Discuss about the case study Accounting Standard for Conceptual Framework.
Conceptual framework is used by Australian Accounting Standard Board to develop and evaluate accounting standard. Australian accounting standards are applicable to all the entities that are required to prepare financial reports under Corporations Act 2001. Many Australian accounting standard requirements are specific in nature that is they are applicable only to few specific Australian entities. Such requirement may require additional disclosure or may require reporting on regulatoryor other issues. Many entities in Australia are required to follow Australian accounting standard in preparing their financial statement as per Corporation Act 2001.
AGL Energy Limited
Conceptual framework deals with essential financial reporting issues like objective of financial statement, the users of the financial statement, the things that enhance the use of the financial statements. It also set out the rules and concept to recognize and measure these basics in the financial reporting. (AGL, 2015)
It can be clearly seen in the annual report of AGL Energy that all the Australian Accounting Standards have been adhered to while preparing the financial statement and also the company has complied with the conceptual framework. It is the primary responsibility of the management of the company to comply with Australian accounting standard while preparing the financial statement of the company. This has been clearly complied with as it can be seen in the annual report, in the director’s declaration. The directors are responsible for preparation of Concise Financial Reports in accordance with Accounting Standard AASB 1039 Concise Financial Reports and Corporation Act 2001 and for such internal control as may be deem fit for adherence to the standard. As per the declaration made by the director of the company , Jeremy Maycock, the company’s financial statements and the notes thereto have been prepared in compliance with Accounting standard AASB 1039 Concise Financial Reports( see Figure 1). The annual report has also mentioned the same in its notes to concise Financial statement in its note 1 mentioning on that have prepared its consice financial statement on the basis of the accounting standard ( see Figure 2)
Figure 1
Figure 2
As per AAS 8 Operating Segment, the companies are required to report all the information of its segment in a similar manner in which it uses it for internal purpose for reviewing its segment performance. As per the standard any change in the segment are required to be reported in the annual report. The company has complied with the standard. The company has reported the change in the form of segment restatement as AAS8 (See Figure 3)
Figure 3
As per Australian Accounting Standard AASB 139 Financial instruments-Recognition and Measurement, derivatives are to be reported at fair value in the financial statements. Changes in the fair value of the derivative in between the reporting period are to be recognized as an adjustment to hedge reserve in the equity if they are effective hedges. Changes in the fair value of derivative in between two reporting period are to be adjusted to the profit and loss account if such changes are recognized as ineffective hedge. The standard further clarifies that the derivative will be regarded as an effective hedge if the change in the fair value of the item hedged and change in the fair value of the derivative considerably counterbalance each other. Other derivatives will be regarded as ineffective hedge. The company uses derivative largely to manage the risk involved in the price of electricity and risk involved in fluctuation of foreign exchange and interest rates. Thus the company consider the transactions as hedging in nature and speculative in nature. As per AGL Energy its most of the derivatives are ineffective hedges as per the definition provided by the standard AASB 139. Hence the company has recognised the profit of $237 million per tax and $166 million post tax inits profit and loss account.(AGL,2015)The company had similar profit of $40 million pre-tax and $28 million post tax in its profit and loss account in previous financial year. The company has also reconciled the financial position movement in derivative balance and shown it in the annual report thereby complying with the standard requirement. (See figure 4).
Figure 4
The company has also further made statutory disclosure of showing AGL’s annual performance of past five years have been shown in the report which is required by the standard. Also for adoption of revised AASB 119 Employee Benefit financial year 2013 figures have been restated. (Julia Irvine, 2015). The company has prepared its financial statement as per the laid down standards are also verified by the auditors of the company. The company auditor has acknowledged the same in its auditors report. However, as per AASB 1039 the company is required to mention and disclose everything in its concise financial report too. The company has failed to comply with that part of the standard which is reflected in its auditor’s report. ( see figure 5)
Figure 5
The company has too complied with all the Australian Accounting Standards while preparing the financial statements. The company has made all the necessary disclosure as are required by the Australian accounting standard to be made in its annual report. The company has specifically mentioned in its annual report the financial statement have been prepared as per Corporations Act 2001and other authoritative pronouncement by Australian accounting standard board and International Financial reporting standards. It has further also adopted all new and amended Accounting Standards and the interpretations as issued by AASB from time to time. Further the company has disclosed in its notes to financial statement that where the company is of the opinion that the new standard or the amended standard has no significant impact on the group then the same has not been followed( See figure 6).
The company has also incorporated AASB 101 ‘Presentation of financial Statements’ in its report stating that the financial statement of its consolidated entities also complies with the International Financial Reporting Standard. Origin Energy has made a point to mention the fact in its remuneration report that the remuneration and the related party disclosure have been prepared in accordance with Corporations Act 2001 and in compliance with AASB124 Related party disclosure. Moreover, the director has declared that financial statement has been prepared based on the conceptual framework and per the directions and regulations of Australian Accounting Standard Board in its annual report.(Julia Irvine, 2013)
Figure 6
Thus Origin Limited has adhered to the Australian accounting standard while reporting its financial statement in its annual report and has also complied with the new or amended standards where such standard has significant impact on its financial statement.
AGL Energy and Origin Energy, both the company has got unmodified opinion from its respective auditors. Though the company belong to same industry there annual report and their style of preparing the financial statement vary significantly. Origin limited has made sure to mention the compliance of Australian Accounting Standard in quite a few places where AGL Energy has failed to do so. (Australian Government, n.d.)However, there were few instances where the annual report of AGL Energy appeared to be more descriptive as compared to its competitor’s annual report.
AGL Energy has complied with AASB 1039 Concise Financial Reports. It has also made notes to Concise Financial Statement in its financial report. The same is not present in the annual report of Origin energy. Neither any disclosure has been made for non-compliance of the same in its notes to financial statement. AGL energy does not mention compliance of AASB 124 Related party disclosure in its Remuneration report. It does not provide a note that the remuneration and all the related party transaction have been made in compliance with Australian accounting standard board 124. (Spiffy D, 2011)Whereas Origin Energy has made a point to mention the same in its notes to remuneration report. Origin Energy has mentioned in its annual report that it has also considered new standards and amended standards while preparing the financial statement of the company.
It has further mentioned that where the new standard or the amended standard has no significant impact on the group profit, according to the directors, then the same have been ignored and mere disclosure of the such departure from the standards have been made in the annual reports. For example, AASB 9 Financial Instrument proposes to make a change in classification and measurement of financial instrument and AASB 15 Revenue from Contracts with Customers have introduced this important principle where the entity recognise revenue to show the transfer of intended goods to be transferred in an amount that will reflect the consideration that the company is expects to be received in exchange of the goods or services. (AASB Framework, 2013)Apart from these two standards the company is assessing the other amended or new standards and assessing the impact of such standards. Having read that, one will absolutely find the absence of the same in the annual report of AGL Energy. AGL Energy has failed to disclose that it has complied with the new or amended Australian accounting standards.
Origin Energy Limited has further specified about compliance with AASB 101 Presentation of Financial Statement. It has mentioned that the financial statements of its consolidated entities have been prepared in accordance with the international financial reporting standard. AGL Energy, despite of having many consolidated entities has failed to specify about the compliance of AASB 101in its financial statement. Origin Energy Limited has mentioned about compliance of international financial reporting standards in quite a few places. For instance, about its non-IFRS measures.(Julia Irvine, 2013)AGL Energy has not mentioned at all about its non-IFRS measures. Neither the company has mentioned in its financial statements that it has complied with international financial reporting standards while preparing its annual report. The AGL Energy Company has also not made full disclosure in its concise financial reporting. The Concise Financial Reporting calls for full disclosure of the facts but the company has not fully complied with the standard and hence the same has been mentioned in the auditor’s report suggesting that reading the concise financial report cannot be substituted with reading the full audited financial reports as the investors or the shareholders can miss out on important disclosures that the company has not otherwise made in its concise financial reports.(Graham Holt, 2016)
Prudence appears to be a very simple word with dictionary meanings like careful, wise, cautious, well-judged, circumspect etc. In financial reporting prudence is important as the users of the financial statement expect that the management is careful while arriving at the figures that are presented in the annual accounts. Also management is expected to apply its judgement wisely because many figures reflected in the financial statement are based on certain estimation. But if the same word is included in the definition of conceptual framework then it becomes equally complex to interpret in a correct manner. Prudence is nothing but to make caution judgement about losses in the event of uncertainty, as per IASB. In the absence of this word, wrong-doers are taking advantage of the opportunity. (AASB Framework, 2013)
Where ever making judgement is required management see this as a chance to overstate the performance of the company to avoid the negative consequences or to understate the performance which will provide them with the reserve to run the company smoothly in future. Investors using such financial statement for investing their hard earned money often land up making wrong investment and end up miss-allocating their funds.(Spiffy D, 2011) The concept of prudence will help to align the interest of shareholders with that of the mangers. The concept of prudence can help to balance the optimistic bias of the companies. If the prudence is included in the definition of conceptual framework then it would help to achieve neutrality in application of accounts. (Sally Ngeno, n.d.)
Conclusion
The company should prepare its financial statement complying the conceptual framework and accounting standard laid by AASB keeping in mind the concept of prudence. It is reflected from the above analysis that the Company has complied with the all the requirements of the standard.The compliance of standard is providing fair presentation of the companies’ accounts and operation. The company should maintain the same level of compliance in future as well. The policies and standards of the company are also in compliance with AASB and IASB. Also the financial statements of the company have been prepared in compliance of corporation act, 2001.
References
Financial Times,n.d.,Definition of Conceptual Framework,[online], Available at https://lexicon.ft.com/Term?term=conceptual-framework, [accessed on 2-08-2016]
AGL, 2015, Annual Report,[online], Available at https://www.agl.com.au/-/media/AGL/About-AGL/Documents/Investor-Centre/150826_AnnualReport_1466512.pdf?la=en, [accessed on 2-08-2016]
Origin Energy, 2015,Annual Report,[online], Available at https://www.originenergy.com.au/content/dam/origin/about/investors-media/docs/annual-report-2015.pdf, [accessed on 2-08-2016]
Graham Holt,2016,Bringing clarity to the conceptual framework,[online], Available at https://www.accaglobal.com/in/en/discover/cpd-articles/corporate-reporting/holt-jan16.html, [accessed on 2-08-2016]
Rachel Knubley,2014,Staff Paper,[online], Available at https://www.ifrs.org/Meetings/MeetingDocs/IASB/2014/May/AP10I-Conceptual%20Framework.pdf, [accessed on 2-08-2016]
Alfred Wagenhofer,2015,The never ending story of Prudence,[online], Available at https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/never-ending-story-prudence-and-ifrs, [accessed on 2-08-2016]
Julia Irvine,2013,ISAB lacking is prudence,[online], Available at https://economia.icaew.com/news/july2013/iasb-lacking-in-prudence, [accessed on 2-08-2016]
Julia Irvine,2015,ISAB reintroduces the concept of prudence,[online], Available at https://economia.icaew.com/news/may-2015/prudence-returns, [accessed on 2-08-2016]
Spiffy D,2011,The Prudence concept in financial accounting,[online], Available at https://hubpages.com/business/The-prudence-concept-in-financial-accounting, [accessed on 2-08-2016]
AASB Framework,2013,Amendment to Australian conceptual framework,[online], Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf, [accessed on 2-08-2016]
Australian Government,n.d.,Conceptual framework,[online], Available at https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx, [accessed on 2-08-2016]
Discussion Paper,2014,A review of the conceptual framework for financial reporting,[online], Available at https://www.ifrs.org/current-projects/iasb-projects/conceptual-framework/discussion-paper-july-2013/documents/discussion-paper-conceptual-framework-july-2013.pdf, [accessed on 2-08-2016]
FRC,n.d.,Conceptual Framework,[online], Available at https://www.frc.org.uk/Our-Work/Corporate-Governance-Reporting/Accounting-and-Reporting-Policy/Research/IASB-Conceptual-Framework.aspx, [accessed on 2-08-2016]
Sally Ngeno,n.d.,Evaluation of Conceptual Framework of Accounting, [online], Available at https://www.academia.edu/5992232/evaluation_of_conceptual_frameworks_of_accounting, [accessed on 2-08-2016]
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