Discuss about the Conceptual Framework and Inclusion of Prudence.
Conceptual framework of accounting have major role in the preparation and the presentation of the financial statements. It provides the basis on which the financial statements of the company are prepared and presented. In case there has no such framework then the company would have ended up with nothing. This framework requires necessary compliances with the applicable provision of the accounting standards, auditing and assurance standards and the requirements of the Corporations Act or any other law for the time being in force. For making the analysis, Suncorp Limited has been selected. The company is registered in Australia and listed in the Australian Stock Exchange and is engaged in the banking sector and the insurance sector and is regarded as the number one company across Australia and New Zealand for insurance business. From the annual report of the company for the current year ending, this report has been prepared. At first the conceptual framework characteristics have been detailed with examples from annual report and it has been ascertained whether the same has been followed throughout the annual report. Thereafter the concept of prudence has been explained and the effects on annual reporting have been discussed after its inclusion in the conceptual framework of accounting. At the end the concluding paragraph has been along with the recommendation as to whether the company adheres to the requirement of conceptual framework or not.
Framework is regarded as the main component for the success of the organization. Framework is defined as the plan or layout which will help to define what the organization is required to do so or how the organization can achieve the organizational goals by having the defined structure. Frameworks are of two types namely theoretical framework and practical framework (Anastasia, 2015 and Capital Markets Advisory Committee Meeting, 2013). Conceptual framework has been defined as the platform or the structure which allows the financial statements to be prepared in accordance with the relevant laws, guidelines, rules and regulations and importantly the Australian Accounting Standards and Auditing and assurance standard (Financial Statement Analysis, 2017). The company’s financial statements will be useless for the users of the financial statements if it does not contain any type of framework whether theoretical or practical. As per the norms, conceptual framework consists of three characteristics which includes faithful representation, relevancy and reliability. All the three characteristics though work separately but are linked by way of many reasons (IASB, 2010 and Weiss, 2014). If the financial statements are free from any error or bias then the data so obtained will always be reliable and thus will be relevant for the users of the financial statements.
Its adherence in the annual report of the company has been checked and confirmed from the various sections of the annual report of the company itself. These are as follows:
Remuneration Report – Remuneration report is the report prepared for apprising the users of the financial statements the amount of the remuneration paid to the key managerial personnel of the company. Key managerial personnel of the company are those persons, who have the authority to plan, manage, control and directs any activities of the company for the achievement of the organizational goals. In this report the basis of the remuneration structure so formed and paid is described. In the starting when the remuneration report is addressed to the shareholders it has been mentioned that the company is striving for its remuneration policy which is described as pay for performance which means that the key managerial personnel will be paid on the basis of the performance of their work. This pay for performance is generally described as the remuneration received for taking risk. It is because the key managerial personnel receives some part of payment only when their performance gives the best results to the organization and increases the turnover of the company. Thus, this is financial linked remuneration. The company also gives the long term and short term incentives described as LTI and STI. Long term incentives are determined with the value of the Total Shareholder Return (TSR) and short term incentives are determined by the score that each executive will get on the analysis of the financial and non financial achievements made by him during the year. Further the remuneration is recommended by the remuneration committee. The recommendation is made only after due consultation with the experts and consultants hired by the company in respect of any legal changes. The committee has met for the six times for the year ending 30th June 2016 and fully supported the board in fixing the remuneration and complete its responsibility towards the shareholders in relation to adequate and proper management of remuneration with prudence and to comply with the prudential standards issued by APRA’s (Annual Report, 2016).
GPFR – These are known as the General Purpose Financial Statements specifically for the users who makes their decision with respect to financing or investment. The company has adhered with the same as it has been mentioned in the statement of compliance that the consolidated financial statements for the year end are the general purpose financial statements and have been prepared in accordance with the Australian Accounting Standards and comply with the provisions and requirements of the Corporations Act, 2001 (Annual Report, 2016).
Inventory – The inventory consists of the derivatives and securities and the same have been valued at cost (Annual Report, 2016).
Accounts Receivable – The accounts receivables are covered under the head of “Receivables due from other banks” amounting $595 million in 2015 and $552 million in 2016. The receivables are only on account of the financial services made by the company. It has been mentioned in the annual report that no adjustments have been made for the collateral or any other security obtained and no impairment has been done as there are no chances in nit getting the recovery from the debtors (Annual Report, 2016).
Property, Plant and Equipment – The assets contribute under this amounts to $183 million in 2016 as compared to $191 million in 2015. The depreciation and the amortization expense have been charged to Profit and Loss statement and the expense has been allocated to different segments of the business including Insurance, Banking, Life and Corporate in order to provide the necessary disclosures as per the conceptual framework and in accordance with AASB (Annual Report, 2016).
Leases – The distinction has been made between the operating lease and the financial lease as per Note 37.19 of the financial statements. The operating lease has been written off as per the straight line method of amortization. It has been stated in the annual report that the AASB 16 on the Leases although are available for early adoption but the company has not incorporated the same as it will become mandatory for the year ending 2020 for the company. Thus, the company has followed the running AASB 117 and have followed the conceptual framework (Annual Report, 2016).
Taxation – The taxation part has been mentioned area wise. Firstly, Australia taxation has been mentioned where the tax is charged partly on the basis of product and partly on the basis of profits and therefore has different rates of tax like superannuation business is taxable at 15% and normal business at 30%. In the New Zealand, there is the corporate tax rate of 28% and is applied for all classes of business. Therefore, at the end the company has $462 million as tax liability for the year ending 2016 (Annual Report, 2016).
The above instances explain that the company has followed the conceptual framework of accounting and is in accordance with AASB.
Prudence is the concept which entails that the company shall provide and anticipate for all expenses and losses and shall not provide for any gains and incomes. Concept of prudence has been regarded as the major concept that shall be kept in consideration while preparing the financial statements of the company and finalizing it. Australian Prudential Regulatory Authority has defined the Prudential Standards which shall be considered by the company while framing the books of accounts (HAL official website, 2013). The fact of having APRA framework for level 3 companies have been mentioned in the annual report and it has been stated that the same will be applicable from the financial year 2017 and company is ready for it. The annual report has stated the instances where the requirements of APRA have been met:
Although the conceptual framework along with the AASB and APRA guidelines has been followed by the company but there remains the issue of Self Interest among the executive and the key managerial personnel of the company. The self interest is mainly in the remuneration. It is because the executives gets the remuneration on the basis of the performance and in order to improve the Total shareholder return or the financial performance of the company, the executives might get themselves engaged into the practice of manipulating the accounts by inflating the revenues or reducing the expenses. Thus, there may be the issue of self interest which might affect the conceptual framework of accounting.
Therefore, the prudence in conceptual framework can affect the reporting in the financial Statements of the company.
Conclusion
Conceptual framework of accounting is very important in preparation of the financial statements of the company and it provides the structure through which true and fair view of the financial statements can be prepared. The inclusion of the prudential norms has further gained the weight age in the conceptual framework of accounting. Although it may affect the reporting purpose by engaging the company in the manipulation or other mal practices in relation to the financial statements, but it’s key for financial statements. To conclude, the report has come out with new facts.
In view of the report, it is recommended to have many more prudential standards so as to make the financial statements representing the true and fair view and not letting anyone to do wrong practices.
References
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 24/04/2017
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 24-04-2017.
Financial Statement Analysis, 2017 available on https://www.business-solutions-and-resources.com/financial-statement-analysis.html accessed on 24-04-2017..
HAL official website, (2013), “Should Financial Statements Represent Fairly or be Relevant”, available on https://hal.inria.fr/halshs-00873959/document accessed on 24-04-2017.
International Accounting Standards Board, (2010), “Conceptual Framework for Financial Reporting 2010” , pages 16-21
Suncorp Official Website, “Annual Report 2015” available on https://www.suncorpgroup.com.au/investors/reports accessed on 24-04-2017.
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 24-04-2017.
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