The six Qualitative Characteristics proposed in Phase A of the joint IASB/FASB review - Coursework Example

?Finance and Accounting Table of Contents The six Qualitative Characteristics proposed in Phase A of the joint IASB/FASB review 3 The Qualitative characteristics as depicted by Diageo Plc. 7 Comprehensive income Statement 8 Current assets from Balance Sheet 10 Lease 14 Reference List 18 The six Qualitative Characteristics proposed in Phase A of the joint IASB/FASB review The Conceptual Framework to be used in financial reporting suggested the concepts that lie under financial reporting and accounting. The framework is a system of interconnected fundamentals and objectives that prescribes the limitations, functions and nature of financial reporting. FASB and IASB, the two standard setting bodies, who are the major users, will be the greatest beneficiaries of the guidance provided by the framework. The six qualitative characteristics proposed in Phase A of the joint IASB/FASB review related to facilitation of decision-usefulness and stewardship is as follows: The two fundamental characteristics that are required for decision useful information are Relevance and Faithful representation The four other enhancing qualitative characteristics are: Comparability Timeliness Verifiability and Understand ability Relevance: This signifies that the users of the financial statement can use the information to make investment decision like buying, retaining or selling of shares. Comparability: This signifies that the users of the financial statement should be in a position to compare the progress of the organization over time and also with other entities. Understandability: This signifies that the user must understand what the financial statement is representing. Timeliness: Verifiability: This signifies that several independent measures will obtain the similar accounting measures. Timeliness: This allows addition of further information in the financial statement, which can be up to six months later from the date of balance sheet. Faithful representation: This signifies that information should represent those, which it claims to depict (Mehnert, 2010). The frameworks that are already provided by both FASB and IASB focuses on giving information, which will be helpful in taking economic decision and is seen to override the objectives of financial reporting. As a section of the overriding objectives, both of them have also discussed about the fact of providing information that would assist in assessing the capability of the management in fulfilling the stewardship responsibility towards the investors of the organization. This signifies that the information that are provided by the management related to the credit, investment and other economic decisions acts as a base for assessing the capability of the management in fulfilling the stewardship responsibility towards the investors. At the same time, the users of the financial report assess the stewardship responsibilities for the purpose of economic decision making. The board considered the decision whether to retain stewardship as it was in the pre-existing framework or to make changes in the discussion of the objectives, by either adding any additional information that would elevate the process of assessing stewardship as a separate objective or by omitting any discussion related to stewardship (Family Research Council, 2008). Financial reporting like financial statements usually does not exhibit the performance of the management and the entity as two separate aspects (International Financial Reporting Standards, 2012). The success or failure of an entity is directly linked to various factors. The performance of the management in rendering the responsibilities of stewardship is a contributing factor but at the same time it should be also noted that there are certain circumstances and events that are not under the control of the management like the price changes, demand and supply characteristics of the entity outputs and inputs and the general economic condition. The information provided in the financial reporting are related to the entity during a particular period of time when it is working under the direction of a specific management but none of the information are provided related to the performance of the management (Zyla, 2009; Kimmel, Weygandt and Kieso, 2010; Lehner, 2012; Zube, 2011). The framework does not need any discussion regarding the accountability or stewardship. As already mentioned the users of the financial report are mainly concerned about the assessment of stewardship in order to facilitate the decision related to economic decision making (Anon., n.d.; Becker, 2005; Gore, 1992). In addition, the information related to economic obligation, economic resources and any alteration in them that is required for making credit and investment decision are not separated from the information that are required for assessing the accountability and the stewardship of the management. The inclusion of stewardship in the discussion as an objective has created many misunderstandings. For instance some have suggested that including stewardship in the discussion implies that a greater focus on the information related to the performance of the management and their intention is given than what is found in accounting today. Thus, it can be concluded that the discussion of stewardship is seen to add nothing substantial to the objectives and is instead seen to leading to the risk related to misunderstanding (Family Research Council, 2008). However, some others have supported the idea of providing information that would help in assessing the capability of the management in fulfilling the stewardship responsibilities as a separate objective in financial reporting. They have agreed on the fact that it is the responsibility of the management to safeguard the assets of the entity and at the same time use them in a profitable and efficient manner (International Financial Reporting Standards, 2012). However, these individuals have agreed on the fact that information that is used for assessing the profitability or the efficiency is not sufficient for the assessment of the management in fulfilling the responsibility of safeguarding the assets. Hence, requires further consideration. On the other hand some scholars have suggested that stewardship is a broader notion than decision-usefulness. They are interested in the potential impact that may result from subsuming stewardship within the decision-usefulness objective (Delaney and Whittington, 2012; Whittington, 2012; Wahlen, Jones and Pagach, 2012). Therefore, it was decided by the board that the discussion regarding providing useful information related to assessing the fulfilment of the stewardship responsibility of the management will be an important part in the objective that looks at providing information used in making economic decision. Eliminating the discussion related to stewardship from the financial report as it is unnecessary may create an implication that the board no longer considers financial report as an important source for providing information that assesses stewardship. This will be a wrong portrayal of the image of the board that always reaffirms that the information used in economic decision should be used in assessing the fulfilment of the management in its stewardship responsibilities. Moreover, the board has also made it important to note that assessing the management in fulfilling the stewardship decision cannot be considered separately because the information that is required to make economic, credit and investment decision also encompasses the information related to stewardship. Thus such a separation is not possible for the board (International Accounting Standards Board, 2010). The Qualitative characteristics as depicted by Diageo Plc. The qualitative characteristics that are suggested by the Phase A of the joint IASB/FASB review are understandability, relevance, reliability, comparability, timeliness and fair presentation. These qualitative characteristics will be applied to financial statement of Diageo to find whether they comply with the IASB conceptual framework. Diageo Plc. has provided a section related to the basis of preparation, that highlights on the information based on which the financial statements are prepared (Anon., 2011). This section says that the financial statements are prepared according to the directives given by the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and IFRS as issued by the International Accounting Standards Board. This intimation to the users helps them in understanding the changes that they can experience in the financial reporting. The organization stated that the consolidated financial statement has been prepared on a going concern basis under the convention of historical cost leaving some of the financial instruments and biological assets that are stated at a fair value. The preparation of the financial statement needs to be done as per the IFRS, which requires the management to make assumptions and estimations, which can affect the amount of liabilities and assets reported, the disclosure related to the liabilities and contingent assets at the date of the financial statement and the amount of revenue and expenses reported during the year. Comprehensive income Statement Understandability: Understandability includes classification, aggregation and user’s ability. According to the directives laid down in the Framework stresses on the fact that the information that are provided in the financial statement by the organization must be presented in such a way that it is readily understandable to the users. In simple words the users of the statement should be in position to understand or perceive the significance of the information. The Framework states that the individuals who are engaged in preparing these statement should assume that the users who are interested in using the statement have enough knowledge regarding the economic activities, business and accounting; at the same time, they display enough willingness to study the information provided using reasonable amount of diligence (The Hundred Group of Finance Director, 2011). If the comprehensive income statement is considered, it can be observed that the organization has adopted standardised presentation format using the presentation rules set in IAS 1. The consistency in the presentation leads to the better understanding of the investors who are the users of the financial information. According to the IAS 1 amendment the items that are presented in the comprehensive income statement of the organization requires that the items that are present in the comprehensive income statement should be scrutinised between the other items that are not recycled to the income statement subsequently along with the items that are recycled to the income statement. This was for the first time applied to the financials in the year 2013 without creating any significant impact on the financial position or consolidated results. In the above diagram it can be also seen that company has provided a clear view regarding the comprehensive income items that can be recycled to the income statement and the items that are not recycled. This facilitates the understanding of the users of the financial statement (Hussey, 2010; Mehnert, 2010). Figure 1: The comprehensive income statement of Diageo Plc. Source: (Diageo Plc., 2013) Comparability: Apart from this, the organization has also provided a comparable view of the above item. According to the Framework, the financial statement should be presented in such a way that it is clearly comparable by the users. The comparison of the information can take place in two ways firstly, over time and secondly, relative to the entities, in order to assess the changes in the financial position, performance and the relative financial position of the entity. This implies that financial statement of an organization should include statement regarding the financial position, statement related to comprehensive income and current year’s statement, presented along with the information from the prior year, which is termed as comparatives. In the figure given above it can be seen that the company has provided information of the current year along with the previous year’s figure. This suggests Diageo has provided comparatives in order to facilitate the understanding of the users. By viewing a similarly prepared financial statement allows the users to undertake sound judgement regarding the trends in the performance, alteration in the financial position and using the information in predicting the future performance, which in turn will help the organization in estimating the return they are going to get. Thus, this information will help in economic decision making regarding selling, buying or retaining the equity shares by holding them. Diageo Plc. has not only provided comparative (sounds incomplete?) for comprehensive income statement but also for consolidated income statement and balance sheet. In order to facilitate sound economic decision making the organization has provided financial information of several years. This suggests that the organization has followed the characteristics related to comparability. Current assets from Balance Sheet If a glance is given at the current assets section of the balance sheet, it can be found that the organization has incorporated the qualitative characteristics like understandability, comparability, relevance, reliability, timeliness and fair presentation (Anon., 2011). In order to facilitate the process of understandability, the financial information is aggregated and is segregated according to the standard disclosure format. Diageo Plc has used a large number of disclosures that will facilitate the understandability of the users. However, it should be noted that too much elaboration regarding any information is often considered as deceptive and camouflaging the original information that has been portrayed in the financial statement. Every entity has a large number of ledger accounts; especially in large companies there are thousands of such accounts. Providing every detail of such accounts is not preferable rather a list of balances should be provided to the users, which is more meaningful. According to the Framework, in order to comply with the IAS, mentioning the disclosure regarding the accounting policies adopted by the organization helps in achieving comparability. Despite the inconsistencies, the organization should provide disclosure that will make the users identify the accounting policies that the entity is adopting for some transaction in the accounts relative to others. It also facilitates in identifying the accounting policies adopted by different entities and varying from time to time. Users need these disclosures in order to conduct an assessment regarding the changes in the accounting policies of the organization. Therefore, disclosure performs a crucial role and is required in detail, stating the reasons behind such changes along with the details regarding the cumulative impact on opening balances and statement of financial position for two years. Under the current assets Diageo Plc. has segregated each element of the current assets into small subheading like inventories, cash and cash equivalent, assets for sale, trade and receivables and other financial assets. For each of the segregation mentioned above the organization has provided separate disclosures. For instance, in case of inventories Diageo Plc. has mentioned that the inventories are stated at a lower cost and net realisable value. The cost has included elements like direct labour and expenses, raw materials, a proportion of overheads and production but has not included any borrowing cost. The cost has been calculated using weighted average cost incurred by the organization in acquiring the inventories. Moreover, the organization has also mentioned in the disclosure that the maturing inventories, which are held for more than one year, are considered as current assets, since they are expected to get realised in the normal operating cycle of the organization. This disclosure is meant for enhancing the understandable of the users regarding which inventories are considered under current assets, why are they considered and how cost is allocated to them. Figure 2: Extract from the Balance sheet of Diageo Plc. Source: (Diageo Plc., 2013) Comparability of an organization is measured by observing whether comparatives are provided by the organization. Disclosures also play a crucial role in measuring comparability. When the organization is making in changes in their accounting policies then they should provide this intimation to the users so that they are aware of the changes. As mentioned above the disclosure has been provided by the organization for each heading under the current asset segment of the balance sheet. Apart from this, comparability is also measured by evaluating whether the organization has provided sufficient comparatives, which implies that data of the previous year should be provided. The extract from the balance sheet statement suggest that Diageo Plc has not only provided data for the current financial year but also the financials of the previous year. This implies that the organization has provided ample opportunities for the users to compare the financial and decide on the financial position of the organization. These data will also facilitate the decision making of the investors (Anon., 2011). Relevance is defined by the Framework as the ability of the organization to influence the economic decision making of the users by evaluating the past, present and future data and correcting or conforming the past evaluation. The Framework has suggested that relevant information should have confirmatory value or predictive value. Information is considered to have predictive value if the information provided helps in assessing or evaluating the past, present or future events (Anon., 2011). However, it should be noted that in order to provide predictive value the organization should not go for providing explicit forecast; instead the information related to the past performance of the organization should be considered to enhance the predictive value. The historical data presented by Diageo related to the current assets shows how predictive value has been provided to facilitate the sound and informed decision of the users. The disclosure along with the past data will allow the users to forecast the future value of the organization. If they find the forecasted future value to be promising, they might go for investment in the organization. However, only the predictive value is not enough for the organization. Along with that the information regarding the confirmatory value also needed to be provided. Confirmatory value are those that help the users to correct or confirm the past assessments or evaluation. The disclosures and presentation of the past financial data helps the user in confirming the past evaluations. Information has to be both confirmatory and predictive, and then only it is considered to be relevant. With concept of relevance comes the idea of timeliness. As recommended by the Framework, relevant information is considered to be more relevant if they are provided in the timely manner. Information provided in correct time have more chances to influence the decision making process. Diageo Plc has provided results of the financial performance through their annual reports in a timely manner. The report is present for all the years and on the website of the organization. Moreover, the disclosures present in the annual report facilitate the understanding of the users (Anon., 2011). Lease In order to measure, whether the information related lease of Diageo Plc. given in balance sheet and profit and loss statement is reliable, fair representation has been considered. According to the Framework, in order to present useful information, they need to be reliable. Reliability signifies, free from material error, free from systematic biases and should be represented faithfully. According to the guideline in the Framework, reliable information is one which represents that the transaction has been done faithfully and all other events are represented in a reasonable manner. It looks for identification of the all the obligations and rights that are arising from the events or the transactions; along with this the accounting and events should be conducted in the way it reflects the economic substance. In the information that are provided in the financial report must not only provide the legal form but should also represent economic substance of the transaction. This is because of the fact that the legal form of a transaction is not consistent with the economic reality of the transaction. For instance the entity are often seen to pass the legal ownership of certain items to another party but when the whole situation is given a full and clear view, it can be observed that the party is still having an access to the future economic benefits that they gain from the property. In such circumstances the report of sale of property is not regarded to represent the faithfulness of the transaction. In such an instance it is more appropriate to represent such a transaction as obtaining loan by using property as the security (Anon., 2011). The most appropriate example of such a case for Diageo Plc is the lease. Under lease the organization has provided a separate disclosure. The lease where Diageo Plc has substantial amount of rewards and risk attached to the assets that is subjected to lease is referred and treated as finance lease. The organization has clearly stated that the assets that are held under finance lease are recognised by the group as the assets that are recognised at the fair value right from the inception of the lease. The company has included the liability of the lessor under the heading of other financial liabilities under the consolidated balance sheet. Apart, from this care has been taken regarding the lease payments that the organization will be paying. The lease payments are apportioned between interest expense and reduction in lease obligation, so that a constant rate of interest can be achieved on the remaining balance of the liability. All other lease leaving the financial lease are treated as operating lease by the organization and the receipts and payments are allocated to the income statement on a straight line basis over the life of the lease (Sachse, 2006). Figure 3: Extract from the Balance sheet of Diageo Plc. Source: (Diageo Plc., 2013) Figure 4: Extract from the Profit and Loss Statement of Diageo Plc. Source: (Diageo Plc., 2013) A focus on the above mentioned sections where the details regarding lease has been provided shows that in those cases also the organization has not only provided importance to relevance but also to comparability and understandability. While providing the information related to the other financial liabilities, interest payable and interest receivables, which has the amount resulting from lease, the organization has provided both comparatives and disclosures. The comparatives provide an opportunity to the investors to compare and understand the scenario. Moreover, the disclosure given by the organization further enhances their understandability (Porwal, 2001). Apart from these, Diageo Plc has also provided information in the form of disclosure for business combination, joint ventures and associates, foreign currencies, sales, promotion and advertising costs, employee benefits, post employment and pension benefits, provisions, hedging and derivatives financial instrument, financial liabilities, financial assets, inventories leases, government grants, plant, equipment and property, goodwill, brands and intangible assets, discontinued operations, taxation and exceptional items. Providing disclosure in the financial statement is considered as one of the fundamental characteristics of financial reporting. The current situation of the company is a stage where it had to make many changes in the way they used to conduct financial reporting. It has been argued that companies who are using different accounting policies or have made significant changes in the accounting policies, which suggest lack of consistency, should provide disclosure that a crucial aspect in this regards (Anon., 2011). Reference List Anonymous, 2011. The qualitative characteristics of financial information [pdf] Available at [Accessed 14 November 2013]. Anonymous, n.d. Conceptual framework for financial reporting [pdf] Available at [accessed 14 November 2013]. Becker, C., 2005. The conceptual framework in the United Kingdom and the introduction of the statement of principles. Munich: GRIN Verlag. Delaney, P.R. and Whittington, O.R., 2012. Wiley CPA examination review, outlines and study guides. New Jersey: John Wiley & Sons. Diageo Plc., 2013. Financial Reports [online] Available at [Accessed 14 November 2013]. Family Research Council, 2008. 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