ACC80005 FINANCIAL ACCOUNTING THEORY

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Swinburne University of Technology
ACC80005 FINANCIAL ACCOUNTING
THEORY
Take-home Assessment
Semester 1, 2020

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Question 1 (10 marks)
(The then Australian Prime Minister) Mr Turnbull said that while the federal government had
considerable power over exports including gas, he was seeking action from the gas
companies rather than a government mandate. ‘The gas companies – I have no doubt – are
very well aware they operate with the benefit of a social licence from the Australian people,’
he said. ‘They cannot expect to maintain that if while billions of dollars of gas are being
exported, Australians are left short. [A social licence has frequently been described as
representing an ‘unwritten social contract’ between companies and communities.]’
(“PM warns gas giants to tackle crisis” Crowe, D. Baxendale, R. and Owen, M The Australian,
2017)
Required
After reading the above extract use legitimacy theory to explain whether the presence of an
‘unwritten social contract’ would cause Australian gas companies to recognise the social and
economic consequences of their actions in their annual reports. (Maximum word limit: 500 words)
Question 2 (10 marks)
Mr Lewis joined Southern Cross as Chief Financial Officer after it issued a profit downgrade in May.
The owner of the 2DayFM radio network said that it expected full-year net profit to fall 10 per cent
below the previous year’s underlying NPAT of $89 million. Although the company’s gearing remains
within its banking covenant of less than 3.5 times earnings before interest, taxes, depreciation and
amortisation, there is concern in the market the company is slipping into a danger zone with its debt
covenants. Some market analysts believe that if revenues continue to deteriorate, gearing of above
three times EBITDA could trigger a breach of banking covenants.
(“Southern Cross CFO quit over writedown “, Darren Davidson, The Australian, 28 July 2014)
Required
After reading the above extract, use the debt hypothesis to explain the actions analysts would
expect of Southern Cross. (Maximum word limit: 500 words)
Question 3 (10 marks)
In an open letter to Chief Executive Officers of listed companies, the CEO of the world’s largest asset
manager Blackrock Inc wrote:
We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of
how companies are managing sustainability-related questions. This data should extend beyond
climate to questions around how each company serves its full set of stakeholders, such as the
diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’
data. Each company’s prospects for growth are inextricable from its ability to operate sustainably
and serve its full set of stakeholders.
The importance of serving stakeholders and embracing purpose is becoming increasingly central to
the way that companies understand their role in society…a company cannot achieve long-term
profits without embracing purpose and considering the needs of a broad range of stakeholders. A
pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a
bank that fails to respect its clients – these companies may maximize returns in the short term. But,
as we have seen again and again, these actions that damage society will catch up with a company
and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to
stakeholders helps a company connect more deeply to its customers and adjust to the changing
demands of society. Ultimately, purpose is the engine of long-term profitability.
(“A Fundamental Reshaping of Finance”, Larry Fink, Chairman and Chief Executive Officer of
BlackRock Inc, 16 January 2020)
Required
After reading the above extract use stakeholder theory to explain why a listed company might shift
its focus to operate to serve its full set of stakeholders. (Maximum word limit: 500 words)
Question 4 (10 marks)
In its latest annual report, business platform Xero (XRO) has made its first full-year profit, but warned
that COVID-19 will impact its bottom line in the 2021 financial year.
The New Zealand company made a NZ$3.3 million (roughly A$3.07 million) net profit in the financial
year ending on March 31 2020 — a huge turnaround from the NZ$27.14 million (approximately
A$25.23 million) loss in FY19.
The ASX-200 lister also enjoyed a 30 per cent spike in its revenue for the full year to March in the
year-on-year statistics. Revenue for the 12 months through to March hit NZ$718.2 million (roughly
A$667.69 million), a sharp increase from NZ$552.8 million (approximately A$513.92 million) the year
before.
Additionally, Xero also saw its annualised monthly recurring revenue grow 29 per cent to NZ$820.6
million (roughly A$762.88 million). But despite the growth, the company says the coronavirus’ impact
on its bottom line is imminent.
“While COVID-19 brings uncertainty, our long-term strategic ambitions are unchanged … now more
than ever, small businesses are recognising the benefit of being able to use the cloud to run their
businesses and manage their finances,” the company said in a market statement.
Further, in a 26 per cent subscriber spike, the company added 467,000 subscribers over the year and
now has a total of 2.285 million subscribers.
However, CEO Steve Vamos said many of Xero’s customers and partners are having to adapt the way
they operate during these current market conditions and difficult times.
“While COVID-19 brings uncertainty, our long-term strategic ambitions are unchanged and we
remain committed to our three strategic priorities: to drive cloud accounting around the world, grow
the small business platform, and to continue to build for global scale and innovation,” he said.
“Now more than ever, small businesses are recognising the benefit of being able to use the cloud to
run their businesses and manage their finances,” he added.
While Xero has performed strongly in the 2020 financial year, it has admitted that trading in the
early stages of FY21 has been impacted by the pandemic.
Xero is down 5.78 per cent on the market this morning, trading for $78.93 per share at 10:26 am
AEST.
{“Xero (ASX:XRO) achieves first full-year profit, warns of virus impact in FY21”, Lisa Simcock, Market
Herald, 14 May 2020)
Required
After reading the above extract explain the fall in Xero share price referring to capital markets
research. (Maximum word limit: 500 words)
Question 5 (10 marks)
Economic man is assumed to be rational and self-interested. He or she always carefully evaluates all
the options before making any decision, and always with the object of maximising his or her personal
‘utility’ or satisfaction. But cognitive psychologists have demonstrated that humans simply lack the
neural processing power to make the carefully calculated decisions economists assume. People are
not rational, they are intuitive. And altruism is often an important consideration in their decisionmaking. People can’t choose correctly between three options where the best option is not
immediately apparent. Rather than carefully thinking through the pros and cons of every decision,
people tend to rely on mental shortcuts (‘heuristics’) which often serve them well enough, but also
lead them into systematic biases. People are often slow to learn from their mistakes. They are
frequently capable of reacting differently to choices that are essentially the same, just because the
choices have been ‘framed’ (packaged) differently. This means that, rather than being coldly rational,
people’s decisions are often influenced by emotional considerations.
(“An economics fit for humans”, Ross Gittins, Ronald Henderson Oration, Melbourne. 2004)
Required
Assume that you a behavioural accounting researcher. Explain how you would design an accounting
study to investigate whether the claim made in the above extract that people’s decisions are often
influenced by emotional considerations is relevant to retail investors. (Maximum word limit: 500
words)
Question 6 (10 marks)
…despite the rise of IFRS, its application has not necessarily been consistent around the world for a
number of reasons…The inconsistent application of IFRS undermines its value as a single set of global
standards.
( “Consistency in IFRS – no borders, one language: dream or reality?” IFRS Outlook Source: Ernst &
Young, 2012)
Required
Ernst and Young state that the inconsistent application of IFRS undermines its value as a single set of
global standards. Provide arguments in support of the position taken by Ernst and Young.
(Maximum word limit: 500 words)
Question 7 (10 marks)
How can a conceptual framework help in the setting and modification of accounting standards in a
political environment?
Required
In answering the above question, your answer should include a discussion of the political
environment/process. (Maximum word limit: 500 words)