Australian Accounting Standards - Literature review Example

Australian Accounting standards Student Name Student Number Tutorial group Date of Submission Introduction It is important for professional accountants to use accounting standards when preparing different financial statements. It helps them make financial reports which can be understood by different accounting information users (Atiase, 1985). The purpose of AASB is to implement the policy of the financial report council by using the international accounting standards. There are other sections of the currently available Australian conceptual framework that overlap with the framework used to make and present financial reports introduced by IASB are replaced to increase their consistency. The introduction of accounting standards ensures that there is uniformity and comparability which enable different companies to compare their financial performance. A) Review current AASB framework AASB is introduced to implement the policies of the council’s accounting standards which use IASB to be used in the preparation and presentation of accounting information after 1 January 2005. It is meant to replace the available standards with Australian standards which have the same applications as those in IASB. In addition, the part of the Australian conceptual framework (SAC 3 Qualitative Characteristics of Financial Information and SAC 4 Definition and Recognition of the Elements of Financial Statements) that also covers the Framework for the Preparation and Presentation of Financial Statement Introduced by IASB is also replaced by this framework to increase consistency (Kothari, 2001). The importance of this framework is that it is able to set out the concepts that are can be used in the preparation and presentation of accounting reports to different users who have no accounting knowledge. This framework also helps AASB in the creation of accounting standards to be used in Australia in future. It also supports the evaluation of the available standards so that there is an improvement in the existing and proposed accounting standards and their pronouncements. The same framework is also vital to AASB in encouraging the harmonization of all the accounting rules and regulations, procedures and principles that are used during the preparation of accounting reports (Kothari, 2001). It achieves this by ensuring that there are proper basis that are able to minimize the number of ways in which accounting principles are treated according to the Australian accounting standards. The introduction of this framework helps different organizations in preparing financial statements when using Australian accounting standards in areas which have not form part of the Australian accounting standards subjects. It is also used by the auditors when formulating their audit opinion to determine whether the financial reports are made in accordance with Australian standards (Atiase, 1985). This framework also effective in supporting different users to interpret of accounting information that are in the financial report which are made in accordance with the accounting standards of Australia (Bamber, 1986). It is also important in assisting stakeholders with an interest to work with the accounting board with essential information concerning the best approach that can be used in formulating the accounting standards as required by Australian Government. B) Review their annual reports for the reporting year 2014. The review of Telstra financial reports This is a telecommunication company in Australia which provides different communication services and has high competitive advantage with other companies in the same industry. This company provides 16.7 millions mobile services; 7.3 millions fixed voices services and 3.2millions retail fixed broadband services. The financial reports of this company are prepared in accordance with the Australian accounting standards (Kothari, 2001). The net profit for this company for the year 2014 was A$3,661 million after the removal of income tax expenses and the cost of other operating activities. The application of this transaction was done as per the requirement of International accounting standards. The earnings before interest and tax were A$6,216 million which show a decline from that of 2013. In the financial report of this company, the accrual accounting method was used and it helps to record all the accounting transactions immediately they occur but not when cash is received or paid. Financial report analysis of BHP The financial report of this company is able to achieve the strategic reporting requirement of UK companies act. It is also able to meet the financial operating and review of Australia according to the Australian accounting standards (Kothari, 2001). The reporting standards that is used by this company is able is able to provide information to different financial information users which have little knowledge about accounting. This company uses IFRS to helps different stakeholders to have easy time when interpreting the information in consolidated financial statement which are made in accordance with the same financial framework. In the financial report of this company, the basis used is fundamental accounting policies which help in the determination of detailed financial performance (Bamber, 1986). All the accounting transactions were prepared in accordance with the generally accepted accounting principles which ensure there are accountability, transparency and honesty. These accounting standards also ensure that the auditors can easily traced down different transactions which are contained in the financial statements. Compare the measurement methods used in each company’s financial report. The measurement methods for these two companies are the same as both used historical cost method to measure the performance of the company (Griffin & Kelly, 2010). These companies also used unit measurement which is able to determine existing accounting practices that are used by the companies.BPH uses historical cost to measure its assets such as plant, property and equipment while Telstra used net realizable value to measure some of its assets. This brings the difference in measurement in which they measure different financial elements of these companies (DeFont & Trezevant, 2007). The account receivable for all these companies is measured using their net realizable value so that their actual cost can be ascertained by the company (Kothari, 2001). The measurement of its long term liabilities for these companies is also the same as both the companies used the present value of future cash payments since when these liabilities are cleared they will have their actual value. These measurement and recognitions are used by these companies because they are associated with the general accepted accounting principles which the board has endorsed. GAAP is therefore considered important as it contains most important standards where accrual accounting model is one of the model that the board has accepted (Bamber, 1986). All these companies applied AASB conceptual framework as it is required to be used by all the companies in Australia when preparing financial statement. Since all these companies are profit making organizations it has AASB policy which needs the inclusion of IFRSs without the amendments of the Australian accounting standards. Measurement methods used between the two companies are consistent with the measurement bases prescribed under the IASB The measurement methods that have been used by these companies conform to the requirement of the international accounting standard board (Beaver, 1968). This is because they ensure that they are in compliance with the generally accepted accounting principles which ensure that every stakeholder with little accounting knowledge is able to understand the accounting practice. c) The relationship between accounting information and market reaction with reference to the fair value The market reaction depends on the accounting information (Bamber, 1986). The accounting information reflects the economic reality regarding financial performance and position. With the accounting information potential investors will be attract ted to the company shares. The accounting information showing that the company has high performance and able to provide high share earnings, will have high share value and this also attracts more investors to purchase the shares. Accounting information is also used to evaluate the performance of the company and through this investors will determine the investment which can produce high returns to them (Bamber, 1987). It is therefore important to note that accounting information inn the financial statement is able to influence the market value and reaction. The speed at which the accounting information reaches the market also affects the market reaction since the speed at which positive and negative accounting information reaches the market fully instantatively reflected in the share prices. The negative accounting information is able to cause a decline in the share prices and positive information increases the share value and as a result affects market reaction either positively or negatively (Ball and Brown, 1968). The accounting information also affects the reaction of existing shareholders since when the information show a negative result, the shareholders tend to lose morale in the company and may wish to leave the company. In the case of a positive result, more potential investors and existing ones will have the desire to buy more shares and as a result the share value goes up. Conclusion It is important for every business organization to prepare its financial report in accordance with the law. These laws and regulations that guide the accountants when preparing and presenting accounting information to external users must conform to the requirement of accounting boards such as AASB. The board produce vital standards which must be complied with when preparing financial statements. The adoption of the accountings standards as provided by the board ensure that there is consistency and uniformity in the way accounting information is presented in the financial reports. This paper also considers the relationship between accounting information and the market reaction. It is therefore determined that the accounting information has a direct influence on the market reaction since it affects share value. Bibliography Atiase, R. (1985). Predisclosure information, firm capitalization, and security price behavior around earnings announcements.Journal of Accounting Research 23 (1): 21-36. Ball, R., and P. Brown. An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research (Autumn 1968): 159-77 Bamber, L. (1986). The information content of annual earnings releases: A trading volume approach. Journal of Accounting Research 24: 40-56. Bamber, L. (1987). Unexpected earnings, firm size, and trading volume around quarterly earnings announcements. The Accounting Review 62: 510-32. Beaver, W., 1968. The information content of annual earnings announcements. Journal of Accounting Research 6, 67-92. DeFond, M., Hung, M., Trezevant, R. (2007). Investor protection and the information content of annual earnings announcements: international evidence. Journal of Accounting and Economics 43: 37-67. Griffin, J., Hirschey, N., Kelly, P. (2010). How important is the financial press in global markets? Working Paper, University of Texas at Austin. Kothari, S. P. (2001). Capital markets research in accounting. Journal of Accounting and Economics 31: 105-231. Read More