Public Interest and Financial Reporting - Coursework Example

Public Interest and Financial Reporting Name: Institutional Affiliation: Table of Contents Abstract 2 Public Interest and Financial Reporting 4 Introduction 4 The Interests of the Public 5 Accounting Policies 8 Relevance 8 Reliability 9 Substance 10 Amendment of the Australian conceptual framework 11 Financial Information and Decision Making Process 11 Conclusion 13 References 13 Abstract This paper is divided into three main parts. All the parts are discussed exhaustively so as to get an in-depth understanding of the concepts and their application. The first part of the document discusses about the notion of public interest and the significance it plays in financial reporting so as to ensure the formation of a decision useful financial information. The second part of the paper analyses the three accounting policies after reviewing financial statements from the various Australian firms that are listed in the Australian ASX and further the disclosure policies are discussed in detail. The third part of the paper analyses the amendment of the “Australian Conceptual Framework, which reduced the number users of the financial information for the profit making organisations. Public Interest and Financial Reporting Introduction The International Federation of Accountants, commonly referred to as IFAC, defines the term public interest as the total benefits derived from and the procedural rigor that is employed on behalf of the entire society in relations to the actions policy or decisions carried out by an institution [IFA12]. This can be easily applied in the accounting profession and the responsibilities it holds to the public fraternity. It is important to understand that the work of the accounting profession and the level of public confidence, can affect the public on a wider scale [IFA12]. The International Federation of Accountants considers the public to include, the widest scope in the society. This includes individual and groups sharing the marketplace for goods and services, individuals seeking a sustainable environmental quality and living standards both for themselves and the future generation [Min14]. Thus the public includes; Business Owners, Shareholders and Investors- this largely involves parties whose well-being and resources depend on the better performance of the institution. Hence, these specific parties greatly rely upon sound financial information to make crucial decision about allocation of resources. This not only involves investors, but also the employees of that specific institution who have their pension funds, among other vested interests that are tied to the performance of the institution. Consumer and Suppliers- this entails all parties that are affected by the availability of goods and services, its costs and the quality. The quality of the financial information has a great impact on the efficiency of resource management and which has a long run effect on the goods and services produced by the organization. Taxpayers, Citizens and the electorates- this greatly involves all parties who are impacted by the activities of the public sector accounting technocrats who facilitate financial information, advise elected officials and policy makers and also make financial decisions. These largely include short term impacts, medium impacts and the long term impacts. It is important to understand that the company is part of the wider social system, thus the entity is assumed to be influenced by and in turn influence upon the society in which it belongs in. Because of this the company should at all times meet the expectations the particular users of the accounting information and at the same time meet the interests of the all users stated above [IFA12]. The public who are also the stakeholders need truthful and informative accounting data so as to be able to make sober financial decisions. The enterprise’s financial accounting policy making process is very crucial, not only for the management of the organisation, but also to the other stakeholders who find the financial accounting information useful [Min14]. The accounting disclosure policy of financial statements is also vital in relations to public interests, thus the financial statements should be made not only for the regulators and investors, but also from the stakeholders and the public at large so as to enable the enterprise to feel obligated to the entire community in its actions [Rud06]. The Interests of the Public In a broader aspect, the interests are all the things that are valued by the individuals and the society. The accounting profession helps the society and the general public to realize certain interests, most of which are economic in nature and greatly related to the effective management of resources [Rud06]. These interests include; Sound and decision useful and non-financial and financial reporting to the investors, stakeholders and the public at large who are directly or indirectly impacted the reporting [Min14]. Increase the economic certainty in the market environment and the entire financial infrastructure which include the insurance, banking and investment firms. A relatively high degree of comparability of both non-financial and financial reporting and auditing across the various jurisdictions. Transparent and Sound financial, non-financial information and sound decision making process on the part of the public sector organization and the governments to their constituents. Sound performance management and corporate governance on the part of the public and private sector organizations. Finally, increased efficiency and minimization of the depletion of natural resource in the production of goods and services, thus improving the welfare of the society by greater accessibility and availability. The accountancy profession and the accountants play a crucial role in realizing the public interests stated above [Aus13]. Thus, then they achieve this by; Providing Sound non-financial, financial and also government, reporting to the investors, stakeholders, taxpayers and all the parties in the marketplace, both indirectly and directly impacted by the nonfinancial and financial reporting from all the organizations from all the sectors. Providing effective and truthful communication with parties which he includes the stakeholders, boards, management and others who are indirectly and directly related to the corporate governance process which they are accountable to. On the other hand, the accountancy profession should; Ensure that the accounting professionals aim at applying high ethical behaviour standards and professional judgements at all times. Work with the governments and the regulatory community to develop and effectively implement the highest quality professional standards for financial reporting, assurance and auditing, ethics, accounting education and public sector financial reporting. Promote high quality levels of international standards so as to facilitate and ensure comparability of auditing and financial reporting across the various jurisdictions. Specify appropriate educational qualifications and requirements for the professional accountants. Finally, ensure the proper disciplinary arrangements are effected to address matters such as a violation of the law, unethical matters or any form of non-compliance with the professional regulation. From the analysis above, we can classify the stakeholders into two groups and these are external stakeholders and the internal stakeholders [KPM14]. The internal stakeholders refer to stakeholders that are inside the company such as the employees, managers and the board members whereas the external stakeholders refer to the stakeholders that are not directly part of the company and they include suppliers, customers and shareholders among others [Aus13]. All these stakeholders want to ensure that their investments are used effectively and for that reason, asses the management through their financial information. The financial information is very useful to the stakeholders because of the following reasons. It enables the stakeholders determine how much profit or loss the organization made, how do the assets of the company stack up against the liabilities, where the organization obtained the capital, what the present performance of the company or organization is. Accounting Policies Accounting Policies refer to the conventions and the set rules that are provided by either national or international committee of accountancy for the entities in that jurisdiction to follow when organizing and publishing their financial statements [Rud06]. The specific entities need to follow those principles ad conventions in the preparation and presentation of the final documents of accounts. The same principles apply to the entities in Australia and that the companies follow the policies stipulated by the Australian Accounting Standard Board [Aus00]. For this reason it is important the entities apply similar accounting policies consistently for a specific transaction, for consecutive periods. For this reason, if an entity plans to change its accounting policy, then it should have a significant and solid reason towards the change and should further state the change in their financial statements and the reason behind the change. After reviewing the financial statements of companies such as Aberdeen Leaders Limited, Allmine Group Limited and APA Financial Services [ASX14]. Their financial Statements are in line with the policies that have been formulated by the Australian Accounting Standards Board. The three main policies include; Reliability Relevance and substance. Relevance The financial Statements of the companies stated above have been audited to ensure that they are relevant. Relevant financial information is crucial since it enables the users of financial information in making and evaluating financial information and decision about the allocation of the scarce resources [KPM14]. This will enable the stakeholders make predictions about the situations in the future and also establish expectations. This also plays a confirmatory role with the respect of their previous evaluations. Financial information may be perceived relevant because of its nature, magnitude or even because of the magnitude in relations to the nature [Aus13]. The companies are therefore obligated to ensure that the financial information they indicate are true and that they reflect. There are also check and balance formulated by the Australian government so as to ensure that the information produced the management of the organization [Aus13]. This is crucial since it ensures that the stakeholders only receive valid and relevant information. Reliability Reliability refers to the situation where the information presented in the financial statements conveys to the users of the financial information the underlying events and transactions that have occurred [Min14]. For any financial information to be perceived as relevant, it should be completely free from any form of bias. Good financial information, does not lead the users to certain conclusions but rather server the specific needs, preconceptions and desires of the owners of the financial reports [Min14]. The second characteristics of a reliable financial information is that it should be from error. Minor errors in crucial financial information documents can be very fatal to the organization since it is likely to lead to the discretization of the financial document and also loss of trust from the stakeholders of the organization [Aus00]. However, it is important to understand that the financial information can at times be subject to certain error because of the difficulties in measuring economic phenomena and the presentation techniques. The impact associated with this risk can be easily offset in some incidence by the disclosure of the level of uncertainties associated with the information [Jon14]. Substance For the financial Information to satisfy both the reliability and the relevance concepts, it is crucial that the substance other than the form of transaction be indicated where the form and substance differ. Reporting the substance of the transaction requires that the information that is reported tends to reflect the economic effect [Jon14]. In the field of financial reporting the substance of the transaction is reflected in the revenues, assets, equity, liabilities and expenses resulting from transaction. The fact that the elements are derived from obligations and legal rights makes the rights and obligations very important in determining the transaction’s substance [Jon14]. In instances where the substance of the transactions are not adequately expressed in their legal form, it is important to account for them in accordance to their form. A good example is when an entity transfers its legal ownership of the asset from one party to the other but there are arrangements in place that will ensure that it continues to enjoy the future economic benefits that are embodied in the asset [Int11]. Identifying the substance of the transaction mainly involves identifying all its applications, aspects and also considering the position of the individual parties to it, their expectation and motivations to enter into the event or the transaction. A good example in this case is where the goods are sold on the basis of retention of the ownership, pending the settlement [Min14]. The buyer and the seller in this case is prevented in any way to recognize the transaction as a sale or a purchase. Accounting policies are very crucial in ensuring that there is proper understanding of the provided information in the financial Statements. The specific entity should state clearly the accounting policies that it used in the preparation of the financial statements. Disclosure is very important because most of the accounting standards allow for alternative treatments of the same transaction. The users of the financial information’s will not be able to make a comparison of the financial information with other entities if the accounting policies used by the entity are not outlined clearly [Aus00]. Amendment of the Australian conceptual framework The main purpose of financial reporting under this specific conceptual framework is to enable the management of the organisation to make decisions but rather the purpose of the conceptual framework is to set standards [Aus13]. This specific conceptual framework is aimed at reducing the influences associated with political pressures and personal biases on the accounting judgements. The other aim is to reduce the cost of analysis and also help resolve the disputes that exists in accounting. The Amendments of the Australian Conceptual Framework of 2013 reduced the number of the user of financial information for the for profit organization to lenders, existing and potential investors in making the major decision with regards to making the decision about the provision of resources so as to benefit from some of the factors stated above [Aus13]. Financial Information and Decision Making Process One of the main functions of the financial information, both in general and in particular is to assist the decision making process. The decision making process mainly involves selecting a course of action from a possible list. Thus the decision makers may decide not to make any changes in their existing policies [Jon14]. The number of stakeholders have a significant impact on the decision making process and also affect the speed of the decision making process. The effectiveness and the quality of the decision making process greatly depends on timely, accurate and relevant information [Jon14]. In this case the body in charge of providing relevant financial information is the specific company that produces the financial statements. A slight error in the type of information provided to the stakeholders who in this case are both existing and potential investors, creditors and the lenders, might lead to the making of a wrong decision that might greatly affect the company both in the short-run and the in the long-run [KPM14]. This new amendment will significantly ensure that there is a more decision useful information for every user of the financial statements. This is because the users of the financial information are stakeholders whom the performance of the institution affects them directly and would therefore not risk to make the decisions that would futile to the company [Int11]. The greater the performance of the company, the greater the returns the major stakeholders get. The previous framework include other stake holders such as the public and the government who the annual performance of the organisation does not affect them directly but rather indirectly ad because of this it was perceived that such sake holders tend to make decision that only benefit them presently for the purposes of greater gains but may harm the business in the longrun. Because of this, such stakeholders might not have the greater interest of the company at heart and therefore not provide every useful information I comparison when the users of the financial information is left to the major stakeholders [Min14]. Conclusion From the analysis of various research literature, It is vivid that the “Amendment to the Australian Conceptual Framework, which recommends for the reduction of the user of the financial information for the profit organization will have a significant impact in creating a more useful decision for all the users of the financial information. This is after critical consideration of the decision making process and also analysing considering the fact that the remaining stakeholders are regarder as the internal stakeholders who hold the performance of the organization with very high regard and that the success of the organization directly impacts the success of their organization. References IFA12: , (IFAC, 2012), Min14: , (Mintz, 2014), Rud06: , (Rudžionienė, 2006), Aus13: , (Australian Accounting Standards Board, 2013), KPM14: , (KPMG, 2014), Aus00: , (Australian Accounting Standards Board, 2000), ASX14: , (ASX Limited, 2014), Jon14: , (Jones & Bartlett Learning, 2014), Int11: , (International Federation of Accountants, 2011), Read More