Accounting management on: Case study analysis of Pacific Dunlop
Case 1 Pacific Dunlop
It is viewed from the case study that at the end of 1994, the ASC was considering taking Pacific Dunlop ltd to court because on its implementation of the controversial ISOTD technique of amortizing goodwill, in spite of constant threats from the court. In simple words, it could be stated that the main reason for the ASC to take Pacific Dunlop ltd to court because of the utilization of the ISOTD technique for treatment of goodwill which breaches the Accounting Standard 1013. The main argument for the case study is on the computation of the goodwill, that the Pacific Dunlop must utilize which technique of accounting for the computation of goodwill such as ISOTD technique, discount method or computes the sum of the goodwill in relation with Accounting Standard 1013 (Schipper, 2003). Those who are not in the favor of ISOTD technique claimed that utilizing ISOTD technique for amortization of the goodwill is not the accurate technique because this technique is related on the fact that majority of the gains are predicted to be achieved in coming years and that might be possible in rare situations (Mack, 2003). According to the ASC’s perspective, it could be complex to anticipate the situations in which gains are estimated to be accomplished from the goodwill after the later year of useful life of the goodwill.
On the other side, AASB 1013 describes the computation of accounting for the discount and goodwill on the acquisition of the business entity. This standard comprises the computation of accounting for the internally created goodwill (Mulford & Comiskey, 2002). The objective of the AASB 1013 is to mention the treatment of accounting for discount and goodwill on the acquisition of the business entity and wants disclosure information relating to the goodwill so that users of financial statements are provided with the information about the financial position of the business entity.
It would be complex for the ASC/ASIC to show that accounts of Pacific Dunlop were not accurate and fair because managing director of the Company, Mr. Philip brass has claimed that the boards of directors of the Company were being emphasized to sign off the accounts with no their own input as to goodwill value. But on the other side, the AARF executive director placed information together which forms the foundation of standards of the accounting and he supported that the ASC principle against Pacific Dunlop forms the legal and intuitive position which could appear to be the sufficient move for ASC to make. It has been examined that executive director of the AARF was worried how the ASC would succeed the case. The lawful action find out by ASC is recognized to be related on whether the accounts of the Company show an accurate and fair view of the financial position, if the implementation of the ISOTD technique breaches the standard of accounting AASB 1013 (IAS Plus guide, 2008). It is very clear that the management of the Company had manipulated the accounts in such a way which becomes difficult for the corporate regulators to prove in the court that the financial statements are not accurate and does not offer the adequate information to investors and users. The most compelling argument in this case study is that the Pacific Dunlop was continuing to use ISOTD method for amortizing the goodwill after the constant threat from the court.
The ASC was worried about how to prove in court, the financial statements made by the Pacific Dunlop were not accurate and fair because the accounting method for the treatment of the goodwill breaches the accounting standard AASB 1013. At last, it can be concluded that the proving of the accounts that they are not accurate and fair has been the complex task for the corporate regulators (Gramlich, Mc anally & Thomas, 2001). It is advisable to the management of the Pacific Dunlop that they must amortize the goodwill in relation with accounting standard 1013 to avoid any sort of issues claimed by the ASC. It can be seen, there are several benefits on the utilization of AASB 1013 because this standard mentions the treatment of accounting for discount and goodwill on the acquisition of the business entity and need disclosure information associating to the goodwill so that financial report users are offered with the information about the financial position of the business entity.
Case 2 HIH Insurance Limited
Q.1.) It is very true that creative accounting is frequently not apparent until after the company faced the difficulties. It is likely to be the case because; the management of the HIH Insurance Limited had done the illegal decision in the accounting choice by manipulating the figures of the items in the balance sheet for showing the figure of the loss less in the financial statements. It is viewed that largest insurance company of the Australia called HIH suddenly collapsed because of resulting in loss of wealth and income for various investors, creditors and policy holders. It has been examined that the former finance director of the HIH conceded, the organization that they had list one-off items for reducing the size of the loss by $ 157 million in the half year of December 1998. In simple words, creative accounting can be considered as the practice of creating financial statements which suit a specific motive but don’t really depict the fair and true view. The similar was happened in the case of HIH Insurance Limited; the management had listed one –off items for reducing the size of the loss which comes under the illegal practices and creative accounting.
Q.2.) It is true that unexpected corporate failure recommends limitations in the roles of auditors and regulators and this can be seen in the situation of HIH Insurance Limited. It is ethically wrong what the HIH insurance did, they misled the figure of the loss in order to safeguard their image in front of the users and investors. Everyone in the market, get shocked when the former financial director of the Company admitted that the company had minimized the figure of the loss from $230 million to $ 73 million by not showing the one of the items in the financial statements.
At the royal commission of HIH, Finance director had to admit that the HIH had recorded reserves that were at very low side of the actuaries and tolerable limits of auditors
The former finance director of the HIH Insurance admitted that the failed insurer took large time to make individuals and public, the truth that the FAI, that it bought in Sep 1988 had increased the figure of the profits for the last years by the amount of $ 60 million through the implementation of the contracts that were booked as the reinsurance. But on the other side, he said that he had not misled the financial market above the results, because they were ratified by auditors, although they were deviated from the recommendations of the auditors. HIH insurance recorded more goodwill on the acquisition of the FAI than it actually costs, and implementing goodwill as the distinction among the net tangible assets value of the acquisition and the value paid for it. At last, it can be said that this kind of unexpected corporate failure suggest limitations and questions on the role of auditors and regulators.
Q.3.) In simple words, creative accounting could be referred as income smoothing, earnings smoothing, earnings management, cosmetic accounting and financial engineering. It must be recognized that some manipulation in accounting is done because of balance sheet not really because of earnings management (Dechow & Skinner, 2000). Generally, creative accounting is considered as undesirable and deceitful practice. It can be said that some problems of creative accounting have also seen in the case of HIH Insurance Limited and which comes under deceitful and undesirable practice.
It has been analyzed that the HIH Insurance Limited had misled the financial statements by various ways such as showing the figure of the loss less in the financial statements, raised the figure of the profits by the amount of $60 million with the help of contracts that were recorded as the reinsurance and recorded more goodwill on the acquisition of the FAI than it actually costs. These all kinds of practices mentioned above come under the practice of creative accounting.
It is ethically wrong what the HIH insurance did, they misled the figure of the loss in order to safeguard their image in front of the users and investors.
It is very wrong, when former finance director said that failed insurer took large amount of time to make aware about the public about the truth that the FAI that it purchased in 1988 had raised the figure of the profits of the year by the sum of $ 60 million with the help of contracts that were recorded as the reinsurance.
But on the other side, Normative Accounting Theory can be considered as the theory where theorist tries to suggest his ideas on the accounting related upon deductive logic, inductive methods and subjective opinion. It is very clear that normative theory offers a means for the further research in optimal practices of accounting and concerned with the optimal performance of accounting. It has been analyzed that normative theory of the accounting is related on what must happen with the finances of the organization, given a particular group of those situations throughout the organization and not on what is actually observed or occurred. The perspective of the normative theory is that it is utilized in relation with prescribed methods and rules. Sometimes, theories of normative accounting are viewed as the measure of the Organizations true income (Harrison, 2011). To an extent, normative accounting theories would offer solutions to the problems of HIH Insurance Limited. It motivates the management of the HIH Insurance to utilize only those methods of accounting which are accurate and fair. Moreover, it restricts the management of the Company not to indulge in any kind of activities which are deceitful and undesirable.
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