Financial Reporting Disclosures in the Australian Corporate Sector - Example

Running header: accounting Student’s name: Instructor’s name: Subject code: Date of submission: General purpose financial reporting General purpose financial reporting has the objective of providing financial information about the reporting entity which is useful to current and potential investors, lenders and other creditors in making useful decisions regarding provision of resources to the entity. Such decisions may include decisions involving buying, selling or holding equity and debt instruments as well as providing or settling loans as well as other forms of credit. The decisions regarding whether to buy sell or hold debt and equity instruments by current or potential investors are dependent on the returns expected from investing in the instruments such as dividends or instrument payments (Charles, 2012). Decisions on settling or providing loans and other forms of credit will depend on principal and interest payments or the returns they expect. The expectations about the returns on the other hand depend on the investors/ lenders assessment of the amount, timing and uncertainty of future net cash inflows to the entity. General purpose financial reports will thus help them in assessing the prospects of the entity’s future net cash inflows. This they do by providing information regarding the entity’s resources, claims against it and how effective and efficient the entity’s management is in discharging their responsibilities to use the entity’s resources (IFRS Foundation, 2010). As such, general purpose reporting is aimed at providing information that helps existing and potential lenders estimate the value of the entity The Qualitative characteristics of useful financial information include; a) Relevance Useful financial information need to be capable of making a difference in the decisions by users. Such information is able to make a difference in decision making given it has confirmatory value, predictive value or both (Joseph, 2010). Having predictive value implies the information can be used as an input to processes users employ in predicting future outcomes. On the other hand, confirmatory value implies that the information provides feedback concerning previous evaluations. Materiality Useful financial information is considered material if misstating it or omitting it would influence the decisions made by users based on financial information of the entity. It is an entity specific aspect of relevance based on its nature, magnitude or both of the items the information relates in the context of the entity‘s financial report. b) Faithful representation Useful financial information must not only represent relevant phenomena but it must also faithfully represent the phenomena it purports to represent. In this case, the information has to be complete, neutral and free from error. Being complete implies that it includes all necessary information for the user to understand the phenomenon being depicted in addition to containing all necessary explanations and descriptions. Being neutral implies the information is without bias or containing any form of manipulation to increase the probability of it being received favorably by users. On the other hand, being free of error implies it contains no omissions or errors in describing the phenomenon while the process of producing the information is also free of errors. Qualitative qualities that enhance usefulness of financial information include; a) Comparability – since user’s decisions vary among alternatives, financial information regarding the entity need to be comparable with similar information from other entities and of the same entity but of different period. b) Verifiability – this implies that different independent and knowledgeable observers can reach consensus though not in complete agreement implying faithful representation. c) Timeliness –it implies the information is available to decision makers at the right time so as to influence their decisions. d) Understandability – Useful financial information need to be presented clearly and concisely so that users can understand it. Disclosure requirements for PPE as per AASB 116 The company chosen for this analysis is Qantas airways. AASB provides the following as far as the disclosure of PPE is concerned; i) The financial statements to disclose for each class of PPE a) The measurement bases used in determining the gross carrying amount in this regard, the company states its PPE assets less accumulated depreciation and impairment losses. This would also include installation and dismantling costs (Aasb.gov.au, 2014). b) The method used in determining depreciation- the company has disclosed that it uses the straight line method in determining depreciation. c) The useful lives and/ or the rates of depreciation used- in this regard, the company discloses the following; Years Residual value Building and leasehold improvements 10-40 0 Plant and equipment 3-20 0 Passenger aircraft and engines 2.5-20 0-10 Freighter aircraft and engines 2.5-20 0-20 Aircraft spare parts 15-20 0-20 d) The gross carrying amount as well as accumulated depreciation at the beginning and at the end of the accounting period. The company has fully complied with this requirement by disclosing for each PPE item i) Its cost ii) Less accumulated depreciation iii) Assets at net book value e) A reconciliation of the carrying amount at the beginning and at the end of the accounting period that details; i) Additions ii) Assets classified as held for sale iii) Acquisitions through business combinations iv) Increase or decreases that result from revaluations and from impairment losses recognized or reversed in other comprehensive income v) Impairment losses recognized in profit or loss vi) Impairment losses reserved in profit or loss vii) Depreciation viii) Net exchange difference that arise on the translation of the financial statements from functional currency to a different presentation currency ix) Other changes (Institute of Chartered Accountants Australia,2014) The company has fully complied with this requirement. A the reconciliation table for Qantas airways is shown below (Qantas.com, 2014) 2013 $m Opening net book value Additions Acquisition of controlled entity Disposals Transfers Transferred to assets classified as held for sale Depreciation Others Freehold land Buildings Leased improvements Plant and equipment Aircraft and engines Aircraft spare parts Aircraft deposits Total PPE f) The existence and amounts of restrictions on title and PPE pledged for security for liabilities. In this regard, the company has disclosed that certain aircraft and engines have been pledged as security. The assets are worth $8,852 million in 2013 and $8,878million in 2012. As outlined above, the company meets the disclosure requirements for PPE as per AASB 116. However, some provisions might not have been met owing to the fact that there might not have been any installations or demolitions during the 2013 accounting period. c) The extent to which the disclosures above on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information; As has been indicated above, financial information has to be both relevant and faithfully presented if it has to be useful owing to the fact that neither faithfully represented information that is irrelevant or relevant information that is unfaithfully represented can be useful to decision makers (Thomas, 2007). In recognition of this fact, Qantas airways have observed these fundamental qualitative characteristics of useful financial information. This can be analyzed as follows; a) Relevance The information that has been disclosed about the company’s property, plant and equipment is relevant for decision makers as it can influence their decisions. They can use it to gauge the extent to which the company has used its resources to secure assets capable for generating future revenue and hence income. This is relevant as it will help potential investors in deciding whether or not to invest. On the other hand, creditors and lenders will be able to assess whether the company can generate enough income to meet its obligations in future. In addition, it may help them to decide whether there are assets that have not been pledged as security on the basis of which future loans can be secured. In other words, the PPE disclosures have a predictive nature as they may help current and future creditors, investors and lenders predict about the company’s future performance and hence financial position and hence make their decisions based on this. In addition, the PPE disclosures are of confirmatory nature as they can be compared with previous period amounts and any discrepancies investigated by the decisions makers thus helping them maker more informed decisions. The disclosures can also be compared with those of future periods. The disclosures are also material since their omission or misstatement would influence the decisions by the decision makers. b) The company’s PPE disclosures have been faithfully presented. This is because the disclosures have included all information necessary for decision makers to understand including additional explanations and descriptions. For instance, it has disclosed that an asset book value is arrived at after subtracting accumulated depreciation from its cost. This is in addition to providing information on assets that have been pledged as security. Similarly, the disclosures are free from errors as the methods used in arriving at assets values and the process itself is free of error implying the amounts can be relied upon in making decisions. c) Enhancing qualitative characteristic One of the enhancing characteristics of useful financial information that has been observed by Qantas is comparability. The disclosures of the 2013 period have been laid side by side with those of 2012 to enhance comparison between periods . Furthermore, since the disclosures have observed the requirements of AASB 116 as outlined above, it is hoped that they can be compared with similar disclosure from other entities of similar nature who also observe the same requirements. This level of comparability will aid decision makers in varying their decisions among alternatives. d) The extent to which the disclosures on PPE align with the objective of general purpose financial reporting and recommended actions of improvement As stated above, the objective of general purpose financial reporting is providing financial information about the reporting entity which is useful to current and potential investors, lenders and other creditors in making useful decisions regarding provision of resources to the entity. The decisions would include whether and when to buy sell or hold equity investments, assessing the management’s accountability, assessing the company’s ability to pay its lenders as well as its ability to provide security for lending among other decisions (Johansen, 2012). To a large extent, Qantas airways’ PPE disclosures have been aligned with this objective. For instance, the disclosures would help existing and potential investors in making decisions regarding providing and settling of loans by the company. This is because the company has disclosed all its PPE including the amount of assets that have been pledged as security. Thus, in making a lending decision, one would be fully aware of the amount of assets that have been pledged and those that have not been pledged. This acts to help the investors make informed decisions on lending to the company. In addition, the kind of PPE that have disclosed will help current and potential investors and lenders predict whether or not the company will generate revenue and hence income owing to the nature of disclosures. This is important in helping one to decide on whether to invest or to divest from the company. In addition, the company has disclosed the PPE items held for sale and additions during the year. Furthermore, this information is comparable to that of previous periods in addition to having fully adhered to the requirements of AASB 116. This improves its relevance and faithfulness. As such, one can conclude that the company’s disclosures on PPE have to a large extent been aligned to the objective of general purpose financial reporting. It is however worthy for the company to improve on the understability of their disclosures. Although the information could be concise and clear to a person with an accounting or financial background, it may not be easily understood by a lay man. Given that an investor can be any body, there is need to make the disclosures more understandable (International Federation of Accountants, 2014). Otherwise, some potential investors and even people with adequate financial background would have to undergo the trouble of looking for advisors to explain what the disclosures entail. However, despite some complexities, the PPE disclosures have adhered to the objective of general purpose financial reporting. References: Charles, G2012, Financial reporting and analysis: Using financial accounting information, Sydney, Cengage Learning. Joseph, M2010, Financial accounting simplified, London, Rutledge. IFRS Foundation, 2010, The conceptual framework for financial reporting, IFRS Foundation. Aasb.gov.au, 2014, AASB 116: Property, plant and equipment, Retrieved on 19th April 2014, from; http://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07- 09.pdf Institute of Chartered Accountants Australia, 2014, FAQs AASB 116, Retrieved on 19th April 2014, from; http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Publications-and- tools/FAQs-Reporting/FAQs-on-Analysis-of-AASB-standards/AASB116 Thomas, A2007, Financial reporting and corporate governance, New York, John Wiley & Sons. Johansen, B2012, General purpose financial reporting, London, Rutledge. International Federation of Accountants, 2014, Conceptual Framework for general purpose financial reporting by public sector entities: Presentation in general purpose financial reports, Retrieved on 19th April 2014, from; http://www.ifac.org/publications-resources/conceptual-framework-general-purpose- financial-reporting-public-sector-enti-7 Qantas.com, 2014, Annual report 2013, retrieved on 19th April 2014, from; http://www.qantas.com.au/travel/airlines/investors-annual-reports/global/en Read More