Take Home Exam ACC80005 FINANCIAL ACCOUNTING THEORY. Semester 1, Swinburne University of Technology. Exam information

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1 FINANCIAL ACCOUNTING THEORY Take Home Exam Semester 1, 2018 Exam information This is a take home exam. This paper represents 60% of the final assessment for this subject. Marks on the paper total 60. There are 4 questions. Answer all questions. The exam answers should be submitted as a Microsoft Word file through the Turnitin System on Blackboard by 5pm AEDT 28 May. Also, a hard copy of the exam answers should be submitted by placing in a specially assigned exam drop box located on level 11 of the BA building by 5pm AEDT on 29 May. The hard copy version should be identical to the softcopy version submitted via Turnitin. To avoid plagiarism, you are required to provide references whenever you include information from other sources in your work. Both in-text citations, as well as a reference list, is required if you are using others work. The reference list will be excluded from the maximum word count for each question. Referencing convention required for this unit is the Swinburne Harvard System. Helpful information on referencing using the Swinburne Harvard System can be found at:

2 QUESTION 1 New rules to shakeup insurance sector Players in the local insurance industry will in three years time be required to adopt a new version of the International Financial Reporting Standard 17 (IFRS 17) issued by the International Accounting Standards Board (IASB). Experts told The Financial Gazette that the new regulations, which come into effect in 2021, could see insurers changing their distribution channels and the traditional broker could be rendered obsolete. The new rules dictate that financial firms report their financial statements, to the capital requirements and transparency demands within their corporate governance structures. The way insurers will report income earned from life insurance business will change. They will not report future premiums earned from the life cover, creating a volatile environment for them financially. The new rules are also expected to bring about radical changes whereby investment income, money put in stocks and government paper as invested will not be counted in the overall profits of the insurer. Insurance expert, Sijabuliso Moyo, told The Financial Gazette that IFRS 17 was likely to significantly impact on brokers as insurers seek to cut costs. He said many insurers would opt for direct contact with clients. The truth is that IFRS 17 will significantly impact insurance companies, said Moyo. When underwriters are affected by the new rules, they will likely ignore brokers as they try to cut their losses and opt for direct contact with clients. A broker sources for clients and connect clients with underwriters. The client doesn t pay the broker but is directly remunerated by the underwriter. But, once these rules come into effect, insurers are likely to change their distribution channels, meaning the traditional broker could be kicked out, experts said. Elles Mukunyudze, the Institute of Chartered Accountants of Zimbabwe (ICAZ) s technical consultant, who is also the managing director of Training and Advisory Services told The Financial Gazette this week that IFRS 17 will introduce significant changes to the way insurance entities report their financials. When IFRS 17 is applied in 2021, it will provide investors, policyholders and other users of information with consistent information for all insurance contracts as well as new metrics for evaluating the performance of insurers. Information that may already Page 2 of 5

3 be available for some companies through current measures will be available for all in a more comparable manner. (Source: Mhlanga, P. (2018), New rules to shakeup insurance sector, The Financial Gazette, Associated Newspapers of Zimbabwe: Harare, Available at: ) Required (a) The above article highlights economic and social consequences of the introduction of IFRS 17. Argue whether accounting standards setters should consider economic and social consequences of accounting regulation. When formulating your answer discuss the pros and cons of accounting standard setters considering economic and social consequences that may be associated with the adoption of their standards. (Maximum word limit: 500 words) (10 Marks) (b) What qualitative characteristics of general purpose financial reporting are the new IFRS 17 upholding? Explain how IFRS 17 is promoting those qualitative characteristics. (Maximum word limit: 300 words) (5 Marks) QUESTION 2 (a) If a reporting entity has a choice of either expensing or capitalising an item of expenditure, and if the entity is subject to a high degree of political scrutiny, then what choice would be predicted by the political cost hypothesis of Positive Accounting Theory (PAT)? Explain your answer. (Maximum word limit: 250 words) (5 Marks) (b) If senior managers within a company were rewarded by way of accounting-based bonus plans, then would they prefer the use of conservative accounting methods? Explain you answer. (Maximum word limit: 250 words) (5 Marks) (c) Organisations typically have a number of contractual arrangements with debt holders, with many covenants written to incorporate accounting numbers. Explain using the debt hypothesis of PAT why an organisation would agree to enter into such agreements with debt holders. (Maximum word limit: 250 words) (5 Marks) Page 3 of 5

4 QUESTION 3 The Institute of Chartered Accountants of England and Wales (2018) in their recent report entitled Ethos: a Guiding Compass for the Future Professional argues that it is important to understand that as part of their journey, professionals should develop not only knowledge but also moral sensitivity, and the ability to critically recognise themselves as responsible individuals, whose actions have a direct impact on society and who contributes toward a specific greater good. (p.6) Required: Explain how the actions of accounting and finance professionals impact the economy and society. Provide at least three well explained examples (real or hypothetical) to justify your arguments. (Maximum word limit: 600 words) (15 marks) QUESTION 4 IFAC calls for wider take-up of International training standards Government and organisations around the world should do more to ensure accountants are trained to common international standards, an International Federation of Accountants report has said. The report, which looks at the global status of adoption and implementation of international standards, stressed both public and private sectors around the world have a low understanding and capacity to introduce international accounting education standards. IFAC s Joseph Bryson, director of quality and development, told PF International that international education standards are absolutely fundamental for the profession, as well as economic growth. He said that when accountants around the world are trained to the highest level, it adds credibility to the profession and the government, which in turn can help economies grow. He said: It improves overall trust in the system, and where there is trust there s more investment, where there s investment there s more flow of capital and more economic growth. Bryson added that mobility is a hallmark of the profession and that education allows professionals to move around the world. Where countries have adopted high quality standards for competent professionals, those professionals are able to get mutual Page 4 of 5

5 recognition in other jurisdictions and work in those as well. But they are also able to be mobile between the public and the private sector. It s not only a passport around the world, it s also a passport around the economy and the nation. The federation also stressed that international accountancy standards can enable wider economic growth and improve the global economic system. (Extracted from: Simone, R. (2018), IFAC calls for wider take-up of international training standards, Public Finance International, The Chartered Institute Of Public Finance And Accountancy By Redactive Publishing Ltd: London) Required (a) In the above news report, Joseph Bryson, Director of Quality and Development at the International Federation of Accountants is quoted as explaining the benefits of adopting international accounting education standards. Analyse Joseph Bryson s arguments from the perspective of classical political economy theory, explicitly considering how he subscribes to a capitalist ideology and the role of accounting education in sustaining this ideology. (Maximum word limit: 500 words) (10 marks) (b) In you view, how should accountants be trained to take a more critical view of accounting and consider the emancipatory role accounting can play. (Maximum word limit: 300 words) (5 marks) END OF EXAM Page 5 of 5