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ARTICLE for question 1:

Check the numbers: Accounting information still matters to you, me and investors around the world

When: 9 August 2018

Where: University of Western Australia, Perth, Australia

Ann Tarca delivered the CPA Philip Brown Annual Lecture, which is organised annually by CPA Australia together with the University of Western Australia Business School and Curtin Business School.

Introduction

Good evening. It is with great pleasure that I deliver the Philip Brown CPA Lecture this evening. I will discuss three things: (1) the relationship between accounting information and share prices, that is, what we know about the impact of accounting information in capital markets, based on empirical accounting research, (2) whether current accounting practices and changes in the economy have diminished the role for accounting information, and (3) the ways the International Accounting Standards Board (Board) is addressing the issues raised by those who consider accounting has lost its relevance.

I first met Professor Philip Brown in 1996 when I commenced post graduate studies at the University of Western Australia. I was immediately impressed by Philip’s enquiring mind and the rigour with which he examined research questions. Subsequently Philip was one of my PhD supervisors and then my coauthor on several research papers. Like many of Philip’s PhD students, I have continually referred to principles, techniques and strategies I learned from Philip – applicable to accounting research and beyond.

Background—Ball & Brown 1968

Philip’s own career received a crucial boost from a paper he published with Ray Ball in 1968. In this paper Philip and Ray investigated whether (or, rather, to what extent) accounting information was useful in capital markets, that is, they investigated whether the release of accounting earnings was reflected in stock prices. Today this seems a question with an obvious answer—yes. But at the time the answer was not obvious. In the 1960s accounting research was largely normative—investigating what ought to be rather than what was happening.

Like some of the very best research, Philip and Ray’s underlying idea was simple: could they observe any relationship between stock market returns and the release of companies’ earnings announcements? The innovation of their work was to apply a scientific method and provide empirical evidence to answer their research question. As many of you know, their study led to the development of an entire research school which continues to be influential in the lives and work of many academics and practitioners.

The findings of Ball and Brown showed that cumulative abnormal returns increased for firms with unexpected good news prior to the earnings announcement with some effects following the announcement. An opposite and stronger reaction was observed for bad news firms. The evidence

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was taken to support semi strong market efficiency, that is, market prices reflect all publicly available information. Since the publication of Ball and Brown many scholars have investigated various relationships of accounting information, share prices and market returns.

However, since the 1980s some researchers have argued that financial accounting numbers are becoming less useful, that is, less relevant to investors. This conclusion is based on examining the statistical association between accounting earnings and share prices (or returns) over time.

Loss of value relevance—Lev and other research

A recent strong voice in this area has been Professor Baruch Lev from New York University. In his December 2017 presentation at the ICAEW Information for Better Markets conference in London he stated that there was ‘widespread and growing dissatisfaction with the relevance of financial reporting information particularly among investors and corporate executives’. He pointed to research that shows a growing gap between capital market indicators and financial information, particularly earnings.

He linked the deterioration of the usefulness of financial information to: (1) the abandonment by accounting standard-setters of the traditional income statement (matching) model in favour of a balance sheet (asset valuation) model, and (2) standard-setters’ failure to adjust asset recognition rules to the fundamental shift in corporate value-creating resources from tangible to intangible assets.1 I will return to these criticisms later.

The research referred to by Professor Lev investigates the association of share prices (or returns) and a range of accounting measures in addition to earnings.

Measures include book value of equity; costs of goods sold; selling, general and administrative expenses; research and development expense; advertising expense, capital expenditure and revenue growth. Explanations proposed for the decline in relevance of accounting information include (1) the rise of the ‘new economy’ featuring companies with future earnings that depend largely on intangible assets and (2) the presence of more loss companies (for which earnings is less relevant to determining share price).

Research that provides another view

So, is there any hope for the usefulness of accounting information, the preparation and consumption of which is the focus of the working lives of many of us here this evening? The good news is yes, according to some recent new research.

In a paper published in 2014 Dechow, Sloan and Zha (two of Philip Brown’s outstanding honours students from the class of 1986 and one of Patty Dechow’s PhD students) replicated the B&B study for 1971–2012 and concluded that the relationships demonstrated in B&B were still present. That is, share prices reflect accounting information. Similarly, the study’s replication of Beaver (1968) showed increased trading volume and price residuals on the earnings announcement day, particularly in the later years (since 2000 ie 2001–2012).2

A study by Professor Mary Barth from Stanford University and her colleagues applies a new design approach (ie statistical technique) to a long time series of US data (1962–2014) to investigate the issue of the declining relevance of accounting information. The authors consider a larger set of

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accounting amounts than in prior work. They include accounting amounts that could reflect information about intangible assets (R&D expense, advertising expense and recognised intangible assets), growth opportunities (cash and revenue growth) and other performance measures (operating cash flow, revenue, special items and other comprehensive income)—all relevant to new economy companies.

They find no evidence of a decline in the value relevance of accounting information across all sample years or in any decade except the 1990s (tech stock bubble). In addition, they find increases in the value relevance of the accounting amounts for intangible assets, growth opportunities and other performance measures. The combined increase in relevance of these items offsets the decline in value relevance of earnings.

Although the trends are more pronounced for ‘new economy’ companies they are present for other companies too, suggesting the evidence is economy-wide. The authors conclude there is an evolution in value relevance of accounting information to a ‘more nuanced not declining’ relation between accounting amounts and share prices that reflects equity valuation in the new economy.3

Professor Barth’s evidence relates to US companies and markets. Is there evidence from other markets, and for IFRS firms? A recent study by Davern, Gyles, Hanlon and Pinnuck (University of Melbourne and Monash University) finds no decline in the value relevance of earnings for Australian firms from 1992 to 2015.4 The authors conclude that both shareholders’ equity and net income are important for investor decision making.

The empirical findings are consistent with evidence gathered in interviews with investors, regulators and practitioners. Interviewees note that the audited financial statements are an important foundation in investor decision making, having a confirmatory role and providing the initial input to investment models. The researchers also investigate the usefulness of summary measures including EBIT and EBITDA. They find both measures are value relevant and conclude that they are complements to net income. Interviewees state that these measures are used by investors when predicting and entity’s future performance.

Marvin Wee, Greg Clinch and I have also been investigating summary performance measures presented by IFRS adopting companies. We studied the non-GAAP disclosures by 400 IFRS adopting firms in eight countries in four years between 2005 and 2013. We find that the disclosure of non-GAAP earnings reconciled to a measures of management defined operating profit are strongly associated with share prices, suggesting the disclosure is useful to market participants. In addition, the adjusting items are not significant, consistent with them not being relevant to determining price.

The evidence is consistent with investors using multiple measures of earnings, not just net profit.5 The evidence of these studies is relevant to the Board’s work on the Primary Financial Statements project, which I will mention shortly.

Standard-setter response—Lev 1: Balance Sheet focus/IFRS 3/Conceptual Framework

I will return now to Professor Lev’s criticisms of the shortcomings of accounting information and consider how professional accountants and standard setters should respond.

Overall, we can be encouraged that there is evidence of the continuing value relevance of accounting information, albeit that some items of information have increased in importance (ie

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information about intangibles and disaggregated amounts) while others (such as earnings, a high-level summary measure) have decreased.

In light of the evidence and the criticisms, what should the Board be doing - remembering of course that the Board works in consultation with preparers, auditors, regulators and investors, so we need your input and advice about any changes we are considering.

An important Board project is the Primary Financial Statements project. We are working on requiring changes to the Statement of Financial Performance that will require entities to present more subtotals and more specific classifications of items. The requirements will encourage disaggregation to ensure more information about items by nature is available.

In addition, we will propose that if management performance measures are provided (ie additional performance measures calculated by an entity’s management) then they are presented within financial statements and subject to reconciliation and audit.

Considering the research findings I have presented this evening, we are confident that these changes will further enhance the accounting information provided that is relevant in today’s capital markets.

But what about Lev’s claim that standard-setters have a misguided focus on asset valuation and that they neglect the matching of revenue and costs? We could look at IFRS 3, the Standard that applies to acquisition accounting, as an example. On acquisition, the assets of the acquired company are recorded by the acquiring company at their fair value, which represents the value of the business acquired. Surely that makes good sense?

The objective of accounting standards, which underpins the standard-setter’s work and is familiar to many of you, is to provide information that is relevant and representationally faithful and thus useful to decision makers who rely on that accounting information.

The acquirer is recording the assets acquired at their cost to the acquirer, and of course recording transactions at historical cost is a fundamental and longstanding principle of accounting. Assets acquired that have a finite useful life are amortised over their useful life, reflecting consumption of the asset.

However, this accounting leads to an issue for analysts that makes comparison of some companies difficult. Companies that grow through acquisitions may show higher cost of goods sold and more amortisation expense relating to the value of inventory and identifiable intangible assets acquired. The postacquisition earnings are reduced by these charges, which, being non-cash items, are not reflected in cash flows.

If a company grows organically, that is, not by acquisition, and creates intangible assets such as brands and customer lists through its own business activity, the company will not record the charges for amortisation that are incurred by the acquirer. Therefore, many analysts adjust the reported earnings of the acquiring company (ie add back to earnings the effects of fair value adjustments and amortisation) so they can better compare companies and investment opportunities.

Companies may provide clear disclosures to allow investors to make these adjustments, but the accounting is part of a friction that imposes costs and noise into the information system. An outcome could be that, for acquirer companies, earnings becomes less relevant as a summary measure and operating cash flows become relatively more relevant. A University of Western

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Australia doctoral student, Jian Liang, has found evidence that this is the case for IFRS adopting companies.

The above example of IFRS 3 illustrates the logic of the asset valuation model and of using fair value measurement in acquisition accounting. Some critics of the Board state that the standard setter has a fair value bias, perhaps based on their experience with IFRS 3 and the financial instrument standards IAS 39 (and now IFRS 9).

But a careful review of IFRS Standards (which has been undertaken by some academics) shows that fair value measurement is required in only a small number of Standards and there is a clear rationale behind the requirements. In particular, derivatives do not have an historical cost. Fair value measurement is the measurement base which provides relevant and representationally faithful information.

In March 2018, the Board issued the revised Conceptual Framework for Financial Reporting. An important new feature of this document is the measurement chapter. It presents discussion of several measurement bases and the factors to be considered when selecting a measurement base. The chapter is not ‘biased’ in favour of fair value measurement but rather the chapter states that the measurement base will be selected to maximise the qualitative characteristics of financial information (relevant and representationally faithful information).

In addition, the Conceptual Framework is clear that the Statement of Financial Position and the Statement of Financial Performance are of equal importance. It explicitly states that information about income and expenses is just as important as information about assets and liabilities. The structure of asset and liability definitions, followed by definitions of income and expenses, provides the best approach to measuring financial performance and presenting financial position.

If you think about the issues, you can see that the definitions must start somewhere. Standard-setters have spent considerable time and effort attempting to define ‘profit’, but without success. This suggests that we would be unable to build a conceptual framework from the definition of profit.

Also relevant to tonight’s topic is the statement in the Conceptual Framework that understanding an entity’s financial performance requires an analysis of all recognised income and expense, that is, not just a summary total of profit or loss, as well as other information in the financial statements. This approach is consistent with the value relevance research I have been discussing that points to the importance of a range of performance measures within IFRS reporting.

The Concpetual Framework captures a great deal of thinking about contemporary accounting issues and will provide a basis for Board decisions in the future. For the Board, it is already applicable and you can see reference to the Conceptual Framework in our current discussions. The Framework is also being used by the Interpretations Committee.

Standard-setter response—Lev 2: Recognition of intangible assets

The second criticism from Lev is that standard setters have failed to adjust the asset recognition rules to accommodate the changes in the economy related to generating value through intangible assets. Lev’s criticism has more weight in relation to US GAAP where all research and development expenditure (except expenditure on software) must be expensed.

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In contrast, IFRS Standards allow the capitalisation of development expenses when certain criteria are met. Lev cites research on IFRS reporting companies that shows firms’ capitalised development costs are highly correlated with market values and that disclosures about the process of testing for capitalisation is useful for investors.6

Nevertheless, there is criticism of accounting for intangible assets under IFRS Standards and calls for activity in this area. IAS 38 is one of the oldest IFRS Standards and reflected conservative international practice—recognition of purchased intangible assets at cost, revaluation of intangibles only in the presence of an active market and no recognition of a company’s internally generated intangible assets.

This was somewhat at odds with practice in Australia at the time and some of you may recall a flurry of activity prior to the adoption of IFRS standards in 2005, by both preparers who were concerned about removing internally generated and revalued assets from their balance sheets and academics who considered IFRS accounting requirements as a backward step in relation to providing useful information about intangible assets.

Lev’s criticism is that standard setters do not permit recognition on the balance sheet of the intangible assets that companies are creating. Lev suggests that expenditure on intangible assets should be capitalised and then assets would be recognised on the balance sheet. The relevance of earnings would increase because expenditure that generates future benefits is not being written off. This is consistent with the idea behind capitalisation of development expenses under IAS 38. Lev argues that his proposal is not pursuing an asset valuation approach, but rather better matching of revenue and expenses.

Recent discussions of the Board have raised the question as to whether IAS 38 will serve us well in the future. In addition to being a core part of IFRS 3, intangible assets are important in the extractive industry. The Board has added a research project on Extractive Industries to its work plan so I look forward to hearing your views on this topic in the future.

Another issue that touches IAS 38 is commodity trading, including accounting for cryptocurrencies. The IFRS Interpretations Committee and the Board have had several discussions on this topic over the last year and our research and exploration of issues is continuing.

So, in summary, I find several benefits in the points raised by Professor Lev. He leads us to consider the way the Standards require assets to be recognised (the asset valuation approach) and whether our Standards result in useful information for decision makers.

He also challenges us on the topic of intangible assets which now represents a key issue for standard-setters, without a clear way forward. Therefore, his work shows some of the benefits we can receive from academics: valid criticisms and challenges but also suggestions for changes to address the problems identified.

Does this mean we should pursue more historical cost measurement? In some cases this is not possible. Accounting practice has used a mixed measurement model for decades, reflecting attempts to capture economic reality within accounting information. The Board’s recent Post-Implementation Review of IFRS 13 included a literature review of the impact of IFRS 13, the Standard about fair value measurement. Many studies in that review (using US and IFRS company data) pointed to the relevance of fair value measurement for market participants.

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Lev suggests it is time for standard-setters to rethink their approach to accounting for intangible assets. He suggests the capitalisation (and amortisation) of many expenditures on intangible assets (for example internally generated patents, copyrights, software, customer lists) to improve matching of revenue and expense and thus the quality (and value relevance) of earnings. Such a proposal is not presently on our agenda and a project would only be initiated with support from constituents.

We are very aware that at present our community has a substantial amount of work to complete with the implementations of IFRS 15, 9, 16 and 17. We are supporting implementation in a variety of ways, including the work of the Board and the IFRS Interpretations Committee issuing agenda decisions and narrow-scope amendments, transition resource groups, educational material on our website (webinars and articles), speaking at conferences and meetings with regulators, standard-setters and audit firms.

Chair of the Board Hans Hoogervorst has recognised that a period of calm is important as the new Standards are implemented. The future work direction of the Board will be considered in depth through the next agenda consultation.

Analyst response to Lev—Nick Anderson

As I conclude my talk, I would like to mention some insights provided by my colleague Nick Anderson about Professor Lev’s views.7 Nick is a Board member with 30 years’ experience as a buy-side equity investor and of course analysts are the primary users of listed company financial information. Nick recognises that the environment for company operations and for financial reporting has changed dramatically during his working life and that the importance of other information (that is, information derived from outside a company’s financial reports) has become more plentiful and more useful.

However, Nick is clear about the vital importance of the foundation provided by audited financial statements in the investment decision making process. Nick also notes that financial statements are not designed to show the value of a reporting entity. As our colleagues at the Board’s Capital Market Advisory Group remind us, valuing an entity is their job!

Overall, Nick points to the range of information that an analyst may use, and also the skills and experience necessary to make wealth enhancing decisions from the available information. Although the Board does not have any specific projects at present that address the broader issues of recognition of more intangible assets, we do have a project to revise our Management Commentary Practice Statement.

We know that investors and others make use of a wide range of information and that many entities seek to provide information to complement the financial statements through their management commentary reports. Accordingly, we consider that updating our guidance for narrative reporting, following the many changes in the economy and in entities' business models and strategies, may encourage better reporting on a wide range of issues, including the value generating potential of intangible assets.

Conclusion

In conclusion, I return to the title of my talk this evening. I once wrote a paper with Philip that referred to accounting information as ‘the life-blood of capital markets’ or similar. (Incidentally,

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those words feature prominently on this website). I haven’t changed my view and I expect that Philip hasn’t changed his either. Accounting information matters – to entities seeking to raise capital, to accountants working in the preparer, auditor and regulator communities and to analysts and investors.

Yes, the economy has changed in ways we may not have predicted even a short time ago and the range of potentially useful information available to investors has expanded enormously. Yes, there are many intangible assets that are not recognised on the balance sheets of our listed companies and accounting will continue to fail to capture aspects of companies that are essential to their future success, such as the quality of management and the skill of staff.

However, accounting provides a record of past activity and provides the starting point for predicting a range of earnings measures. The Board seeks to improve financial reporting by developing IFRS Standards that promote trust, growth and long-term stability in the global economy.

Please continue to assist us by sharing your knowledge and expertise in the standard-setting process. In the conclusion of his paper, Professor Lev calls researchers to pursue that ‘exciting and potentially influential research area: accounting standard setting’. I fully concur with Professor Lev in this view and look forward to seeing the outcomes of your research endeavours.

1Lev, B., 2018. The deteriorating usefulness of financial report information and how to reverse it. Accounting and Business Research, 48(5), pp.465–493.

2Dechow, P.M., Sloan, R.G. and Zha, J., 2014. Stock prices and earnings: A history of research. Annual Review of Financial Economics, 6(1), pp.343–363.

3Barth, Mary E. and Li, Ken and McClure, Charles, Evolution in Value Relevance of Accounting Information (May 7, 2018). Stanford University Graduate School of Business Research Paper No. 17–24. Available at SSRN: https://ssrn.com/abstract=2933197 or http://dx.doi.org/10.2139/ssrn.2933197

4Is financial reporting still and effective tool for equity investors in Australia? Working paper, University of Melbourne and Monash University. https://www.ifrs.org/- /media/feature/meetings/2018/april/asaf/asaf-08a-research-paper-april-2018.pdf. Also https://www.ifrs.org/-/media/feature/meetings/2018/april/asaf/asaf-08-is-financial-reporting-still-an-effective-tool-for-equity-investors-in-australia-april-2018.pdf

5Clinch, Greg and Tarca, Ann and Wee, Marvin, The Value Relevance of IFRS Earnings Totals and Subtotals and Non-GAAP Performance Measures (March 8, 2018). Available at SSRN: https://ssrn.com/abstract=3178567 or http://dx.doi.org/10.2139/ssrn.3178567

6Chen, E., Gavious, I. and Lev, B., 2017. The positive externalities of IFRS R&D capitalization: enhanced voluntary disclosure. Review of Accounting Studies, 22(2), pp.677–714.

7Anderson, N., 2018. ‘The deteriorating usefulness of financial report information and how to reverse it': a practitioner view. Accounting and Business Research, 48(5), pp.494–496.

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Answering Q1 - 9 marks (1,500 words)

The purpose of Q1 is to demonstrate that you can analyse a current accounting issue reported in a news article, and to write a report for the CEO that provides her with a deeper theoretical understanding of the issues identified in the news article.

A well-designed answer that addresses the specific aspects of marking rubric will:a) Present as a report to the CEO

Introduction: Include a copy of the news article

b) Identify, describe and discuss the key issues reported in the news articlec) Link the major issues to ACC518 topics and theories:

i) Identify a range of relevant accounting theories that are applicable to the issues reported in the news article

ii) Deconstruct and evaluate the issues reported in the news article through the use of theories

iii) Present a logical conclusion regarding the significance of the issues reported in the news article

d) Critically evaluate the underlying assumptions of the accounting theories, in particular, with regard to their application to the issues identified in the news article

The Guidance outlines a range of relevant literature. First read through the literature in order to gain a greater understanding of the issues being analysed by your paper, then paraphrase your understanding of the concept or issue in your own words.

201860 ACC518 Assignment 2 Guidance: Academic References has been loaded into the 201860 ACC518 Assignment 2 folder in Student Resources on Interact; it contains links to the various publications, relevant APA referencing information for each publication, as well as referencing information for the other prescribed readings (including Deegan).

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First of all, consider the presentation of this assessment. A well-designed answer will incorporate the following sections:

a) Present as a report to the CEO 50 words Introduction: Include a copy of the news article

Your paper is meant for the CEO to read, so when you do your analysis of the article, write your response to her. Begin your paper with an introductory paragraph of around 50 words that outlines what your paper will be presenting; write the introduction to the CEO...

Here is a template for to use; you need to add in the specific details:

Attention: CEOThe following report is an analysis of a recent article on accounting... First, the key issues in the article are explained; then accounting theory is used to further explore these issues; and finally conclusions are drawn as to the significance of the article.

Then add in a copy of the news article:

Deloitte IAS Plus (see 201860 ACC518 Assignment 2 Guidance: Academic References)

Figure 1: IASB member discusses the relevance of accounting information ("IASB discusses accounting information", 2018 )

-Take a screen shot from the website and paste a copy of the article into your Word doc. -Format the image: crop, border. -Label the image: Figure 1: IASB member discusses the relevance of accounting information -Reference the image: ("IASB discusses accounting information", 2018)

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b) Identify, describe and discuss the key issues reported in the news article 375 words

Tell the article’s story IN YOUR OWN WORDS clearly outlining the key issues.

The article refers to a speech by Ann Tarca; here is the text for the news article:

Deloitte IAS Plus

IASB member discusses the relevance of accounting information17 Aug 2018

17 Aug 2018

On 9 August 2018, IASB member Ann Tarca gave a lecture during a conference at the University of Western Australia in Perth.

Her speech entitled ‘Check the numbers: Accounting information still matters to you, me and investors around the world’ covered (1) the relationship between accounting information and share prices, (2) whether current accounting practices and economic changes have diminished the role for accounting information, and (3) how the IASB is addressing issues raised by those who consider accounting has lost its relevance.

The full version of Ms Tarca’s speech is available on the IASB’s website.

The article directs you to Ms Tarca's speech on the IASB's website:

IFRS 2018b

It is the content of the speech that you will be analysing for your report.

The text of the speech has also been loaded into the 201860 ACC518 Assignment 2 folder in Student Resources on Interact: 201860 ACC518 Assignment 2 Q1 Article: Check the numbers

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Tarca's speech contains a number of issues that are relevant to your studies:a) The relationship between accounting information and share pricesb) Whether current accounting practices and changes in the economy have diminished the role

for accounting informationc) The ways the IASB is addressing the issues raised by those who consider accounting has lost

its relevance

p.1: Background: The relationship between accounting information and share prices-1960s normative theory -Ball and Brown's ‘An empirical evaluation of accounting income numbers’ and the link to Efficient Market Hypothesis (EMH)

p.2: Loss of value relevance: Lev's criticism of the balance sheet (asset) valuation model

pp.2-3: Research that provides another view: arguments for the usefulness of accounting information

-p.3: for investor decision making, to market participants

pp.3-5: Standard-setter response 1: -p.4: IFRS3 and fair value, relevant and representationally faithful information -p.5: fair value bias, the Revised Conceptual Framework for Financial Reporting

pp.5-7: Standard-setter response 2: -p.6: IAS38, revaluation of intangibles and Australia in 2005 IFRS13: historical cost, fair value, and the Post-Implementation Review

p.7: Analyst response: primary users, financial statements and investment decision making

pp.7-8: Conclusion: accounting information matters, IASB seeks to improve financial reporting

The following outlines an effective method for answering this section: First print the speech, then read it through in its entirety, making notes as you identify the

key issues. Use a highlighter to outline important sections, and write your thoughts in the margin as you go.

Next you need to describe these issues by paraphrasing the speech. o To paraphrase is to include the ideas or information from an original source in your

paper by rephrasing those ideas or information in your own words. The key to successful paraphrasing is to use as few words as possible from the original text (definitely no cut-and-paste/right click synonym), but be mindful not to change the meaning that you are trying to convey as you rephrase. Write with confidence as you extend your post-graduate English language skills...

Finally, discuss any identified arguments for/against, advantages/disadvantages or strengths/weaknesses that become apparent as you describe the identified issues.

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c) Linkage of the major issues reported in the news article to topics and theories covered in ACC518 ≈850 words

The Guidance The Guidance for c) Linkage of the major issues... consists of three subsections: i), ii), iii)… This design helps you to clearly identify the different required aspects: the relevant accounting theories, linking the theories to the issues in the article, and drawing a conclusion about the linkage between the theories and the issues.

i) Identify the relevant accounting theories 100 wordsii) Use the accounting theories to explain the issues outlined in the speech 650 wordsiii) Present a conclusion 100 words

Your reportRather than structuring your answer as three distinct subsections, a quality response will integrate all three subsections into a seamless section of approximately 850 words, using paragraphs to distinguish transitions in your thinking. The following outlines an effective method for answering this section:

Use a variation of the basic D D E A method of answering an academic question... Definition: Give a brief yet concise outline of the relevant accounting theory Discussion: Link the accounting theory to the issue reported in the article in order to better

analyse the issue. Remember, the function of a theory is to explain how things and events are connected, so use the theories to better explain the issues

Example: This is directly tied to the issue in the article Answer the question: Explain the significance of the analysis by applying the theory to the

issue and drawing a conclusion about the linkage

The Marking Rubric indicates that essays which link the issues in the article to accounting theories will be well rewarded. As post-grad students, you should be able employ the D D E A method without using Definition, Discussion, Example & Answer as headings. Rather, D D E A is a functional philosophy that provides a structured way of thinking about your response to an academic assessment... A more appropriate style at this level is to use paragraphs to differentiate each D D E A element of your response.

In summary, for each issue from the article, use the relevant theory to better explain the issue, and then draw a conclusion about the linkage. Remember: structure, consistency, attention to detail, so don't 'cut corners' when writing your response. This section of the essay presents you with an opportunity to demonstrate your awareness of the various accounting theories, and how this can be used to provide the CEO with a deeper understanding of the issues in the article.

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i) Identify a range of relevant accounting theories that are applicable to the issues reported in the news article 100 words

There a number of ACC518 topics that are applicable to the news article/speech: Measurement in accounting

o Measurement is one of the most important contemporary accounting issues Normative accounting theories

o The Conceptual Framework is the principal normative accounting theoryo Other significant normative theories include the measurement bases Historical

Cost and Fair Value The standard-setting process

o IASB is responsible for the development and publication of IFRS Standards International accounting

o Standardisation of accounting o IASB's principles-based standards

ii) Deconstruct and evaluate the issues reported in the news article through the use of theories 650 words

Tarca's speech considered the debate around the usefulness of accounting information:-Is accounting information still useful?-If so, who is it useful to? IFRS 2018a: pp.8-9: Objective, usefulness and limitations of GPFR

Make sure you define the Revised Conceptual Framework of Financial Reporting, refer to it by name, and reference it correctly. Do not assume that the reader knows this information.

Deegan 2014: pp.231-234: Objectives of general purpose financial reporting

Lev criticised the balance sheet (asset) valuation model:-Have the standard-setters rejected the income statement model? IFRS 2018a: p.22: Objective and scope of financial statements Deegan 2014: pp.36-37: General purpose financial statements

Over the past decade, the use of fair value measurement has increased in significance:-Are the standard-setters biased towards fair value?-If so, what effect would this have on the usefulness of accounting information? IFRS 2018a: p.54: Information provided by particular measurement bases

pp.62-63: Factors to consider when selecting a measurement basispp.69-70: More than one measurement basis

-What is the connection between measurement bases and qualitative characteristics? IFRS 2018a: pp.63-66: Relevance, faithful representation

pp.14-17: Relevance, faithful representation

The standard-setter continues to work towards globally accepted accounting standards:-What is the role of the standard-setter? IFRS 2018c: web page: Who we are IFRS 2018d: web page: How we set IFRS Standards IFRS 2018e: web page: How we develop IFRS standards

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-What is the purpose of the IFRS13 Post-Implementation Review? IFRS 2018f: web page: Post-implementation Review of IFRS13 Fair Value Measurement

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NOTEThe Post-implementation Review of IFRS13 Fair Value Measurement will be the subject of 2018 ACC518 Assignment 2 Question 2.

iii) Present a logical conclusion regarding the significance of the issues reported in the news article 100 words

Round off your linkage of the major issues reported in the news article to topics and theories covered in ACC518 with a logical conclusion. This is your opportunity to express your opinion based on the D D E A logic that you have just presented. Most importantly, it's your opinion, so write the conclusion entirely in your own words without any matching text. You are offering your opinion to the CEO who has entrusted you with this assessment, and the CEO will base her views at the upcoming conference on the conclusions that you draw.

d) Critically evaluate the underlying assumptions of the accounting theories, in particular, with regard to their application to the issues identified in the news article ≈285 words

The following are some questions and/or statements that can guide your critical evaluation of the news article. Remember, you are writing this report for the CEO, so use this critical evaluation to provide her with a deeper theoretical understanding of the issues identified in the news article through your insights, in your own words.

Is financial accounting information still useful?o Do capital markets still value financial accounting information? o Are contemporary financial statements biased towards balance sheet models?o If so, are balance sheet models biased towards fair value? o Has historical cost lost its significance?

Explain how the accounting theories help to provide the CEO with a deeper understanding of the issues discussed in the news article.

o Focus your thinking on the interdependent relationships between measurement, normative accounting theory, the standard-setting process, and international accounting.

Comment on the role of the standard-setter:o What are the IASB's goalso Will the IASB achieve these goals?o If the IASB does achieve its goals, what will be the outcomes:

- for accounting?- for the CEO and her organisation?

Think back to Assignment 1, where you critically evaluated the connection between the different functions of financial accounting, measurement bases, the primary users of general purpose financial statements, and the qualitative characteristics they require. Now expand your critical evaluation based on these conclusions, and apply them to the article/speech.

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