Current Australian Accounting Standards Board Framework - Assignment Example

A DEEPER REVIEW IN TO THE CURRENT AASB FRAMEWORK: FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS By (Student’s Name) Course Title Professor’s Name Institution City and the State Date Abstract In this assignment, it will be expected that provide a rather extensive analysis into the most current review of the AASB framework. It should be known that this framework is also known as the framework for the preparation and presentation of financial statements. The paper will further postulate on expounding on the different forms of measurement bases which are instigated during the preparation of the financial statements. In the next section of the research paper, it will be required that at least two separate companies that operate in completely different industries be reviewed in terms of their application of the different measurement bases and in turn provide a rather vast descriptions into the implications which are faced by these firms in their daily operation routine altogether. In the last section of the research, the paper will take to explore the correlation that exists between accounting information and market reaction with reference to the measurement challenges. In conducting this research, it should be noted that the resource material will be sourced completely from secondary forms of information for the mere reason that they are cheap to obtain and assess at the same time. AASB Framework: “Framework for the Preparation and Presentation of Financial Statements” Introduction: The AASB Framework which is also known as the framework for the preparation and presentation of financial statements refers to a standard of bodies which were formulated with the purpose of replacing the already existing AASB standards with a more relevant framework which is meant to ensure that consistency is achieved whenever the Australian financial standards, which are, equivalent to IASB are in turn referred back to the framework itself (Australian Accounting Standard Board 2004, p.2). Secondly, it is made to ensure that the Australian Accounting Standard Board is placed in a position whereby it can effectively and efficiently review the proposed forms of standards so that it can as well be utilized in the Australian Accounting sector. It should be noted that the AASB introduced the framework with the purpose of replacing the SAC 3 and SAC 4 which deals with qualitative characteristics of financial statements and the recognition and definition of the elements of financial statements respectively (Australian Accounting Standard Board 2004, p.5). This research paper will therefore examine the role played by the aforementioned accounting framework to bring about the application of effective accounting standards as well as analyze, with real life examples, the different forms of measurement bases. SAC 3 Qualitative Characteristics of Financial Information: The qualitative characteristic of the financial information refer to the different facets which are made present to the financial accounting reports so that in essence they are termed as being properly useful to the different users of accounting information. There are basically four forms of qualitative characteristics which include: (A). Understandability: it is true to indicate that for an accounting financial report to be useful to its users then it has to be comprehendible at all costs. When preparing and presenting the accounting information to the users it is believed that they are somehow conversant with both accounting and economic phenomenon (Australian Accounting Standard Board 2004, p.21). These different users are also expected to posses the urge of getting to comprehend more about the prepared data with a clear of mind attitude. The fact that this feature stipulates the need for simplification of accounting data does not necessarily mean that the sophisticated forms of the accounting information should be discarded away but rather be incorporated within the statements especially when the information is needed for various complex decision making processes. (B).Relevance: accounting information is said to be relevant when it is placed in a better position that will aid the users to make effective and efficient decisions. These decisions are meant to assist them to be able to make both past and future implications altogether. Relevant accounting information is perceived to be both predictive and confirmatory in nature so that they are made to correlate. It is very possible to use past information of any given firm to predict the future financial position of the company. A possible fruitful future of a company is determined by its ability to pay attractive dividends, wages, as well as the ability of the company to pay its commitments as they fall due(Australian Accounting Standard Board 2004, p.22). It should be noted that the relevance of accounting information is determined by the level of its materiality as a whole. On the other hand, accounting information is considered to be of material when its omission is able to influence the users significantly in terms of their respective economic decisions. Thus, materiality largely depends on the size of the accounting information (C). Reliability: in order to determine both the efficiency and effectiveness of accounting information, then it should be reliable at all times especially when making significant accounting decisions. Accounting information is termed to be reliable when it is completely free from both errors and biasness and could thus be confidently used by users to represent the different financial statements (Australian Accounting Standard Board 2004, p.17). To be reliable, accounting information is supposed to represent the various accounting activities faithfully. For instance, a balance sheet is termed to be faithful when it clearly postulates the assets, liabilities and the capital structure of the firm. In a further illustration, it is clearly viable to indicate that faithfully represented accounting information possess the substance over form criterion so that they are represented in accordance with their respective economic viability and not simply as a legal requirement obligation in that matter. Accounting is also termed reliable when it posses the neutrality element altogether. Neutral accounting information refers to the accounting information which is free from biasness altogether. Prudence is another facet of accounting information which depicts the inclusion of a certain level of caution especially when users are making judgments pertaining to useful decisions of the firm under study. Reliability further conforms to completeness of accounting data so that they are termed complete whenever they are set within the materiality and costs altogether. (D). Comparability. It is expected that different forms of users accounting information be placed at a position whereby they are able to compare both the productivity and performance of financial positions of firm’s altogether. Comparability of accounting information is made viable especially when it is utilized to enlighten the different users on the need of conforming to similar accounting policies and standards (Australian Accounting Standard Board 2004, p.34). SAC 4: Definitions and Recognition of the Elements of Financial Statements: Recognition of the elements of financial statements refers to the accounting process of correlating items in the balance sheet or the income statement which are considered to satisfy the postulated formulations of recognition as a whole. In this case then, the recognition is set out to include words which pertain to the item as well as the monetary amount attributed to it. Items which fail to be recognized are never purported to be rectified by a mere disclosure of the financial accounting policies. There are basically two criterion upon which the items are considered to meet the definition of an accounting element, that is, when there is a possibility of the viable economic benefits flowing either into or out of the item of the firm or when the item possess the value or cost which can be measured with a larger extent of reliability altogether. Assets are recognized in the balance sheet of a firm when there is a clear possibility that there would be benefits which will flow into the firm. The level of surety which suffices when the economic benefits are flown into the accounting period is enough reason to recognize an asset. A liability is recognized in the balance sheet when there is the possibility of economic benefits flowing out of the firm. Recognition of liabilities can also take place when there is consequently recognized assets altogether. Recognition of income happens when there is the possibility of economic benefits flowing into the income statement altogether. However, the recognition is limited to those items which are measurable. Expenses are recognized within the income statement whenever there is a possibility of outflow of future economic future benefits altogether. It is sometimes recognized when a liability has been incurred without a subsequent recognition of an asset. Measurement Bases of the Elements of Financial Statements: The process of measuring the items of accounting information is conducted for the purpose of postulating the monetary value at which the different forms of financial statements are to be recognized and carried out in both the balance sheet as well as the income statement. There are basically four bases for which measurement is carried out. This include the historical cost measurement bases whereby assets are posted with the same value for which during the period that they were acquired while liabilities are posted in the books of accounting with a value which was incurred during the exchange of the firm’s commitment altogether. Secondly, there is the current cost of measuring accounting elements in these bases, the assets are posted at the value of cash or its equivalent which could have been paid when the aforementioned asset was possessed currently in the market while liabilities are posted with a figure which will be used to settle the commitment of the firm at the current state. Thirdly, realizable value type of measuring the accounting items postulates that assets are posted at the most current value which could be obtained after disposing it in a rather orderly manner while liabilities are posted at a value which stipulates the most current value that could be paid to take care of the firm’s financial obligation in an orderly manner, that is, in the right course of the operation of the business altogether (Australian Accounting Standard Board 2004, p 35). The last bases for which accounting measurement are reflected is through the present value technique whereby assets are posted at a rather present discounted value of the probable prospective net cash in flows which the accounting item is to create during the normal line of business duty while liabilities are posted at a present discounted value of the prospective cash outflows while still the business is conducting its normal forms of operations altogether. Part B: The two companies listed in ASX are Adacel Technologies Limited which is a company deals with the production of software and other technological services while the second firm, Advanced Engine Components Limited, deals in the selling and assembly of automobile engines. Advanced Engine Components Limited is part of the Starrag group. According to the financial statements of Adacel Technologies Limited it is clear to indicate that the firm uses the current cost of measuring accounting assets in the sense that their respective assets and liabilities are posted at the value that reflects the amount that was to be paid if the assets were to be acquired currently while liabilities are posted at a value which depicts an amount that would be incurred in settling their financial obligation at a current state altogether ((Adacel Technologies Limited Website 2011, p.21). On the other hand, the Advanced Engine Components Limited (Starrag group) uses the present value as a measurement basis for posing both the liabilities as well as the assets. This is postulated by the accounting methodology applied when determining the net cash flow as well as the outflow in that matter (Starrag Group 2011,p.59).both the assets and the liabilities are discounted to value which depict present cash values. Part C: It is wise to indicate that there is a substantial form of relationship between accounting figures provided by the financial statements of any firm and the reaction of the capital market at large. This is true especially because the investors for any capital market require substantial amount of information before they undertake the risk of investing altogether. Investors are much concerned with the information to determine the future cash flows of the firm as well as the securities risks and returns. There are various methodologies which have been put forward to explain this particular phenomenon including the mean abnormal return approach which postulates the assumption that earnings of any given firm should either lead to an increase in the stock price when news about accounting data are favorable and a subsequent decrease in the stock price when the news about the accounting data is not favorable. The approach which is based on volatility of the aforementioned returns postulates that any public acclamation of accounting data should cause a significant change in the stock price of any given firm. It is therefore expected that there will always be a greater level of significant change in the stability of prices whenever there is the public proclamation of accounting information. The four dependent variables that investors utilize in order to determine their respective levels of investments into the various firms, they include the immediate release of annual reports, the public proclamation of current preliminary earnings, the general annual meeting of shareholders as well as the release of interim accounting information (Dumontier, Raffournier, & Mendes 2002, 17-28) All in all, it is to indicate that the relevance and usefulness of accounting information uses valuation techniques which are in turn used by various professionals to determine the extent to which they can fully and clearly use accounting data for investment purposes. References Australian Accounting Standard Board (AASB) 2004. Framework for the Preparation and Presentation of Financial Statements. Government Journal Article, Retrieved on 27th April 2012, From URL: http://www.aasb.com.au/admin/file/content105/c9/Framework_07- 04nd.pdf Adacel Technologies Limited 2011. Annual Financial Reports. Web Journal Article, Retrieved On 27th April 2012. FromURL: http://pdf.marketpublishers.com/bac_swot/adacel_technologies_ltd_swot_analysis_bac.pdf,pp.1-35 Australian Securities Exchange Website 2012.ASX Listed Companies. Retrieved on 27th April 2012, From URL: http://www.asx.com.au/asx/research/listedCompanies.do Starrag Group 2011. Annual Report 2011.Web Journal Article, Retrieved on 27th April 2012, From URL: http://www.starrag.com/media/geschaeftsberichte%20_en/GB%202011_Starrag%20Group_e_end.pdf,pp.12-123 Dumontier.P, Raffournier, B & Mendes, P 2002.Accounting and Capital Markets a Survey of the European Evidence. The European Accounting Review 11:1, 1-33 Read More