Intermediate Financial Accounting Research - Case Study Example

Student Name: Tutor: Title: Intermediate Financial Accounting Research Course: Executive Summary It is important to entities to follow the respective accounting standards of disclosure of uncertainty and judgments’ estimation in application of policies. This report reviews the standards of accounting applied in disclosures of such uncertainty and judgment to the benefit of the users of accounting information. The introduction gives the overview of the report and its bearing to accounting entities. The first part discusses the requirement accounting standards with regard to disclosure for entities. The second part reviews the financial practices adopted by Common Wealth Bank of Australia with regard to disclosures. The bank has demonstrated how the accounting policies in its practices reflected the recommended accounting standards on disclosures of estimates of uncertainty and judgment in regard to them. The third of the report gives the perceived discrepancies between the accounting standards and the practices being applied in the accounting policies of Common Wealth Bank of Australia. The last part of recommendations gives suggestions on what has to be done to make sure Common Wealth Bank of Australia comply with accounting standard requirements. The conclusion gives a caption of important things that have been reviewed in the report. The appendix contains notes to accounts that have been used in this analysis. Table of Contents Executive Summary 2 Table of Contents 3 Introduction 4 Requirement of accounting standards to disclosure of sources 4 Current accounting practice of the Common Wealth Bank of Australia 6 Gap between company’s current practice and the accounting standards 8 Recommendations 8 Conclusion 9 References 10 Appendix 11 Introduction Australian Securities and Investment Commission (ASIC) provide directions on how business entities have to represent their final accounts in regard to disclosure of sources of estimation of uncertainty in application of accounting policies. The press release by ASIC offers further direction and emphasis on what business entities have to consider in financial reporting to the benefit the users. The users have to have full information in order to make sound judgment with regard to investment, taxation by government and any other use that is relevant. In this respect, the Common Wealth Bank of Australia annual report of 2012 has been used to discuss the gaps in accounting policies and where they have been applied successfully. The accounting standards for the disclosures have also been reviewed. Requirement of accounting standards to disclosure of sources The Chief Financial Officer has to realize the impact of AASB 12 Disclosure of interests in other entities; that provides a direction to entities on information that has to be provided in the final accounts. The aim of the Standard is to call upon an entity to disclose information that will enable users of its financial statement to evaluate: a) the nature of, and risks related with interests in other entities; and b) the impact of those interests on its financial position, cash flows and financial performance. An entity has to disclose adequate assumptions and judgments it has arrived at in determination of the nature of its interest in another entity or arrangement, and deciding the type of joint arrangement in which it has an interest. The entity has to disclose information concerning interests in subsidiaries, joint arrangements and associates as well as structured entities that are controlled by the entity. If there are some disclosures that are missing the entity has to provide additional information in order to meet the objective of the standard (Epstein, 2011). The Standard requires that an entity has to disclose information that enables users of its consolidated financial statements to comprehend the composition of the group; and the interest that non-controlling interests have in the activities of the group as well as its cash flows. The users have to be supplied with sufficient information in order to make important decisions with regard to the performance, the financial position and cash flow of the company. The disclosure of information should enable the users evaluate the extent and nature of significant restrictions on its ability to use or asset assets, and settle the liabilities of the group. Users have to evaluate the changes in, and nature of, the risks related to its interests in consolidated structured entities; the impact of changes in, the risks related to its interest in a subsidiary that do not result in a loss of control; and the impact of losing control of a subsidiary during the period of reporting. AASB 12 provides a direction to particularly entities with consolidated accounts on how to represent accounting information in its final account to the benefit of the users (Sandretto, 2011). AASB 11 Joint arrangements standard establishes principles for financial reporting by entities which have an interest in arrangements that are controlled jointly. The standard gives a definition of joint control and requires an entity which is a party to a joint arrangement to determine the type of joint arrangement where it is involved through evaluation of its obligations and rights and to account for those obligations and rights in accordance with that type of joint arrangement. AASB 13 defines fair value; sets in a single Standard framework for measurement of fair value; and requires disclosures in regard to fair value measurements. Fair value is described as a market-based measurement, not an entity-specific measurement. The objective of a fair value measurement is to estimate the price at which an orderly transaction to transfer liability or sell an asset would happen between market participants at the measurement date under the prevailing market conditions (Epstein & Jermakowicz, 2010). Fair value is defined by AASB 13 as the price that would be received to sell an asset or paid in transferring liability in an orderly transaction between market participants at the date of measurement. This standard requires entities to give the fair value of an asset or liability while recognizing the characteristics of the item. An entity will have to disclose information that assists users of its financial statements assess both of the following: a) for recurring fair value measurements applying significant unobservable inputs, the impact of the measurements on loss or profit or other comprehensive income for the period; b) for liabilities and assets that are measured at fair value on non-recurring or recurring basis in the statement of financial position following initial recognition, the valuation techniques and inputs used to develop those measurements (Mirza, Holt & Orrell, 2010). Current accounting practice of the Common Wealth Bank of Australia Common Wealth Bank of Australia has applied requirement as called upon by accounting standards of disclosure of sources estimation of uncertainty and judgment in its accounting policies. This has been explained in note 1 Accounting policies; which explains the standards which have been applied in the preparation of the final accounts. In the use of estimates and assumptions, it is explained that the preparation of the financial report needs the application of certain critical accounting estimates. It is upon the management to exercise its judgment in the course of applying the Group’s accounting policies. It has been revealed in the notes to the accounts that related assumptions are based on historical experience and other factors that are regarded as relevant. The underlying assumptions and estimates are reviewed on an ongoing basis (Sandretto, 2011). Complexity or areas requiring higher degree of judgment have been outlined in Note 1 (j). AASB 13 has been following in the group with regard to fair value. In Note 1 (i) it has been stated how assets have been classified at fair value. Financial assets of the group are managed at a fair value as well as their performance is evaluated fair value. Whereby the asset is a contract contains an embedded derivative, the same condition is applied. Assets are normally on the trade date at fair value. The transaction costs included are commissions, brokerage and fees expensed by the income statement. Prior to initial recognition, whereby an active market is present, fair value is determined by use of market bid prices. Offsetting risk positions in portfolio have been recognized. Assets that are non-market quoted are valued using valuation techniques based observable inputs on the market (Mirza, Holt & Orrell, 2010). Before the initial recognition, fair value changes are recognized in other operating income. It is also reported that the net interest earned is usually recorded as within net interest earnings applying the effective interest method. The financial instrument is measured at fair value analyzed for day one profit or loss. Changes in fair value are recognized immediately in the income statement with no regard to deferred day one losses or profits. In the annual report, it is stated that the Group gets into transactions whereby fair value is determined by use of valuation models, for which not entire inputs consider market observable rates or prices. In this regard, the financial instrument is recognized at the first time at the transaction price that is the best gauge of fair value even though the value gotten from the relevant valuation model may be different. Gap between company’s current practice and the accounting standards There is a potential gap between the Common Wealth Bank and the accounting requirement as stipulated by ASIC review. In this case, ASIC requires that auditors and directors have to review entity policies of revenue recognition to make sure that revenue is recognized in accordance with the underlying transaction substance. It is required that revenue recognition on financial instruments on the basis that is suitable for class of instrument under accounting standards. Interest earned in the comprehensive income statement has not been recognized accordingly. Changes in fair value have been acknowledged in other operating income but this is tedious for users of the company’s financial statements the recognition is partial and there is no full disclosure. The difference between the model value and the transaction price and this day one profit or loss is not captured immediately in the income statement. The AASB 13 requires fair value recognition of loss or profit under the prevailing market conditions. Common Wealth Bank has tried as much as possible to stick to the rules and directions provided in the accounting standards on disclosures. Recommendations Directors of Common Wealth Bank of Australia have to carefully consider asset values and underlying assumptions’ appropriateness with regard to the prevailing economic conditions. Disclosure of major assumptions applied in the preparation of the final accounts provide an opportunity to financial report users to arrive at their own judgment in regard with the carrying values of the entity’s assets given that the nature of many asset valuations is subjective (Epstein & Jermakowicz, 2010). The directors have to make sure that services related to the revenue earned are performed and the relevant goods find its way to the respective buy. The disclosures in the financial annual report should not be full of complexity to the level of confusing the targeted use of the accounting information. Where complexities exist, proper further explanation has to be provided. The review of accounting standards with the relevant procedures has to be done from time to time to acquaint with necessary adjustments that have been recommended. The com company has to reconcile its financial report preparation with the accounting requirements on disclosures. Determination of fair value of profit or loss has to be done with reference to the prevailing market conditions. The revenue has to be recognized at fair value on the day of the transaction. Conclusion Disclosures in financial accounts of profit making entities are important to users of this information. AASB 13, AASB 12, AASB 11 and even AASB 10 provide the threshold for various applications with regard to disclosure of certain information that is important to the users of accounting information from the company. Australian Securities and Investment Commission (ASIC) have provided highlights in its investigations of the current situation with regard to disclosures. This report has taken the case of Common Wealth Bank of Australia and explored its application of the stipulated accounting standards that ensure accountability and transparency with profit-making organization. The discrepancies between the current practices of the bank and the requirement of standards of accounting have been reviewed to provide direction of existing short comings. The parts of the annual report used in this assignment have been included in the Appendix. References Epstein, B.J. & Jermakowicz, E.K., 2010, WILEY Interpretation and Application of International Financial Reporting Standards 2010, John Wiley & Sons, Melbourne. Mirza, A.A. Holt, G. & Orrell, M., 2010, International Financial Reporting Standards (IFRS) Workbook and Guide: Practical insights, Case studies, Multiple-choice questions, Illustrations, John Wiley & Sons, Melbourne. Epstein, L., 2011, Reading Financial Reports For Dummies, John Wiley & Sons, London. Gibson, C.H., 2010, Financial Reporting and Analysis: Using Financial Accounting Information, Cengage Learning, New York. Sandretto, M.J., 2011, Cases in Financial Reporting, Cengage Learning, New York. Appendix a) b) c) d) Read More