For article, apply the chosen accounting theory in a report style format:
•Summary (Part A):
-Summarise the article in 100words or less.
Note: the summary is not included in the 500 words allowed for article, thus the maximum number of words for article is actually 600 words.
•Accounting Theory Issue (Part B):
-Identify and describe the issue or issues in the article that are relevant to, or can be explained using, the accounting theory.
Note: DO NOT describe the accounting theory itself, but instead outline the issues that led you to choose the article (i.e. ask yourself, what is this article dealing with that relates to accounting theory).
-Suggested word count = 100 words.
•Analysis (Part C):
-Provide an analysis of the relationship between the theory and the newspaper article. Describe and appropriately reference the applicable accounting theory and then show how the facts of your article are directly related to the theory. Use references to support your arguments.
-Suggested word count = 350 words.
-Provide a brief conclusion.
-Suggested word count = 50 words.
– Make sure that you include a word count at the end of your analysis. Otherwise you will lose marks for presentation.
•The article that you choose yourself must be reproduced in full:
•It should be included before the summary.
-It must be no more than 1.5 pages.
This is the article!
Account changes set to hit profits
•by: RUSSELL EMMERSON
•From: The Advertiser
•January 18, 2010 11:30PM
COMPANIES face a profit cut under proposed changes to accounting rules that would boost their liabilities and force potential debts on to balance sheets.
The proposed changes require companies to value liabilities at a contractor’s price if a market exists, or include all internal costs – including overheads such as equipment leasing costs – if it is performed in-house.
The changed approach would effectively require the company also to include an estimated profit margin on the liability, critics say.
Companies would also have to include potential liabilities at their “risk adjusted value”, a change that would require companies to include the impact of unlikely events such as paying large costs in a court case or massive payouts for environmental remediation.
Companies currently only include such events as contingent liabilities in a note to accounts, where they have no direct impact on profit.
Both changes are likely to force companies to include higher costs in their reports, cutting their profits.
Members of the Australian Accounting Standards Board split over the issue, with only one vote standing between its success or failure.
National Institute of Accountants chief executive Andrew Conway said the changes, if approved, would place greater pressure on companies to back up their attractiveness to investors and analysts.
“The minute you change anything related to accounting for liabilities and provisions . . . one of the biggest issues is explaining the changes to people,” he said.
“People will make up their minds based on the information in front of them, and if they don’t like what they see, they will invest elsewhere.
“It is important for people to know what a company does and if they change the calculation (of liabilities) then people need to understand what those changes mean, and companies will need to think about the way they explain it.
“I wouldn’t say this was almost a deal breaker but it is the sort of thing people focus on.”
The move is in part motivated by the global financial crisis, to reduce reliance on the “fair value” approach to search for established markets to value liabilities.
Critics of the proposal believe it would inflate their values and create incorrect information.
The AASB is seeking comment until April 12.
And I think this article related to “EMH(Efficient Market Hypothesis)”
So, please apply this theory in a report.
**This is an examplar for this assignment.
ANALYSTS DOWNGRADE CBA EARNINGS FORECAST
SUMMARY OF ARTICLE
As earnings forecasts for Commonwealth were downgraded by analysts due to the slowly growing revenue and rising bad debts, shares in Commonwealth Bank were under pressure. The share price of Commonwealth suffered the largest loss and dropped by $1.27, or 3.5 percent, to $35.47. In addition, the stock price of Big Four banks reacted in the same way. National Australia Bank was down 54c to $21.18. The share price for Westpac decreased by 40c to $20.20 and ANZ Bank closed down 34c to $15.37.
ACCOUNTING THEORY ISSUE:
The accounting issue encapsulated in this article is the responsiveness of the share price to earnings forecasts, one form of publicly available information. More importantly, such impact was not limited to the company to which the forecast was directed, specifically Commonwealth, but diffuses onto the other banks in the industry in general as well.
ACCOUNTING THEORY APPLICATION:
As per EFFICIENT MARKET HYPOTHESIS, the Australian equity market is generally consistent with its semi-strong efficient form (Watts and Zimmerman, 1986; p.19). All publicly available information, including all financial statements and other financial disclosures, will be rapidly and fully impounded into share price in an unbiased manner in the semi-strong efficient equity. In particular, an increase in share price indicates a good news and vice versa. If there is no price movement after the release of information, it is evidenced that the information fails to provide something new or all the information has already been anticipated. Simply put, it does not have information content. Ball and Brown (1968), for instance, specifically
concluded that unexpected earnings announcement has an impact on share prices. Investors generally respond to new information that significantly revises their valuation as to the potential future cash flows attributable to the company, and this is reflected in the share price.
According to the news article, the share price of Commonwealth went down by 3.5 percent due to the analysts downgrading its earnings forecasts.
In relation to this, two points should be noted. Firstly, the information contained in the earnings forecast had not been anticipated by the public before its release. This unexpected information, causing the decrease in Commonwealth share price, was generated by differentiation between shrinking expected earnings and acceptable March-quarter cash profit, as well as the relatively low bad debt expenses of Commonwealth. Secondly, the earnings forecasts, considered to be a kind of financial disclosure available to the public, are likely to have effective impact on share price (Imhoff and Lobo, 1984; Penman, 1980). Sound earnings forecasting deems to stimulate the increase of share price, while unfavorable forecasting contributes to the decrease of share price. As analysts downgraded earnings forecasts, investors relying on this information became reluctant to invest in Commonwealth yielding a drop in the stock price.
Additionally, the Big Four banks in Australian all suffered a loss in stock price. Commonwealth’s share price decreased most significantly by $1.27 to $35.47. The share prices for National Australia Bank, Westpac and ANZ went down by $ 54c, 40c and 34c respectively. This phenomenon is known as the information transfer (Forster, 1981) in which, provided the equity market is efficient, the earnings forecast for a particular organization tends to cause the positively correlated movement of share price for other organizations in the same industry. In the article in focus, the adverse earnings forecast for Commonwealth resulted in the decrease in its share price. In addition to that, such impact was magnified into the banking sector in general, manifested by the corresponding decrease in the share prices of other banks as well.
Plz shown a high level of ability to present the issue in a logical manner and to analyse the specific issue including application to a theory.
And references are clearly articulated and expertly used to support arguments throughout.
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