The Requirements of the Australian Accounting Standards Board - Case Study Example

A REPORT TO THE BOARD OF DIRECTORS ON THE REQUIREMENTS FOR DISCLOSURE OF ESTIMATES UNCERTAINTIES AND JUDGMENT IN APPLYING ACCOUNTING POLICIES Executive summary Qantas Airways limited was founded in 1920 and it has tremendously grown to be Australia’s largest airline. Not only has it grown domestically but also internationally. Indeed, it prides itself as the leading airline in long distance flights and the strongest selling brand in Australia. Indeed, it has continued to excel in its safety, maintenance and engineering, customer services and operational reliability. It core business is the transport of customers using two airline brands, Jestar and Qantas. The company also specializes in operating subsidiary business such as operating other airlines. The company operates at regional, domestic and international level (Qantas 2008). This paper is based on published half year reports of Qantas airways limited, QAL Ltd whose half year report was published on 30 june 2012 and its ASX Code is QAL. The report will critically evaluate whether financial reporting and disclosure followed by TCL Limited are consistent with the requirements of the Australian Accounting Standards Board, AASB and the Corporation Act 2001 for the users of the annual report of the specific information provided by the company. The views in this report are justified by reference to relevant accounting theories and ASX pronouncements. The report gives details of the accounting requirements in relation to financial reporting and disclosure. The paper will also show that an important aspect of developing any theoretical structure is the body of basic elements or definitions to be included on the structure. This will guide the way in which elements of financial statements are recognized, treated and disclosed in the financial reports. In addition, the paper will identify the strengths and weaknesses of financial reporting and disclosure followed by the company. Introduction This paper is concerned with identification of the particular information provided to satisfy the various disclosure requirements contained in the Corporation Act of 2001 and the AASB accounting standards. The information is analyzed from the perspective of the users of financial accounting information. According to AASB (2004), stating the financial statements core objectives would be simple if all users had similar needs and interests. Importantly, however, is that accounting information should be free from bias intended to achieve a predetermined result or to provoke a certain mode of behaviour. There is need to highlight the relevance of increased intangible assets as brought about by new information technologies and the stiff competition among companies. This has meant that the value of the companies has been rising correspondingly (Aboody et al 1998), but most existing accounting frameworks have not been capturing this aspect. Therefore, there is great need to disclose such information in the notes to the financial statements. New and emerging issues should be quickly solved by reference to an existing framework of basic theory. Over the years, several organizations, committees and individuals have developed and published their own conceptual framework of accounting, but no single framework has been universally accepted and relied on in practice. Conceptual framework for financial reporting is based on its objectives, qualitative characteristics and the concept of recognition and measurement. Many accounting standards and IFRS differ in the way they recognize and measure intangible assets among other things. This creates the need to disclose such information in order to improve the reliability of the reported results. Recognition and measurement concept explains how, when and which financial statement element including intangible asset and other transactions should be measured, recognized and reported by the system of accounting. REQUIREMENTS FOR DISCLOSURE OF ESTIMATES UNCERTAINTIES AND JUDGMENT IN APPLYING ACCOUNTING POLICIES The disclosure principle requires that financial statements be complete in the sense of improving all information necessary to users of the statements. CCH Editors (2008) argues that if the omission of certain information would cause the financial statements to be misleading, disclosure of such information is essential. Example of information often disclosed in notes to financial statement include: a summary of significant accounting policy; related party transaction; description of stock option and pension plan, and amount and nature of contingencies and commitments and terms and status of proposed business combination. Information is considered material if it has an effect on the decision made by a user. Disclosure is necessary in financial statements if it can have an impact on decision made. In deciding on the materiality of an item in terms of financial statement disclosure, accountants should consider whether knowledge of the item would likely influence the decision of users of financial statements since that which is material for one entity may not be material for another entity. Increased importance for intangible assets has been as a result of strong business competition and the dawn of advanced information technologies. Beattie (2005) notes that these factors have caused an important change in corporate value hence ignoring their disclosure will compromise the representational faithfulness of financial statements. Significant increases in intangible assets have been witnessed in intangible assets related to human resources, intangible assets related to innovation, and organizational intangible assets. There are various cost measurement models used in accounting for intangible assets, and entities reporting the intangible assets in their financial statements employ these models in different degrees and in varying combinations. However, it depends on the accounting policy that is adopted by the entity (Oliveira et al 2010). These models include initial cost and realizable value. Under the initial cost measurement, intangible assets are initially recorded in their account at cost and no adjustment is made to this valuation in later period except to allocate a portion of the original cost to expense as the intangible asset expires. At the time an intangible asset is originally acquired, initial cost represents the fair market value of the goods or services exchange as evidenced by an arm’s length transaction (Dumontier et al 2002). With the passage of time, however, the fair market value of such an intangible asset as copyrights and research and development may deviate greatly from the initial cost. AASB 138 provides that intangible assets should be measured initially at cost. Any expenditure on the asset that is subsequent to initial measurement must be expensed unless this criteria hold to be true: it is probable that the asset’s expenditure will result to an increase in future economic benefits in material form of the asset over the immediately assessed standard performance before the expenditure is incurred; and a reliable measurement of the expenditure can be linked to the asset. Paragraph 71 of AASB 138 requires that if an expense is recognized out of expenditure incurred on an intangible asset the expenditure cannot be recognized as a cost of the intangible asset in future time. Telstra company have been amortising the intangible assets over their useful lives. The policy adopted in Telstra is to recognize and amortize new patents over their useful lives of five years and write off the unamortized cost if the patent is superseded. The straight line method is used to amortize the other assets over their useful lives. An impairment review is conducted annually to determine the fair value of its goodwill. Higson (1998) clarifies that there are many ways of acquiring an intangible asset which include: separate acquisition in which case the criteria of probability recognition must be satisfied for the intangible assets that are separately acquired. Intangible assets can also be acquired through business combinations. The assets acquired through this method are initially measured at fair value and not initial cost. This is a requirement by the AASB 3 that deals with business combinations. Intangible assets acquired through government grant include licenses, quotas or rights to accessing restricted resources. Under this acquisition, a choice is left for accountant to make initial recognition of the asset at fair value or cost. Generating intangible assets from within the company is another way of acquiring the intangible asset. The internally generated intangible assets include research and development, brands, publishing titles, mastheads and customer lists. Goodwill is also generated internally but according to the definition of intangible assets by AASB 138 it is not an intangible asset and hence is excluded from recognition. Since goodwill is the amount by which interest of the acquirer in the net value of the identifiable assets and liabilities is over the acquisition cost, it means that the value of an entity is greater than the value of its separate tangible assets. Therefore, goodwill is a composite asset which cannot be identified individually but its identification is only related to the total value of the entity during acquisition. Goodwill is an intangible non-current asset which cannot be realized on its own ( Scholz et al 2001). Intangible assets are defined by AASB 138 as category of assets, though identifiable, they are non-monetary and have no physical substance. In essence, it means that this category of assets cannot be held in money and they can neither be received in determinable or fixed amount of money. Therefore, their main characteristics are that they are non-monetary, identifiable and they do not have physical substance unlike the plant, property and equipment which have physical substance ( Kwan et al 2004). The conceptual framework defines an asset as a resource controlled by the business entity. However, it can be difficult to establish control since it originates from legal or other rights. For instance, highly trained expertise cannot qualify as intangible assets since the entity cannot exercise control over them. Whatever practice adopted the company has to maintain consistency in its application in order to allow comparison between different accounting periods (Sougiannis et al 1996). The company has responded to the requirement in AASB 118 paragraph 35 by disclosing that they have $15,724,000 in total revenue from continuing operations. This information is very useful to investors and they will respond positively to it. This information is also helpful to other stakeholder who would use the information disclosure to determine the products offered in the company or competitors to use the company as a benchmark when evaluating their performance with respect to a certain segment of the production. Qantas airways limited(Qantas) and its controlled entities(the Qantas Group) results for announcement to the market. JUNE 2012 JUNE 2011 CHANGE $M CHANGE % Revenue and other income Statutory profit(loss) after tax Statutory profit(loss) after tax attributable to members of Qantas Underlying profit before tax 15,724 (244) (245) 95 14,894 249 250 552 830 (493) (495) (457) 5.6 (198.0) (198.0) (82.8) The company has also responded to the requirement in AASB 118 paragraph 9 by disclosing that it measured revenue at the fair value of the received or receivable consideration. The disclosure will be appreciated by investors since they would like to know the actual revenue generated during the period. Recognition and measurement concept explains how, when and which financial elements and transactions should be measured, recognized and reported by the system of accounting (Fridson and Alvarez, 2011). The concept is a guideline for developing coherent responses to contentious issues in financial reporting. Every company is supposed to abide by the “Generally Accepted Accounting Principles” (GAAP). The company has complied with the requirements of AASB 10 by disclosing consolidated financial statement for the half year ended 30 june 2012. The accounting standard requires preparation of consolidated financial statement for the group. The consolidated financial statements consist of financial statements of QAL Ltd and its subsidiaries. The investors will find this information being useful since they will know revenue generation from the different subsidiaries of the company. The parent company reports its financial results separately which gives more view of the level of financial performance from the perspective of the parent company. It is also possible to tell which subsidiary is not generating much income hence most company resources may be directed to that subsidiary in order to improve revenue generation. References AASB (Australian Accounting Standards Board), 2004. Framework for the Preparation and Presentation of Financial Statements. Melbourne: Australian Accounting Standards Board. Aboody, D. and Lev, 1998. The value relevance of intangibles: the case of software capitalization, Journal of Accounting Research, 36 (Supplement), pp. 161–191. Beattie, V., 2005. Moving the financial accounting research front forward: the UK contribution, British Accounting Review, 37, pp. 85–114. Black, G., 2003. Students' Guide to Accounting and Financial Reporting Standards. London: Financial Times Prentice Hall. CCH Editors, 2008. Australian Master Accountants Guide. Sydney: CCH Australia Limited Dumontier, P. and Raffournier, B., 2002. Accounting and capital markets: a survey of the European evidence, European Accounting Review, 11 (1), pp. 119–151. Fridson, M.S., and Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. New York: John Wiley & Sons. Higson, C., 1998. Goodwill, British Accounting Review, 30, pp. 141–158. Hirshey, M., Richardson, V. and Scholz, S., 2001. Value relevance of non-financial information: the case of patent data, Review of Quantitative Finance and Accounting, 17, pp. 223–235. Kallapur, S. and Kwan, S., 2004. The value relevance and reliability of brand assets recognized by U.K. firms, Accounting Review, 79 (1), pp. 151–172. Lev, B. and Sougiannis, T., 1996. The capitalization, amortization, and value-relevance of R&D, Journal of Accounting and Economics, 21, pp. 107–138. Lev, B., 2001. Intangibles: Management, measurement and reporting. Washington DC: Brooking Institution Press. Oliveira, L., Rodrigues, L. and Craig, R., 2010. Intangible assets and value relevance: Evidence from the Portuguese stock exchange, The British Accounting Review, 42 (4), pp. 241- 252. Read More