Analysing Company's Performance - Example

Name Professor Course Date Table of Contents introduction 1 General objective of financial reporting 2 Qualitative characteristics 3 Prudence as an accounting quality 4 Comparison between Qantas Airway and Adelaide Brighton Company…………………………………………….…….5 Recommendations……………………………………………………………………………………………………………………………..……6 Conclusion……………………………………………………………………………………………………………………………………………….7 Executive Summary Financial reports are reports that are required to be made by firms to give information on their financial situation. These reports are important since they give information needed to make decisions such as; investment, credit, legal decisions. Financial reports are used by financial institutions, management of the firm, investors, employees, government among others. Accounting is supposed to be a source of information to investors, creditors among others. Requirements by AASB standards and conceptual framework for financial reporting have been put into place to ensure that necessary financial information concerning a certain firm has been put across for use by relevant parties. Conceptual framework has been revised to add a qualitative characteristic, prudence, in a bid to deal with disparity in corporate reporting. Introduction Investors and creditors see financial statements as their source of financial information. The conceptual framework and AASB (Australian Accounting Standards Board) have put in place requirements and objectives of financial statements. Companies are required to follow the standards put in place by these boards. Qantas Airway is an Australian airline while Adelaide Brighton Company is a company which deals with cement and related materials. We have decided to work on their annual reports, 2015/2016 annual report for Qantas Airways and 2016 annual report for the Adelaide Brighton Company. General Objective of Financial Reporting Financial reports are mostly used by the management, creditors, debtors, government, investors among others. Investors require information on the financial position of a firm in order to make a decision on whether to invest in the firm or not. Government needs the information to ensure that required regulations have been carried out properly. The management, debtors and creditors require this information to assess the financial position of the firm. Qantas airway has provided the financial information in the annual report of the 2015/2016 financial year. Although the financial report given by the airline is useful to the relevant parties since it is in line with the conceptual framework and AASB standards, the information is not enough to make financial decisions on its own (“conceptual framework for financial reporting 2010”). These parties therefore need more than the financial statement to make decisions. The financial accounting is supposed to be source of information, as seen in both Qantas airway and Adelaide Brighton Company. Companies are not required to add information that doesn’t affect performance on the reports. Some of the undisclosed information may greatly influence decisions made by the parties, making them seek this information elsewhere (“Conceptual Framework for Financial Reporting 2010”). Relevance Relevance is a qualitative characteristic of financial statements. The information given is supposed to be relevant to the users of the financial information. Information on the financial statements is supposed to have a predictive value, that is, it should not be something completely unexpected (“Conceptual Framework for Financial Reporting 2010”). Qantas airway has provided relevant information on their annual report. Comparing their 2014/2015 and 2016/2017 annual report, there is a predictable trend, making it relevant to the users. A report made by the directors of the Adelaide Brighton Company compares financial results in the year 2015 and 2016, which shows a clear trend, with their profit after tax increasing by 3.1%. Users of financial reports cannot trust or make decisions based on these reports if there are not relevant (“Conceptual framework for financial reporting”). Relevance also means not burdening the users with unnecessary information. Faithful Representation One of the limitations of financial statements is reporting information that is untrue, in a bid to attract investors and creditors. The conceptual framework has faithful representation as one of its qualitative characteristics. A statement must be true, as much as it must be relevant. Financial reports cannot be useful if the data is fallacious. The financial reports are supposed to be neutral, meaning that the data is not manipulated to favor the firm (“Conceptual framework for financial reporting”). While these reports are required to be free of errors, they are not necessarily meant to be accurate since it is hard to give an accurate record of the financial data. However, the financial statements are prone to error when drawn according to the current conceptual framework. Comparability Users of the financial information cannot make financial decisions based on financial statements which cannot be compared by statements of other firms or of the same firm over different periods. Qantas Airway has compared its annual report with that of 2014/2015 while Adelaide Brighton Company has compared its annual reports with that of 2015. The AASB standards require firms to have financial statements which can be compared with that of other entities. If a company has a statement which is so different from that of its former period, then investors are likely to shy away from it (“Conceptual framework for financial reporting 2010”). Timeliness Conceptual framework demands that financial reports be made available to relevant parties on time (“conceptual framework for financial reporting 2010”). For example, making an annual report made in 2015 available to the financial users in 2017 is completely useless since that information cannot be of any help to them. Both Qantas Airway and Adelaide Brighton Company have made their annual reports immediately after the end of a financial year. This shows that they have complied with the requirements of AASB. Understandability The accounting boards require the financial statements of all firms to be drawn in a correct manner which makes it easier to be understood. The reports are supposed to start with the financial position of the firm, detailing its profits or losses, expenses, debts, and dividends paid to the shareholders (“Conceptual framework for financial reporting 2010”). Adelaide Brighton Company starts with a directors’ report, which starts with stating its revenue. Qantas Airway starts with the performance of the firm in the 2015/2016 financial year, followed by the financial framework. Though they use different styles, both companies have complied with the requirements of the accounting boards in making their annual reports to be correct and easy to understand. While some people may see the annual reports as being complex and hard to understand, financial statements are meant for people who understand business and economic terms. They are therefore meant to be understood basically by business-elite people (“conceptual framework for financial reporting 2010”). Verifiability The accounting boards require the firms to give financial statements that can actually be verified. This means that even people outside the firm can be able to reach the same results. When independent auditors are called to audit a firm, its financial statements should be verifiable and the auditors should come up with the same results or almost the same (“conceptual framework for financial reporting 2010”). The companies should clearly explain any assumptions made and the methods used to get the information. Qantas Airway has explained the assumptions made in their annual reports and the methods used to collect the information. The company has explained the directors’ performance and why some performed the way they did. Michael Lestrang’e was made a director for Qantas Airway in April, making him attend lesser meetings than other directors. Materiality Financial reports are termed as immaterial if they do not influence financial decisions of the users. The accounting boards have put the materiality concept as a requirement for financial statements in a bid to ensure that firms disclose all information critical for the users (“Conceptual framework for financial reporting 2010”). Materiality concept in financial reports depends on the purpose of the report and the intended users. Qantas Airway and Adelaide Brighton Company have both complied with the requirements by conceptual framework and AASB by making their annual reports to be relevant and disclosing relevant information for the users of their reports. Prudence as an Accounting Quality In 2010, the International Financial Reporting Standards (IASB) removed prudence as an accounting qualitative characteristic. However, the IASB has now come up with a new proposal to reintroduce cautious prudence. Cautious prudence means being cautious in the face of uncertainty (“World watch, IASB prudence conceptual framework: PwC”). The IASB’s intention of introducing cautious prudence is to attain neutral accounting, which means that firms do not have to overstate or understate their performance to avoid uncertainty. Reintroducing prudence has its disadvantages, most accountants see it as a way of putting their losses and weaknesses out there, making them vulnerable instead of helping them to get investors. Most business people see prudence accounting as being conservative, and not reflecting the real economic condition of a firm. In fields such as banking, prudential accounting is very helpful to avoid a financial crisis. However, it is a great way to ensure that financial information is represented truthfully on financial statements (“World watch, IASB prudence conceptual framework: PwC”). Comparison between Qantas Airway and Adelaide Brighton Company The Qantas Airway annual report starts with the performance of the financial year, followed by their financial framework. Adelaide Brighton Company starts with the directors’ report, consisting the revenue and operations of the company. Qantas Airway includes chairman’s report, while the Adelaide Brighton Company includes reports from the directors only. Qantas Airway gives the data, and then explains it later on, making it to be easily understood and not confusing to the users. The Adelaide Brighton Company gives the financial data while at the same time giving the explanations which may prove to be a little bit confusing to the financial users. Also, both companies have followed the requirements made by the accounting boards. Their financial statements are relevant, understandable, verifiable, and comparable among others. Both financial statements are also useful to the users of the financial information. Recommendations While the conceptual framework of financial accounting acts as a reliable source of financial information for financial users, it has its limitations which make it not to be the perfect source of financial information. Financial systems can be manipulated to favor a firm, making them not to be so reliable. Financial users can also misinterpret the data on financial reports. This is one of the reasons why investors and creditors might require the services of an auditor. A system should be put into place to ensure that data is not cooked just to gain confidence of investors and creditors. Conceptual framework deals only with the financial conditions of a firm. It doesn’t care about the social or environmental conditions affecting a firm. Such conditions also affect the decisions made by users of the financial reports. The conceptual framework should therefore come up with objectives which incorporate social and environmental conditions of a firm. To ensure that financial reports are not manipulated, the accounting boards should help improve auditing. The auditors are only able to audit firms with the financial records provided by the firm. Improved auditing will mean that auditors will be able to use even additional information not recorded in the financial reports. Financial reports are mainly meant for investors, creditors, management, and government, among others. The way to make them to be more useful is to involve the users. The users of financial reports need to get themselves involved when financial standards are being set. They can do this by joining accounting boards. The process of collecting and organizing information for financial reports is costly. If auditing is needed, it means more expenses for the company. After the financial statements are made, companies may be forced to defend the information in court if the users’ term is as misleading. This adds more costs for the company. The accounting boards should therefore put into consideration the costs incurred by the firms, especially when they have to produce two separate reports for external and internal use. The accounting boards should come up with standards that minimize costs and maximizes benefits of the financial reports. Conclusion In brief, Qantas Airway and Adelaide Brighton Company have complied with both conceptual framework and AASB (Australian Accounting Standards Board) requirements of financial reports. They have followed the qualitative characteristics of accounting, which are; materiality, comparability, verifiability, faithful representation, relevance, among others. Both companies have also ensured that they have achieved the general objective, which is providing information to the financial users. Though the companies have not disclosed all information about their finances, it is in line with the conceptual framework which allows companies not to disclose unnecessary information, or the information which is considered to be risky or to ruin the company’s reputation. Conceptual framework has been revised to include prudence as a qualitative characteristic. While many accounting boards do not see this as a good idea, introducing prudence might just be what is needed to ensure that financial statements are true and free from biasness. Though the current conceptual framework is still relevant as a source of financial information, changes are needed to make it more relevant. Improving auditing, reducing financial report costs and reducing rigidity of financial reports will go a long way to improve the financial accounting standards. Works Cited World Watch, IASB Prudence Conceptual Framework: PWC.” PWC, 15 2015, www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/world-watch/iasb-prudence-conceptual-framework.html. Accessed 11 Aug. 2017. “Conceptual Framework for Financial Reporting 2010.” IAS plus, www.iasplus.com/en/standards/other/framework Accessed 11 Aug. 2017. Appendices Qantas Airways annual report 2016 Adelaide brighton company annual report 2016 Read More