For the purpose of this assignment, the annual reports of Dicksmith Holding Ltd and BHP Billiton Ltd have been opted. A brief comparison of both the companies will be done through this assignment in order to know whether material disclosure (whether financial or non-financial) have been done by both the companies because such disclosures are very significant for users of financial statements to make economic decisions considering the financial position and performance of the companies. Moreover, it is clearly observable through their annual reports of 2015 that both the companies have complied with statutory requirements as per the AASB conceptual framework. According to Everingham (2007) it has to be noted that due to a significant increase in the number of transactions, disclosure of irrelevant information has been deemed secondary for companies because these do not facilitate in decision-making. Considering the amount of transactions, companies have only disclosed that information which is relevant and reliable to users of their financial statements.
The annual report of Dicksmith Holding Ltd and BHP Billiton Ltd has been selected for the purpose of compliance with AASB requirements and conceptual framework. According to the disclosure standards required by the Australian Corporate Sector, every company is bound to comply with the qualitative characteristics of conceptual framework for reporting (IASB, 2010). Dicksmith Holding Ltd and BHP Billiton Ltd, being an ASX company also complies with such characteristics as observable through its annual report, 2015As per (Conceptual Framework (2016) these characteristics mainly include fair representation, relevance and materiality and the companies have successfully complied with these characteristics as per the conceptual framework of reporting.
(Source: Dicksmith Holding Annual report, 2015)
With respect to the corporate governance practices of the company, Dicksmith has committed to achieve highest corporate governance standards by conducting business according to the ASX recommendations outlined in the third edition of ASX Corporate Governance Principles and Recommendations. BHP Billiton has furnished reports not only in accordance with the Principles and Recommendations issued by ASX but also with the UK Corporate Governance Code that also includes the Turnbull Guidance stated in the annual report of BHP Billiton (2015). Furthermore, Dicksmith provides material information regarding the disclosure of information of material directorships that are currently held by it, and if the candidate is re-elected, then will he be regarded as an independent director or not and also a statement whether the Board of the company supports such re-election. Dicksmith has also provided material information regarding the disclosure of material risks as it is prone to many risks like malfeasance and fraud, safety and health of workplace, macro-economic risks including effects on consumer discretionary spending, cash management risks, reputational risks, competition policy risks etc. Hence, materiality characteristics with respect to conceptual framework have been followed by Dicksmith. Similarly, BHP Billiton also considers risk tolerance and materiality as prime considerations for decision making. It has disclosed material information regarding investments in low-emission technologies in order to minimize emissions from fossil fuels. Furthermore, in respect of material risks, BHP discloses competition policy risks, deflation of prices risk, sustainability risks, arrangement of leasing risks, water-related material risks etc.
In respect of relevance, Dicksmith provides several relevant details that have higher predictive value. For example, it provides relevant information regarding product efficiency levels under which minimum energy performance standards are necessitated for retailers so that the products that are sold in New Zealand and Australia have efficiency labels. Furthermore, it also provides relevant information regarding the compliance of amended and new accounting interpretations and standards in accordance with the AASB requirements. Relevant information to facilitate election and re-election of directors are also provided by Dicksmith to assist in decision-making (Dicksmith Holding, 2015). Considering the case of BHP Billiton, it has also provided significant information as per the AASB standards and conceptual framework of financial reporting (Conceptual Framework, 2016). It discloses relevant details about its KPI (key performance indicators) that helps to evaluate the financial performance and sustainable development of the company. It also discloses relevant information on the HSEC (Health, Safety, Environment and Community) trends like the evaluation of performance, alignment with requirements of other companies etc. Relevant information on climate change, variations in standards of corporate governance, commodity markets etc are also disclosed by BHP Billiton and stated in the annual report of BHP Billiton (2015). Hence, both the companies have also complied with the relevance characteristic of conceptual framework.
(Source: BHP Billiton Annual report, 2015)
Furthermore, both the companies have also portrayed a true and fair representation of their financial statements in their annual reports. From the annual report of Dicksmith, it can be seen that the CEO and Managing Director, CFO and Finance Director of the company have certified the truthfulness of the report. Provided in the annual report of Dicksmith Holding (2015) a written declaration has been given by the Board to these directors which states that the annual report has been formed on a sound basis method of internal control and risk management which is functioning efficiently, thereby giving a true and fair view of the financial statements. In note 2 of the financial statements of the company, directors have also stated that the consolidated financial statements have been prepared on the basis of AASB 101 (Presentation of financial statements) and also comply with IFRS. Similarly, the directors of BHP Billiton have stated in their declaration that the financial statements are true to the best of their knowledge. Notes set out in section 7.1 and 7.2 of the financial statements also prove that the annual report is in accordance with the Australian Corporations Act 2001 and UK Companies Act 2006. Therefore, both companies also comply with the faithful representation characteristic of conceptual framework.
In relation to Dicksmith, firstly it has followed the AASB 101 standard which states that the financial statements of the company are in compliance with the IFRS requirements. Secondly, the assets and liabilities related with employee benefits together with deferred assets and liabilities of the company are in accordance with AASB 119 Employee Benefits and AASB 112 Income Taxes respectively. Thirdly, assets held for sale are in accordance with AASB 5 Non-current assets held for sale and discontinued operations. Lastly, as per IASB (2010).the contingent assets and liabilities of the company are in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets.
In relation to BHP Billiton, it has also followed the AASB 5 Non-current assets held for sale and discontinued operations after the demerger of South32. It also follows the AASB 116 Property, Plant and Equipment (PPE). Fixed assets of the company are recorded at historical cost less depreciation and current assets are recorded at minimum of net realizable cost or value. It is observable through the company’s balance sheet that fixed assets are investigated and carrying values are disclosed. After investigation, these fixed costs are recorded at cost less provision for impairment. Stated in the annual report of BHP Billiton (2015) the impairment charges as evident from the annual report are US$2.8billion on Onshore US assets, US$409million on Nickel West assets and US$542million on goodwill and other intangible assets. It can be seen that the valuation of fixed assets of this company complies with the AASB standards.
(Source: BHP Billiton Annual report, 2015)
Hence, both Dicksmith Holding Ltd and BHP Billiton have complied with the conceptual framework and AASB requirements.
Under the prudence concept, amounts of income identified must not be overestimated and amount of expenses must not be underestimated. In other words, companies must not recognize an asset at a higher value than the amount which can be recovered from its sale or use. Similarly, liabilities must not be recognized at a lower value than the amount at which they are expected to be paid in future. As per A tale of Prudence (2015) management must be cautious and conservative in recording the assets while not underestimating the liabilities. The outcome of this surely must be conservatively stated financial statements. The International Accounting Standards Board recognized the importance of prudence in the year 2010 but as it conflicted with the concepts of neutrality, it had to be removed. In the year 2015, IASB further reinstated the prudence concept through an Exposure Draft in the conceptual framework for financial reporting. As per Melville (2013) another method of looking at the prudence concept is to record an income or asset transaction only when it is certain and record a liability or an expense transaction when it is probable in nature. With the support of this amendment in the conceptual framework (2016), companies will have to remain cautious in the events of uncertainties and risks. It can be concluded that this concept helps in removing predilections from the financial statements from the annual reports of Dicksmith and BHP Billiton, it can be observed that both companies have adopted the concept of prudence in their annual reports.
(Source: Dicksmith Holding Annual report, 2015)
In relation to Dicksmith, the identification of the company’s profits proves the inclusion of prudence concept when these depict risks and uncertainties about future outcomes. Furthermore, the assets which are held for sale are recorded in accordance with AASB 5 Non-current assets held for sale and discontinued operations instead of being identified as fair values. This is the concept of prudence where assets held for sale are not written up and instead written down to their recoverable values. Similarly, in relation to BHP Billiton, the impairment events which results in the write-down of an asset’s carrying amount is subject to the concept of prudence as this overcomes the normal distribution of a non-current asset’s cost above its efficient life. As per Brigham & Daves (2012) IASB has redressed the limitations that impacted the relevance of prudence but sadly, many companies find the applicability of prudence in accounting very difficult and hence more standardization is required.
Both Dicksmith and BHP Billiton have successfully complied with the conceptual framework of accounting and AASB requirements in their annual reports. In relation to corporate governance, Dicksmith follows only ASX Corporate Governance Principles and Recommendations while BHP follows both UK Corporate Governance Code and ASX Recommendations. On one hand, the majority of underlying earnings of Dicksmith originate from consumer electronic items while BHP mainly earns from Onshore US Assets including Petroleum, coal, copper and iron-ore. Both the companies have adopted a whistle-blowing policy on violations of code of conduct (Dicksmith Holding, 2015). Dicksmith has more advantage than BHP in case of corporate governance of the company because it has outlined several principles that must be followed by every person associated with the company. It not only ensures integrity and morality but also transparency in the annual reports. BHP mainly aims for a high corporate governance standard for enhancement of long-term value, that is short-term value is not given due importance. But due to this purpose, BHP benefits in the long-run as its policies and corporate governance standards have high flexibility for enhancing long-term value (Needles & Powers, 2013).
(Source: BHP Billiton Annual report, 2015)
The disclosure policy of Dicksmith is observed under the Corporations Act 2001 and Listing Rules. It must disclose any such information to the Australian Stock Exchanges that can have a material impact on its price value of shares. As per Dicksmith Holding (2015) a continuous Disclosure Policy has been established by the company which aims to ensure that every investor has equal and timely availability of relevant information relating to the company. Directors are bound to comply with this policy that includes delegation of responsibilities. If any officer or employee of the company becomes known to any material information that can be price-sensitive, he is bound to report of such happening to the disclosure officer (Company Secretary) of the company. Important announcements relating to the company is first made public on its website before complying with continuous disclosure policies.
In relation to the disclosure of BHP Billiton, it can be observed that for the purposes of IFRS, it has disclosed its demerged assets which are treated as discontinued operations of the company. It also discloses information relating to its operations in hydraulic fracturing done on federal lands. Chemicals and water used for such operations are also disclosed and laid down in the annual report of BHP Billiton (2015). As the company is committed towards open and transparent communications with public, government and investors, it discloses relevant information towards the CDP (Carbon Disclosure Project) which is a measure of activities that any company has undertaken for management of carbon. According to Kalpan (2011) disclosure of such information has resulted in an enhancement of the CDP score of the company since 2013. In relation to the market risks, company has disclosed quantitative and qualitative information and the primary market risks can be found in section 1.15.1 of the annual report while outstanding sensitive instruments (market risk) is consisted in note 23 of the financial statements.
(Source: BHP Billiton Annual report, 2015)
As per Carmichael & Graham (2012) in relation to royalty and tax liabilities, company has disclosed various provisions regarding such tax liabilities and contingent liabilities that include estimates of transfer pricing and other issues where uncertainty is present during the application of law. A disclosure committee is also appointed by the company that purposes to see whether the company has complied with disclosure requirements and other security dealings or not. In relation to political donations, contribution to public debate of policy matters that can impact the operation of the company is disclosed through AEC (Australian Electoral Commission) purposes, in the Director’s report. According to the UK requirements in the remuneration report, BHP is also bound to disclose relevant information regarding the Directors. AASB, IFRS and Australian Corporations Act 2001 also bound the company to disclose information relating with the Key Managerial Personnel. Information associated with the remuneration of directors including KMP, ordinary transactions and shareholdings etc are also required to be disclosed by BHP Billiton.
The information disclosed by BHP Billiton and Dicksmith are clearly of material nature and must not be ignored by the companies, whether it is compulsory or not, because it facilitates in better decision-making by the users of financial statements.
After a critical evaluation of the annual reports of both Dicksmith and BHP Billiton, it can be stated that disclosures that are of relevant nature must be disclosed by the companies because users can take an effective decision on the basis of them. However, it is recommended that any information that is not relevant must be discarded by the companies as it diminishes the usefulness of valuable information. As per Gibson (2010) with days passing by, there has been a significant increase in accounting transactions and if companies do not adhere to disclosure policies, then not only users will face problems, but the company itself will. It is highly recommended that companies must not only follow the conceptual framework for accounting but the disclosure principle must also be given significant consideration because it helps in reducing risks that have originated through such complexities in transactions.
It can be concluded that conceptual framework of accounting and disclosure principles play a key role in enhancing the usefulness of information present in the financial statements. Considering the example of Dicksmith and BHP Billiton, both have complied with such frameworks and AASB requirements. They have also successfully complied with the disclosure policies as laid down in their annual reports which surely must have been very useful to every user. On a whole, it can be said that conceptual framework, accounting standard requirement and the disclosure principle are altogether an essential ingredient of a useful financial statement. Companies adhering to such ingredient enjoy a good reputation in the market and are very less prone to risks.
A tale of Prudence 2015, Investor perspectives, [online] Available at: <https://www.ifrs.org/Investor-resources/Investor-perspectives 2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF> [Accessed 17 August 2016].
BHP Billiton 2015, BHP Billiton Annual Report and accounts 2015, [online] Available at: <https://www.bhpbilliton.com/~/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.pdf>[Accessed 17 August 2016].
Brigham, E. & Daves, P., 2012. Intermediate Financial Management. USA: Cengage Learning.
Carmichael, D.R. and Graham, L., 2012. Accountants Handbook, Financial Accounting and General Topics. John Wiley & Sons.
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Conceptual Framework., 2016. Conceptual Framework Pronouncements, [online] Available at: <https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx> [Accessed 17 August 2016].
Dicksmith Holding., 2015. Dicksmith Holding Annual Report and accounts 2015, [online] Available at: <https://www.dicksmith.com.au/da/> [Accessed 17 August 2016].
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