Discuss about the Conceptual Framework and the Importance of Prudence.
Framework is required to be developed and organized before proceeding for any work. Therefore, in the work or process of accounting also framework is required and it is known by the name of Conceptual framework. It gives the platform to the company on which the company prepares the books of account for each and every transaction that has taken or will be taken and thereafter the same will be recorded. The framework so developed has been made available with the statutory compliances that the company has to do. Statutory compliances includes the compliance with the provisions of the Corporations Act 2001, with the provisions of the relevant and applicable accounting and auditing standards and any compliance that are required to be made in accordance with any law for the time being in force.
The main aim of the study is to define the importance of the conceptual framework in the accounting and presentation of the financial statements. How far the concept of prudence has affected the conceptual framework of accounting and there by how the presentation of the financial statements and other report have been affected. The report has been prepared with the help of the annual report of the company – Woolworths Limited. It is the company registered in Australia and listed in the Australian Stock Exchange. The company deals with all the products that are required by the customers in their daily life and have chain of stores operating in Australia and New Zealand. Through the analysis of annual report of the company the report has been prepared. At first the report has been started with the introduction detailing the main aim of the study and the structure of the paper to be followed. Then the conceptual frameworks along with the prudence have been discussed. Then the same have been discussed in detail in accordance with different parameters highlighted in the annual report. After the analysis, the study has been ended with the concluding paragraph.
In order to do any kind of work, lay out is required. Without any lay out if the work is done then the same will be done in very haphazard manner like as any construction activity taken by the contractor without knowing what is required to be constructed and where and by what time. Therefore, the framework plays very vital role in the completion of any kind of work in the perfect manner. The framework is generally explained in two categories. It may be theoretical or practical. For accounting both types of framework are given by the laws and statutes of the country in which the industry is operating (Anastasia, 2015 and Capital Markets Advisory Committee Meeting, 2013). It is referred by the name of Conceptual Framework of accounting. Conceptual framework of accounting is the layout of accounting which gives the manner and the way in which the accounting is required to be done keeping in consideration the requirements of various laws, rules, regulations and the relevant guidelines. It is referred to as the medium which deals with the measurement of assets and liabilities and the proper and adequate recognition of the income and expenses for the reporting period. Further the body created by the Government of Australia as setters of Accounting Standards has helped the accountants of the company to prepare the books of accounts. It will further make the financial statements useful for the company by following the three characteristics namely – faithful representation, reliability and relevancy.
Prudence is the concept in accounting which envisages that the accounting shall be made in true and fair manner without any bias. The concept of has started in the framework of accounting the year of nineteen hundred and eighty nine. At the very beginning of the concept, prudence has been as the degree of caution used while preparing the financial statements in making estimates for accounting mainly in the condition of neutrality. The same has been criticized by many people stating that the concept has been introduced for the purpose of understatement of net assets only and the net profit. In the year of two thousand and ten, in the concept of conceptual framework of the accounting, no reference have been made to concept of prudence wither in an implied manner or an expressed manner. But in the year two thousand and fifteen the concept of prudence has been included in the conceptual framework of accounting and is defined as to not understate the liabilities and expense and not to overstate the assets and incomes. The reason for inclusion is that the users of the financial statements and other have started arguing that the financial statements so prepared in accordance with the conceptual framework is not prudent because it is not neutral (Cooper, 2015).
For making the analysis as to whether the companies are complying with the conceptual framework of the company or not, the company – Woolworths Limited has been selected. The company is engaged in the retail sector which provides not only the food products but also other products which in required in the daily needs and therefore regarded as the company having the largest supermarket chain Australia and across New Zealand.
The annual report of the company for the year 2016 has been considered and has been analyzed in accordance with the following parameters:
Due to this the KMP’s and other executives might have decided to increase the turnover of the company or increase the earning per share of the company. This shows that the KMP’s get the self interest behavior and tends to manipulate the financial statements of the company.
It depicts that the company has complied with conceptual framework of accounting and that too with prudence.
Conclusion and Recommendation
The concept of prudence plays vital role in the preparation of the financial statements. The concept has provided the way through which the executives of the company will be at caution while preparing the books of accounts and resulting financial statements. In the report, the basis of conceptual framework has been explained and the reason of re inclusion of the concept of prudence has been detailed along with the historical developments of the same. For determining the importance of conceptual framework and prudence Woolworths Limited has been selected and its annual report has been analyzed through different parameters stating whether the company has complied with the same or not. To conclude, the report has come with relevant information to users.
Through the way of this report, it is recommended that the concept of prudence shall be considered as the part of conceptual framework and shall never be excluded.
References
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 29-04-2017
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 29-04-2017.
Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 30/04.2017.
International Accounting Standards Board, (2010), “Conceptual Framework for Financial Reporting 2010” , pages 16-21
Woolworths Limited Official Website, “Annual Report 2016” available on https://www.woolworths.com.au/ accessed on 29-04-2017.
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 29-04-2017.
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