Toyota Motor Corporation is a leading automotive manufacturer headquartered in Japan recognized to produce about 10 million vehicles per year. Toyota is listed as largest company in Japan in terms of market capitalization and second-largest automotive manufacturer around the world. The multinational company is known to provide employment to about 338,875 employees across the world (Toyota: Annual Report, 2015). In this regard, the present report aims to analyze and examine the financial reports of the company to demonstrate the extent to which it complies with AASB standards and conceptual framework principles. The general purpose financial reports are developed by the business organizations for disclosing the important facts and figures related to financial performance to support the decision making process of end-users. It evaluates remuneration report, balance sheet, income statement and financial statements notes for examining their compliance with conceptual accounting framework principles (Hoffman, 2016). In addition to this, the report also discusses the reason for including the concept of ‘prudence’ in conceptual framework of accounting.
The general purpose financial statements are developed by a business entity at the end of a financial year to aid the decision-making process of investors and creditors. The general purpose statements of a business corporation include balance sheet, income statement, statement of owner’s equity and cash-flows. The International Accounting Standards Board (IASB) has developed and established set of accounting standards and principles that should be followed by businesses on a global level at the time of developing their financial statements. The conceptual framework of accounting has been developed by IASB that should be used by accountants for developing financial reports (Mazhambe, 2014). The major principles of conceptual framework of accounting are relevance, reliability, consistency and comparability. The relevance principle of conceptual framework states that all important facts and figures related to financial performance of an organization should be disclosed in the financial reports. The reliability principle of conceptual framework states that financial information provided should be trustworthy and free-from any materialistic error. The consistency principle states that a business organization should adopt a uniform and consistent pattern for disclosing financial information. At last, the comparability principle states that financial information disclosed should be comparable with the previous year financial results in order to determine the net increase in profitability. Australian Accounting Standards Board (AASB) holds the responsibility of businesses operating within Australia to comply with all the principles of conceptual accounting framework developed by IASB (Whittington, 2008).
The compliance of Toyota with the principles of conceptual framework of accounting is valuated through analysis of its annual report. The annual report of Toyota has not disclosed adequate information related to the compensation received by its key executive and non-executive directors. There is no illustration of the financial figures related to the remuneration demonstrating basic pay, bonuses, incentives and other compensation offered. The annual report states that remuneration of board of directors is decided by supervisory board members. Thus, the company does not effectively comply with Companies Act according to which business corporations are required to adopt a separate nomination committee for deciding compensation offered to board members. As per the NYSE corporate governance rules, businesses are required to appoint a spate remuneration committee for establishing rules and procedures to be followed while deciding compensation of the board members (Toyota: Annual Report, 2015). The remuneration received by board members can be stated to be directly linked with profit margins of the company. This can be said to have a negative impact on the organizational culture as it inculcates a desire within employees to maximize profit margin of the company for receiving bonus payments. The problem of recalling 5.8 million cars of Toyota is believed to have occurred in Toyota due to its ineffective people management practices (Trop, 2014).
Source: https://www.sec.gov/Archives/edgar/data/1094517/000119312516630645/d19734d20f.htm
The main cause of recalling such huge number of cars is mechanical failure that caused the company to recall its nine million cars worldwide. The underlying cause of failure is ineffective performance of employees that caused the occurrence of such a huge mechanical failure in the company. The company’s system of providing rewards to employees is believed to be ineffective that has caused ethical breaches and fraudulent activities in the workplace (Why Toyota Is Recalling 5.8 Million Cars Worldwide, 2016). The company provides rewards to its mangers on the basis of cost-containment and not on the basis of sustaining quality of products. The employees received incentives for producing product designs that are of lower cost and thus they do not paid emphasis on developing high quality products that are sustainable in long-term. Thus, the mangers ignored the problems that existed in the product design causing the company to recall its cars and suffered heavy losses. It is reported that Toyota has lost about $155 million per week due to recalling and also product recalling has negatively impacted its brand image worldwide (Sullivan, 2010).
Source: https://www.autonews.com/article/20141117/OEM/311179960/tensions–at-toyota-ahead-of–big-move
Thus, the main issues as analyzed from the remuneration report of the company are short-term decision making and unhealthy pursuit of goals. The employee’s does not pay emphasis on product quality for obtaining greater rewards and incentives. The manager approves design systems that are successful on short-term basis only and has ignored its sustainable use for long-term. This has caused the mechanical failure in the car designing which lead to recalling of cars by Toyota (Sullivan, 2010). Thus, managers pursuit their personal goals of gaining large incentives and ignored the sustainable growth and development of the company. The company does not abide by the principles of conceptual framework such as reliability and relevance as it has not stated complete information regarding the compensation offered to the employees. Thus, it can be stated from the overall analysis of the remuneration structure that Toyota needs to establish strong corporate governance rules for monitoring, controlling and reviewing the remuneration of the board members (Trop, 2014).
Source: https://www.eremedia.com/ere/a-think-piece-how-hr-caused-toyota-to-crash/
The inventories are valued at low cost or at lower cost at a net realizable value as per the accounting standards of IASB. The analysis of the annual report of the company revealed that it has not effectively disclosed the information related to valuing of inventories. There is no disclosure regarding the valuation of inventories in the financial reports of the company (Compiled Accounting Standard AASB 108, 2014). Thus, it can be stated from the analysis of the annual report that it has not effectively complied with the IASB standards of valuing inventories. Also, there is no provision regarding allowance of bad debts as illustrated in the annual report of the company (Toyota: Annual Report, 2015). However, the company has declared in its annual report that it continually monitors its bad debts and has implemented effective risk management system for controlling the occurrence of bad debts. Also, Toyota declares the periodic review of its long-lived assets and intangible assets through estimating the future cash flows. The identification of any impairment in the asset is recorded by the amount through which carrying value of asset exceeds its fair value. The impairments in long-lived assets are reported in the consolidated financial statements by Toyota as illustrated from its director’s report. Toyota has also disclosed information its operating leases and the total capital expenditure on operating leases is reported to be ¥2,776.6 billion at the end of the fiscal year 2016. The financial figures relating to the operating leases are reported in the balance sheet of the company. The financial obligations of the company related to contingent liabilities and leases have been disclosed in the balance sheet (Toyota Motor Corporation, 2016).
Source: https://www.toyota.de/download/cms/dede/Toyota-Kreditbank-Annual-Report-2015_tcm-17-587742.pdf
The evaluation of annual report of Toyota has revealed that it has not effectively compiled all the international accounting standards and principles advocated by IASB. It does not comply with the reliability and relevance principle of conceptual framework as it has not disclosed all the materialistic information related to remuneration, bad debts and accounts receivables in its financial reports. It has been analyzed that the company has not implemented strong corporate governance system in its workplace as evident from the issues that occurred in the company related to weak people management practices. The company though has disclosed information related to its financial obligations at the end of the balance sheet but still needs to improvise over its financial reporting system. The company need to disclose all the accounting policies and procedures adopted in the preparation of financial statements in director’s report to effectively comply with the conceptual framework accounting principles (Toyota: Annual Report, 2015).
The principle of ‘prudence’ in accounting is implemented to prevent the recording of unrealized gains in the financial statements. The financial statements are developed by a business entity on order to disclose pertinent facts relating to the financial growth of a corporation. The information disclosed is used by the investors and creditors to make decisions relating to their investment in the company. Thus, the financial information presented to the end-users must be realistic and errors free in order to protect the interest of stakeholders. The main objective of implementing the prudence accounting principle in conceptual framework of accounting is to protect stakeholder interests through providing them trustworthy information related to financial performance. The concept of ‘prudence’ is in accordance with the conservatism principle of accounting as per which financial statements disclosed should be neutral and error-free to support the decision making process of business corporations. The principle is used by the accountants the time of valuing current assets such as inventories, receivables and current investments. In addition to this, it also requires business to make proper estimates related to the occurrence of losses such as provision for bad debts (Applying the concept of prudence in accounting, 2016).
The concept of prudence was removed from the conceptual framework in the past as it was believed to be against accrual basis of accounting as per some financial experts. The accrual basis of accounting states that business entities should make adequate estimates in advance for uncertainties. This requires that business should create hidden reserves for them that can be used at the time of emergency. However, the principle of prudence restricts businesses to hide nay facts and information related to financial performance. This was the basis for removal of prudence from conceptual framework of accounting. The principle is now again included in current accounting framework to prevent businesses from reporting any overstated revenues and understated expenses. The increasing number of corporate scandals due to manipulation of financial accounts such as Enron has caused the need for its inclusion. This is done mainly to protect the interest of end-users such as investor and creditors by providing them trustworthy and realistic financial information (Prudence and IFRS, 2014).
The major benefits of including prudence are prevention of occurrence of corporate issue related to manipulation of accounts. The implementation of prudence will ensure that financial information presented is trustworthy and free from any material error. This in turn will increase the trust of stakeholders and also ensures the protection of their financial investment. On the other hand, some financial experts are still in criticism with the inclusion of prudence in conceptual framework of accounting on the basis that it restricts business organizations to make proper estimates for dealing with uncertain conditions. However, the benefits of prudence are many and this is the reason for its inclusion again in the conceptual framework (Malley, 2014).
It is recommend to Toyota on the basis of overall discussion held that it should implement a strong corporate governance system that provides rules and regulations that should be followed by all employees within the workplace. As evident from the issues that occurred in Toyota due to ineffective people management, it needs to place strong emphasis on developing its corporate governance policies and procedures. The reward and incentive system of the company needs to be changed so that employees work for promoting long-term growth of the company rather than pursuit of their personal goals. The reward system should be based on encouraging the adoption of workplace procedures that promotes sustainable development and growth of the company. The adoption of strong corporate governance system is necessary for managing workplace diversity effectively and thus prevention of nay problems related with people management (Toyota Motor Corporation, 2016). Also, the company needs to comply with IASB standards of disclosing adequate information relating to the inventories valuation in its financial reports. The company should also disclose the information regarding the accounting policies and procedures adopted during the preparation of the financial statements. The adequate compliance of company with IASB bad conceptual framework principle is necessary for promoting its brand image globally. The company though has achieved good brand image worldwide still need to improvise over its corporate rules and policies. The recalling of its car model has negatively impacted the brand image and the company has suffered heavy losses on account of its faulty product designs. Thus, it is essential for Toyota to strengthen its brand image by adopting strong corporate governance policies that will ensure the company strict compliance with IASB standards and conceptual framework principles (Hoffman, 2016).
Conclusion
The main finding as gathered from the overall analysis of annual report of Toyota is that it needs to develop strong corporate governance policies for promoting its sustainable growth. The company governance system is inadequate responsible for its product design issue that occurred in the past and negatively impacted its brand image. The company needs to improvise over its people management practices by changing its reward system policies. Also, the company needs to comply with IASB standards of developing remuneration committee for deciding over the matters of compensation of board members. It also needs to disclose all the relevant information about valuing its inventories and provisions taken for bad debts in notes to the financial statements section of the annual report. The incorporation of prudence concept in conceptual accounting framework is also essential for preventing the misrepresentation of financial statements by businesses worldwide. The adoption of prudence principle will help in maintaining neutrality of financial information disclosed by the businesses.
References
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Hoffman, C.W. 2016.Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism.World Journal of Business and Management 2 (1), pp. 1-32.
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Sullivan, J. 2010. A Think Piece: How HR Caused Toyota To Crash. [Online]. Available at: https://www.eremedia.com/ere/a-think-piece-how-hr-caused-toyota-to-crash/ [Accessed on: 15 April 2014].
Toyota Motor Corporation. 2016. UNITED STATES SECURITIES AND EXCHANGE COMMISSION. [Online]. Available at: https://www.sec.gov/Archives/edgar/data/1094517/000119312516630645/d19734d20f.htm [Accessed on: 15 April 2014].
Toyota: Annual Report 2015. 2015. [Online]. Available at: https://www.toyota.de/download/cms/dede/Toyota-Kreditbank-Annual-Report-2015_tcm-17-587742.pdf [Accessed on: 15 April 2014].
Trop, J. 2014. Tensions at Toyota ahead of big move. [Online]. Available at: https://www.autonews.com/article/20141117/OEM/311179960/tensions–at-toyota-ahead-of–big-move [Accessed on: 15 April 2014].
Whittington, G. 2008. Fair Value and the IASB/FASB Conceptual Framework Project:An Alternative View. ABACUS 44 (2), pp. 139-168.
Why Toyota Is Recalling 5.8 Million Cars Worldwide. 2016. [Online]. Available at: https://fortune.com/2016/10/26/toyota-recall-takata-airbag-cars/ [Accessed on: 15 April 2014].
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