The purpose of this paper is to discuss the consolidation of financial statements with regard to three group of companies including Macmahon Holdings Ltd, Mercantile Investment Company Ltd and Maca Ltd. This paper discusses how these entities report their comprehensive income, and compares and contrasts their practices with regard to disclosing their income. The paper also focusses on discussing if reporting of comprehensive income enhances information contained in financial statements information to be clear and useful to users. The paper also discusses certain issues regarding the current IFRS.
According to the 2017 annual reports of Macmahon Holdings Ltd, Mercantile Investment Company Ltd and Maca Ltd, comprehensive income has been appropriately and sufficiently reported. For instance, Macmahon Holdings Ltd starts by reporting its revenue for the 2017 financial year and aggregates it to other income, giving a total amount of $366.490 Million in revenue. It then subtracts the amount of its total expenses from this revenue figure, arriving at a gross loss of $5.22 million. After making an adjustment of other income and expenses such as tax, the company arrives at its total comprehensive loss for the year which amounted to $21.04 million (Macmahon Holdings Ltd 2018, pp. 56). Mercantile Investment Company Ltd and Maca Ltd also follow a similar reporting structure in their comprehensive income for the financial year 2017. It can therefore concluded that the reporting of comprehensive income of the three companies is in accordance to the GAAPs and IFRSs that are developed by IASB (Mercantile Investment Company Ltd 2018, pp. 74).
As discussed above, the three companies adopt a similar structure of reporting their incomes for the financial year 2017. For instance, all of them start by reporting on their revenue from operations and add other income to arrive at the gross revenue figure. Total operational expenses are then deducted from the gross revenues to arrive at the firms’ gross profit or loss, which is then subjected to other various deductions such as income tax expense in in order to arrive at the net or total comprehensive profit/loss for the companies during the year then ended (Macmahon Holdings Ltd 2018, pp. 56). Additionally, the three firms report on their basic as well as diluted Earnings per share (EPS) for the financial year 2017. Furthermore, the three companies have accompanied their income statements with disclosure notes that accompany the statements, as required in the IFRS. The three firms also have a fiscal year ending on June 30 (Mercantile Investment Company Ltd 2018, pp. 74).
Although the three companies have a similar reporting structure of their comprehensive incomes, there is one key difference observed on their 2017 annual reports. For instance, while Maca Ltd reports a net profit of $31.2 Million, Macmahon Holdings Ltd and Mercantile Investment Company Ltd report a net loss of $21.04 Million and $5.11 Million respectively (Macmahon Holdings Ltd 2018, pp. 56).
According to the 2017 three companies’ annual reports, their reporting of comprehensive income enables users to gain an understanding of financial information clearly. These disclosures are used by investors and other interested stakeholders in gaining an understanding of the financial performance of the companies for the year ended June 30, 2017. The notes accompanying the statement of comprehensive income have played a major role in bringing clarity to the users of such financial statements. For instance, according to note 1 in the 2017 annual report of Maca Ltd, income is measured at the fair market value of the consideration obtained after considering trade discounts and volume rebates allowed. This helps in enhancing clarity regarding the company’s reported revenues and other income (Maca Ltd 2018, pp. 45).
After doing a comprehensive research, it has been noted that information which is considered essential and useful is often concealed by companies through Boilerplating, and due to this, financial information is often presented poorly. Boilerplate disclosures are standardized documents, procedures or methods. According to research, most of Australian companies are not adopting the best practice of corporate governance (Tirole 2010, pp. 25). Most companies have instead resorted to boilerplate disclosures and the information given in their financial statements is meaningless, irrelevant and therefore not useful for key decision making by investors and other interested stakeholders. Most of companies opt to provide only little details about the risks affecting them. Furthermore, according to research, most companies indicate in their reports that they have a board of directors in which independent directors are outnumbered (Vernimmen, Quiry, Dallocchio, Le Fur and Salvi 2014, pp. 56).
Research indicates that only forty five (45%) of companies operating in Australia comply fully with best practices of corporate governance, as defined by International Financial Reporting Standards (IFRS). For instance, it was found out in research that seven percent (7%) of companies reported that the roles of chief executive and chairman were performed by same person, a situation which significantly defies the principles laid out by the standards. Furthermore, out of the 96% of companies which claimed to have formed an audit committee, only 89% were found to have set up their committees in accordance to the prescribed composition. According to IFRS, audit committees must be comprised of a minimum of three members, and only non-executive directors should be compromised most of whom are considered to be independent. Additionally, the chairman of audit committee must not serve a similar role in the board (Hillier, Grinblatt and Titman 2011, pp. 51).
Research also finds out that most companies do not disclose information regarding the systems put in place for reporting about management of risks as well as systems of internal controls. Only a few provide full information on approaches used in identifying, monitoring, managing and measuring risk. For companies which prepared these reports, it was not clear on how the systems of risk management worked, and if the reports generated were reviewed or audited (Kieso, Weygandt and Warfield 2010, pp. 45).
It has also been found out that most entities are not compliant with sustainability disclosures. Most of them adopt an approach of minimal compliance, thus end up providing the users and market with inadequate information which is irrelevant in decision making. Most companies in all industries were discovered to have significant weaknesses and deficiencies in the quality of information disclosed in regard to factors of sustainability that have impacts on their financial conditions (Hillier, Grinblatt and Titman 2011, pp. 51).
In conclusion, most companies are not providing adequate and useful financial data to financial statements users. Research indicates that investors rely mainly on more detailed financial disclosures in making key decisions regarding their financial investments. They use information in these disclosures in assessing the risk of a firm and its financial viability (Gapenski and Reiter 2008, pp. 14).
A Discussion on the Current Framework of IFRS with Regard to Operating Profit and EBIT
According to research, the current framework of IFRS does not sufficiently give a clear definition of operating profit and EBIT. Research points out that the framework has not clearly defined operating profit and EBIT. Researchers have argued that operating the current definitions of profit and EBIT are partly consequential to definitions of expenses and income as changes in liabilities and assets which cause changes in equity, and partly due to presence of two concepts of equity and profits, which are conflicting in the current IFRS framework (Epstein and Jermakowicz 2010, pp. 21).
Using the definition of operating profit as changes in net assets, two perspectives can be conceptualized. First, it is argued that there are no key differences in realized and unrealized elements recognized in the equity changes. In such a case, changes in assets and liabilities which can be measured objectively would be adequate for being recognized as income and expenses (Iatridis and Rouvolis 2010, pp. 57). Secondly, operating profit can be understood as the changes which are recognized and realized in the account of retained earnings. This account is considered different from reserves of revaluation and other adjustments for maintenance of capital. In such a scenario, changes which can be measured objectively in assets and liabilities are not considered adequate or sufficient for being recognized as operating income and expenses (Edwards 2013, pp. 12).
The current conceptual framework of IFRS deals only with the financial reporting objective as well as qualitative properties of useful and relevant financial information, and does not therefore contain a sufficient definition of operating profit and EBIT.
In accordance with IASB, profit/loss and OCI statement is primarily prepared for showing the financial position of an entity in a manner that can be used widely by users in assessing the entity’s net cash inflows in future. IASB defines profit or loss as all items of income or expense, with exclusion of adjustments of reclassification, except those income items or expense items that are recognized in OCI allowed by the IFRS (Peirson, Brown, Easton and Howard 2014, pp. 29). Profit and loss therefore, are considered the main source from which financial information is retrieved, regarding return made by an entity on its economic resources during a given period of operations. IASB defines OCI as other items of revenues and expenses and income that support a firm’s profit or loss, but are not generated from its operations (Deegan 2013, pp. 45).
IASB currently defines profit or loss and OCI in a matter that meets the various stakeholder’s needs. For instance, it gives the users of financial statements relevant information regarding changes in the resources of an entity, as well as its obligations. This assists users in understanding the return that has been produced or generated by the entity on its economic resources (Schroeder, Clark and Cathey 2009, pp. 18). Additionally, this is useful information for users in making assessments of the future net cash flow prospects of a company. This definition of profit, loss and OCI by IASB also helps stakeholders in determining the efficiency and effectiveness of the management of an entity in discharging their roles and responsibilities as regards use of firm’s resources. Users of this information therefore use it in deciding whether or not they should provide the entity more resources (Brealey, Myers, Allen and Mohanty 2012, pp. 11).
This definition also helps stakeholders in getting a clear understanding on whether an expense is incurred upon issuance of an instrument of equity by an entity, in exchange for some services. This helps stakeholders in determining how share based payments should be treated. For instance, upon acquisition of an asset in exchange for issuance of instruments of equity, an entity must recognize the asset provided that the criteria of recognition is met (Weil, Schipper and Francis 2013, pp. 23).
Conclusion
As discussed above, useful information is most commonly concealed by companies through their use of Boilerplating practices. Due to this, financial information is in most cases presented poorly. Additionally, the current framework of IFRS does not sufficiently define operating profit as well as EBIT in a clear manner. According to IASB, the profit and loss and OCI statement is primarily prepared for showing the financial position of an entity in a manner that can be used widely by users in assessing the entity’s net cash inflows in future.
References
Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting). Routledge.
Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.
Gapenski, L.C. and Reiter, K.L., 2008. Healthcare finance: an introduction to accounting and financial management. Chicago, IL: Health Administration Press.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy (No. 2nd Eu). McGraw Hill.
Iatridis, G. and Rouvolis, S., 2010. The post-adoption effects of the implementation of International Financial Reporting Standards in Greece. Journal of international accounting, auditing and taxation, 19(1), pp.55-65.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley & Sons.
Macmahon Holdings Ltd, 2018. Annual Report to shareholders. Retrieved from https://hotcopper.com.au/threads/ann-annual-report-to-shareholders.3635127/#.W5UIpiQza1s
Mercantile Investment Company Ltd, 2018. Annual Reports – Mercantile Investments, 2018. Retrieved from https://mi.com.lk/investor-relations/annual-reports/
Maca Ltd – AnnualReports.com, 2018. Retrieved from https://www.annualreports.com/Company/Maca-Ltd
Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-Hill Education Australia.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2009. Financial accounting theory and analysis: text and cases (p. 82). John Wiley & Sons.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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