Standards of Financial Reporting - Essay Example

?Financial Reporting Executive Summary This assignment reviews the accounting standards adopted by Early Learning Services Limited in the preparationof the financial statements. In the wake of the recent events transparency in financial reporting has become an important issue. Here it has been highlighted as to whether the company complied with any revisions or changes in accounting standards like AASB 101; and other accounting standards relating to intangible asset; provisions and contingent items etc. Any change adopted by the company in financial reporting for 2009 over the previous year has also been discussed. Table of Contents Table of Contents 3 Introduction 4 AASB 101 “Presentation of Financial Statements” 4 AASB 107 “Statement of Cash flows” 7 AASB 116 “Property Plant & Equipment” 8 AASB 138 “Intangible Assets” 9 AASB 136 “Impairment of Assets” 10 AASB 137 “Provisions, Contingent Liabilities and Contingent Assets” 10 AASB 112 “Income Taxes” 10 AASB 110 “Events after the Reporting date” 11 Overall evaluation and objectives of reporting 12 Introduction A fair and comprehensive disclosure of information requires that the entity adheres to certain accounting norms. The financial statements of a company must be prepared in conformance with the relevant accounting standards. There are accounting standards which prescribe the accounting treatment of intangible assets, contingent assets, contingent liabilities, presentation of statements etc. The adoption of these accounting standards in the case of Early Learning Services Limited has been reviewed as to whether the company has prepared its financial reports as per the accounting norms. AASB 101 “Presentation of Financial Statements” The accounting standards to be applied in Australia with effect from January 1, 2005 include International Financial Reporting Standards (IFRSs). International Accounting Standards Board (IASB) issues IFRSs. For reporting periods commencing on or after January 1, 2009 IASB made certain amendments to the IAS 1 ‘Presentation of Financial Statements’. In line with this AASB also made certain amendments to AASB 1 ‘Presentation of Financial Statements’ for enabling IFRS compliance of the reporting entities in Australia. The major changes to this standard as compared to AASB 101 issued in the year 2006 are discussed as under- Making the reporting comprehensive- The revised standard brings in a notion of ‘completeness’ in financial reporting. Previously this standard used the heads ‘balance sheet’ and ‘cash flow statement’ to refer to the two statements. On the other hand the revised standard uses ‘statement of financial position’ and ‘statement of cash flows’ to describe the above statements. As per the new rules an entity has to present comparative information with respect to the previous year. Disclosure relating to changes owners’ equity- Previously AASB 101 required items relating to expenses and income which are not shown as profit or loss to be reported in ‘statement of changes in equity’. The previous standard also required preparation of ‘statement of recognized income and expense’ comprising of profit or loss in the statement of changes in equity, any affects of accounting policy changes and any correction related error. The new amendments require “owner changes in equity” to be reported separately from “non-owner changes in equity”. The detail relating to comprehensive income is not permitted to be presented in the “statement of changes in equity”. The main aim of this is to integrate items with similar characteristics and separate items with varying characteristics to disseminate useful information. Changes relating to “Other comprehensive income”- As per the revised standard an entity has to make disclosure of income tax relating to each comprehensive income component. This was not required as per previous AASB 101 version. Dividend presentation- As per old AASB 101 the amount of ‘dividend’ was disclosed as “distributions to equity holders” and the amount of dividend per share in the “statement of changes in equity” and “income statement” or as a part of notes. However, as per the recent amendments to AASB 101 these disclosures cannot be presented in “the statement of comprehensive income” (Commonwealth Law, 2007). Changes reflected in the annual reports- For 2008 Early Learning Services Limited prepared Income Statement, Balance Sheet, Statements of Recognised Income and Expense and Cash Flow Statements whereas for 2009 the company described Income Statements as “Statements of Comprehensive Income”, Balance Sheet, Statement of changes in equity and Cash Flow Statements. This shows that in 2009 the company prepared an additional statement relating to changes in equity. For 2008 the company showed net income as simply “(Loss) for the period” but for 2009 the company described this as “Total Comprehensive Income”. Any changes relating to dividend disclosure is not reflected in the annual reports of the company as the company did not declare any dividends in 2008 as well as 2009 (Early Learning Services Limited-c, 2008; Early Learning Services Limited-d, 2009). AASB 107 “Statement of Cash flows” In 2009 Early Learning Services Limited reported net cash inflows from operating activities at $ 831,675. This has been computed after including the receipts from customers and the payments made to employees and suppliers. Such receipts and payments have also been shown in the statement of comprehensive income in the form of “Revenue from continuing operations” and employee related expenses like “Employing benefits expense”. In the above statement the revenue has been shown at $ 33,393,370 whereas in the Cash flow Statements the total receipts from customers have been shown at $ 33,091,624. From this it can be inferred that the company does not receive the entire amount of revenue as shown in the Statement of comprehensive income. Due to this the net cash inflows from operating activities is less as compared to the company’s operating profit. The actual tax outflow of the company is higher as reflected from the income tax figure of 2009 which is higher than the amount of income tax deducted in the Statement of Comprehensive income (Early Learning Services Limited-c, 2008; Early Learning Services Limited-d, 2009). The company reported similar earnings to the operating cash flows in the year 2008 as well. In this year the company showed earnings like Interest received, Borrowing costs, Receipts from customers etc in the Cash flow Statements which is similar to earnings reported in 2009 (Early Learning Services Limited-c, 2008; Early Learning Services Limited-d, 2009). The earnings refer to the amount earned by the company in a year irrespective of whether the company realises this in the year itself. The cash flows are however different as it accounts for the actual cash inflows and outflows. The net cash inflow of the company from operating activities is positive whereas the earnings generated by the company is negative indicating a loss. The net cash outflow from investing activities of the company was higher in 2008 as compared to 2009. This is mainly due to the reason that the company settled significant amount outstanding payments for its acquisitions in 2008 while there was no such payment in 2009. However the company increased payments for property, plant and equipment in 2009. An increase in fixed asset investment suggests that the company wishes to expand itself further (Early Learning Services Limited-c, 2008; Early Learning Services Limited-d, 2009). AASB 116 “Property Plant & Equipment” AASB 116 applies on assets like Land, Leasehold Improvements, Buildings, Infrastructure Assts, Plant &Equipment and Heritage & Community Assets (Australian Capital Territory Government, 2009). This excludes biological assets, assets held by the business for the purpose of sale and mineral reserves or rights (Holmes, n.d.). For 2009 Early Learning Services Limited reported Property plant and equipment at $ 3,771,949. For this year the company charged a total depreciation of $593327. As required by this standard the company has not shown assets held for sale under Property, plant and equipment. This shows that the assets included under this head are in conformance with the relevant accounting standards (Early Learning Services Limited-d, 2009). The company has not charged any depreciation on land. For depreciating vehicles the company has used the “diminishing value method” and for other assets the company has adopted the “straight line method”. The estimated life of buildings has been taken as 40 years; for vehicles as 3 to 5 years; for furniture, fittings and equipment as 2 to 15 years and for leasehold improvements as 3 to 20 years (Early Learning Services Limited-d, 2009). AASB 138 “Intangible Assets” This standard sets out the accounting treatment of intangible assets that are not covered under any particular standard. It will not apply on intangible assets already within the purview of some other standard; financial assets; evaluation and exploration assets; extraction and development expenditure relating to oil, natural gas, minerals etc. For some type of intangible assets like Leases, business possessions for the purpose of sale like Construction Contracts etc there are specific type of accounting standards and hence do not fall within the scope of AASB 138 (Australian Accounting Standards Board, 2009). The important intangible assets include good-will, construction contracts, patent, license, advertisement and research & development expenditure as they raise the total value of the business. The company has adhered to AASB 138 as reflected from the inclusion of items in the financial reports. The company has shown deferred tax assets separately and has not shown it under intangible assets as laid down by the AASB 136. The company has made forecasts relating to occupancy after taking into account seasonal factors and the achievable growth rate from the strategies adopted by the company. This shows that the disclosures relating to customer contracts are based on reasonable forecasts and hence can be viewed as the best estimate of the management. As the company has made the best possible forecast in presenting information such as customer contract it can be said that the company has complied with the standard. AASB 136 “Impairment of Assets” The company did not recognize any impairment expense in 2009. AASB 136 requires an entity to report an impairment loss in the event of recoverable amount of assets being less than the carrying amount. However no gain is recognized if the carrying value exceeds the recoverable value. For 2008 the company reported an impairment charge of $10.04 million. This was with respect to the ELS portfolio of 20 centres (Early Learning Services Limited-d, 2009). AASB 137 “Provisions, Contingent Liabilities and Contingent Assets” For the financial year end 2009 the Group and the company reported contingent liabilities with regard to- Early Learning Services Limited is acting as a defendant in the court proceedings. These proceedings are with respect to the company’s decision of not going ahead with the buying process of two care centres for children in A.C.T. in the year 2008. The plaintiff has appealed for performance of purchase contract of $3.9 million for the two centres. The company is expecting a favourable outcome in this legal claim and therefore has not maintained any provision for the same. The company has reported this as contingent liability (Early Learning Services Limited-d, 2009).There has not been any change even after the reporting date as the corporate website of the company has not reported any news with regard to this legal claim (Early Learning Services-a, 2010). AASB 112 “Income Taxes” The company has not maintained any provision for income taxes for the year 2009. The Group has also recognized deferred tax assets with respect to “carried forward tax losses” as per the available “taxable profits”. However such utilisation is subject to the company’s ability to clear certain tests. If the company fails to satisfy these “carried forward losses” must be set off against income tax expense. For 2009 the company reported an increase in deferred tax asset of $5309. In this year the total deferred tax asset has been reported at $2211273. This has decreased marginally as compared to the previous year when this amount was $2255242. In this year the company reported deferred tax liability of $27837. This has declined as compared to the last year figure of $2158745. The deferred tax assets represent any temporary differences and unused tax losses” ((Early Learning Services Limited-c, 2008; Early Learning Services Limited-d, 2009). AASB 110 “Events after the Reporting date” This standard prescribes as to when a company must make an adjustment to the financial statements for the events occurring after the date of reporting and the disclosures with regard to the events occurring after this date. ELS announced a merger proposal with Payce Child Care Pty Limited (PCC) on December 18, 2009. From this transaction the company expects to diversify its group with child care positions of 5000 spread across nearly 97 centres. This merger deal will involve an offer for the shares of PCC. ELS also disclosed that PCC does not have any debt in its capital base and runs 60 childcare centres spread across various locations. It has been reporting profits for the last four years. ELS’s offer included a cash amount of $6 million along with an issue of 40 million shares in the company at $0.25 per share. Based on this the value of PCC comes to $16 million. As a part of the proposal the company also offered for issue of extra shares if it fails to raise necessary amount of cash required for the deal. On January 22 2010 the company made further announcement that in the case of shareholders approval the entire deal will be settled by offer of shares (Early Learning Services Limited-d, 2009). Disclosures have also been made about the land and building classified as ‘held for sale’ in the balance sheet. It has been stated that this was finally sold in January 2010. This resulted in net proceeds of $1 million. ELS used this amount to bring down its bank debt (Early Learning Services Limited-d, 2009). On April 1, 2010 the company announced its plan of acquiring 10 childcare centres. Of this 6 are in South Australia, 2 in Victoria, 1 in New South Wales and 1 in Queensland. The management of the company is of the view that this acquisition will increase the geographic distribution of the company. This will facilitate the company’s plans for expansion (Early Learning Services Limited-b, 2010). Overall evaluation and objectives of reporting The company has reported all the necessary financial information as per relevant accounting standards. ELS complied with the amendments made to AASB 110. As required under the new amendments the company has prepared an additional statement relating to changes in equity. Under the new rules the company has presented total comprehensive income in its financial statements. With respect to AASB 138 the company has based its figures on the best possible estimates taking into account seasonal factors. As per this standard any probable benefits that the company expects to receive in the future must be based on reasonable estimates. This leads to improved transparency which is one of the pre-requisites of financial reporting. Other than this the company has also made disclosures relating to interest rate risk in notes to the financial statements. A fair and full disclosure of such risks is important as it enables the users of the reports to assess the impact of any unforeseen events on the financial health. As per AASB 137, the company has also disclosed about the contingent liability relating to the legal claim made upon it regarding a purchase contract. The company has also made disclosures about the proposed merger deal as ‘events after the balance sheet date’. This is an important disclosure as it will help the investors in understanding the future plans of the company. The company has also furnished all the details regarding its merger offer such that the shareholders and the other stakeholders can also get an insight into the future business plans. Therefore it can be said that the company has adhered to the relevant accounting standards, thereby, making a fair and complete disclosure of its operating activities. The company has disclosed all the relevant financial information that may be of use to an existing or potential investor. Reference Australian Capital Territory Government. 2009. PROPERTY, PLANT AND EQUIPMENT. ACT ACCOUNTING POLICY. Available at: http://www.treasury.act.gov.au/accounting/download/AP_04.pdf [Accessed on January 7, 2010]. Australian Accounting Standards Board. 2009. Intangible Assets. Available at: http://www.aasb.com.au/admin/file/content105/c9/AASB138_07-04_COMPjun09_07-09.pdf [Accessed on January 7, 2010]. Commonwealth Law. 2007. Accounting Standard AASB 101 Presentation of Financial Statements. Explanatory Statement. Available at: http://www.comlaw.gov.au/ComLaw/Legislation/LegislativeInstrument1.nsf/0/451633C100C32FBBCA257376000A04FB/$file/AASB101_ES_0907.pdf [Accessed on January 7, 2010]. Early Learning Services-a. 2010. News Listings. News. Available at: http://www.earlylearningservices.com.au/for_investors/news/ [Accessed on January 7, 2010]. Early Learning Services Limited-b. 2010. Proposed acquisition of 10 childcare centres. ASX Announcement. Available at: http://www.earlylearningservices.com.au/resources/pdfs/news/001/2010-04-01%20ASX%20Announcement_Proposed%20Acquisition%2010%20Centres.pdf [Accessed on January 7, 2010]. Early Learning Services Limited-c. 2008. Annual Report 2008. Early Learning Services Limited-d. 2009. Annual Report 2009. Holmes, E. No Date. The nature of property, plant &equipment. Australian Accounting Standards. Available at: http://www.johnwiley.com.au/highered/aas/student-res/student_powerpoints/Ch08.pdf?examid=708 [Accessed on January 7, 2010]. Read More