Companies in the current scenario are well aware of the prevailing rules and regulations and therefore, attempt to adhere to all significant requirements. This assists the companies in depicting relevant and genuine information to the users. Moreover, disclosures also assist the companies to offer material and meaningful data to every related party because the present financial world is filled with complexities and risks, and such disclosures can play a role in guiding the company in the right direction. Furthermore, it must also be noted that the financial statements of companies must accommodate both financial and non-financial information as it can assist in effective decision-making on the part of users. Nevertheless, such financial statements must effectively comply with the conceptual framework (materiality, prudence, relevance, etc of financial reporting.
Companies that are listed on the Australian Stock Exchange (ASX) are required to comply with the corporate sector of Australia (ACS). Based on this sector, every company must fulfill the qualitative characteristics (relevance, reliability, materiality, etc) of a conceptual framework for corporate reporting. The reason behind this is the fact that it assists the companies in progressing towards the right direction. For the purpose of this study, the annual reports of Virgin Australian and Qantas are selected that will assist in knowing whether these companies have successfully complied with such requirements. The report highlights the conceptual framework and the manner in which both the company adhere to the concept.
The emergence of materiality concept happens when any item forming part of the company’s financial statement can influence the decision-making capability of users. Nevertheless, based on the annual reports of Qantas and Virgin Australia, it can be stated that both companies effectively adhere to the materiality concept. For instance, both companies have followed materiality aspects like ASX Corporate Governance Principles and Recommendations. In addition, both have disclosed their corporate governance statement in their respective websites. Furthermore, it can also be viewed from the director’s report of both companies that they have followed various materiality aspects required by section 295A of the Corporations Act 2001. This means that it is the responsibility of the Board to portray an effective and genuine representation of the state of affairs of the company in order to ensure that the annual reports are true and fair to the best of their knowledge (Northington, 2011). Hence, the board must ensure that all the regulations are adhered to so that compliance is not distorted in any manner.
In relation to relevance in the conceptual framework, Qantas has offered all details regarding the material risks encountered by it. Such disclosures provide immense transparency to the parties who are related and have a vested interest. Moreover, such a disclosure portrays the efficiency of the company in terms of compliance (Needles & Powers, 2013). Furthermore, the annual report depicts numerous concerns like competitive intensity wherein the ability of market surpasses the underlying demand and persuades the entire industry’s profitability. In addition, the company has also undergone a hedging program in relation to volatility in forex and fuel. Hedging program is essential to mitigate the risk, however; an accurate disclosure of the same helps the users of the financial statement to make a decision (Bushman & Piotroski, 2006).
Similarly, Virgin Australia also complies with the conceptual framework of financial reporting by disclosing relevant issues to the users. For instance, Virgin has offered relevant details regarding the risks that are correlated with the foreign and local aviation industry. Furthermore, the government policy also possesses a negative influence on the business of Virgin Australia that can affect its financial performance (Virgin, 2016). The company has provided relevant information regarding the same in its annual report that can assist stakeholders in making effective decisions (Merchant, 2012). Such information is vital for the moral conduct of the company and a disclosure of it in the annual report provides immense benefits to the stakeholders.
Both companies have also provided reliable information that can assist several communities and societies. For instance, Qantas provides significant information associated with the capacity and climate of the resource. It also endeavors to seek effective utilization ways of the fuel and to tackle innovative technologies to minimize emissions (Qantas, 2016). Similarly, Virgin Australia also focuses on the areas that are significant from conserving the environment point of view. For instance, reduction of emissions through the emergence of such aircraft that is innovative and effective in nature. Furthermore, the company also shares information regarding its involvement in projects that assist the society and other communities. Moreover, both the companies also offer relevant information to their security holders in order to allow them to gain a position for the director’s reelection. Other qualitative characteristics like understandability, timeliness, etc also form part of the annual report of both companies (Melville, 2013). The presence of such information is an indication that the company has looked after the process of compliance and adhered to the guidelines laid down by the ASX.
In relation to impairment, Qantas’ carrying amount of financial assets is computed periodically in order to determine whether any objective evidence has been impaired or not. Moreover, items associated with PPE (Plant, Property, and Equipment) are recorded at cost minus accumulated depreciation and impairment losses.
Furthermore, intangibles like goodwill are recorded at cost minus accumulated impairment losses (Meeks & Swann, 2009). Similarly, in relation to Virgin Australia, such impairment is recorded as the difference betwixt asset’s carrying value and the present value of expected cash flow. Such assets go through impairment periodically. Nevertheless, Virgin Australia prepares their financial statements as per the AASB standards and Corporations Act 2001. It also adheres to the IFRS standards as offered by the IASB. Similarly, total assets and liabilities of Qantas ($70 million inclusive of other derivatives) are also recorded as per AASB 9 standard.
The fair value concept in the case of Qantas is also done on the basis of AASB 137 standard. Moreover, there are many other AASB standards that are being taken into account by the company but are not adopted as of now (Qantas, 2016). For instance, AASB 16, AASB 15, AASB 9, etc are some of the standards that are not adopted by the company but is being planned to be adopted soon. The process and computation are clearly laid down in the annual report of the company that projects the methods undertaken by both the companies (Lapsley, 2012). All these points clearly portray that both the companies adhere to the process of impairment as well, thereby proving that they comply with the conceptual framework and AASB standard requirements.
Qantas is subjected to contingent liabilities and the same has been provided in the annual report. As per the directors, provisions are not needed in tune to such matters as the same is not probable in nature that economic sacrifice needs to be forgone. Qantas is even subjected to various claims and litigations in the normal course of business that might or might not be subjected to provisions. The directors are of the notion that no material contingent liability exists however, the same needs to be consideration.
Contingent liabilities are not recognized by Virgin. There is a possibility that obligation might arise from the events of the past. Moreover, the group has disclosed various bank guarantees, letters of credit to third parties as payment guarantee for fuel. As on 30th June 2016, there were $124.7 million of bank guarantee as well as letter of credit.
Accounting transactions and many other events are often uncertain and in order to be effective, companies are bound to report these in proper time. For such purpose, they have to make several estimates that necessitate professional judgment so that uncertainties can be avoided. Hence, while making such judgments, they must remain prudent or cautious. The International Accounting Standards Board terminated such concept of prudence in the year 2010 but after witnessing its utmost significance, it was revised again in the conceptual framework for financial reporting. Prudence is mainly an accounting principle that ensures that income and assets are not exaggerated and expenses and liabilities are not understated (IASB, 2010).
With other qualitative characteristics already prevalent in the conceptual framework, the revision of prudence to address disparities clearly sheds light on its immense significance. Moreover, the best advantage of such concept is that it does not necessitate a division of income amounts or discards any part of the physical assets of companies (Spiceland et. al, 2011). In contrast to this, prudence allows the implementation of caution before making any decisions so that uncertainties can be mitigated. It enables to keep the risk at bay that helps in creating a better prospect for the companies in terms of reducing the level of risk.
In relation to Qantas Airways, the concept of prudence can be witnessed in its notes to financial statements. Firstly, the company has raised a provision for onerous contracts wherein the cost of satisfying the obligations of the contract surpasses the financial benefit that is expected to be attained. Therefore, the company has initiated a prudent step by raising a provision for such contracts in respect of customer contracts and operating leases on premises (Titman et. al, 2016). Moreover, such provision is recorded at the present value of the minimum of the anticipated expense of terminating the contract and anticipated net expense of continuing the contract (Horngren, 2013). Besides, prior to recognition of any provision, the company identifies every type of impairment losses that are related to the contract. Similarly, in the case of Virgin Australia, the concept of prudence can be easily witnessed. For instance, the company has initiated a provision for doubtful receivables in its financial statements in order to ensure that its income is not overstated. Such provision for doubtful receivables in relation to trade receivables is utilized to record impairment losses unless the company is satisfied that no further recovery of the amount is possible. At such point, the amount is regarded as irrecoverable and is written off in opposition to the financial assets directly.
Therefore, the inclusion of prudence in the conceptual framework plays a vital role in addressing various disparities in corporate reporting. Moreover, other qualitative characteristics incorporated in the conceptual framework are also assisted by the inclusion of prudence because it necessitates one to be prudent or cautious in the case of uncertainties (Douma & Hein, 2013). This can not only enhance the reporting standards but also assist the users in effective decision-making, as they can achieve a true and fair view of the company’s performance.
It can be observed from the annual reports of both companies that they comply with the principles provided under the ASX (Australian Stock Exchange) and Corporate Governance Principles and Recommendations. In addition, both the companies earn a maximum portion of their revenue from airline business and have shown a significant amount of compliance with the AASB standards and conceptual framework for corporate reporting. The manner of business and operation of both the companies indicates that both the companies have done reasonably well in terms of business (Davies & Crawford, 2012). By shedding light on both these companies it is clear that both the companies have effectively adhered to the rules and regulations defined by the ASX. Furthermore, both the companies have an equal number of committees to guide the company in the right direction. Besides, they even have same committees that monitor the companies’ operations effectively (Whittington, 2008).
In addition, Qantas Airways have also shown a significant conduct of business activities and it always endeavors to surpass its problems that are associated with the corporate governance process. Nevertheless, the company has ensured effective efficacy from its overall operations that depict the powerful standards of the company when it comes to survival from the long-term point of view (Qantas, 2016). In short, Qantas have highlighted a strong urge for ethics and governance. it can be visualized from the operations of the company and the manner it complies with the standards.
Similarly, when it comes to Virgin Australia, it also endeavors to comply with the corporate governance principles and ensures transparency, morality, and integrity as well. This assists the company in overtaking its competitors easily (Virgin, 2016). Even Qantas adheres to the principles that are laid down by the ASX ensuring that all the activities are in harmony with the standards. However, unlike Qantas, Virgin does not prioritize corporate governance problems. Instead, it makes sure that its shareholders are provided timely and accurate information that can assist them in proper decision-making. Therefore, the major stress of Virgin is to look after the shareholders and maximize their wealth (Virgin, 2016).
It can be stated from the analysis of the annual reports of both companies that proper disclosures are very significant in the current scenario because of the complexities prevalent in the financial world. Furthermore, both companies belonging to airline industries have to encounter the innumerable amount of transactions and therefore, if details of every material transaction are not made accessible to the users, then the companies may fail to progress according to their desired goals (Zeff, 2007). Besides, it is significant for companies to terminate meaningless information from their financial statements as it does not play any role in decision-making and distorts the annual reports as well (Choi & Meek, 2011). Meaningless information distorts the information in the annual report and makes it complicated. Lastly, it must be noted that both companies must comply with the updated AASB standards so that the users are satisfied with their operations and it results in a higher efficiency level as well. The AASB standards help in framing the future of the operations because it provides a specific course of action. Hence, the management must continuously update with the requirements and policies.
Conclusion
An in-depth evaluation of the annual reports of Qantas and Virgin Australia clearly concludes the fact that disclosures have become extremely significant in shedding light on the aspects of the company. Furthermore, companies must address qualitative characteristics like materiality, relevance, etc so that users can make proper decisions based on the information achieved by them. In addition, the concept of prudence must also be implemented while preparing financial statements because it assists in mitigating uncertainties, thereby enhancing the level of corporate reporting as a whole. Nevertheless, both Qantas and Virgin Australia have not only complied with AASB standards and conceptual framework but also included prudence in their reports to address disparities. Going by the nature of the companies it can be ascertained that proper disclosures lead to the betterment of the entire business as it creates transparency and provides meaningful information. Further, the stakeholders are more concerned with the company that has better disclosures policy.
References
Bushman, R & Piotroski, R 2006, ‘Financial reporting incentives for conservative accounting: The influence of legal and political institutions’, Journal of Accounting and Economics, vol. 42, pp. 107-148.
Choi, R.D. & Meek, G.K 2011, International accounting, Pearson .
Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Douma, S & Hein, S 2013, Economic Approaches to Organizations. London
Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.
International Accounting Standards Board 2010. Conceptual Framework for Financial Reporting, viewed 12 August 2017 <https://www.aasb.gov.au/admin/file/content102/c3/Oct_2010_AP_9.3_Conceptual_Framework_Financial_Reporting_2010.pdf
Lapsley, I. 2012, Commentary: Financial Accountability & Management, Qualitative Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.
Meeks, G & Swann, G.M.P 2009, ‘Accounting standards and the economics of standards, Accounting and Business Research’, International Accounting Policy Forum, vol. 39, no. 3, pp. 23-44
Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK
Merchant, K. A. 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting Review, vol. 24, no. 3, pp. 1-34.
Needles, B.E. & Powers, M 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co.
Northington, S 2011, Finance, New York, NY: Ferguson’s.
Qantas 2016, Qantas 2016 Annual report & accounts, viewed 12 August 2017, https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf
Spiceland, J., Thomas, W. & Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin,University Press
Titman, S, Martin, T, Keown, AJ & Martin, JD 2016, Financial management: principles and applications, 7th edn, Pearson Australia, Vic.
Virgin 2016, Virgin 2016 Annual report & Accounts, viewed 12 August 2017, https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2016-asx-financial-report.pdf
Whittington, W J 2008, ‘Harmonization or Discord? The critical role of the IASB conceptual framework review’, Account. Public Policy, vol. 27, pp. 495–502
Zeff, S.A. 2007, ‘Some obstacles to global financial reporting comparability and convergence at a high level of quality’, The British Accounting Review, vol. 39, pp. 290–302
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