Financial Reporting Disclosures in the Australian Corporate Sector - Case Study Example

UNIVERSITY NAME Financial Reporting Disclosures in the Australian Corporate Sector Research Based Case Study and Report STUDENT NAME COURSE NAME & CODE SUPERVISOR DATE OF SUBMISSION TASK a). The requirements according to the respective accounting standard related to disclosures of sources of estimation uncertainty and judgments in applying accounting policies (10 marks) b). The current accounting practice of your company regarding these disclosures (15 marks) c). Any potential gap between your company's current practice and the accounting standard requirements (10 marks) d). Recommended actions to satisfy the potential ASIC reviewers (5 marks) REPORT COVER PAGE Newcrest Mining Limited Material disclosures of sources of estimation uncertainty and significant judgments in applying accounting policies To the Board of Directors Prepared by CFO Word Count: Focuses on: 1. The requirements according to the respective accounting standard related to disclosures of sources of estimation uncertainty and judgments in applying accounting policies 2. The current accounting practice of your company regarding these disclosures 3. Any potential gap between your company's current practice and the accounting standard requirements 4. Recommended actions to satisfy the potential ASIC reviewers ****2013**** Executive Summary Financial reporting standards requires all items of income and expense recognized in a reporting period to be included in profit or loss unless an Australian accounting standard requires otherwise. This is sometimes referred to as the all-inclusive approach and requires all income and expense items to be taken into account in determining profit or loss, irrespective of whether, for example, they relate to the ordinary operations of the entity or to prior years. The current accounting practice and standard Newcrest Mining Limited entails that the financial decisions which are utilized stakeholders in the company call for the valuation of the capacity of a company to generate profits and cash equivalents based on the timing and uncertainty of their generation. Such type postulations as well as estimation uncertainty take into account the estimates which necessitate management’s need resolve any tricky financial scenario that encompass a subjective or complex judgement for the company. As a result, disclosure should also be in accordance with Australian Accounting Standards Board (AASB) for a sound operation in Australian economy. IFRS recommends minimum standards of disclosure for any uncertainty or unusual circumstances faced by mining sector companies in preparation of their financial statements. This has forced Newcrest Mining Limited to adopt own accounting practices and policies to aid material disclosures of sources of estimation of uncertainty and significant judgments in applying accounting policies. TABLE OF CONTENT Page Executive Summary …………………………………………………………............... 4 1.0. Introduction…………………………………………………………………….. 5 2.0. Material disclosures …………………………………………………………… 6 2.1. Estimation of uncertainty and judgments ……………………………………... 6 2.2. Current accounting practice of the Company …………………………………. 7 2.3. Current practice and the accounting standard requirements ………………….. 8 3.0. Conclusion …………………………………………………………………….. 9 4.0. Recommended actions ………………………………………………………… 10 5.0. List of References …………………………………………………………….. 11 1.0. Introduction Newcrest Mining Limited activities comprise of mineral exploration, mine development and production. The disclosure of transactions in exploration, development and product is sometimes complex because of uncertainty that surrounds some activities. As such, some common transactions and their disclosures may be deliberately be omitted or simplified for presentation of illustrative financial reports (Ronen, 2010, p.189). Furthermore, the deficiency of specific guidelines for some transactions and arrangements present the mining sector with a challenge to generate practical financial statements through effective presentation and disclosure. Regrettably, differences in accounting policies in relation to varying sectors and their application make it hard for comparability and increases complexity (Carmichael et al., 2007). The report describes what the company considers to very important practice of disclosure that concentrates on those areas of IFRS and AASB reporting that relies mostly on the professional judgement and management. However, these illustrative disclosures may not only accept as form of presentation, but they replicate a leading practice in the mining sector. According to Ronen (2010, p.192).They may sometimes not put into consideration the stock market regulations in any given control, but it is pivotal to refer to the relevant accounting standards for specific requirements when necessary, and seek suitable professional advice where they seem to be doubt. The purpose of material disclosures of sources of estimation on uncertainty and significant judgments in applying accounting policies is to enable stakeholders in the company to comprehend the areas of financial statements that may appear subjective, and which could be material impact on the financial statements if diverse judgements or assumptions are made. 2.0. Material Disclosures 2.1. Estimation of uncertainty and judgments For those assets and liabilities, the proposed disclosures include details of their nature and their carrying amount as at the balance sheet. Circumstances may differ from company to company, and nature of estimation uncertainty at the end of the reporting period has many facets. Newcrest Mining Limited limits the scope of the disclosure to items that have a significant risk (because of the nature of its business) which may cause a material adjustment to the next financial year (Carmichael et al., 2007). The elongated the upcoming period to which the disclosure relates, the bigger the choice of items that would meet the requirements for disclosure, and the fewer detailed are the disclosure that could be made about particular assets or liabilities. A period which seems longer than next financial year may hinder the understanding of most pertinent information on other disclosures. Determination of value for some assets and liabilities may be hard because of the nature of mining business, hence need to estimate the effects of uncertainty in a likely future events on the company’s assets and liabilities at the balance sheet date. For example, in the nonexistence of lately observed prices at the market might be employed to compute the value of assets and liabilities in future. (Carmichael et al., 2007). Despite the importance of an entity ballpark figure, the carrying amounts of assets and liabilities focus to considerable judgment of uncertainty in the financial statements, even though, the reporting of point computations in the balance sheet may not offer real information regarding the view of uncertainties drawn in calculation of those assets and liabilities along with the repercussion of such uncertainties on postulation of year ending profit or loss. 2.2. Current accounting practice of the Company As from December 14, 2008, the Newcrest Mining Limited started using the AASB with Newcrest Reporting Initiative (NRI) for material disclosures of sources of estimation uncertainty and significant judgments in applying accounting policies in public domain as a way of providing standards against which its performance in the Australian market segment could be judged (Newcrest Mining Limited, 2011). Moreover, the standards set sought to introduce a regular means of reporting to increase accountability and transparency within the Newcrest as well as gain public trust. To establish the accounting framework at Newcrest, a committee of 14 financial analysts and 10 marketing executives were appointed by the management team to set guidelines of what the NRI framework should contain (Newcrest Mining Limited, 2011). The guidelines were aimed at enhancing reporting standard disclosures at both the environmental and the financial level. In case assets and liabilities are calculated at fair value based on the lately experiential market values, the expected changes in carrying item value may not result from using approximation to compute the value of assets and liabilities for financial statement at a particular date. The use of experiential market prices in measuring the value of the assets or liabilities for the company averts the requirement for disclosure estimates for a financial statement. The market prices on itself correctly replicate the fair values of financial statement at particular date, even though upcoming market prices might be hard to predict. The purpose of fair value for the Newcrest Mining Limited measurements is to illustrate the fair value at a given date, not to forecast an upcoming value. 2.3. current practice and the accounting standard requirements The Board decided that disclosure of the most important of these judgements would enable users of financial statements to understand better how the accounting policies are applied and to make comparisons between entities regarding the basis on which management make these judgements. The observations presented on the Newcrest Mining Limited balance sheet shows that the rationale of the projected disclosure was uncertain. Based on the AASB and IFRS which Newcrest Mining Limited heavily borrows in reporting its financial statements the disclosure openly served to leave out judgements concerning estimations disclosed. The conceptual framework on disclosure at Newcrest makes it possible for users to compare financial statement information of the company and gives a foundation upon which similar transactions and events can similarly be accounted for and also same way for reporting for same events. A conceptual framework enshrined in Newcrest Reporting Initiative assists accountants to make ideal decision and reduce biased decisions which accountants may make. Biasness is not allowed by the accounting standards hence information will be faithfully presented. The fundamental qualitative characteristics have been used to make a distinction between the useful financial information from information that is not useful in financial reporting. This is based on supposition that information is useful if it can have an impact on the decision made by the users. Ronen (2010, p.194) points out that the fundamental qualitative characteristics that Newcrest Reporting Initiative has been using include relevance and faithful representation. 3.0. Conclusion Users of this accounting information need to encompass a rational understanding of business as well as monetary accounting procedures to comprehend financial statements. Recently, cases after cases of accounting fraud have been heard and investigated. Most of these cases involve the unethical behavior of the auditors themselves. This is a grave issue, considering these cases can lead to snowballing, first making the company lose customers, eventually negatively affecting the stock market (Hegarty et al., 2004). However, literature established that here is a distinction between what is legally and morally right in the disclosures of sources of estimation uncertainty and judgments. Law is not concerned with feelings or morals, and things that may be morally wrong may be legally right. The essential accounting standards and ideologies relating to disclosures of sources of estimation uncertainty and judgments, and the severity of the contingencies and the individual ethical reasoning are components of the ethical decision-making process. 4.0. Recommended actions The management should ensure that financial reports open illustrate the disclosures of sources of estimation uncertainty and judgments as this help to demonstrate the outcomes of the stewardship or the responsibility of management for the property or assets assigned to it for them to achieve the objective of the business ((Ronen, 2010, p.195). Disclosures of sources of estimation uncertainty and judgments in financial reports are vital as it gives information on how the management of the reporting entity has fulfilled their work to attain the objectives of the shareholders. Shareholders have delegated powers to the management to use the entity’s resources to achieve objective of the entity and the main objective is to maximize shareholder’s wealth. 5.0. List of References Carmichael, D. R., Whittington, O. R & Lynford, G. (2007) Accountants’ handbook, 11th edn, John Wiley and Sons, New Jersey. Hegarty, J., Gielen, F., & Barros, A. C. H. (2004). Implementation of International Accounting and Auditing Standards. Lessons Learned from the World Bank‟ s Accounting and Auditing ROSC Program Michael, J, Renny, G., Ron, D. & Graeme, L.W. (2003) Corporate Accounting in Australia, Melbourne: UNSW Press. Newcrest Mining Limited official website Ronen, J. (2010) “Audit and How to Fix Them” The Journal of Economic Perspectives, vol. 24, no. 2, pp. 189-210 Rezaee, Z., Sharbatoghlie, A., Elam, R., & McMickle, P. L. (2002) “Continuous auditing: Building automated auditing capability. Auditing” Journal of Practice & Theory, vol. 21, no 1, pp. 147-163. Rezaee, Z. & Riley, R. (2011) Financial Statement Fraud Defined (Vol. 196). John Wiley and Sons, New York. West, B. P. (2003) Professionalism and Accounting Rules, Taylor & Francis, New York. Read More