Accounting Principles, Financial Reporting and Accounting Frameworks - Assignment Example

Accounting principles, financial reporting and accounting frameworks Name Institution Date Question 1 Critically discuss the notion of public interest and its relevance to financial reporting for the creation of decision useful financial information with the help of research literature Financial reporting involves making formal recordings of all financial activities of an individual, firm or institution in a structured manner to enable easy understanding of the information for the final user. Information communicated in financial reporting includes information in financial statements such as statements of the financial position, comprehensive income statements and cash flow statements among others. The financial statements are then followed by discussions and analyses by the management team of the firm or company (Financial Reporting Council, 2000). Financial reporting is very useful for the public because the information allows them to make more informed economic decisions about their financial affairs. The balance sheet also known as the statement provides information about the assets, the equities as well as the liabilities of the financial entity at a specific period of time. According to New Zealand Institute of Chartered Accountants (2011), this information allows the public to know about the financial position of the entity thus know whether to invest in it or not. This protects the public from making investments in entities that have too many liabilities and their assets not enough to pay them off. According to Financial Reporting Council (2000), the income statement also known as statement of comprehensive income provides information about the entity’s revenues against their expenses hence revealing the entity’s profitability or losses over a specified period of time. The statements show how the entity runs its operations during the specified period of time including their sales as well as the effectiveness of their expenses allowing the public to know and be assured that the operations of the entity are going to be in their favor in terms of making profits for them. It helps them to avoid making investments in companies that are making losses or with irregular profitability (Aris & Jill, 2005). Another financial statement that is included in financial reports is the cash flow statement which offers information on how the cash in the entity is operated, invested and also how it is used to carry out the various finance activities in the entity (Ministry of Corporate Affairs, 2008). For purposes of public interest the financial statements should be easy to understand, reliable, comparable and also relevant. Financial reporting is relevant to the process of economic decision making by the public because the financial statements reveal the entity’s financial position, performance and other financial activities among others. Financial reporting is significant to various members of the public and these include; business owners and members of their management team, employees of the business entity, prospective investors, financial institution and also government authorities among other members of the public (Accounting Standards Steering Committee, 1971). Owners and members of the management team Reports on financial statements are relevant to business entity owners and also members of the management team because they help in making important financial decisions for the business entity that affect the operations of the business. The analysis of these financial statements allows the owners and the management team to be able to understand the figures presented to them in the financial statements. The management team further uses financial reporting to make and present their annual reports to the entity’s stakeholders. Employees of the Business Entity Financial reporting is relevant to the employees as it helps them during the process of making collective bargaining agreements with the business entity for pay raises, promotions or even compensations or indemnifications. Positive financial reporting gives the employees’ better chances of asking for the collective bargaining agreements that have been mentioned above. Prospective Investors into the Business Entity financial reporting provide financial information that allows them to assess the viability of a business before making an investment, therefore good financial reporting act as the basis for making their investment decisions. Financial institutions Financial reporting is very relevant to financial institution as they help to assess the ability of a business entity to pay off their debts and thereafter they will be able to make decisions as to whether they will give credit to the business entity, grant them fresh capital or even make decisions as to whether they should extend their debt securities among other decisions for the financial institutions to make with regards to the business entity. Financial institutions offer funds in form of credits, grants among other credit facilities that help the business entities in growth and expansion projects they therefore need to know that the money they give can be refunded and on time as well. The government The government requires the financial reports so as to be able to calculate the amount of tax they can charge on the business entity. The financial reports can also help the government decide whether they can step in to help the business financially or even close down the business entity. Conclusion Financial reporting is very important to the members of the public as it helps them make informed economic decisions that could affect their financial situations in the long run. It is therefore important that financial reporting is done properly to allow proper analysis and discussions about the financial statements by the members of the public among other users. Question 2 Identify and select at least three accounting policies by reviewing the latest financial statements of an Australian firm listed in the ASX and critically discuss the disclosure of these accounting policies for decision usefulness Accounting policies refer to the way a business entity adheres or follows the accounting rules or accounting principles. Accounting policies in a business entity ensure that employees do not stray from the principles that govern accounting processes and procedures among others. Accounting principles compared to accounting principles deal with issues such as the consolidation of accounts, look into costs involved with research and development, methods of depreciation, the business entity’s goodwill and pricing of the inventory among others. The IAS8 define accounting policies as specific principles and practices of accounting that a business entity or business entities use or follow during the preparation of their financial statements. The disclosure of accounting policies follows certain phases and these involve; identification of the accounting principles used or followed, looking into the methods in which these accounting principles have been used, how the methods used affect the determination of the financial position of the business entity as well as how the methods affect any changes in the financial position of the business entity and finally looking at how appropriate the accounting principles are in the process of recognizing the business entity’s revenue and how the costs are allocated in the business or company. Acuvax Limited Acuvax limited is a pharmaceutical and Biotechnology Company that is involved in making drugs or medicine for various types of ailments and it is based in west Perth Australia. The company has been listed on the Australian stock exchange since 1971 and it is still actively trading at the stock exchange market in the millions of values. According to the Australian Stock exchange the stock price has not changed for the past few months and the difference between the highest and lowest volume of shares traded is too large (highest volume of shares traded in August was 13,000,000 while the lowest was 1,800,000). As of 10th September, 2014 the volume of shares traded were 2,913,000 at 0.001 Australian dollars. The company has not announced payment of dividends to its shareholders for the past few months. The company also did not offer exchanged traded options, warrants and also structured products and also it does not offer contracts for the differences. According to Acuvax (2012), the company has followed a certain set of accounting principles such as the principle of disclosure with the company providing cash flow statements, balance sheets or statements of financial positions and also income statements also referred to as statements of comprehensive income among others (Perrin, 2011). Other policies used are the basis of preparation; the financial statements were prepared in compliance with the international financial reporting standards (IFRS) which have been issued by the international accounting standards board (IASB). Another principle used in the basis of preparation is the principle of historical costs where the disclosure was based on revaluation of assets and liabilities. The second policy revealed is the going concern policy. Assessment of financial statements helps the management team to make decisions and develop policies that will help in the future of the business such as cost reduction, new expenditure policies, choosing investments that will add value to the business entity and also help increase cash flow for the business and also make policies that will ensure that the business can raise funds in the capital markets by building a successful track record in the capital markets (Accounting Standards Steering Committee, 1971). The other principle used is the principle of revenue recognition that measures the revenues Acuvax makes at fair value. This can be achieved using the effective interest method by establishing a interest income policy (Acuvax, 2012). This method calculates the amortized value or costs of the assets of the business and then allocating the interest earned during that financial period using the effective interest rate which is a rate that discounts future receipts of the business for the expected life expectancy of the given asset (Accounting-Simplified.com, 2010). Conclusion Accounting policies have been used by many businesses to ensure that it follows the accounting principles, processes and procedures provided by international governing bodies of accounting. Accounting policies differ slightly from accounting principles in that accounting principles are the rules that govern accounting and accounting practices while accounting policies are strategies placed by the business entities to ensure that the rules provided are followed and that the activities of the business do not stray away from rules given. Question 3 Amendments to the Australian Conceptual Framework Members of the public need to be well informed about the financial progress and financial activities of their investments; however information has found its ways to other members of the public other than the shareholders or owners such as the creditors, the government, suppliers, customers among other agencies. However, with the amendments to the Australian Conceptual Framework that have been approved by the Australian Accounting Standards Board (AASB) that have reduced the numbers of parties that have access to existing and potential investors, creditors and also lenders that could help in the allocation of resources within the business entity. The amendments made on the Australian Conceptual Framework were not established to bring changes in the accounting policies that companies among other business entities were using and also it should be noted that the previous AASB Framework has been retained (Commonwealth of Australia, 2013). With regards to nonprofit organizations the following members are allowed access to financial information in the financial statements because they are in a position to make informed and better decisions when it comes to resource allocation in the entity. The framework allows the following parties to access financial statements of nonprofit entities; investors, lenders, donors, taxpayers and creditors. Existing and potential investors were allowed access to help in decisions about purchase and sale of equity and debt instruments. Lenders and other creditors require the information to make decisions about the entity settling their debts and other forms of credit instruments extended to them. The financial information helps the parties make assessments on the prospects for future inflow of cash for the entity and also themselves. Nonprofit organizations are established to offer help to individuals or entities that cannot help themselves at certain points and therefore do not seek to make profits, therefore financial statements are useful to investors not to monitor their returns but instead to find out how effectively their investments are being put to use. The investors, donors and other parties are mainly interested to know the capability of the entity to allocate the resources effectively and efficiently and that they offer the best of their services and products to their customers. Lenders and creditors require financial information so as to assess the prospects of future cash inflows of a business entity they have invested in, how the resources have been allocated, in the events of making claims against the business entity the financial information is important and also the information is useful when auditing and assessing the ability and efficiency of the management team. This information can also be useful when protecting the business entity and its resources against issues such as unfavorable economic conditions, changes in regulations and contract provisions as well as compliance with the laws of the country (Commonwealth of Australia, 2013). Many decisions are made based on the information provided in the financial statements and the framework regulations ensure that the management team carries out their responsibilities properly. It is useful because the shareholders can use the information during elections when the shareholders have to vote in for the management team (Accounting Standards Board, 2000). According to AASB Standard (2013), the amendment will also allow the investors to make well informed choices before investing and also lenders and creditors before issuing loans because the business entity is not likely to share the information with them at personal levels therefore they get the information from the financial statements prepared and provided according to the requirements of the Australian Conceptual Framework in the International Financial Reporting Standards (IFRS) and also Australian Accounting and Standards Board (AASB). The amendments will also continue to ensure that the reports are designed to show how valuable the reporting of an entity is to the various users of the information including the investors, creditors and other lenders by looking at the information provided in the financial statements (Financial Reporting Council, 2009). Conclusion Various members of the public have different needs and uses for financial institutions but the information provided by the financial statements helps the users such as investors, lenders, creditors, suppliers and also employees among others to make more informed economic decisions for the long term. The Australian conceptual framework ensures that the information provided in the financial statements is properly prepared and presented to ensure that the users can easily understand them, interpret them and also enable a good discussion and analysis by the users or management team when making important financial decisions. List of References Financial Reporting Council, 2000, FRS 18 Accounting Policies, retrieved on 14th September, 2014 from Commonwealth of Australia, 2013, Accounting framework AASB CF 2013- 1 Amendments to the Australian Conceptual Framework, pp. 5- 13. Accounting-Simplified.com, 2010, IAS 8 Changes in Accounting Policies, retrieved on 14th September, 2014 from Acuvax, 2012, ASX Full Year Information- 30th June 2012, pp. 1-21. Anderson, Chris, 2008, Are your Accounting Policies Providing Internal Control? Bizmanualz Ministry of Corporate Affairs, 2008, Disclosure of Accounting Policies- Ministry of Corporate Affairs, pp. 16-23. Accounting Standards Board, 2000, Financial Reporting Standard 18: Accounting Policies. Perrin, S. 2011, Head to Head with IFRS. New Zealand Institute of Chartered Accountants, 2011, Losing the Excess Baggage Reducing Disclosures in Financial Statements to what’s Important. Financial Reporting Council, 2009, FRS 18: Accounting Policies. Retrieved on 14th September, 2014 from http://www.icaew.com/en/library/subject-gateways/accounting-standards/uk-frs/frs-18 AASB Standard, 2013, Amendments to Australian Accounting Standards- Conceptual Framework, Materiality and Financial Instruments, pp. 1-142. Norwalk, Conn, 2008, Chapter 2, Qualitative Characteristics and Constraints of Decision- Useful Financial Reporting Information, the Proposed Conceptual Framework for Financial Reporting, pp. 1-23. Finance and Treasury Association, 2013, Comments sought by AASB on Conceptual Framework for Financial Reporting, Retrieved on 14th September, 2014 from http://finance-treasury.com/comments-sought-by aasb-on-conceptual-framework-for-financial-reporting/ Aris S. & Jill S. 2005, A Conceptual Framework of Conceptual Frameworks: Positioning Corporate Financial Reporting and Corporate Environmental Reporting on a Continuum, pp. 1-36. Accounting Standards Steering Committee, 1971, SSAP2: Disclosure of Accounting Policies, Accounting Standards Board. Read More