The Involvement of Stakeholders in the Decision Making of a Firm - Assignment Example

ACCOUNTING THEORIES AND ACCOUNTING POLICIES (Student Name) (Institution) (Instructor) (Course No) (Date) Question 1 a. The Stakeholder Theory In accounting, the stakeholder’s theory is an organizational management theory that addresses the values and morals in the management of an organization. The stakeholders of an organization are the individuals who benefit from or are harmed by the activities of an organization. The stakeholders of an organization include; the owners, who expect financial returns from the organization, the employees who have jobs and their livelihood relies on the firms, the suppliers who maintain the flow and materials and the customers who exchange resources for the products of a firm. The involvement of stakeholders in the decision making of a firm is important for the success of the firm. One of the reasons why the NAB would care about the small business sector and the regional business communities is to gain their trust. The NAB was the leading lending bank for many of the small businesses in Australia. However, following the internal restructuring under new management, the small businesses were adversely affected, causing the bank to lose their trust and hence lose the market share at the sole proprietor level. The application of the stakeholder theory would help the bank in ensuring that its quest for efficiency would be advantageous for the sole proprietors, who were the bank’s largest lenders. Under the new management, many of the bank staff were moved to the capital city offices with the notion of centrally managing the small businesses. The result was the lack of face to face contact with the clients and business failures. The McMinns for instance, had 16 different commercial managers in just five years. Additionally, the bank would care about the small businesses and the regional business communities by ensuring that staff restructuring is done in an orderly manner. Although staff restructuring is a managerial role, there would be the need to assess their relations with the sole proprietors before the transfers. In this case, the staff restructuring caused the NAB to lose its market share on the sole proprietor end, which was the most important lending group in the business. b. The Positive Accounting Theory The positive accounting theory is a theory that deals with the prediction of actions such as the choices of accounting policies by the corporations as well as the response of corporations the anticipated accounting standards. The positive accounting theory helps the financial institutions in integrating the securities market with the economic consequences. The theory is based on the fact that corporate institutions will always act in a way that maximizes their profit. An important hypothesis of the positive accounting theory is the political cost hypothesis. The hypothesis states that the greater the political costs to a corporation, the more likely it is for the management to use the accounting policies to defer reported earnings from the current period to the future period. The hypothesis brings politics into the choice accounting policies. The highly profitable firms attract both the media and consumer attention, causing increased taxes and regulations (Whittington and Delany, 2010, p. 65-80). In the case study, the case is the same for the National Australian Bank and the other banks from which the small businesses borrow money in Australia. Following the Cicutto’s Positioning for Growth Strategy, the NAB has lost numerous borrowers, hence losing the sole proprietor market share. To avoid accounting policies from the government that will make the banks to improve services to the small and medium size business owners in the country, the banks tend to promote the studies where the small and medium size business operators get fair deals from the banks. This is because the regulations by the federal government may be costly on the banks. c. Legitimacy Theory In the corporate world, legitimacy is considered as the perception that the actions of a corporation are desirable and appropriate within the socially constructed systems of values and definitions. The legitimacy theory helps organizations to implement and develop the social and environmental disclosure of information. The social perceptions of the organizations activities should concur with the societal expectations. In the case where the bank closures and management turnovers are not expected by the community, the banks may choose to carry out management turnovers and closures in a way that does not adversely affect the community. This can be done by involving the stakeholders in decision making and making them part of the growth project. Question 2 a. Benefits of sale and lease-back transactions One of the benefits that might accrue to Lion Nathan following the sale and leaseback transactions is the conversion of equity to cash. The sale-leaseback transactions allow the sellers to regain use of the capital that would else be entrenched in property ownership. Additionally, Lion Nathan would still enjoy the possession and use of the property for the lease period. With this type of transaction, the seller is likely to receive more cash than through mortgage financing. Another advantage of the sale lease back transactions to the Lion Nathan is that it provides an alternative to conventional financing. This type of arrangement can help the brewer in structuring the original lease term for a period that meets its needs with the absence of financial burdens such as the call provisions and refinancing. Furthermore, through the sale leaseback transactions, Lion Nathan can avoid expenses of conventional financing such as legal and appraisal fees. The other advantage of this transaction type to Lion Nathan is the improvement of balance sheet and credit standing of the company. Through this type of transaction, the seller replaces fixed asset with the current asset. This will help the company as it will result in an increase in the current ratio of the seller. This increase in the current ratio of the seller increases the seller’s ability of borrowing future additional funds. b. Finance vs Operating Leases The finance lease refers to a type of lease in which a company is the legal owner of the asset during the tie of the lease. In this type of arrangement, the lesee has the operating control and shares the economic risks and returns from the change of valuation of the asset. Conversely, the operating leases are the type of leases that allows for the use of an asset but does not convey ownership of the asset. The operating leases are representative of the off-balance sheet financing assets in which the company’s balance sheet does not include the leased asset and associated liabilities (Chandra, 2011, p.45-60). In the case of the sale and leaseback of the assets of the Lion Nathan Company, the type of lease involved is the operating lease. This is because the company seeks to retain the ownership and control of its collection. The case study reveals that Lion Nathan issued a statement to the market saying that it was not seeking to sell the individual venues and was committed to retaining the ownership and control of the portfolio. This, according to the company, would help in maximizing the shareholder values and produce the best outcome for the company. c. Accounting for profits and losses One of the ways through which the Lion Nathan company can account for the profits of the sale-leaseback transaction is through the recognition of the profit or loss associated with the sale of the asset, in this case, the pubs belonging to the company. This can be done by both the seller and the lease recognizing the profit or loss of the asset over the leaseback term. While recognizing the profits resulting from the sale and leaseback of an asset, there is the need for both parties to stick to the procedures and guidelines of profit recognition in the sale-leaseback transaction (Davis, 2012, p. 28-53). The profits and losses of a company can be recognized in different ways owing to the different situations. Since Lion Nathan retains the ownership of the pubs, the present value of the lease payments is more than 90% of the fair asset value. Losses can occur when the fair value of the asset is lower than it carrying value in the seller’s (Lion Nathan) records. By recognizing these profits and losses, the company can be able to effectively account for profits and losses in the sale leaseback arrangement. d. Changes in Accounting Depreciation refers to the loss of the value of an asset due to the increased use of the property. The more an asset is used, the more its value depreciates. In the business world, some of the items depreciate while others appreciate with time. Depreciation is commonly typical in organizations that deal with things such as cars. Items that do not depreciate are considered by the corporate entities as expenses. Other things such as land and buildings do not lose value overtime from continual use. In the case of Lion Nathan Company, selling its pubs and later leasing them back would not result in changes in the ways through which the company accounts for the depreciation of the buildings. This is mainly because the buildings are not expected to depreciate within the period of lease. References Chandra, P. (2011). Financial management: theory and practice. New Delhi, Tata McGraw-Hill Education (p. 45-60). Davis, M. K. (2012). Accounting for real estate transactions: a guide for public accountants and corporate financial professionals. Hoboken, N.J., Wiley (p. 28-53). Whittington, R., & Delaney, P. R. (2010). Wiley CPA exam review 2011. Hoboken, NJ, Wiley (p. 65-80). Read More