Financial accounting and corporate reporting are two important aspects of business studies as both the elements require consideration of several business-critical aspects. CF, on the other hand, is considered to be the standards and guidelines for the preparation of financial statements as per the given norms and principles. Since the financial reporting adds value to the firm’s brand and market positioning to an extent, it becomes imperative for the management to prepare the same with utmost efficiency and complying with all the existing and applicable prescribed guidelines (Herath, McCoy, Lucas, and Mensah, 2011). It may be stated that a successful and effective adoption and application of theories of enhances the quality of financial statements in terms of recognition of financial items, their respective treatments in the books of accounts and also their disclosure in the financial statements (Fasb.org, 2018).
The conceptual framework developed and issued by the International Accounting Standards Board (hereinafter may be referred to as “IASB”) is regarded as the foundation of corporate reporting by way of laying down the standards guidelines as to the treatment, presentation and disclosure of various financial events and transactions (Haslam, 2017). Since the financial information and data are technical, it may not be understandable for all the stakeholders associated with the business. On the other hand, financial statements provide an estimate about the overall financial health of the business in which stakes of all the stakeholders are invested. Therefore, it becomes a very challenging task for the management to prepare financial statements abiding by certain guidelines and standard which primarily enhances the quality of disclosure and understandability of the financial statements. There arises the need of CF which pronounces directions as to how the different financial events and transactions should be measured, recognised and recorded in the books of accounts. The primary objective of CF, therefore, revolves around making the financial statements relevant, reliable, comparable and timely for the prospective investors and stakeholders (Kampanje, 2013).
The report attempts to analyse the implication of CF in the context of a business, as stated earlier and for the purpose, AMA has been chosen. AMA is an Australian company specialised in the operation and development of complementary businesses in the automotive aftercare market. The focus area of the business is the wholesale vehicle aftercare and accessories segment including the cable accessories and automotive component remanufacturing. The company has received several awards for providing quality services in the specialised segment. As per the annual report of 2017, the company’s reported revenue has been $382,165 thousands with reported EBITDA of $37,205 thousands and total asset base of $292,396 thousand. The shares of the company are listed in Australian Stock Exchange (ASX) and trading at 97.00 cents as on 30th June 2017 (https://amagroupltd.com, 2018).
Analysis of CF requires the identification of basic elements of financial statements which are consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and also the notes to the financial statements. Annual report for the year 2017 has been considered for AMA to identify those elements therein and thereafter the necessary analysis and evaluation has been carried out. The subsequent sections of the report briefly present such analysis and examination.
CF requires few compliances to be met in terms of the objective of financial statements, qualitative characteristics of financial statements, the definition, recognition and measurement of the elements of financial statements and also the) concepts of capital and capital maintenance. To explain further, it may be stated that the CF demands that the elements of financial statements a mentioned earlier are prepared in accordance with the applicable laws of the country. In addition, the definition, measurement, recognition and treatment of various financial events should be performed as per the standards set for the purpose and these should be appropriately disclosed as laid down in these directives and standards (HAMPTON, 1999). Besides, it may also be observed that principles of capital maintenance (be it the financial capital or the physical capital) has also to be adhered by the firm. In other words, how the assets and liabilities are valued and re-valued and corresponding increase or decrease in such values affect the equity of the firm should be properly measured in the backdrop of relevant accounting standards (Lion, 2012).
In the case of AMA, it has been identified that the firm has included all the elements of financial statements in their corporate reporting purpose. Income statement presents the results of operations for the period; the balance sheet depicts the state of affairs of the business in terms of assets and liabilities position and so on. Since the accounts of the firm are being audited by the independent auditors with an unqualified opinion (as may be reflected in the annual report), it may be construed that the financial statements are prepared in accordance with the Australian Accounting Standards (AASs) and also the Corporations Act 2001 (https://amagroupltd.com, 2018). Moreover, it may also be observed that the business has presented an explanation of all critical items of financial statements in the form of notes which occupy a major portion of the annual report.
As per the CF, the financial statements should contain certain qualitative characteristics. These are relevance and faithful representations. However, in order to be a faithful representation, the statements should also be reliable and timely for the stakeholders. Also, there remains a concept of materiality that should be abided by the management while preparing the financial statements If any material elements are omitted from the booms of accounts, the statement may not depict the true and fair view of the state of affairs of the business and hence may not be faithful (He, Evans and He, 2016).
In the case of AMA, it has been noted that the company maintains policy charters and manuals which clearly lays down the principles of corporate governance including the guidelines for the preparation of financial statements. There have been declarations by the directors that the company has not adopted AASB-9: Financial Instruments which will be applicable later on. However, the same may not have any material impact on the group’s financial statements. In addition, there have been events after the balance sheet date on account of the declaration of fully franked dividend. The management has accordingly treated and disclosed the same in the books of accounts as the same as a material impact and significant bearing on the business for the given reporting period.
CF provides for certain approaches for enhancing the qualitative characteristics of financial statements. These are comparability, verifiability, timeliness and understandability. It is to be noted that comparability would primarily mean the compliance with respect to IFRS which is a set of harmonised accounting standards. Verifiability should be read in conjunction with the consistency framework which suggests that the accounting principles and methods and valuation techniques should be used consistently on a yearly basis. Timeliness, on the other hand, denotes the punctuality in terms of reporting (Jhunjhunwala, 2014).
The report investigates that the AMA management has prepared the financial statements in accordance with IFRS as well, which has been clearly mentioned in their annual report. Moreover, there have not been any major changes in accounting policies or assumptions as asserted by the management. Also, the annual report has been published in three months after the balance sheet date, which may be regarded to be fairly timely (https://amagroupltd.com, 2018).
CF is alleged to be non-practical at times especially about its application in the reality when the definitions of main elements of financial statements are dependent on unspecified rules and conventions (Smith, Haniffa and Fairbrass, 2010). Moreover, the complex items like fair value measurement, deferred tax and tax credit have not been lucidly explained in the CF (Jhunjhunwala, 2014).
However, AMA has provided detailed disclosure regarding its fair value measurement for two larger acquisitions namely Geelong Consolidated Repairs and Smash Repair Canberra in its annual report (https://amagroupltd.com, 2018).
On the other hand, GPFR is the basis of financial statement preparation activity. Though there is a number of stakeholders with varying degree of their individual needs, financial statements serve as the base for all to assess about the basis and its capacity to act as per its pre-set objectives and corporate goals. The annual report of the firm exhibits that AMA has complied with all the relevant standards while preparing the accounts and also the necessary Interpretations in force as issued by the standards setters and regulators from time to time.
Conclusion
Based on the discussion and analysis performed in the preceding sections of the report, it may be construed that the CF acts as a support to the management’s responsibility of preparation of financial statement. Management should consider both financial as well as non-financial elements of the business while reporting the financial elements of the business sot the investors and CF will guide them in the process (Rihanna and Dr.B.Mahadevappa, 2011).
References
Fasb.org. (2018). The Conceptual Framework. [online] Available at: https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774#section_1 [Accessed 5 Dec. 2018].
HAMPTON, G. (1999). The Role of Present Value-based Measurement in General Purpose Financial Reporting. Australian Accounting Review, 9(17), pp.22-32.
Haslam, C. (2017). International Financial Reporting Standards (IFRS): Stress Testing in Financialized Reporting Entities. Accounting, Economics, and Law: A Convivium, 7(2), pp.105-108.
He, L., Evans, E. and He, R. (2016). The Impact of AASB 8 Operating Segments on Analysts’ Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), pp.330-340.
Herath, S., McCoy, R., Lucas, S. and Mensah, E. (2011). Understanding international financial reporting standards (IFRS): a review and evaluation of IFRS research. International Journal of Managerial and Financial Accounting, 3(3), p.304.
https://amagroupltd.com. (2018). Annual Report. [online] Available at: https://amagroupltd.com/wp-content/uploads/2017/09/Annual-Report-to-shareholders-1.pdf [Accessed 11 Dec. 2018].
https://amagroupltd.com. (2018). Our Businesses. [online] Available at: https://amagroupltd.com/our-businesses/ [Accessed 11 Dec. 2018].
Jhunjhunwala, S. (2014). Beyond Financial Reporting-International Integrated Reporting Framework. Indian Journal of Corporate Governance, 7(1), pp.73-80.
Kampanje, B. (2013). Bridging Gap between IAS 1 and IASB Conceptual Framework on Users of Financial Statements. SSRN Electronic Journal.
Lion, J. (2012). How the IASB Interacts with Domestic Standard Setters – A Network of Standard Setters. Australian Accounting Review, 22(3), pp.244-245.
Rihanna, R. and Dr.B.Mahadevappa, D. (2011). The Conceptual Framework Of Corporate Social. Indian Journal of Applied Research, 1(4), pp.40-50.
Smith, J., Haniffa, R. and Fairbrass, J. (2010). A Conceptual Framework for Investigating ‘Capture’ in Corporate Sustainability Reporting Assurance. Journal of Business Ethics, 99(3), pp.425-439.
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