Accounting Theory and Current Issues

Question: Describe about the accounting theory and current issues. Answer: Yes, KGC ltd should revalue its assets from historic cost to fair value method. Fair value price is the price which states that how much money will be received when the asset will be sold in the market(KPMG , 2013). It is based on the present value of the asset in the market. This methodology will facilitate the comparability as well as consistency of the transactions(KPMG , 2013). It will enhance the understanding level of the stakeholders towards the company who value the assets at fair value method(KPMG , 2013). Principles According to the IFRS, investments should be measured at fair value(Christensen Nikolaev, 2016). Assets which are held by the company for profit generation purpose should be recorded according to the fair value measurement(Christensen Nikolaev, 2016). It is a market based approach; it cannot be regarded as entity based approach. It is based on the principle of future cash inflows as well as future cash outflow. It has been presumed that transaction will take place in principal market(Christensen Nikolaev, 2016). Potential issues Fair value states the exit value of the investment. It states the value through which it can be converted into cash. On the contrary, assets are recorded in the books of accounts when they are purchased. Therefore, recording of the assets in the books of accounts cannot be justified through this concept. Moreover there is lack of clarity as compared to the market assumptions(IFRS Org, 2016). It completely ignores the transaction cost which is incurred by the company while purchasing the assets(IFRS Org, 2016). Risks It will change the concept of measuring. Now the assets will be recognized at price rather than the realizable value. This will modify the amount of deprecation which is charged on the assets. Deprecation is the amortization cost of the fixed assets(Ramanna, 2013). This methodology will enhance the depreciation amount. Thus, the profit of the company will be reduced. Correspondingly less tax will be paid(Ramanna, 2013). Replacement value of the machine is $20.5 billion AUD. Further, value in use for the company is $12 billion AUD. This cost will be incurred in the current situation i.e. expected operations. On the other hand value will increase to $ 30 billion AUD if the contract relating to PPE is renewed for 10 years(Cpaaustralia.com, 2016). Presently there is no information about whether the company has renewed the contract or not. Therefore, it has been assumed that decision relating to the renewal is still pending. So it is advisable to record the assets at the replacement value. Recording the assets at the replacement value will represent true and fair value of the assets (KPMG , 2015). Triple Bottom line Triple bottom line is regarded as accounting framework. It involves three parts that are Financial Social Environmental(Carolina, 2016) It evaluates the performance of the company at the broader concept. It creates greater business value. It is based on the concept of full cost accounting. It has replaced the concept of bottom line which is related to the profit and cost of the organization. Triple bottom line facilitates the cost benefit analysis for the company (PWC, 2015). It states that primary responsibility of the company lies with the stakeholders as compared to the shareholders. It states that business should be conducted in such a way so that interest of the stakeholders can be promoted. It is not centered towards the profit maximization of the shareholders only(Carolina, 2016). Merits It facilitates the sustainability in the environment and the business processes. It is useful for the nonprofit organization, government as well for the profit making enterprises. It is an accounting technique which is beyond the traditional concept of accounting. This concept is very useful for economic development(Carolina, 2016) It enhances the profit for the organization. It identifies both risk and opportunities associated with it simultaneously. It reduces the opportunity cost and enhances the cost saving concept. (Carolina, 2016) Risks It enhances the responsibility of the companys board members. It is very difficult to quantify the financial aspects of the company. It is very difficult or hard to quantify environmental aspects as well as social aspects. It results into management conflicts because the main aim of the management is to maximize the shareholders return(Pondent, 2016). Nature of legitimacy The business legitimacy can be defined as a normative and subjective concept. Here company has used legitimacy in the context of the equities(KPMG , 2015). It has direct impact on the financial performance of the company as well as its goodwill on the market. Thus, it can be said that legitimacy of the company is directly linked with the creditworthiness of the business operations(Australian Accounting Standards Board., 2016). Importance of maintaining the legitimacy in the eyes of the traditional land owners The KGC ltd has already paid $4 million in royalties to the traditional owners of the land. These traditional owners carry out the mine process and pore process(Australian Accounting Standards Board., 2016). Moreover, the company has paid an amount of $ 6 billion to the PNG government as taxes. Company has built and operating the hospitals, water processing plants, grade schools, and health centers. These constructions have been taken place in the star mountain range of PNG(Andrews, 2002). Thus it will develop the trust and confidence level of the traditional land owners towards the company. They will be more loyal towards the agreements signed with the company. Thus, it will provide stability of the operations to the company in PNG range(Australian Accounting Standards Board., 2016). Importance of maintaining the legitimacy in the eyes of the government of PNG It is very essential to maintain the legitimacy in the eyes of the government. Government will have a positive outlook toward the company(Carolina, 2016). Moreover, they have the belief that operations of the company are carried out for the interest of trade and commerce. It will ensure that transactions are not conducted which are prejudicial to the interest of the stakeholders. Furthermore, government will support the business operations of the company. Government can provide assistance in the ways of subsidiary or grant which may be useful for the business to carry out its operations more effectively and efficiently. Thus it is relevant to maintain legitimacy from the business perspective(Australian Accounting Standards Board., 2016). Importance of maintaining the legitimacy in the eyes of the People of Australia Human resources are regarded as the greatest assets of the company(PWC, 2015). Company cannot function in the market until and unless people have the belief in the operations of the company(KPMG , 2013). Thus, it is very essential to maintain the trust of the people which can be built through legitimacy(KPMG , 2015). It will help the organization in expanding its operations. It will provide alternative source of labor to the company(Andrews, 2002). Do the legitimacy of the KGC ltd is at risk? In the last decades, the residents of the Indonesia known as Christian -animist residents along with the island of the New Guinea are agitating for their independence from the Indonesia. The PNG tribes are closely associated with the wars tribes. Further there is fear of conflict within the region(Australian Accounting Standards Board., 2016). Further, there is probability that the police actions will take place shortly. Thus there is high security alert in the Star mountain range of PNG portion. A recent collapse has taken place which has dumped 5 million liters of ore waste into the water of river. This river supplies drinking water to two local villages. This water is also used for harvesting purpose, fishing purpose, for cassava cropping. Moreover, there is allegation against the company that it is not environmentally responsible. The Company has made commitment that they will dispose the diluted water in the ocean. But this was not the case in actual or reality. Thus, it states that directly or indirectly KGC is at risk(KPMG , 2015). There is ample of allegation against the company(Andrews, 2002). Consequences if it loses its legitimacy If company losses its legitimacy, then it will be a great set back to the company. It will ruin the reputation of the company in the market(KPMG , 2015). This may hamper the goodwill and credit worthiness in the market(IFRS Org, 2016). Moreover, it may hamper the business operations of the company. It will increase the cost of the company unnecessarily. In addition, customer will lose their trust from the company(KPMG , 2013). Furthermore, loyalty of the customers towards the company will be ruined. It may hamper the profit ratios of the company. And will also hamper the overall financial health of the company. Company has to suffer huge losses. Overall it will not be beneficial for the organization(Andrews, 2002). Methods for restoring legitimacy of the KGC ltd First of all, company should do the discussion internally within the board members. Decision should be such which is according to the economic viability of the company. Decision should be approved in the general meeting by the shareholders. Proposed decision should be submitted to the government for the approval purpose(Andrews, 2002). When the proposed activity will be approved by the shareholders it will develop their trust and confidence towards the company. It will help the company in removing and mitigating the allegation towards the company. Moreover company can take CSR activities also(Andrews, 2002). This will ensure that activities of the company will be transparent and fair for the interest of the trade and commerce(Andrews, 2002). Two types of stakeholders theory Company should focus on the internal stakeholders' theory in which the employees and owners will be the main focus of the company. Apart from this, the company should also focus on the external stakeholders(Redwardfreeman, 2016). It involves society, creditors, shareholders, government, customers etc.(Stakeholdermap, 2016). This theory will promote the values and morals of the management in the organization(Edwardfreeman, 2016). It is based on two pillars i.e. Organization management and the ethics of the organization. Various ways to record the cost of the harm associated with the sludge spill Various costs are as follows Clean up cost Compensating cash payments Fines Offsetting work else where These cost be recorded either from the internal financing or from the outside borrowing Internal borrowing Pros It does not create any external burden on the company. There is no further liability of the company to pay fixed interest to other person. Thus entire profit is retained for the benefits of the organization(KPMG , 2015). It does not dilute the control of the company. Control of the company should be limited in few hands only as company is going for the internal borrowing(KPMG , 2013). Thus, it can be said that company's right to decision will not be diluted through internal borrowings(Redwardfreeman, 2016). Cons It reduces the share of the company in the profit of the company. It will reduce the retained earnings of the company which can be invested in other sources also(DanielRichards, 2016). External borrowings Pros It will help in maintaining the ownership of the company. It will provide the tax deductions. Moreover, there are low interest rates as compared to other source of finance(Extension.iastate.edu, 2016). Cons Payment of interest is fixed at the constant rate. Therefore, the company has to pay the debt whether it is having profit or not(IFRS Org, 2016). Also, the payment is fixed after a certain period of time and at that time whatever may be the condition of the company; payment has to be made at any cost(KPMG , 2013). If payment is not made on time then creditworthiness of the company is degraded in the market(PWC, 2015). References Andrews, C.J., 2002. Restoring legitimacy to the systems approach. Australian Accounting Standards Board., 2016. Property, Plant and Equipment. Carolina, M., 2016. The Triple Bottom Line and Why Its Crucial for Businesses. Christensen, H.B. Nikolaev, V.V., 2016. Does Fair Value Accounting for Non-Financial Assets Does Fair Value Accounting for Non-Financial Assets. Cpaaustralia.com, 2016. Guide to valuation and depreciation under the international accounting standards for the publicsector. DanielRichards, 2016. Debt Financing - Pros and Cons. Edwardfreeman, 2016. Stakeholder theory. Extension.iastate.edu, 2016. Types and Sources of Financing for Start-up Businesses. IFRS Org, 2016. Issues arising from the IASB Discussion Paper Fair Value Measurements. The British Accounting Association. KPMG , 2013. Fiar value Measurement. KPMG. KPMG , 2015. InsightsintoIFRS:Anoverview. KPMG. Pondent, C.S., 2016. Disadvantages of Triple Bottom Line Reporting. PWC, 2015. Consolidation and equity method of accounting. PWC. Ramanna, K., 2013. Why Fair Value Is the Rule. Redwardfreeman, 2016. Stakeholder Management. Stakeholdermap, 2016. 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