Research Topics: Financial Accounting Australia

Prepare an analysis of the corresponding arguments and discuss in terms of the current thinking of the issue in light of the movement to international Australian accounting standards

FINANCIAL ACCOUNTING ASSIGNMENT   Parts A and B of this assignment are to be completed in pairs and constitute twenty-five marks of the total marks awarded for this subject.   Assessment Criteria:   Student work will generally be assessed in terms of the following criteria:   1.         Effectiveness of communication – ie readability, legibility, grammar, spelling, neatness, completeness and presentation will be a minimum threshold requirement for all written work submitted for assessment. Work that is illegible or incomprehensible and does not meet the minimum requirement will be awarded a fail grade.   2.         Accuracy – This will be the primary criterion for assessing the computational and procedural tasks.   3.         Demonstrated understanding – This will be evidenced by the student’s ability to be dialectical in the discussion of contentious issues. Few, if any, accounting concepts are scientific facts and stereotype answers will demonstrate poor understanding on the part of the student.   4.         Evidence of research – This will be evidenced by the references made to the statutes, accounting standards, books, journal articles and inclusion of a bibliography.   Note:     2.         For all written work students must ensure that they submit their own original work. Any act of plagiarism will be severely penalised.   PART A.   Below are two extracts concerning the implementation of the private sector for-profit accounting model on not-for-profit government sector organisations. The first, by McGregor, argues the case for sector-neutral accounting standards on the premise of insignificant differences between each. The second, by Barton, suggests there to be significant differences and perhaps the need for unique accounting standards for government.   Required   Prepare an analysis of the corresponding arguments and discuss in terms of the current thinking of the issue in light of the movement to international accounting standards. (12.5 marks) (1500 words)   ARTICLE 1   MCGREGOR: The pivotal role of accounting concepts in the development of public sector accounting standards          Perhaps the most important decision made by the Public Sector Accounting Standards Board was taken soon after it was formed in 1983. That decision was to adopt a conceptual approach to the development of public-sector accounting standards. This paper explores the implications for the reform of public-sector financial reporting practices in Australia.          The Public Sector Accounting Standards Board (PSASB) has developed and issued in         conjunction with its private-sector counterpart, the Australian Accounting Standards         Board, four Statements of Accounting Concepts. Work is progressing on projects which may lead to the issue of other concepts statements. These projects include Measurement of the Financial Statement Elements, Performance Reporting, Reporting Financial Position and Scope of Financial Reporting.          Together the concepts statements comprise the board’s conceptual framework for         general purpose financial reporting. The framework is applied by the board in the         development of all new and revised accounting standards.          An important feature of the concepts statements developed by the board is that         they are applicable to financial reporting by all types of reporting entity. That is,         no distinction is made between entities on the basis of their operating structure         (corporate or non-corporate), source of funding (for example, equity and debt capital         or public funding), operating motives (profit-seeking or not-for-profit service delivery) or sector location (public or private). This broad applicability is evident at the highest levels of the framework, where the objective of financial reporting is specified as being the provision of information to users to assist them in making decisions about the allocation of resources (Statement of Accounting Concepts SAC 2 Objective of General Purpose Financial Reporting, para. 43). While the precise nature of the decision-making may differ from entity to entity and user to user, in each case the focus of the financial-reporting process is to provide users with the appropriate financial information on which to base their resource allocation decisions. SAC 2 explains:           ‘Reporting entities control resources and influence members of the community         through providing goods and services, levying prices, charges, rates and taxes, and         acquiring and investing resources … Members of the community make resource         allocation decisions in respect of reporting entities -that is, they make reasoned         choices among alternative uses of scarce resources. For example, investors decide         whether to invest in an entity; creditors decide whether to lend resources to an entity;         governments and parliaments decide, on behalf of constituents, whether to fund         particular programs for delivery by an entity; taxpayers decide who should         represent them in government; donors decide whether to donate resources to an         entity; individuals decide whether to contribute to a superannuation plan; employees         decide whether to sell their services to a particular entity; owners/members of         reporting entities decide whether they should contribute resources to the entity and         who should manage the entity on their behalf; and ratepayers decide whether they         should support the particular programs of their local government and who would         represent them on the local government council’ (para. 12).          ‘Efficient allocation of scarce resources will be enhanced if those who make resource         allocation decisions, such as those groups identified above, have the appropriate         financial information on which to base their decisions. General purpose financial reporting aims to provide this information’ (para. 13).          The concepts statements argue that these resource allocation decisions require certain         common types of information, irrespective of the nature of the entity being considered. This includes information about financial performance and financial position.           The broad applicability of the concepts statements is also clearly reflected at the         more operational levels of the framework. For example, the elements of the financial         statements (assets, liabilities, revenues, expenses and equity) are defined from an         economic/resource perspective rather than from the perspective of any particular         reporting entity. Thus, assets are defined in SAC 4 Definition and Recognition of the         Elements of Financial Statements as ‘future economic benefits controlled by the entity         as a result of past transactions or other past events’ (para. 14).          This notion applies to both profit-seeking and not-for-profit entities. SAC 4 explains         that ‘future economic benefits’ can be described as the scarce capacity to provide         benefits to the entities that use them’ (para. 18).          Thus, from the perspective of profit-seeking entities, this scarce capacity is used to         provide goods and services for exchange with the objective of generating net cash         inflows. From the perspective of a not-for-profit entity, the scarce capacity is also used to provide goods and services in accordance with the entity’s objectives. SAC 4 notes:          ‘The fact that not-for-profit entities do not charge, or do not charge fully, their         beneficiaries or customers for the goods and services they provide does not deprive         those outputs of utility or value; nor does it preclude the entities from benefiting         from the assets used to provide the goods and services. For example, assets such as         monuments, museums, cathedrals and historical treasures provide needed or desired         services to beneficiaries, typically at little or no direct cost to the beneficiaries.         These assets benefit the entities by enabling them to meet their objectives of         providing needed services to beneficiaries’ (para. 21).                   The development of a ‘common’ conceptual framework for financial reporting by         entities in the public and private sectors has been a critical factor in the establishment         of a common financial reporting framework for all Australian reporting entities.         Although there are two sets of accounting standards on issue in Australia (the AASB         series for entities reporting under the Corporations Law and the AAS series for other         entities), they are constructed using the same basic framework and contain virtually         identical requirements. The objective of this philosophical approach to the setting of         Australian standards is to produce high-quality and comparable financial reporting         across all reporting entities.          The PSASB’s decision to pursue this philosophical approach was a controversial one.         Some expressed the view that the public sector required a different set of concepts         and standards because it was different from the private sector. They saw the PSASB’s         decision as being tantamount to foisting ‘commercial accounting principles’ on         the public sector. By addressing, at a conceptual level, circumstances relevant to         public-sector entities, particularly those which are not-for-profit entities, the board         was able to demonstrate that the underlying concepts and the standards that derive         from them are relevant to, and appropriate for, these entities.          One common argument in support of a separate, and different, approach for         public-sector entities is the broader notion of accountability that exists in the public         sector. Indeed, the board was under pressure in its early days to specify that the         provision of information for accountability purposes is the objective of financial         reporting by public-sector entities. The board addressed this view and concluded that         the broad notion of accountability which exists in the public sector is compatible with         an objective of financial reporting which focuses on decision-making about the         allocation of scarce resources.          SAC 2 defines accountability as ‘… the responsibility to provide information to         enable users to make informed judgments about the performance, financial position,         financing and investing, and compliance of the reporting entity’ (para. 5). This is         a broad notion of accountability as demonstrated by the following definition of         ‘performance’ contained in SAC 2: ‘… the proficiency of a reporting entity in         acquiring resources economically and using those resources efficiently and effectively         in achieving specified objectives’ (para. 5).          The board concluded that the provision of information for accountability purposes         must, rationally, have a decision-making focus – otherwise it becomes an end in         itself. The expectation that managements/governing boards should report on their         management of an entity’s resources and their performance in meeting the entity’s         objectives is driven by the needs of external users for information on which to base         resource-allocation decisions in relation to that entity. For example, resource-providers need the information as input when deciding whether they should continue to provide the existing level of resources, or whether they should expand or contract         that level. Recipients of goods and services will be interested in assessing whether         the entity has been operating in their interests. Their assessments may influence         their voting preferences and representations made to parliamentary and other         representatives and may lead to the continuation, expansion, contraction or even         cessation of the entity’s activities.                   The board provided a linkage in SAC 2 between the stated objective of general purpose financial reporting and the notion of accountability. SAC 2 states: ‘Management and governing bodies shall present general purpose financial reports in a manner which assists in discharging their accountability’ (para. 44), and notes:           ‘When general purpose financial reports meet this objective [the objective of general         purpose financial reports] they will also be the means by which managements and         governing bodies discharge their accountability to the users of the reports’ (para. 27).          Source: W. McGregor, ‘The pivotal role of accounting concepts in the development of public sector accounting standards’, Australian Accounting Review, vol. 9 no. 1, 1999, pp. 3-5 (extract).     ARTICLE 2   BARTON: Public and private sector accounting – The non-identical twins                        A debate in this journal, spanning several years, over the accounting treatment of public assets has concentrated attention on the appropriateness of the Public Sector Accounting Standards Board’s decision to apply private sector accounting concepts to the development of public sector accounting standards. The case is examined here and it is shown why private sector accounting standards must be appropriately adapted to suit a very different and varied operating environment in the public sector. These differences have been largely ignored, with resulting problems for public sector accounting standards.          In the development of accrual accounting standards, for the public sector, the Public         Sector Accounting Standards Board (PSASB) has endeavoured to apply concepts and         standards initially developed for commercial activities to the public sector. The major         standards are AAS 27 Financial Reporting by Local Governments (1995), AAS 29 Financial Reporting by Government Departments (1996), AAS 31 Financial Reporting by Governments (1996), SAC 1 Definition of the Reporting Entity (1990), SAC 2 Objectives of General Purpose Financial Reports (1990), SAC 3 Qualitative Characteristic of Financial In formation (1990), and SAC 4 Definition and Recognition of Elements of Financial Statements (1992).          The board holds the belief that the two sectors are fundamentally similar in the         information needs of users of general purpose financial reports (GPFRs) and in their         operating environments; and hence that private sector accounting standards can be         readily applied to the public sector with only a few minor modifications. This viewpoint has been explained and justified by Warren McGregor, executive director of AARF in his recent useful and thoughtful article (1999). He states (p. 3): ‘An important feature of the concepts statements developed by the board is that they are applicable to financial reporting by all types of reporting entity. That is, no distinction is made between entities on the basis of … sector location (public or private).’          This universal approach is challenged in this response. Parts of the public sector         environment are so different from a business environment that a differentiated         approach is required. Moreover, the public sector environment is itself so highly         heterogeneous that it cannot be treated as one for accounting purposes, and         generalisations cannot be made which embrace the whole of the sector. The public         and private sectors of the nation are not identical twins. The fundamental differences         between the two must be acknowledged and accounting standards designed, where         necessary, to suit the unique characteristics of the public sector. It should also be            acknowledged that private sector accounting standards have been designed over a long period to take account of its unique characteristics. Unless accounting standards are designed to suit the fundamentals of the markets in which the entities operate, the           resultant accounting information systems cannot provide the information required by           users. It cannot be relevant to their needs or be reliable.          The board appears not to have looked at the markets in which public sector goods and         private sector goods are provided. Rather, they have concentrated their attention on         assets and used them as the fundamental building block for the whole edifice of concepts and standards. They have concluded that assets are much the same in each         sector (McGregor 1999, p. 5). This is true – with some exceptions (e.g. Defence         equipment) the public sector uses types of assets (financial assets, buildings, land,         equipment etc.)—similar to those used in commercial markets. This similarity in the         physical characteristics of assets is then used to justify the application of private sector accounting standards to the public sector. But this concentration on the physical         characteristics of assets has diverted attention from the real divide between the two         sectors – that of markets in which the services are provided. It is here that the two         sectors differ. Indeed, if they did not then there may be no case for governments to exist at all. Governments exist because they fulfill functions which are largely complementary to those of the commercial sector in a modern democratic, mixed economy.          SAC 2 defines the fundamental objective of general purpose financial reporting as to         …. provide information useful to users for making and evaluating decisions about the         allocation of scarce resources’ (para. 43), and states that resource-allocation decisions         require information about financial performance, financial position and financing and         investment (para. 45). While this may be appropriate for private goods markets, where         firms have financial objectives, use resources having financial costs to them and receive financial benefits from their use, a wider objectives statement is required for the non-commercial activities of government covered in categories 1 and 2. Because of the nature of government operations in the supply of public goods, governments must be accountable to their citizens for both the arrangements about taxation and the         provision of public goods. Certainly accountability has implications for the use of         resources; however, it should be stated as a major objective in its own right for public         sector accounting. Some regard it as the major objective. For example, the Government Accounting Standards Board of the US states: ‘Accountability is the cornerstone of all financial reporting in government’ (1987, quoted by Pallot 1992, p. 40).            The need for accountability is written into the US constitution (Granoff 1998, p. 6)         and it is the first objective of financial reporting by the US government (Granoff 1998, p. 647). Likewise, the central role of accountability is emphasised by some Australian authorities (MAD 1993, ANAO 1997/98), and it is included in the Australian constitution and the 1901 Audit Act (recently replaced by the Auditor General Act 1997).          Second, allowance in the objectives statement must be made for non-financial         objectives. The provision of most community services has social welfare, cultural,         heritage and/or environmental objectives. Information must be directed towards the         achievement of these non-financial objectives if the information provided in the         accounting system is to be relevant for resource management, performance assessment and accountability.                   The statement of objectives for the public sector could, for example, be: ‘The fundamental objective of financial reporting in the public sector is the provision of information, both financial and non-financial, to enable accountability for the use of public funds and other resources to stakeholders, and to facilitate the efficient and effective use of those resources in the provision of public goods and services.’   Source:   A. Barton, ‘Public and private sector accounting—The non-identical twins’, Australian Accounting Review, vol. 9, no. 2, 1999, pp. 22-3, 28 (extracts).           PART B   Critically discuss and evaluate the following article: (12.5 marks) (1500 words)   The micro-economic reforms and modern management practices that had swept through the business community in the mid 1960’s and the government sector in the 1980’s are now lapping at the feet of third sector organisations. Criticisms of a lack of transparency, accountability and calls for accounting standards directed to the public sector a decade ago are now being directed at third sector organisations.   THE THIRD SECTOR   Laissez-faire Australian market-oriented governments over the past three decades have considered the private sector accounting model of financial reporting as the appropriate vehicle to deliver improved accountability and performance from the public sector. Important within this context is the acceptance of a clearly delineated relationship between accountability and accounting wherein accounting has become the measure of accountability.   Whilst alternative measures such as the triple bottom line and balanced scorecard have sought a broader and more inclusive set of measures, they have for the most part had little impact on shifting the focus from accounting and the single bottom line as the preferred measure. This is not unsurprising given that accounting can quantify and signify the economic much more readily than other organisational inputs and outputs.   By appealing to supposedly less opaque private market values, and promises of greater accountability and increased community knowledge of public sector financial affairs, central government has directed public attention more succinctly towards the subordinate. The calculative consequences which accompanied the private sector accounting model brought with them the potential to create seemingly precise and specific quantitative facts that delineated what is costly, beneficial and of value. In so doing, calculative priority could be given to the economic rather than the social.   With its performance measurement orientation, the private sector accounting model would give a clearer identification of those who are accountable, their agreed goals and means of measuring their performance. Moreover, the use of the private sector accounting model can been used to measure blame particularly where contemporary economic rationalism has demanded the shift towards balanced budgets or surpluses, which are seen to be economically correct and portray sound financial responsibility and accountability.   History reverberates with ideas regenerated from past experiences. Concepts of reform and the processes through which they are achieved are very rarely the construct of a contemporary idea. Rather their outcome is the product of a movement, which encapsulates their beginning and being. Reform of the third sector will be no different while the construct of accountability is narrowly enshrined in, and measured for most part, by accounting numbers. Carlton argues against “the imposition of ill-fitting organisational models derived from the government or business sectors”   In questioning criticisms of a lack of accountability in the third sector, Goodin suggests this is so because it is unclear to third sector organisations who they are accountable to as there is “simply no equivalent to ‘voter’ in the state sector or ‘shareholders’ in the market sector.” Private sector financial reporting is not as limited as represented here. Financial reports must be prepared if there are users dependent upon this information as their only source of financial information and incorporates a far broader accountability than to just shareholders. Concepts of stewardship and accountability have been subjugated to the issue of reporting ‘decision-useful’ information. The issue is not with finding who to be accountable to, for there will be a plethora of economic, social and political stakeholders, rather how accountability will be measured to provide decision-useful information.   Lyons suggests that non-profits are “more trustworthy than for-profits and thereby require lower levels of monitoring.” Aside from the issue of differing levels of monitoring between sectors, perhaps a more pertinent question to ponder is whether reform of the third sector will provide only better monitoring or has accountability been defined too narrowly due to its overwhelming reliance on the accounting system to provide a measurement?           Carlton, J., (2001), Book Review of Third Sector: The Contribution of Nonprofit and Cooperative Enterprises in Australia by Mark Lyons, Policy, The Centre for Independent Studies, Spring, Vol. 17, Issue 3, pp.52-53. Goodin, R.E., (2003), Democratic Accountability: The Third Sector and All, Research School of  Social Sciences, Australian National University, Paper presented to Conference on ‘Crisis of Governance: The Non-Profit/Non-Governmental Sector’ at Harvard University, 3-4 April 2003, p.6. Lyons, M., (2001), Third Sector: The Contribution of Nonprofit and Cooperative Enterprises in Australia, Allen & Unwin, Sydney. Lyons, M., (2001), “Why a Third Sector Roundtable”, Retrieved: June 16, 2004 from www.philanthropy.org.au/advocacy/LyonsPaper.doc     Credit:ivythesis.typepad.com

Prepare an analysis of the corresponding arguments and discuss in terms of the current thinking of the issue in light of the movement to international Australian accounting standards

FINANCIAL ACCOUNTING ASSIGNMENT Parts A and B of this assignment are to be completed in pairs and constitute twenty-five marks o...

Continuous Disclosure and Income

ASX Listing Rules, Stock Prices and Telstra   Introduction             In the business industry, information that could affect the market system in general should be properly disclosed. In the case of Australia, the Australian Stock Exchange (ASX) has developed certain regulations that govern the disclosures of price sensitive information by listed entities. Complying with these regulations is then essential so as not to cause disruption in the business economic operations. Telstra Corporation Limited (TLS), an Australian telecommunications and information company is among the enlisted companies covered by the ASX Listing Rules.   The main operation of the company include the provision of telephone lines, which allow local, long distance and international calls, online services, mobile communications, directory provision and pay TV. The Australian Government serves as the company’s major shareholder. In 2005, the company had announced a profit downgrade caused by the fall of its shares.  In this paper, the case of this company, particularly on its disclosure, will be analyzed using the provisions cited in the ASX Listing Rules. Furthermore, the relation of stock price movements with accounting income numbers will be established using academic researches.   ASX Listing Rules             Disclosure is a significant aspect of investor protection and market integrity. Within this framework, continuous disclosure is considered an essential component. Specifically, this enables investors to develop accurate judgments of the price of certain securities. Moreover, this ensures that security prices represent their corresponding economic value. Legal obligation is bestowed on listed entities for the disclosure of price sensitive information once it reached their awareness. The failure of the entities to comply with this legal obligation can increase the possibility of insider trading and can result to a partly informed market. This then should be avoided as it does not support the interest of the investors as well as the economy as a whole. For this reason, it is then essential that rules and regulations controlling the disclosures of price sensitive information are enforced. Certain condition in relation to this topic had been developed by the Australian Stock Exchange (ASX) and found on the ASX Listing Rules. Part of these regulations is the companies’ commitment to full disclosure of this information.               With regards to continuous disclosure, the ASX Listing Rules obligate listed entities to provide immediate disclosure of price sensitive information to the ASX, particularly on data that would cause a material effect on the value or price of the securities or influence the investors’ decisions to hold or trade their securities. In this ruling, the ASX do not require the entities to disclose information that a reasonable person would not expect disclosing, are considered confidential or are exempted from the Listing Rule. Examples of this information could be those that are relevant to incomplete negotiations or proposal, insufficiently explicit or those generated for the purpose of internal management.               Once the entities have become aware of any price sensitive information, the Company Secretary must be informed immediately. The Company Secretary, along with the General Counsel, Chief Financial Officer and Managing Director will discuss whether the information must be disclosed to the ASX. The release of price sensitive information to the market must be done by the ASX before any other person. Once ASX has given the confirmation, all information disclosed will then be placed in the website. In terms of market rumors and speculations, it is a general rule that entities are not to comment on them unless the ASX requires it. A trading halt may be requested by the company so to prevent the trading of its securities by an uninformed and inefficient market. The trading halt process will be arranged by the Company Secretary and consulted with the Board (2005).   One-to-one of open briefings with institutional analysts and investors are often conducted by the entities. The ASX Listing Rules however indicate that during such briefings, price sensitive information is not to be disclosed until they had been officially disclosed to the general market. Should there be questions raised during the briefing which can only be answered by price sensitive information, the employees of the involved company must refrain from answering the question or take not of the question and have it checked first with ASX before providing a response. If undisclosed price sensitive information is disclosed during a briefing, this must be reported right away to the Company Secretary who in turn will release the information to the market through the ASX (2005).   When the Company Secretary is uncertain whether the information is price sensitive or not, consultation with the General Counsel, Chief Financial Officer and Managing Director must be done. The failure to follow the general rules of the ASX with regards to the disclosure of price sensitive information may result to the breach of applicable legislation. In turn, this may cause personal penalties for officers and directors. Disciplinary actions are also taken when any part of the policy is breached. In serious cases, dismissal can also be granted for the same reason ( 2005).   Profit Downgrade and Telstra             In 2005, the Australian Financial Review (See Appendix A) released an article stating the fall of Telstra’s shares through its barrier; investors on the other hand continue to leave the company resulting to Telstra’s profit downgrade. Based on analysis, the fall of the company’s shared to .94 will result to the termination of its capital return plan, dividend limitation and downsizing, leading to 12,000 job loss rate for the coming years.  In order to restructure the company, Telstra would have to enhance its networks, a project requiring billion. , Chief Executive of the company, announced to the market that Telstra’s EBIT or earnings before interest and tax would drop to 25 to 30% during the financial year. The fall was inevitable even without the inclusion of the redundancy payments.               Based from the details provided in the announcement, this has been initiated by the announcement of the Australian Stock Exchange. The information disclosed in the announcement can be considered as price sensitive since the fall of the company shares can affect the decisions of the investors; most importantly, such information will directly affect the value or price of the securities. Though there had been no indications that provisions of the Australian Stock Exchange in line with disclosures had been breached in the article, certain published articles indicated that the company has violated some of the cited disclosure regulations. According to the statement of the Australian Securities and Investment Commission (ASIC), Telstra committed a technical breach of law due to its provision of private briefings. In addition, ASIC stated that the company had connected the cost of regulation to a profit downgrade in a manner that could have been confusing to small retail shareholders.   Sainsbury (2005) noted in his article that Telstra’s chief executive officer, along with his henchmen, are under investigation and could possibly be imprisoned. ASIC basically suspect the company and its top executives of continuously violating ASX’s disclosure regulations, which are applicable to listed entities. The violations are mainly characterized by the conduction of secret briefings where price sensitive information are given to the ministers of the Australian Government and the press; these had been done a few weeks before informing the ASX of a profit downgrade. Details of this claim were submitted to the company’s largest stakeholder, the Australian Government. The regulator however, indicated that no disciplinary actions would be granted against the telecommunication company in spite of its failure to properly make a disclosure to the general market (Charles 2005).   Stock Price Movements and Profit             Based on the stock prices of Telstra during its announcement of profit downgrade in 2005, indeed, there has been notable reduction in its price target of (See Appendix B). From January to March of last year, the stock prices of the company have constantly increased. However, the months of April and May of the same year showed signs of decrease. Telstra’s stock prices continuously fluctuated in the following months up to October 2005. In November and December of last year, Telstra had finally gone below its price target, which is also the same period when the company announced the profit downgrade. This then suggests that there is a close connection between the share price, profit and the stock price reaction. Several literatures had indicated this relationship.               The academic literatures propose two basic claims on the relationship of stock prices with that of profit or earnings. In particular, there are academics who claim that the relationship between these two factors is weak, while others indicate a positive correlation. Some authors believe that the usefulness of the information found within the accounting earnings is not as strong. Specifically, academics stated that the latitude provided to the management and accountants in choosing between competing convention relevant to earning reports and the unsuitability of certain accounting conventions enabled the inclusion of variances and inaccuracies to reported earnings, reducing the quality of accounting earnings information considerably.   This claim has been supported further by empirical researches which concluded that unexpected changes in accounting earnings and stock price reactions show an insignificant relationship (Lev, 1989). Lev (1989) further noted that the correlation between stock returns and earnings is low and at times negligible; this conclusion implies that the effectiveness of annual and quarterly earnings to investors is minimal only. Some academics have noted that the insignificant relationship between stock prices and profit identified by other researchers are attributable to the studies’ failure to use and analyze an appropriate model that will identify the factors’ relation.   A specific model, known as the Ohlson model (1991), indicated that at a constant rate, stock price movements can represent the capitalization of earnings. Basically, the Ohlson model suggests that the total of the company’s common stock price by the end of the year as well as the dividends declared by the company on the same year can be denoted as the firm’s capitalization of the earnings for the year. This can be computed using the formula P 1+ dit+ = Kit+ e 4. This theory has been tested by  (1991). The model tested in the researchers’ study was linear and has an additive error term which is distributed normally.   It should be considered however, that there are partial truths to Lev’s initial claims where stock prices are insignificantly related to the capitalization of earnings. For instance, in the case of a company that is encountering losses, the presence of positive equity valuation makes stock prices an ineffective indicator for capitalized earnings. In addition, it has been hypothesized common stock valuation in companies that are experiencing positive income below a certain level can be influenced by several factors. These include potential or actual tender offers and liquidation value. In this case, considering that the earnings of the company is not affected by the price of the common stock for that year, the change in the in the company’s stock price for the same and subsequent years should not be affected by the earnings of that year.   These academic researches then suggest that while stock price movements may represent profit or earnings, the trend is a case to case basis. In the case of Telstra, the stock price movements observed for the last two months of 2005 may have been below the stock price target and suggest low company earnings for the coming years due to the profit downgrade. This then suggest that the announcement of the company was done on a timely basis. Nonetheless, it is still essential that further investigations are done for other cases that undergo unusual stock rice movements or profit downgrades.   Conclusion             Based from the provisions developed by the ASX, disclosures are an important economic matter that must be supported by standard regulations. This paper cited various sections of the Listing Rules, tackling the different conditions involved in making disclosures of price sensitive information. Sanctions for the violation of these developed policies are also implemented. The discussion of the Australian disclosure regulation had also mentioned the significant role of the companies’ top management in determining price sensitive information and in informing the market through proper disclosures. In the case of Telstra, the company has recently announced a disclosure regarding its falling shares, resulting to profit downgrade.   The disclosure has been delivered through the confirmation of the ASX; nonetheless certain organizations claim that the company has violated the rules of proper disclosure, implying that the company had conducted secret briefings with its major shareholder before its formal announcement to the market. The issue appears to be negatively influenced by the fact that the Telstra’s major shareholder is the Australian Government; hence, report indicated that proper investigations or actions for the company’s violation were not done accordingly.   Analyzing the stock prices of Telstra and its announcement of profit downgrade suggest that there is a direct correlation between earnings and stock price movements. However, academic researches noted that while there may be a relation, certain factors can still make the relationship of these two factors insignificant Thus, it is essential that proper investigations are done for such situations as the reaction of the stock price and its ability to represent earnings is a case to case basis.   Word Count: 2,200     APPENDIX A: Telstra and Profit Downgrade   Telstra shares fall through the .00 barrier Nov 16, 2005 Australian Financial Review     Telstra’s shares plunged through the barrier on Wednesday as investors continued to desert it following Tuesday’s profit downgrade.   Telstra shares sank as low as .94 after yesterday’s marathon strategy review that outlined a massive restructure of the company that will see the cancellation of the company’s capital return plan, the capping of its dividend and the loss of up to 12,000 jobs over the next five years.   Its shares were cut to “underperforms” from “market perform” at Goldman Sachs JBWere, and to “underperforms” from “neutral” at Macquarie Equities on Wednesday.   As part of the restructure, Telstra will spend billion to upgrade its networks. To fund the higher spending, it canceled the third installment of a .5 billion annual capital return plan and will cap its dividend at 28¢ a share for the next three years.   Chief executive Sol Trujillo told the market on Tuesday that earnings before interest and tax (EBIT) for Australia’s biggest telco would fall by as much as 25-30 per cent this financial year, including redundancy payments.   He said that even without the redundancy payments EBIT would fall by 19 to 24 per cent, more than the 7-10 per cent drop the company flagged in August.   , an institutional dealer at Aequs Securities, expects Telstra shares to fall as low as .60.   The stock was at .99, down 3¢ at 1046 AEDT.   “It’s fought back to .99 which surprises me because I would have thought every man and his dog would want to get out of it now,”  said.     Source: 2005     APPENDIX B: Telstra’s Stock Price Movement Data   Date Open High Low Close Avg Vol Adj Close* 5-Dec 3.84 4 3.75 3.93 25,037,902 3.93 5-Nov 4.22 4.38 3.85 3.85 47,550,567 3.85 5-Oct 4.07 4.27 4.03 4.21 31,052,065 4.21 5-Sep 4.69 4.7 3.99 4.07 60,258,999 4.07 5-Aug 5.06 5.09 4.66 4.68 41,074,800 4.68 5-Jul 5.07 5.17 4.91 5.07 20,724,312 5.07 5-Jun 5.02 5.18 5 5.06 21,974,826 5.06 5-May 4.86 5.07 4.75 5.02 17,295,904 5.02 5-Apr 5.12 5.14 4.81 4.84 21,788,417 4.84 5-Mar 5.27 5.5 4.98 5.09 27,121,186 5.09 5-Feb 4.96 5.35 4.94 5.26 23,149,634 5.26 5-Jan 4.91 5 4.81 4.94 17,966,108 4.94 4-Dec 4.9 4.92 4.89 4.91 7,032,012 4.91 * Close price adjusted for dividends and splits.     Source: 2006       Credit:ivythesis.typepad.com

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ASX Listing Rules, Stock Prices and Telstra Introduction In the business industry, information that could affect the mark...

AASB Framework

AASB Framework