International Corporate Reporting Issues Faced By Diageo - Essay Example

?International Corporate Reporting Issues Faced By Diageo Table of Contents Table of Contents 2 Introduction 3 Identification and Explanation of Six Qualitative Characteristics of Accounting Information 4 Relevance 5 Faithful Representation 5 Comparability 6 Verifiability 6 Timeliness 6 Understandability 7 Company Profile 7 Three Areas Extracted from Diageo’s Balance Sheet 8 Taxation 8 Brands, Goodwill and Other Intangibles 10 Post-Employment Benefit 11 Qualitative Characteristics and Critical Evaluation of Their Application 12 Conclusion 14 References 16 Bibliography 21 Introduction The roles of International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) have been significantly affected with the expansion of business activities. Primarily, these boards are responsible for articulating common languages or the standards for financial reporting across the world (Tran, 2012). In the recent times, companies that have been operating in different countries are troubled by several issues of financial reporting. Literally, the differences in the financial reporting system in varying countries have acted as an obstacle in the integration of national economy with global economy (Verschoor, 2011; Alexander, Britton & Jorissen, 2007). Thus, in order to deal with these challenges, IASB and FASB together have been duly engaged in promoting harmonization of financial reporting systems (Whittington, 2008; Mogul, 2003). Emphasising on these aspects of the international accounting standards, this paper intends to identify and explain the six major qualitative characteristics of accounting information. Furthermore, this paper aims to evaluate the application of these qualitative characteristics by Diageo plc focusing on three particular areas. Identification and Explanation of Six Qualitative Characteristics of Accounting Information The primary role of financial reporting is to meet the requirements of stakeholders and interested parties by making them familiar with relevant information that is often considered to be extremely useful in making economic as well as business decisions. Essentially, such information ensures effective functioning of the business as well as capital deployed by facilitating best possible allocation of available resources by the company. The institutions in the accounting standards namely International Accounting Standard Board (IASB) and Financial Accounting Standard Board (FASB) have been involved in developing conceptual framework for enhancing the financial reporting system. The primary objective of this conceptual framework has been related with identifying the major purpose of financial reporting in business in accordance with the prevailing economic circumstances (Obaidat, 2007). In other words, the conceptual framework developed in accumulation of the principles specified by IASB and FASB deals with establishing objectives and guidelines which are expected to serve as the basis for the preparation of financial accounting and reporting standards. It is worth mentioning that conceptual framework mainly consists of four major items which includes: Objectives related with financial reporting Elements concerning with financial statements Recognition and measurement concepts Qualitative characteristics of accounting information Additionally qualitative characteristics are considered to be one of the vital components of the conceptual framework that supports decision-usefulness and stewardship. Moreover, there are six primary qualitative characteristics that are considered to be vital for economic as well as business decision making according to the specified guidelines in the international standard (Obaidat, 2007). These six elements of qualitative characteristics have been further explained below in relation to their usefulness in terms of decision making and stewardship. Relevance In order to ensure the obtained accounting information to be relevant to creditors, investors and other interested parties, it has been argued that such accounting information must be able of creating differences in a decision. In addition, the relevant information is often been closely related with predictive value, timeliness and feedback value with respect to the financing operations of an organisation. Thus, it can be stated that the element of relevance closely facilitates and supports in decision usefulness and stewardship (Hellstrom, 2005). Faithful Representation It is essential that financial information should not only depict the relevant information, but also comply with both the elements of qualitative characteristics i.e. relevance and faithful representation. Literally, the financial information should be relevant and true to what it actually intends to convey. The financial information should involve complete information and further it must be capable to explain the significant facts as required by the decision makers within the organisation and outside (i.e. its stakeholders). This shall enable decision makers to judge the business and economic situation more accurately and take decisions that best support the existing circumstances (Whittington, 2008). Comparability It is often been admitted that accounting information of an organization can be best utilized if these information are duly compared with the accounting information of another organization operating in similar circumstances. Additionally, the comparability occurs when different organizations implement the identical accounting treatment in the similar context or an event. Such comparability benefits users to identify and understand similarities and differences related with various items and further facilitate to take similar decisions if the identical events occur in future (International Accounting Standards Board, 2010). Verifiability The element of verifiability ensures the users of the financial information that the depictions of the information are faithfully represented according to the prevailing economic circumstances and it duly entails the comprehensive information intended to be conveyed through the financial reporting. In other words, the element of verifiability enables user’s willingness to use the information obtained or not (Ernst & Young Global Limited, 2010). Timeliness The element of timeliness claims that the information is available to users with the time and this information has the capacity to influence the decisions made by its users. The element of timeliness gains importance due to the fact that evaluation of past knowledge is crucial for the success and effectiveness of the current decisions. Additionally, the users shall not be able to make effective decisions if they do not have necessary knowledge of past. Thus, it can be argued that the current decision are significantly based on the past experiences and knowledge gained (McGee & Igoe, 2008). Understandability Understandability entails abilities of information users to aggregate and classify the financial information. The element of understandability postulates that users must have the capability to duly understand the significance of information and further they must be able to relate the obtained information for effective decision making. In other words, those involved in the preparation of financial information should assume that the users of the information have the appropriate knowledge about the principles, concepts and policies articulated in the financial reports of an organization so that the users are able to perceive the business and economic circumstances accurately and therefore gain the ability to make decisions that best suits the prevailing situations (McGraw-Hill Education, 2013; Sinclair, 2010). Company Profile Diageo plc was incorporated in the year 1886 as a player in the premium drinks business industry. The group includes exceptional collection of alcohol brands under the different categories of spirits, wines and beers. It is worth mentioning that the group operates in international context almost in more than 180 countries across the world (Diageo, 2013). Three Areas Extracted from Diageo’s Balance Sheet In order to identify whether the financial reports are prepared according to International Accounting Standards the three important elements are being extracted from the balance sheet of the group which involves ‘brands’, ‘goodwill and intangibles’, ‘taxation and post-employment benefits’. These three primary components of balance sheet are being further evaluated below: Taxation The primary objective of IAS 12 (1996) is to prescribe the standards and principles for accounting treatments dealing with income tax. In order to further understand the implications of IAS on taxation, it is crucial to understand few relevant definitions. Accordingly, the temporary difference as per the IAS standards is related with differences between the amount of assets/liabilities and its tax base. Similarly, taxable temporary differences, according to IAS is considered as temporary differences that shall lead in taxable amounts in the up-coming years when amount concerning with assets is duly recovered or the liability is adequately settled. In addition, a temporary difference is related with the amount that is deductible in the future when amount related with assets are recovered or the liabilities are settled. According to IAS, current tax related with current and an earlier period is considered as a liability till the extent, it has not been settled. The IAS standards also postulate that benefits arising from tax loss that can be carried back to re-ascertain current tax concerning to earlier period should be considered as an asset. The current tax assets as well as liabilities are calculated at the amount expected to be funded to taxation authorities by using rates that have been incorporated by the balance sheet date. Moreover, the general standards articulated in IAS 12 affirm that deferred tax liabilities need to be considered for entire taxable temporary differences. Similarly, IAS standards claim that deferred tax assets need to be considered for deductible temporary differences as well as unused tax credits and losses to the margin when taxable profits shall be obtainable against which the sum that is likely to arise form deductible temporary differences can be used (Deloitte Global Services Limited, 2013). Furthermore, Diageo plc operates in number of countries around the globe and it is subject to follow the different tax jurisdictions as stated in different countries of its operation. Thus, quite often it is perceived to be a complex task on the part of the group. The management of the group determines the provision for income tax. The group also duly estimates current tax liability along with the assessment related with temporary differences that tends to arise as a result of different tax treatments. The temporary differences lead towards identification of both deferred tax assets and liabilities that are presented in the group’s balance sheet. It is worth mentioning in this context that both the deferred tax assets and liabilities are estimated on taxation basis that is being substantively incorporated as on the balance sheet date. However, the group lacks in recognising the deferred tax assets where is identified that assets shall not be realized in the future period. Also, the group does not recognize tax benefits to the extent that tax positions are sustainable. Once the group identifies tax benefits to be probable, it reviews every aspect of material tax benefits in order to identify the need for provision creation which should be taken with respect to full recognition of tax benefits on the potential settlement basis through negotiation. Brands, Goodwill and Other Intangibles IAS 38 prescribes the treatment for intangible asset which requires an organization to recognize its intangible assets whether purchased or created to be treated in its financial statements accordingly. According to the IAS guidelines, intangible assets are defined as an asset that is distinguishable as non-monetary asset which do not have physical substances. Moreover, IAS prescribes that intangible assets can be acquired as a component of business combination, separate purchase, by government grants, exchange of assets and self-creation. Correspondingly, IAS guidelines specify that if the fair value of intangible element does not comply with the definition articulated or with criteria prescribed under IAS 38, any expenditure made on such element or item needs to be considered as expenses (Deloitte Global Services Limited, 2013a). More specifically, IAS 36 elaborates that an organization needs to test for impairment by duly comparing the recoverable amount of the assets together with its currently allocated amount at least annually and in certain circumstances where there is indication for intangible assets to be impaired. Moreover, IAS guidelines state that intangible assets shall be removed or derecognized from the balance sheet when it is disposed or when it is identified that the particular intangible asset does not have the capacity to generate future economic benefits (IFRS Foundation, 2012; Friedrich & Friedrich, 2009). With respect to Diageo plc, the acquired intangible assets are illustrated on the consolidated balance sheet at cost. The group, in order to ensure that intangible assets, such as brands are not estimated over their recoverable amounts, it undertakes impairment reviews. More specifically, the group undertakes discounted cash flow analysis annually in order to compare discounted future operating cash flows against the net value of acquired brands or intangible assets. It is worth mentioning in this context that this analysis is usually based upon the estimated cash flows along with terminal values that are estimated by using the real Gross Domestic Product (GDP) growth rate of a particular country in addition to its inflation rate. Notably, the estimated cash flows are further discounted according to group’s weighted average cost related to its capital in a particular country. Similarly, goodwill of the group discounted and estimated (IFRS Foundation, 2012). Essentially, the above stated tests are largely dependent on the estimation and judgments of the management. However, such estimates and judgments of the management are supposed to change depending on the changing economic circumstances. Nonetheless, the management may endeavour to ascertain the most suitable estimates although actual cash flows may tend to vary (IFRS Foundation, 2012; Friedrich & Friedrich, 2009). Post-Employment Benefit IAS 19 prescribes various accounting requirements related with employee benefits and post employee benefits. IAS 19 applies in matters related with wages, salaries, profit sharing plans, housing benefits, free or subsidized goods, pension benefits, post-employment medical along with life insurance benefits, long service and sabbatical leave, deferred compensation programmes and termination benefits among others (European Commission, 2009). In relation to post-employment benefits, IAS 19 postulates that any benefit related with post-employment shall be determined as per the planned format as to whether the plan is defined contribution or it is defined benefit. According to the defined contribution plan under IAS 19, an organization is liable to make fixed contribution into the fund but it is not legally bound by any constructive obligation to further contribution even if the fund is inadequate to pay post-employments benefits to all the employees. On the other hand, defined benefit plan comprises of both formal plans as well as informal practices that advocate constructive obligations to employees. Additionally, Diageo determines various assumptions that it intends to adopt together with UK practices when reporting for accounting standards. However, it has been argued that application of dissimilar assumptions often have the potential to dramatically affect the amounts presented in the income statements and balance sheet concerning post-employment benefits. Notably, the income and charges that are included in the income statement concerning with post-employment benefits are partly ascertained by assuming an appraised rate of return based on the assets acquired by the post-employment plans. Similarly, the net liability related with post-employment benefits is partly ascertained on fair value basis at the end of each year in association to assets inclusive in the post-employment plan (Diageo plc, 2011; European Commission, 2009). Thus, after analysing the accounting treatment for three areas, namely taxation, brands, goodwill and other intangibles and post-employment benefit, it can be firmly admitted that Diageo duly applies IAS standards while preparing its financial reports. Qualitative Characteristics and Critical Evaluation of Their Application As stated above, the six major qualitative characteristics comprise relevance, faithful representation, comparability, verifiability timeliness and understandability (Pearson Education Ltd, 2013). It has been argued that relevance is an important conceptual framework that proclaims financial information to have the tendency to influence decisions made by the users. Additionally, Diageo in order to ensure that financial information is relevant; the group performs monitoring tasks of every transaction on daily basis through risk management and risk analysis. A finance committee within the organisation has also been established who are responsible for receiving monthly reports on the various activities related with treasury department. On the other hand, the group, in order to ensure that elements of faithful representation have been incorporated under conceptual framework is duly applied, follows guidelines as prescribed under International Reporting Financial Reporting Standards (IFRS) issued by the International Accounting standard Board (IASB) in compliance with the European Union (EU) norms (IFRS Foundation, 2013). The group’s consolidated financial statements are also prepared on the basis of going concern wherein historical costs convention and other costs excluding biological assets and few other financial statements are duly stated at their fair value. Furthermore, the element of comparability is often being perceived as important that enables users to identify similarities and variances among the items. Thus, in order to ensure that the financial information ascertained is efficient enough to make vital decisions, the group compares and contrasts its financial information with its major competitors namely ABMiller, Carlsberg and Coors Brewing (Carling) (Diageo plc, 2011). Contextually, the element of verifiability is considered to be another important component of conceptual framework that is applied while preparing financial information. This conceptual framework ensures that the financial information inculcated in the reporting statements are able to depict fair and faithful information apart from relevancy element, concerning with the information. In order to ensure that the financial information depicts adequate information regarding the group to duly prepare its financial report in conformity with IFRS requirements, the reporting practices applied in Diego advocates the full disclosure of the all the items included in its consolidated financial statements (Diageo plc, 2012). In the similar context, timeliness is also regarded as important as other elements of conceptual framework. The element of timeliness ensures that information is available to users within the time so that they are able to make efficient decisions relating with the overall performance of the group. In order to ensure that financial information is available within the time, the executive and chief financial officers are engaged in the supervision of management as well as they are closely associated with maintaining sufficient control over the financial reporting of the group (Diageo plc, 2012). The element of understandability ensures that the users of the financial information have substantial knowledge about the business and its economics activities. The group, in order to ensure that the information being reflected in the financial reporting are easily understandable by the users, practices the most appropriate accounting policies during the preparation of the financial reporting (Diageo plc, 2012). Conclusion IASB and FASB deal with formulating accounting standards for promoting fairness in the business activities. Owing to the differences in the practices of financial reporting system prevailing across the globe, these institutions have been greatly engaged in introducing accounting standards in order to ensure harmonization of financial reporting system across the world. Evidently, IASB and FASB duly postulated their commitment towards the creation of common accounting standards that would be applied across the world. As the result of joint project, a conceptual framework which comprises the primary objective of financial reporting as well as the qualitative characteristics upon which accounting standards should base has been articulated. The major intention behind the articulation of these qualitative characteristics has been to ensure high quality financial reporting by an organization that is useful for business as well as economic decision-making at every level comprising of the stakeholders group. Furthermore, the analysis of Diageo’s financial reporting system revealed that the group duly applies the IAS standards while preparing its financial reporting in order to ensure high-quality financial information is available to stakeholders for efficient decision making. References Alexander, D., Britton, A. & Jorissen, A., 2007. International Financial Reporting and Analysis (10th ed). Cengage Learning EMEA.  Deloitte Global Services Limited, 2013. IAS 12 — Income Taxes. Summary of IAS 12. 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