Conceptual framework provides information related to the financial accounting and the accounting framework of the company. Conceptual framework provides guidelines related to preparation of general purpose financial statements according to the Australian accounting standard board and international financial reporting standard (Deloitte, 2017).
The conceptual accounting framework describes about the financial accounting and reporting structure of the accounting framework. The accounting framework describes about the objectives, fundamentals which provides information related to function, limitation and nature of financial reporting. These are not prescribed by the international accounting standard board. This framework does not provide the standard that needs to be complied by the company but it provides rationale for not complying with the required standards (Deloitte, 2017).
The main objective behind preparing conceptual framework is to do some improvements in the financial reporting, that is the financial statements must provide the complete and a clear set of the concepts. To accomplish this, the board of the company has to continuously review the conceptual framework for its updating, gaps, and improvement (IFRS, 2014).
The main users of the conceptual framework of financial reporting are international accounting standard board and financial accounting standard board. These are called as major beneficiaries of the accounting framework. In an organization, there are many people who take their economic decision on the basis of the relationship with the company and the information as provided by the company in its financial statements. These users are as: equity investors, lenders, suppliers, trade creditors, customers, employees, government agencies, and public. These are the people who have held some part of their money into the company in the form of investments such as equity, preference and debentures. These can also be the one who provides some financial and investment advices to the company (AASB, 2015).
These financial users of the company have direct or indirect interest in the dealings of the company. Financial reporting plays a considerable role for the users which take their economic decisions on the basis of the financial dealings of the company. The reason behind this is, these users have some kind of financial interest in the company operations (AASB, 2012).
The needs of the financial users are as: in case of suppliers and the trade creditors, they require that the information regarding the company liquidity to ensure that whether the company would be able to repay the loan amount as owed by the company. While in case of lenders, they require information regarding the solvency ratio, to get ensured that whether the company is able to pay off its long term debts from the use of its short term and long term funds. Lenders and banks do this analysis before making them available funds to reduce the amount of nonperforming assets for it. While in case of customers, they need information related to the going concern of the business; this is only required by them if they are economically dependent upon the operations of the company. In case of employees, they require stability and profitability aspects of the company. This is done to increase the level of confidence of them regarding to join the company or not. In case of public authorities such as government agencies the management should provide information regarding the ability to regular payment of taxes and statutory duties. Besides this management should also need to comply with the corporate governance principles that is whether the activities done by the management are harming the environment and society or not. This leads to increase in the confidence of the financial users in making investment in the company (AASB, 2015).
The motive of the conceptual framework is to develop the knowledge base and provide objectives of financial reporting to the financial users of the company. This leads to increase in the participation from the financial users of the company in operational dealings and standard settings of the company. Besides this the framework provides the users knowledge related to the information of the company and limitations of the company. Hence it can be said by the above analysis that the conceptual framework leads the users of the company to make an effective use of the information provided in the financial statements.
To take an effective financial decision in the company, by the investor or the financial users, financial reporting must present the relevant information that is relevant for them in making rational investment and economic decisions. The general purpose financial statements of the company must provide the investors the relevant information to make them able to take investment decisions and economic decisions (Stickney, Weil, Schipper & Francis, 2009).
The main objective of general purpose financial statements is majorly to increase the focus of entities in case of financial reporting. The main objective of the financial reporting is the compliance of framework. The aspects of framework are as: elements of financial statements, qualitative characteristics, and recognition and management objectives of the management, the presentation and display of the financial reporting (Alexander & Archer, 2008).
Besides this, one of the considerable objectives behind preparing general purpose financial statements is that the company should prepare its financial statements by keeping all the users in the mind. This means that the company should not be biased in preparing its financial statements on the basis of its shareholders. Hence financial reporting should be done by keeping all the shareholders in the mind (Nikolai, Bazley & Jones, 2009).
General purpose financial statements fulfils the need of external users who are unable to retrieve the financial information from the company, hence they have to rely to the information as provided by the company management. Hence the general purpose financial statement gives instructions to the management that to include the information as required by the external authorities such as: tax authorities, banks, credit rating agencies (Macve, 2015).
It has been observed that the companies like Woolworths limited and wesfarmers limited does not follow the principle of full disclosure so to follow the confidentiality principle. This leads to increase in the insider trading and results into affecting the wealth of external stakeholders or the external financial users of the company. A company has majorly two types of shareholders that is, major shareholders and minor shareholders. It has been observed that the companies used to prepare its financial statements by keeping major shareholders in the mind, the reason behind this is they makes big investment in the company that makes the company in earning the greater profit (Lee, 2007).
By analyzing the above case, it is said that the wesfarmers limited and Woolworths limited do not comply with the basic requirements of the general purpose financial statements. Hence it should be kept in mind of management of both the companies about the basic objectives of the general purpose financial statements is to accomplish the overall needs and requirements of the financial users (Bellandi, 2012).
The objectives of the conceptual framework do not define clearly the difference between the financial reporting and financial statements. Hence it is the board decision that what information needed to be mention in the financial statements of the company to make the user of the financial statements to take an effective decision and to form standards for the company.
The conceptual framework of the company does not specify the requirements that should be mentioned in the financial reporting for the external users. Hence here the management has to set some standards to provide some additional information that can meet the requirements of external users such as, tax authorities, credit lenders, credit rating agencies and many more (Henderson, 2015).
After analyzing the above discussions over general purpose financial statements the suggestion can be made over the financial statements are as: the financial statement comprises of the historical data that is it is the net effect of the past transactions and dealings made by the company. Hence the company should include the effect of present value and future value to help the investor in taking the decisions for the future.
Apart from these factors, the companies like in the given case study of wesfarmers and Woolworths limited should mention all the information in their general purpose financial statements. This is required because it has been observed that the company’s actual position is shown only when it is liquidating or shutting down its operations, and the statement during the liquidation and during the normal course of the business are very conflicting. Hence it is suggested that the companies must follow a principle of consistency and disclosure principles to ensure the true and fair picture of the financial statements (Kolitz, 2016).
The financial statement must comply with the requirements of Australian accounting standard board and international financial reporting standard. In case of Woolworth limited and wesfarmers limited, they do not follow the complete requirement of disclosures. This means that some of the information is not shown in the general purpose financial statements to maintain the principle of confidentiality. This is a positive suggestion for the company as it has complied the principle of confidentiality, but in case of financial users it is considered as threat, as due to this, the investing and economic decisions of the investor are affected.
The main requirements of the Australian accounting standard board for the companies are that the companies must follow the principle of fair compliance and presentation of international financial reporting standards, going concern, accrual base of accounting, disclosure of material transactions, comparative financial statements, and consistency of presentation (Epstein & Jermakowicz, 2008).
In case of wesfarmers limited and Woolworths limited it has been observed that the companies do not follow all the requirements of the Australian accounting standard board. This means that the companies follow the principle of accrual basis of accounting, disclosure of material transactions, going concern, comparative financial statements, and consistency in applying the principles. The companies used to prepare comparative financial statements by considering the past year financial statements. But the companies’ fails to follow the principles of full disclosures which affect the true and fair presentation of the general purpose financial statements and make the users of the company presume that the company is biased towards the major shareholders of the company.
The information which are kept as confidential by general purpose financial statements of both the companies are that they show the overall profitability ratios of the company, but does not show about the profits made for a particular product or a branch. Hence this does not depict a true and fair picture of the company. Besides this, the companies show cost structure for the whole unit, but does not shows the cost structure for a particular product. Hence this does not provide a clear picture of the company to the financial users. This is the reason that majorly companies fails to control their cost structure and came into losses. Besides these factors, the wesfarmers limited and Woolworths limited does not follow the recommended policies for valuation of stock, provisions, depreciation method. This means that the company chooses the method according to their convenience which affects the true and fair picture of the financial statements of the company (Ruppel, 2010).
Conclusion:
After reading the report over conceptual framework and general purpose financial statements, it is said that the companies such as wesfarmers limited and Woolworths limited follow the main requirements of the Australian accounting standard board but fails to comply with the requirement of full disclosure. This does not make affect if there are some small non compliance to the standards, but it can affect the true and fair picture of the companies if all the non compliance factors are taken into consideration. Hence it is recommended for the companies to follow all the requirements to run effectively the business and win the trust of its financial users.
References:
Deloitte,. (2017) Conceptual framework for financial reporting 2010. Retrieved on 14th April, 2017 from https://www.iasplus.com/en/standards/other/framework
IFRS,. (2014) A review of the conceptual framework for financial reporting. Retrieved on 14th April, 2017 from https://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Discussion-Paper-July-2013/Documents/Discussion-Paper-Conceptual-Framework-July-2013.pdf
AASB,. (2015) Conceptual framework for financial reporting. Retrieved on 14th April, 2017 from https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
AASB,. (2012) Presentation of financial statements. Retrieved on 14th April, 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_09-07_COMPsep11_07-12.pdf
AASB,. (2015) Presentation of financial statements. Retrieved on 14th April, 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf
Stickney, C, P. Weil, R, L. Schipper, K & Francis, J,. (2009) Financial accounting: an introduction to concepts, methods and uses, Cengage learning, USA
Alexander, D & Archer, S,. (2008) International accounting/ Financial reporting standards guide 2009, CCH,USA
Nikolai, L, A. Bazley, J, D & Jones, J, P,. (2009) Intermediate accounting, Cengage learning, USA
Macve, R,. (2015) A conceptual framework for financial accounting and reporting, Routledge, New York
Lee, T, A,. (2007) Financial reporting and corporate governance, John wiley & sons, Hoboken
Bellandi, F,. (2012) The handbook to IFRS transition and to IFRS U.S. GAAP dual reporting, John Wiley & Sons, United Kingdom
Henderson, S. et al,. (2015) Issues in financial accounting, Pearson higher education, Australia
Kolitz, D,. (2016) Financial accounting: a concepts based introduction, Routledge, United Kingdom
Ruppel, W,. (2010) Governmental accounting made easy, John Wiley & sons, Canada
Epstein, B, J & Jermakowicz, E, K,. (2008) Wiley IFRS 2008: Interpretation and application of international accounting and financial reporting standards 2008, John Wiley & Sons, Canada
IFRS,. (2017) Conceptual framework. Retrieved on 14th April, 2017 from https://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Framework-Summary.aspx
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