Accounting Theory

| December 8, 2017

QUESTIONS: (500 words)
Read Accounting Headline
7.7 below, and, adopting a Positive Accounting theory perspective, consider the
following issues:
a) If a new accounting
standard impacts on profits, should this impact on the value of the firm, and
if so, why?
b) Will the imposition of a
particular accounting method have implications for the efficiency of the

Please use appropriate referencing style. For this
assignment, you may need to use Proquest or Use recent academic journal
articles in referencing ( in-text referencing is mandatory).or google search.

Headline 7.7 Implications of the release of new Accounting Standards

less goodwill, higher earnings

The challenges facing
investors seeking a true picture of a company’s earnings during the impending
profit reporting season were underlined again on Friday when Foster’s flagged
it would report a $1.2 billion reduction in the net assets under new accounting
The transition to
international financial reporting standards (IFRS) means Foster’s net assets
will fall from $4.6 billion to $3.37 billion based on its last reported balance
sheet, mainly as a result of the internally generated goodwill on brand names
not being recognised.
The other major
contributor to the reduction is the requirement to allow for deferred tax
liabilities based on the difference between the carrying value of assets and
their cost base.
Despite scepticism about
the likely success of Foster’s recent $3 billion acquisition of winemaker
Southcorp and Foster’s ability to extract sufficient merger synergies, the
changes to the reported accounts do not relate to any issues with that
acquisition. The brewing and winemaking group told analysts the balance sheet
adjustments wouldn’t affect in cash flows or ability to pay dividends.
But reported profits will
be higher than they otherwise would be because of the removal of goodwill
amortisation charges.
Under the standards,
goodwill is instead subject to an annual ‘impairment test’, with the
elimination of amortisation expenses boosting reported profits. If the new
standards were applied to Foster’s half-year accounts to December 31, 2004, the
company would have made a net profit of $783.2 million versus the $757 million
The reduced asset base
reported by companies such as Foster’s will also mean they will report more
favourable returns on these written-down asset values.
The transition to new
standards has raised concerns that companies will announce potentially
misleading profit numbers and will be reluctant to predict future profits
because of the uncertainty around some aspects of the standards. There is also
concern about how credit ratings agencies will react to such wild swings in
balance sheet values.
But the adoption of the
standards will make it easier for investment analysts to compare companies to
their global peers. In Foster’s case, this means investment analysts will be
able to better discern whether it is outperforming global wine and brewing
peers such as Diageo and Pernod Richard.
ABN Amro Asset
Management’s Mark Nathan said: ‘It differs by company and industry. There will
be some concern over whether the new standards result in a less realistic
portrayal of what’s happening than the current Australian standards, but by and
large it’s an improvement.
However, Goldman Sachs JBWere said in a
note to clients that given the shortened period in which companies must now
report their results, the new standards ‘would only add to the data overload
during the last two or three weeks of August.’ Foster’s closed 2¢ higher at

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