Conceptual Framework Accounting and Reporting

Question: Discuss about the Conceptual Framework for Accounting and Reporting. Answer: Introduction Accounting theories refers to the pre defined methodologies and various assumptions that applied in application of financial reporting principles. Accounting theories help in reviewing the accounting practices and how accounting practices are changed to add in the regularity framework that governs the financial reporting. Every organization must follow the accounting theories in order to serve all the mandatory requirements of the financial reporting. Failure to follow the accounting theories will lead to accounting issues and at last complete failure. Such an incidence has happened with the Dick Smith and it led to the complete failure of the organization. In this report, there will be discussion of what are the accounting issues that led to collapse of Dick and who are the shareholders that are impacted by this collapse. Discussion of accounting theories that is being affected and that clearly demonstrate actions of Dick Smith management. Review of Dick Smith Failure Accounting issues that led to collapse of Dick Smith On the basis of report by the McGrath Nicol liquidators that highlighted the accounting issues that led to failure of Dick Smith. Such accounting issues are well in the industry as Real activities management. There are many wrong accounting practices done by the management of Dick Smith that impacted the organization net worth and there was point where the net worth is below the total liabilities. It has been reported that there has manipulation of sales figures and stock inventories (Malley, 2016). Management at Dick Smith is involved in showing the high revenue despite of very low sales. According to the report, major part of reserves has been used to purchase the excessive amount of inventory in order to expand the stores rapidly. Bank loans and rebates taken from suppliers have influence on purchasing decision of managers. It can be said because in year 2014-15 there was earning before interest, tax, depreciation and amortization of $72 million but after excluding rebates and sub sidies the earning figure comes to EBITDA loss of $119 million (Keall, 2016). So it can be clearly said that treatment of rebates in the accounting procedure can be the major issue that led to failure of Dick Smith. The accounting standard Revenue Recognition has been exploited in the case of Dick Smith as there was huge alteration in the earnings due to treatment of rebates (Malley, 2016). The auditing firm Deloitte was also in question on the treatment of non earning elements in the financial statements. The private equity owner (Anchorage Capital) in Dick Smith, earned higher profits when firm was listed at AHX and this point can be said as the turning point in the mystery of the failure of Dick Smith (Malley, 2016). The owners at Dick Smith are attracted towards the IPO and they have expectation to earn more through rapid expansion. This built the pressure on the management to purchase excessive inventory and rest is history (Keall, 2016). Impact on Stakeholders due to collapse There has been huge impact on the Stakeholders due to collapse of Dick Smith. Stakeholders are those who have interest in the success of the business and they are highly influenced due to takeover or merger. Stakeholders are those who are impacted by the management decisions and in addition to shareholders themselves, creditors, employees, customers and communities are severely impacted by the liquidation of Dick Smith. Shareholders are those who invest in the shares of the company to get some part of ownership and they are in expectation of good dividends and best value for their investment (Menicucci, 2014). After collapse of Dick Smith, market value of Dick Smith crashed on the floor and no dividend was paid by the company. Employees refers to people that are involve in day to day activities at the organization and are responsible for the welfare of the organization. Their contribution to the organization are more valued and respected by the management. There are more than 3300 employees in the Dick Smith who are totally dependent on the salaries they received from Dick Smith. On the collapse of Dick Smith all these employees are severely impacted due to unemployment. There are around 2.1 million $ are due to paid to the employees that will cleared in this calendar year. Customers and Communities are the ones that need to be satisfied by the organization. Ability to meet the customers wants are the key success to any business (Pratt, 2010). Customers provide revenue to the organization that helps management to operate the business efficiently. Dick Smith fails to fulfill the customer demands as they do not persists with changing demand and proper supply of required products. Management at Dick Smith has invested quite a huge amount on the supplies that are no longer in demand and have low worth as estimated. This turn into low demand and high supplies at Dick Smith and there is shortage of earnings to fulfill the current and future objectives (Britton Alexander, 2004). Suppliers also impact the business through taking active role in decision making. In case of Dick Smith, it can be said that suppliers are main players who forces the management to manipulate the decisions regarding the purchasing of inventory (Stolowy Lebas, 2006). Dick Smith has received quite a huge amount as rebate from the suppliers and it has affected the decisions taken by the management. Suppliers have suffered a huge loss due to wide up of Dick Smith as million of dollars stands credited in the books and also suffered a loss of valued customer. Management role at Dick Smith and what motivated them to manage as they likely to do On the plain reading of article on Dick Smith it can be implied that management have taken many wrong decisions that led to failure of Dick Smith. The private owners at Dick Smith are overwhelmed by the success on the listing of the company at Australian Stock Exchange. They received quite a huge profit on listing the shares and they were looking for profits through expansion of company rapidly. As per the article it is clearly seen that massive purchasing of inventory and costly expansion are the main cause of failure. Management was forced to purchase inventories at large scale without inspecting the actual requirements and future changes in the inventory list (Bonham, 2008). Private owners were in view that rapid expansion of business will lead to more growth as in year 2013 when listing of shares has been done. On inspection it has been found that either of expansion plans was reviewed by the auditors and it cause to purchase massive stock that are not required in the market. Major accounting issue was that the entire inventory was overvalued as it was valued in the market. As per the report by the market investigator rapid clearance sale was required to keep with the cash requirements in order to finance the current and future needs of business. Management fails to keep the required cash and cash equivalents that cause the company to go under liquidation (Greuning Koen , 2001). Accounting Theories that explains the actions of Dick Smith Management There are various accounting theories that explain the relationship between the company and its stakeholders. In the case of Dick Smith, positive accounting theory explains more about the actions of management at Dick Smith. Positive Accounting theory is concerned with the accounting practices. It is highly linked with the management actions and how they impact the stakeholders. It explains and predicts which organization will or will not uses a particular method for accounting practices. It does guide which method to be applied but highly concerns with the action of management on the organization (Weygandt, Kieso, Kimmel, 2010). Agency theory explains more about the positive accounting theory and it helps to understand the relationship between the shareholders (principles) and managers (agents). According to this theory managers perform to increase the wealth of organization and promote the stakeholders needs. Agents are responsible to enter into such contracts that are beneficial for the stakeholders. Agency theory defines the different models of corporate governance. According to this theory, it is duty of board of directors to act for the best interest of the company shareholders (Staubus, 2013). In the case of Dick Smith, managers had to perform to increase the company performance and to satisfy the needs to company owners. As per the report, managers fail to comply with the agency theory and this ultimately results in collapse of company (Greuning Koen, 2001). Managers have purchased the inventories that are not required to be purchased and this action reduces the reserve capital with the Dick Smith. Stakeholders are not benefited with action of company and company goes under complete wind up. Discussion of accounting theories There are two accounting theories that are clearly relates with the business activities. These two theories are positive accounting theory and other is normative accounting theory. Positive accounting theory as discussed above is related to real life occurrence of accounting transactions and it focus is on how management address the accounting treatment of various transactions. On the other hand, normative accosting theory tells the accounting policy makers on what should be done to confer with the accounting theoretical principles (Macve, 2015). In simple terms, normative theory starts with the theory and with specific policies whereas positive theory starts with the specific policies and ends with the management accounting principles. On the basis of analysis it can be said that positive theory is more important than normative theory as positive theory is related with the real life transaction and it impacts large number of people (Kieso, Weygandt Warfield, 2010). Conclusion On the basis of above discussion it can be said that management role is most important for the organization success. They work as agent for the company owners and they are wholly responsible for every act they perform to complete various activities in the organization. In the case of Dick Smith it can be said that one wrong action of management regarding the purchase of excessive inventory leads to collapse of Dick Smith. Bibliography Bonham, M. 2008. International GAAP 2008: generally accepted accounting practice under international financial reporting standards. Wiley. Britton, A. and Alexander, D. 2004. Financial Reporting. Cengage Learning EMEA. Greuning, H. Koen, M. (2001). International Accounting Standards: A Practical Guide Other World Bank Bks. World Bank Publications. Keall, C. 2016. Five serious questions about Dick Smith collapse. [Online]. Available at: https://www.nbr.co.nz/opinion/five-serious-questions-about-dick-smith-collapse [Accessed on: 4 September, 2016]. Kieso, D., Weygandt, J. and Warfield, T. 2010. Intermediate Accounting: IFRS Edition. John Wiley Sons. Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting. Routledge. Malley, A. 2016. 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