Analysing accounting standards within National Australia Bank Limited

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Abstract: "Harmonized standards," a common body of standards that could be used in preparing and auditing financial statements the world over, would simplify comparisons of entities' financial positions and results of operations and cash flows. Such standards could also result in greater efficiency for entities reporting for national and international purposes (Roussey 2009). High quality accounting standards are critical to the development of a high quality global financial reporting structure. Different accounting traditions have developed around the world in response to varying needs of users for whom the financial information is prepared (SEC Concept Release). The principal activities of the National Australia Banking Group during the year 2008 were banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance, and custodian, trustee and nominee services (Annual Report 2008).

Introduction

Over the last two decades, the global financial landscape has undergone a significant transformation. These developments have been attributable, in part, to dramatic changes in the business and political climates, increasing global competition, the development of more market-based economies, and rapid technological improvements. At the same time, the world's financial centers have grown increasingly interconnected (Roussey 2009).

High quality accounting standards are critical to the development of a high quality global financial reporting structure. Different accounting traditions have developed around the world in response to varying needs of users for whom the financial information is prepared. In some countries, for example, accounting standards have been shaped primarily by the needs of private creditors, while in other countries the needs of tax authorities or central planners have been the predominant influence (SEC Concept Release).

The directors of National Australia Bank Limited (Company) present their report, together with the financial statements of the Group, being the Company and its controlled entities, for the year ended September 30, 2008. The principal activities of the Group during the year were banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance, and custodian, trustee and nominee services (Annual Report 2008).

Part A

Accounting and auditing standards have historically been set by national bodies and regulatory agencies in countries all over the world. Each country virtually has its own set of standards. Now, the developing global economy and growth in cross-border financing are creating an environment that would benefit from greater harmonization of accounting standards at both the international and the national levels (Roussey 2009).

Over the last two decades, the global financial landscape has undergone a significant transformation. These developments have been attributable, in part, to dramatic changes in the business and political climates, increasing global competition, the development of more market-based economies, and rapid technological improvements. At the same time, the world's financial centers have grown increasingly interconnected.

The International Federation of Accountants (IFAC) was organized in 1977. Its broad objective has been to develop and enhance a coordinated worldwide accounting profession with harmonized standards. The International Accounting Standards Committee (IASC) was formed in 1973 to formulate and publish, in the public interest, accounting standards to be used in the presentation of financial statements. Since its inception, the IASC has issued 31 statements on International Accounting Standards (Roussey 2009).

Because many countries followed (and still follow) different accounting principles, the IASC found it difficult to agree on particular accounting principles to use in the standards. In order to make progress, the IASC found it necessary to issue standards that contained, for example, the two most widely used accounting principles on a particular topic. Thus, the published standards contain alternative accounting principles and permit users to choose freely among the alternative accounting treatments for similar economic events and transactions (Roussey 2009).

To meet the need for greater comparability of financial statements, the IASC issued a new document aimed at improving accounting standards, "Comparability of Financial Statements,". The purpose of this document was to set forth proposals for the elimination of alternative accounting principles contained in the issued standards, or to identify the preferred accounting treatment when the retention of two treatments was still necessary (Roussey 2009).

The Australian accounting standard setters also put significant effort into contributing to the development of international accounting standards under the International Accounting Standards Committee (IASC). The AASB also sought to harmonize and to converge its standards with those of the IASB, and to assist the Public Sector Committee (PSC) of the International Federation of Accountants in developing standards for the public sector (Keith 2006).

The AASB implemented the FRC's strategic directive regarding the adoption of IASB Standards in 2005 with the issue of 40 new and revised accounting standards, and 14 Urgent Issues Group (UIG) Interpretations, including 12 UIG equivalents to IASB Interpretations published as Pending Standards and UIG Interpretations. The AASB also issued two new accounting standards during the year (Ciesielski 2008).

The AASB has a transaction neutrality policy, which means similar transactions and events should be accounted for in a similar manner by all types of entities, whether in the for-profit sector, the not-for-profit private sector, or the public sector - unless there is a sound reason to be different in particular circumstances. The AASB considers the specific needs of not-for-profit entities in the private and public sectors when preparing new and revised IFRSs for adoption in Australia (Ravlic 2000).

The role of developing nations in global economic development cannot be ignored. As sources of comparative advantage in labor and raw material, it is necessary to harmonize international accounting standards to measure the value of these assets in the world market. Government accounting needs to be standardized to assist in the efforts of inter-governmental economic development cooperation (Weber 1992).

Part B

High quality accounting standards are critical to the development of a high quality global financial reporting structure. Different accounting traditions have developed around the world in response to varying needs of users for whom the financial information is prepared. In some countries, for example, accounting standards have been shaped primarily by the needs of private creditors, while in other countries the needs of tax authorities or central planners have been the predominant influence (SEC Concept Release).

"Harmonized standards," a common body of standards that could be used in preparing and auditing financial statements the world over, would simplify comparisons of entities' financial positions and results of operations and cash flows. Such standards could also result in greater efficiency for entities reporting for national and international purposes.

Investors, analysts, organizations involved in cross-border financing, accountants, auditors, and the national professional bodies of standard setters and regulatory agencies will all be affected by these initiatives toward harmonized standards. There are presently at least three international bodies working toward harmonized accounting and auditing standards: the International Federation of Accountants, the International Accounting Standards Committee, and the International Organization of Securities Commissions (Roussey 2009).

International Standards of Accounting and Reporting (ISAR) identified a number of obstacles that small and medium-sized enterprises were facing in applying accounting standards that had been issued by various standard-setting bodies, both national and international. These existing standards have been created primarily with the financial reporting needs of larger companies in mind. Consequently, it has often been difficult to apply them to SMEs, particularly those in developing countries and countries with economies in transition. ISAR therefore agreed to work on identifying possible approaches that would meet the accounting and financial reporting needs of SMEs (United Nations Conference on Trade and Development; UNCTAD 2000).

FRS issued by the IASB is primarily designed to apply to companies that are publicly accountable, such as listed companies. While the IASB 's mandate is not expressed so clearly, the reality is that the increased complexity and scope of IRFS is very much driven by the capital markets' information needs. AASB has a mandate to produce accounting standards not just for the private for-profit sector, but also the public and the not-for-profit sectors. This can be contrasted with the lASB's mandate to only produce accounting standards for private sector reporting entities. Indeed, the convergence presently happening between the IASB and the American FASB has highlighted these crucial differences with intense debate on the IASB/FASB draft conceptual framework that is driven purely by the needs of the private for-profit sector (Reily 2006).

However, there is also a 'market' for producing financial reports that are not designed to be general purpose but which are required for other purposes, such as accountability, where the users are able to demand specific information or do not require information for economic decisionmaking. Such entities are non-reporting entities and at present make up some 75 per cent of large proprietary companies that lodge financial reports with the Australian Securities & Investments Committee (ASIC). The IASB does not consider these entities, however, the Institute of Chartered Accountants in Australia has, and has on issue a Business Practice Guide (BPG) that provides 'guidance' on the accounting policies that could be applied by such entities. This BPG is updated for major changes in accounting standards, such as the recent move to AIFRS for reporting entities (Reily 2006).

Part C

Globalization and privatization have created an enormous need and appetite for the capital necessary to fund these undertakings. They have also created, when the risks were appropriate, an eagerness on the part of investors to take part in the resulting global investing opportunities.

The ability for markets to be efficient and thereby attract capital sufficient to provide the necessary liquidity and depth is dependent in part on their ability to provide investors with high quality transparent information on a consistent and timely basis. That information must be sufficiently credible to investors that they believe it is reliable and are willing to invest based on it. Markets that have experienced events where the credibility of financial information was in question have experienced a flight of capital to safer havens. In addition, as was recently experienced by the Neuer Market, companies may leave or avoid markets where their reputation is affected by a lack of credible financial reporting (Turner 2001).

"Disclosures are statements which are widely and understandably presenting all material facts relevant to transaction in the notes to the financial statements so that financial statement users are properly informed." (Deegan 2007).

According to AASB framework income is defined as increase in economic benefits during the reporting period in the form of cash inflows or enhancements of assets or decrease in liabilities that result in increases in owners' equity other than those relating to contributions from equity participants. Revenue is the income that arises in the ordinary course of activities of an entity and is referred to a variety of different names including sales, services fees, interest income, dividends received and royalties earned. Revenue is recognized when it is probable that future economic benefits will inflow to the entity and these benefits can be measured reliably.

AASB 7 "Financial Instruments: Disclosures" was issued by the AASB in August 2005 and is effective for the first time for 2007/08 financial statements. This standard moved the disclosure requirements contained in paragraphs 51-95 of the former AASB 132 "Financial Instruments: Disclosure and Presentation" into AASB 7 so as to include all financial instrument disclosures in one place. The relevant paragraphs of AASB 132 were deleted via AASB omnibus 2005-10 so that AASB 132 now contains only presentation requirements for financial instruments. As a result it was also renamed AASB 132 "Financial Instruments: Presentation".

The Standard requires minimum disclosures about credit risk, liquidity risk and market risk in addition to those required under AASB 132 (AASB 7, paras 31-42), including:

Qualitative information for each type of risk arising from an entity's financial instruments, including the exposures and how they arise; objectives, policies and processes for managing risk; the methods used to measure the risk; and any changes since the previous reporting period (AASB 7, para 33). AASB 132 required disclosure only of financial risk management objectives and policies.

Quantitative disclosures, including summary data about exposure to each type of risk, based on information provided internally to key management personnel of the entity, as well as concentrations of risk (AASB 7, para 34).

Specific quantitative disclosures required for credit risk, liquidity risk and market risk.

Credit risk - maximum exposure to credit risk, an analysis of financial assets that are either past due or impaired, information about the credit quality of financial assets that are neither past due nor impaired and collateral and other credit enhancement obtained (AASB 7, paras 36-38). Previously, only disclosure of the maximum exposure to credit risk was required.

Liquidity risk - a maturity analysis for financial liabilities that shows the remaining contractual maturities and description of how the liquidity risk is managed (AASB 7, para 39). Previously, only banks disclosed this information under AASB 130.

Market risk - a sensitivity analysis for each type of market risk to which the entity is exposed, showing how profit or loss and equity would have been affected by changes in the risk variable, the methods and assumptions used in preparing the analysis and changes from the previous period (AASB 7, paras 40-42 and Appendix B Application Guidance, paras B17-B28).

NATIONAL AUSTRALIA BANK

The directors of National Australia Bank Limited (Company) present their report, together with the financial statements of the Group, being the Company and its controlled entities, for the year ended September 30, 2008.

The principal activities of the Group during the year were banking services, credit and access card facilities, leasing, housing and general finance, international banking, investment banking, wealth management, funds management, life insurance, and custodian, trustee and nominee services.

Credit risk

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees, but a significant portion is personal lending where no such facilities can be obtained.

Liquidity risk

The Group manages liquidity and funding risk through a combination of positive cash flow management, the maintenance of portfolios containing high quality liquid assets, maintenance of a prudent funding strategy and diversification of its funding base. The Group undertakes a conservative approach by imposing internal prudential limits that are in addition to regulatory requirements.

Market risk

The Group takes on exposure to market risks. Market risk arises from open positions in interest rate, currency, commodity, credit spread and equity products, all of which are exposed to general and specific market movements. The Group applies a Value at Risk (VaR) methodology to estimate the market risk of positions held and the losses expected, based upon a number of statistical assumptions for various changes in market conditions. The Board sets limits on the VaR that may be accepted, which is monitored on a daily basis. Market risk of derivative financial instruments held or issued is the risk that the value of derivatives will be adversely affected by changes in the market value of the underlying instrument, reference rate or index. Not all risks associated with intermediation can be effectively hedged. The residual market exposures together with trading positions are managed within established limits approved by the Board. A unit independent of the trading activities monitors compliance within delegated limits on a daily basis.

In my personal opinion National Australia Bank's has presented high quality disclosures. All the policies and standards they have used in the preperation of their financial reportes have been explained very well in the notes. Financial Instrument Disclosures are in accordance with the AASB 7 and faily understandable by a common person.

Conclusion

Accounting and auditing standards have historically been set by national bodies and regulatory agencies in countries all over the world. Each country virtually has its own set of standards. Now, the developing global economy and growth in cross-border financing are creating an environment that would benefit from greater harmonization of accounting standards at both the international and the national levels The International Federation of Accountants (IFAC) was organized in 1977. Its broad objective has been to develop and enhance a coordinated worldwide accounting profession with harmonized standards. The International Accounting Standards Committee (IASC) was formed in 1973 to formulate and publish, in the public interest, accounting standards to be used in the presentation of financial statements. Since its inception, the IASC has issued 31 statements on International Accounting Standards.

Investors, analysts, organizations involved in cross-border financing, accountants, auditors, and the national professional bodies of standard setters and regulatory agencies will all be affected by these initiatives toward harmonized standards. There are presently at least three international bodies working toward harmonized accounting and auditing standards: the International Federation of Accountants, the International Accounting Standards Committee, and the International Organization of Securities Commissions (Roussey 2009).

In my personal opinion National Australia Bank's has presented high quality disclosures. All the policies and standards they have used in the preperation of their financial reportes have been explained very well in the notes. Financial Instrument Disclosures are in accordance with the AASB 7 and faily understandable by a common person.

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