to IFRS, the first issue is related to all the required disclosures of the fair value measurement of the assets of the companies. The main aim of this disclosure of all the information about fair value measurement is to provide both the users and preparers with deeper understanding about fair value measurement ("How we set IFRS Standards", 2018d).
  2. The second issue is related to whether the inputs from Level 1 need to be prioritized or the unit of account.
  • The third major issue is related to the application of the highest concept and best use at the time of the measurement of fair value of the non-financial assets so that better understanding can be gained ("How we develop IFRS Standards", 2018e).
  1. The last issue is related to the application of the judgment in some of the specific areas with the aim to assess the challenges in fair value measurement ("Post-Implementation Reviews", 2018f).

Description of Issues Related to Comment Letters

In this context, it needs to be mentioned that different respondents have provided their comments and feedbacks about the post-implementation period of IFRS 13: Fair Value Measurement and these respondents includes accounting standards setter bodies, individual companies, accounting firms, auditing firms and others. The following discussion shows the comment letters of four of the respondents:

It can be observed from the comment letters of the above four bodies that all of them are agreed with the recent development in the standards of IFRS 13: Fair Value Measurement. All of them believe on the fact that there needs to be one uniform standard for the companies related to the use of fair value measurement. However, the presence of some differences is there for these four individual bodies related to the use of fair value measurement ("How we set IFRS Standards", 2018d). Difference can be seen among these four respondents related to the implementation of fair value measurement in different assets. For example, UBS has little experience of the application of fair value measurement on biological assets where the company has much experience to apply fair value measurement in the assets like intangible assets, investment properties, financial instrument and others. On the contrary, other three respondents have different experience on the application of fair value measurement. Moreover, it can be observed from the comment letters that the respondents have followed certain pattern for the feedback letter where the answers of the RFI document issue are followed by a general agreement body of letter. Thus, one can gain understanding about the popularity of the IFRS 13: Fair Value Measurement from these comment letters ("How we set IFRS Standards", 2018d).

Utilization of Arguments

It can be observed from the analysis of the above four comment letters that there are both the ‘for’ and ‘against’ arguments for the post implementation review of IFRS 13: Fair Value Measurement and they are discussed below:

According to the analysis of the four comment letters, it can be seen that the main ‘for’ arguments from these four respondents is the introduction of IFRS 13: Fair Value Measurement as all the companies can get the chance for using three-level fair value hierarchy due to the fact that it provides the companies with the useful framework for the use of fair value measurement. At the same time, another major ‘for’ argument can be seen from these four respondents related to the fact that IFRS 13: Fair Value Measurement has been helping the companies in effectively disclosing all the information related to the use of fair value accounting (Deegan, 2014, p.44-47).

However, the presence of some major ‘against’ arguments can also be seen. For example, CPA Australia has considered some disclosures in IFRS 13: Fair Value Measurement as excessive and unnecessary; like the reconciliation requirement under 93 (e) as it does not provide any useful information for the management and the users (Deegan, 2014, p.44-47).

Thus, it can be seen from the above discussion that the respondents mostly believe that IFRS has introduced IFRS 13: Fair Value Measurement for the interests of the public, but in some of the cases, they are considering that some of the disclosure requirements of IFRS for IFRS 13: Fair Value Measurement is not good for wither the companies or the users. In this situation, it may be the reasons that there is a requirement for the standard setters to adopt different approach for setting the standards (Deegan, 2014, p.44-47). 

Application of Theories

The presence of some of the major theories can be seen that are related to regulations. Three of these major theories of regulations are Public Interest Theory, Private Interest Theory and Capture Theory. They are discussed below:

Public Interest Theory: This theory is considered as one of the major theories that help in giving theoretical justification of regulations. As per the core concept of this theory, public demand leads to the introduction of new regulations; and this aspect imposes the obligation on the regulators to play a vital role in the promotion of the interest of the public (Deegan, 2014, p.79-80). At the same time, public interest theory indicates towards the fact that the regulations look for the protection as well as benefit of the public at large. For this reason, one can further provide the description of public interest as the possible allocation of the scarce resources for the collective as well as individual goods (Koopman, Mitchell & Thierer, 2014).

Private Interest Theory: One can observe the presence of similarity between the public interest theory and private interest theory; and the core concept of their theory states that the individuals look for acting for their own interest. This particular theory indicates towards the assumption that the public form group with the aim to protect their self interest. This particular reason leads to the use of lobby of the regulations in order to adopt or reject a particular regulation (Deegan, 2014, p.89-93).

Capture Theory: It is considered as another major theory of regulation; and the core concept of their states that the regulators have the tendency to manipulate the regulations with the aim to satisfy their own interest. Hence, the regulations serve the interest of the regulators after certain period of implementation (Deegan, 2014, p.80-87).

The present situation related to the review of the post-implementation of IFRS 13 can be evaluated with the lights of the above-discussed theories. According to the private interest theory of regulation, it can be said that there may be the presence of lobby between the respondents as they want IFRS 13 to be worked for their own interest (Gans & Ryall, 2017). At the same time, the presence of ‘against’ argument eliminates the possibility of the presence of personal interest. In this context, it needs to be mentioned that the accounting bodes of different countries like Australia, India, China, Japan and others have expressed their views for the review of the post-implementation of IFRS 13 where they have provided their opinions both for the ‘for’ and ‘against’ arguments of IFRS 13. This aspect indicates towards their intention to work for the public interests so that better accounting principles can be developed. Hence, in the presence of all of these aspects, it can be said that there is not the presence of any fact that the respondents are lobbying in spite of the presence of similar responses (Gans & Ryall, 2017).  

Critical Evaluation of Underlying Assumptions

Based on the above analysis related to the theories of regulations, it can be said that IFRS does not have any intention to serve their own interest as their intention is the introduction of a uniform standard for the companies related to the application of fair value measurement. It can also be observed that the respondents do not have any persuasion related to serve their own interest with the help of lobbying. In the presence of these two aspects, it is not possible for the powerful lobby groups to achieve the preferential treatment related to IFRS 13 (iasplus.com 2018).

In this context, it needs to be mentioned that one major goal of IASB is to advertise the concept of fair value measurement by using the review of IFRS 13 as a major tool; and IFRS has been able in gaining many comment letters on this aspect. This aspect implies that the initiative of IFRS reflects the goals of IASB (iasplus.com 2018).

References

Beattie, V. (2014). Accounting narratives and the narrative turn in accounting research: Issues, theory, methodology, methods and a research framework. The British Accounting Review, 46(2), 111-134.

Borghetti says Virgin Australia in "strongest position" in his time as CEO. (2018). Australian Aviation. Retrieved 24 September 2018, from http://australianaviation.com.au/2018/08/borghetti-says-virgin-australia-in-strongest-position-in-his-time-as-ceo/

Cazier, R., Rego, S., Tian, X., & Wilson, R. (2015). The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes. Review of Accounting Studies, 20(1), 436-469.

Chytis, E. (2015, February). Deferred Tax Assets from unused Tax Losses under the prism of Financial Crisis. In International Conference on Business & Economics of the Hellenic Open University, Athens. Retrieved from http://193.108 (Vol. 160).

CPA Australia. (2018). Comment Letter. Retrieved 24 September 2018, from https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/media/submissions/reporting/iasb-aasb-fair-value-post-implementation-review.pdf?la=en

Deegan, C. (2014). Financial Accounting Theory (4th ed.). McGraw-Hill: Sydney.

Deloitte. (2018). Post-implementation review of IFRS 13. Retrieved 24 September 2018, from https://www.iasplus.com/en/meeting-notes/iasb/2018/march/post-implementation-review-of-ifrs-13

(2018). Comment Letter. Retrieved 24 September 2018, from https://www.ey.com/Publication/vwLUAssets/ey-comment-letter-pir-ifrs-13/$FILE/ey-comment-letter-pir-ifrs-13.pdf

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

Hoque, Z., Covaleski, M. A., & Gooneratne, T. N. (2015). A response to “theoretical triangulation and pluralism in accounting research: a critical realist critique”. Accounting, Auditing & Accountability Journal, 28(7), 1151-1159.

How we develop IFRS Standards. (September 2018). IFRS Foundation. Retrieved from http://archive.ifrs.org/How-we-develop-standards/Pages/How-we-develop-standards.aspx

How we set IFRS Standards. (September 2018). IFRS Foundation. Retrieved from http://www.ifrs.org/about-us/how-we-set-standards/

How we set IFRS Standards. (September 2018). IFRS Foundation. Retrieved from http://www.ifrs.org/about-us/how-we-set-standards/

ICAI - The Institute of Chartered Accountants of India. (2018). Comment Letter. Retrieved 24 September 2018, from https://icai.org/comments/asb/viewdetailpastcomment.html?commentdoc_id=33

Johnston, D., & Kutcher, L. (2015). Do stock-based compensation deferred tax assets provide incremental information about future tax payments?. The Journal of the American Taxation Association, 38(1), 79-102.

Koopman, C., Mitchell, M., & Thierer, A. (2014). The sharing economy and consumer protection regulation: The case for policy change. J. Bus. Entrepreneurship & L., 8, 529.

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

Mura, A., Piras, F., & Valentinčič, A. (2015). Do asset revaluations signal future performance of private firms. In 39th EAA Annual Conference.

Research Programme: Post-Implementation Reviews. (September 2018). IFRS Foundation. Retrieved from https://www.ifrs.org/projects/research-programme/#reviews

Sinclair, R. N., & Keller, K. L. (2014). A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), 286-302.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance: theory and practice. John Wiley & Sons.

Yasseen, Y., Jansen, J., & Small, R. (2016). Accounting for deferred taxation: accounting technical. Professional Accountant, 2016(27), 14-16.

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