Discuss about the Conceptual Framework for Obligations Financial Reporting.
In today’s world companies are expanding their operations globally; as a result financial reports are becoming more complex due to the high involvement of financial transactions. Due to the existing complexities, shareholders and stakeholders are not able to understand and analyze the financial report for their own use. Financial statements are included in the annual report of an organization which is a comprehensive report which addresses the need of knowing the financial performance of the company ti its shareholders, creditors and investors. Hence it is the responsibility of the accountants to simplify the terminology used in those statements to make every individual who is not technically qualified can read and understand. Internationally acclaimed accounting bodies such as IASB and AASB have provided a legal framework which gives a true and fair view of the organization’s financial position. It is the duty and obligation of an accountant to make sure that these accounting standards are followed properly and provide the right judgment about the organization’s performance. They should disclose all material information which can affect the decisions of the investors in the long run.
An annual report of the firm gives an insight about the company’s performance and its future strategic decisions taken in the previous financial year to its shareholders and stakeholders. It is very important that it should be provided in such a manner that it is understandable to everyone, to be very specific the company’s investors. The investors analyze the important information and take crucial investment decision based on that. So, it is very important simplification of material information should be done (Deloitte, 2014). Elements of simplification:
Materiality and disclosure: Organization should provide information which is relevant to the shareholders and stakeholders. Irrelevant information provided may distract and confuse the investors but not disclosing any financial information should not be misunderstood as concealment of important information which will considered as a fraud (Hughes & Fisher, 2015). In the report of AGL energy information about their business growth, profitability of each business segment, future strategic plans and cost and expenses occurred are presented in very precise and clear manner (CPA, 2012)
Illustrative tables and figures: It is not important for the user of annual report to understand important information between the lines. The information should be presented in an interactive manner so that the investor does not miss any relevant information. On the very first few pages all the information regarding company’s EBIDTA, EBIT, underlying profits etc. are provided in a graphical format showing clearly the increasing and decreasing trends. Also AGL’s major achievements and developments are highlighted using pictorial view (Grand thornton, 2015).
Comparative analysis: Investors can only analyze the growth of the company by comparing current year performance with the previous ones. Comparison plays a crucial role in the investor’s decisions. AGL energy has stated the information of past 4 years in preparing the financial statements to provide an overview of company’s performance (Deloitte, 2015)
Footnotes and explanation: It is not possible to understand each and every item mentioned on the financial statements, so the company’s explain the relevant details in the footnotes, so that it can provide additional detail view to the investors. In AGL’s report all the necessary clarification regarding the financial statements are disclosed in footnotes in a very clear manner (HMT, 2014).
The purpose of preparing an annual report is to help the investors, lenders and creditors to take appropriate investing decisions based on the performance of the company. Not every individual is an expert in reading and interpreting the financial reports provided by the company. Company’s financial report as it is prepared by professionals is complex and difficult to understand. Financial illiteracy in this context refers to situation where the investors or any concerned party are not in a position to understand the financial statements and as a result they are not being able to take any sound investment decisions. To cope with this problem internationally recognized accounting bodies such as IASB/AASB have provided a universally accepted framework in terms of accounting standards and concepts to simplify the annual report for its end users. The aim of these organizations is to set high quality understandable standards which are accepted uniformly all over the world. They provide various guidelines regarding disclosure and presentation which is to be followed strictly. IASB/AASB standards are following principle based system which follows judgment based application of policies and procedures (ACCA, 2014). The advantages of following principle based system are:
There are certain concepts which provide a framework for the better understanding of the annual report. The annual report of AGL energy has been prepared in accordance with the AASB standards which are taken from the IASB standards. These are:
Report Entity concept: Under the reporting entity concept more emphasis is laid on preparing the consolidated or combine financial statements of all the businesses of the organization. The report of AGL energy has prepped their statements in a consolidated manner and the loss mentioned is also consolidated loss (ICAS, 2012).
Recognition and derecognition: According to the recognition concept all the material transaction should be brought into the light of the investor. Derecognition concept refers to ignoring all the irrelevant information which does not affect the investment decision should be ignored. AGL energy has mentioned in detail about their energy plant transactions, sale and purchase of their fixed assets in a detailed manner (IFRS, 2015).
Measurement: It is the right of the investor to know the method used to evaluate the assets of the firm. AGL energy in their notes have disclosed that they have prepared the consolidated financial statement on the basis of historical cost method and financial assets are measured using fair value (ACCA, 2013).
These concept provide an overview about the policies and procedures followed by the company in a simple and clear manner. The annual report of AGL has been a clear example of a good and precise report as it states all the necessary in an easy and organized manner, this report educate investors about all the material information which will form a strong basis for their investment decision (PWC, 2015).
A financial report cannot be presented without the help of professional and qualified individuals. These professionals are Auditors, accountants and chartered accountants. Companies hire these people to give their professional judgments to make their financial report more reliable and credible. There is no governing framework for providing a professional judgment rather it is based on the abilities, experiences and intuition of the professionals (Ernst & Young, 2015). As told before there is no governing law or standard for giving a sound judgment but they should be made in the context of existing applicable accounting standards, concepts and policies.
The authority of taking professional judgments lie in the hands of the auditor and the prepare of the financial statement. An auditor is an individual who checks and verify all the information presented in the financial report before it is presented in front of the shareholders and stakeholders. Without the auditor the financial statements are mere a piece of information which is not verified and authorized. It is the responsibility of the auditor to verify and check each and every items and cross check that they have supportive evidence or not (ASIC, 2015).
Shareholder’s and investors only trust on reports which are authenticated by an auditor. No annual report holds any importance if it is not authenticated by an Auditor. The AGL energy’s annual report is also audited by the external auditor Deloitte. By appointing an external auditor the company ensure its lenders and investors that the financial information provided is unbiased and true to the best knowledge of the company and the auditor.
Conclusion
It is very important for every organization to comply with accounting standards so as to give a true and fair view of their financial statements. Legal compliance with accounting standards gives investors a confidence in the financial data presented. It is the responsibility of an accountant to simplify the financial terms and disclose all material information so that investors can acknowledge relevant information useful in taking investment decisions. Too much disclosure should be avoided as the investors may miss the useful information and the core purpose remains unsolved. The accountant should use their expert judgment in order to give unbiased opinion and guide the organization to follow the rules and procedures.
References
AASB (2015) Conceptual framework for financial reporting. Australia accounting standard board, Australia. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf on 24 January, 2017.
AASB (2017) About Australian accounting standards. AASB, 2017. Retrieved from https://www.aasb.gov.au/Pronouncements.aspx on 24 January 2017.
ACCA (2013) Why breadth and depth of finance capability matter in today’s finance function. The Association of Chartered Certified Accountants, London. Retrieved from https://www.accaglobal.com/content/dam/acca/global/pdf-campaigns/cfo-survey.pdf on 24 January 2017.
ACCA, (2104) Prudence and IFRS. The Association of Chartered Certified Accountants, London. Retrieved from https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf on 24 January, 2017.
CPA (2012) Accounting concepts and principles. CPA, Australia. Retrieved from https://www.cpaaustralia.com.au/documents/study-manual-accounting-concepts-and-principles.pdf on 24 January 2017.
Deloitte (2014) Reporting obligations. Deloitte, Australia. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-GPFS-listed-model-FS-june-2014-section-d-270514.pdf on 24 January 2017.
Deloitte (2015) Annual reports insights 2015. Deloitte, UK. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/audit/deloitte-uk-annual-report-insights-2015-highlights.pdf on 24 January 2017.
Ernst & Young (2015) Role of auditors in the society. Ernst & Young LLP, UK. Retrieved from https://www.ey.com/Publication/vwLUAssets/EY-financial-services-viewpoints-audits-role-in-society/$FILE/EY-financial-services-viewpoints-audits-role-in-society.pdf on 24 January 2017.
Ernst & Young (2014) Comment letter on conceptual Framework. Ernst and Young, UK. Retrieved from https://www.ey.com/Publication/vwLUAssets/EY-Comment-letter-Conceptual-Framework-DP-23-01-14/$FILE/EY-Comment-letter-Conceptual-Framework-DP-23-01-14.pdfn 24 January, 2017.
Grand Thornton (2015) Example special purpose financial statements. Grand Thornton, Australia. Retrieved from https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/technical-publications/example-financial/gtal_2015_june_example-special-purpose-financial-statements.pdf on 24 January 2017.
HMT (2014) Simplifying and streamlining statutory annual report and accounts. HM Treasury, UK. Retrieved from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/330725/simplifying_annual_reports_print.pdf on 24 January 2017.
Hughes, J. & Fisher, A. (2015) Five steps to simplifying financial statements today. Chartered professionals accountants, Canada. Retrieved from Five-Steps-to-Simplifying-Financial-Statements-Today-July-2015%20(1).pdf on 24 January 2017.
ICAS (2012) A professional judgment frame work for financial reporting. Institute of Chartered Accountants of Scotland, Edinburgh. Retrieved from https://www.icas.com/__data/assets/pdf_file/0013/2605/Professional-Judgement-Framework-Report-ICAS.pdf on 24 January, 2017.
IFRS (2015) Conceptual framework for Financial Reporting, Exposure Draft. IFRS Foundation, UK. Retrieved from https://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Framework-Exposure-Draft-and-Comment-letters.aspx on 24 January, 2017.
PWC (2015) Streamlined financial reporting trends in 2015 annual reports. PricewaterhouseCoopers, New York. Retrived from https://www.pwc.com.au/assurance/ifrs/assets/ifrs-streamlined-financial-reporting-oct15.pdf on 24 January 2017.
ASIC (2015) Audit quality – The role of directors and audit committees. Australian securities and investment commission, Australia. Retrieved from https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit-quality-the-role-of-directors-and-audit-committees/ on 24 January, 2017.
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