Contemporary Issues In Acounting

Disclosures are vital for creditors, investors, management and various other parties who are user of the financial statements as it helps in ascertaining the actual position of the company. However, it needs to be noted that the size of transactions has increased and therefore, it is of utmost importance that such must be properly disclosed. Proper rules and regulations is compulsory to give effect. It needs to be noted that financial, as well as non-financial information both plays a major role in shaping the destiny of the company and hence, both should be adequately highlighted (IASB, 2010). Going by the bulk of transaction and complexity some irrelevant information is discarded that does not play any part in the decision-making process.

For the purpose of this report, the two companies selected for analysis is BHP Billiton Ltd and Dicksmith Holding Ltd respectively. Considering the financial reporting disclosures in the (ACS) Australian Corporate Sector, details accommodated in the reports must fulfill the qualitative characteristics as per the conceptual framework of the companies. These characteristics include materiality, faithful representation and relevance. An item is regarded as material if it can influence the decisions of users (Albrecht et. al, 2011). By observing annual reports of both companies, it can be seen that the companies have followed various aspects of materiality like the ASX Corporate Governance Principles and Recommendations in association with the corporate governance of the company. Similarly, both companies are prone to risks and hence they have incorporated several material risks in their annual reports. The material risks disclosed by Dicksmith includes competition policies, consumer spending, exchange rates etc while BHP discloses material risks like price deflation, leasing arrangements, competition etc.

(Source: BHP Billiton Annual report, 2015)

(Source: Dicksmith Holding Annual report, 2015)

For faithful representation, companies must present a true and fair view of their reports. Thus, in the case of Dicksmith, it can be seen that every director whether managing director or CFO or CEO, provides a written declaration to the Board in accordance with Sec 295A of Corporations Act, 2001, that information in the annual report present a true and fair view. Similarly, in section 7.4 of the Statement of Director’s Responsibilities, a true and fair view of financial records must be presented by every director that is free from misstatements and frauds. With respect to relevance, both Dicksmith Ltd and BHP Billiton provide relevant information which pursues predictive value. For instance, in Dicksmith, relevant information is provided to security holders to assist them in deciding whether to or not to elect or re-elect any director (Davies & Crawford, 2012). Similarly, BHP provides relevant information associated with its greenhouse gas emissions in its annual report. Other qualitative characteristics like timeliness, comparability, understandability etc also forms part of conceptual framework for financial reporting and also followed by both the companies. Furthermore, the annual report of BHP Billiton complies with AASB 116 or IAS 16 that deals with recognition, measurement and disclosure principles associated to plant, equipment and property (BHP Billiton, 2015). An asset can be recognized when the future economic benefits flows from the productive usage of that asset. These benefits can be measured in various ways, thereby leading to asset recognition. Measurement of assets can be done by various ways like present value, historical cost etc. Fixed assets are measured at historical cost minus depreciation while current assets are measured at lower of net realizable value or cost. In the company’s balance sheet, net carrying amounts are disclosed and fixed assets are examined for impairment each year (Choi & Meek, 2011). According to the Notes to Financial Statements of BHP Billiton Ltd, fixed costs are disclosed at cost minus impairment provisions. The examination is conducted to assure that carrying values does not surpass estimates of recoverable values (BHP Billiton).

(Source: BHP Billiton Annual report, 2015)

The impairment charges depicted by the annual report of BHP Billiton are Petroleum (US$2.3 billion), Nickel West (US$0.4 billion), Goodwill (US$0.5 billion) and others (US$0.8 billion) respectively. The impairment methods consist of mathematical correctness of cash flow models, sensitivity evaluation etc (Melville, 2013). Hence, the valuation of fixed assets is in accordance with AASB requirements. According to notes of financial statements of Dicksmith, the assumed liabilities and acquired assets are recognized at their fair value but every deferred assets and liabilities related with employee benefit arrangements are measured and identified in accordance with Income Taxes (AASB 112) and Employee Benefits (AASB 119).

(Source: Dicksmith Holding Annual report, 2015)

Equity Instruments or liabilities associated with share based payment arrangements are measured according to AASB 2 (Share-based payment). Assets held for sale are measured in accordance with AASB 5 standards (Non-current assets held for sale and discontinued operations). Contingent considerations that are classified as an asset or liability are re-measured in accordance with AASB 139 (Recognition and Measurement of Financial Instruments).

The concept of prudence was eliminated in the year 2010 by the International Accounting Standards Board but in 2015, a revision was made in the conceptual framework which again included the prudence concept. This characteristic in the conceptual framework for corporate reporting requires the management to be alert in pursuing policies and estimations in such a way that the income and assets are not overstated and liabilities and expenses are not understated (IASB, 2010). The application of this characteristic eliminates bias from financial statements and reports but it must not affect the relevance and reliability of the presented information (Graham & Smart, 2012). This concept does not require companies to bisect their revenue figures or ignore a part of their physical assets and instead it requires the application of caution where uncertainty exists. It is applied in many areas of financial reporting like in the case of BHP Billiton, the impairment events that can result in the write-down of carrying value of an asset is considered prudent because this surpasses the regular apportionment of expenses of an asset (non-current) over its useful life (Kaplan, 2011). Similarly, assets held for sale in the case of Dicksmith are not recognized at their fair values and instead they are measured as per AASB 5 standards (Non-current assets held for sale and discontinued operations). This implies that assets which are held for sale are written down to their respective recoverable amounts but are not written up. This is the prudence characteristic of conceptual framework. The recognition of profits or revenues is also subject to prudence when these profits associate with the provision of services for a long period and portray uncertainties about future results (Gibson, 2010). As the recognition of unrealized profits is limited by the inclusion of prudence, it leads to contribution of reliability and relevance characteristics of corporate reporting (Christensen, 2011). Hence, prudence can be applied to achieve neutrality and it also helps investors in sorting out financial performance like cost of business and future problems prior to recognition of any profit signs (Libby et. al, 2011). All these inconsistencies that were prior to the inclusion of prudence are successfully addressed.

After observing the annual reports of both BHP Billiton Ltd and Dicksmith Holding Ltd, it can be seen that Dicksmith is the leading company when it comes to consumer electronics while most of the earnings of BHP comes from its iron ore activities that also includes coal and copper. Both the companies follow the ASX Corporate Governance Principles and Recommendations and both comply with the conceptual framework and AASB standard requirements. On one hand, the corporate governance principles not only assure transparency in Dicksmith but also assure morality and integrity which makes the company more beneficial than others. Similarly, on the other hand, BHP Billiton adheres to the business conduct and surpasses interest in governance in order to comply with various regulatory requirements. It has more energy exposure and flexibility that makes it more suitable for long-run or when contingencies create havoc in commodity markets (BHP Billiton, 2015). When it comes to disclosure, the security holders of Dicksmith are provided proper and timely information so that they can pursue their rights effectively. The functioning of Finance and Audit Committee ensures completeness, adequacy, timeliness and disclosure regimes that includes financial reporting to major stakeholders like the ASX, shareholders and ASIC, financial reporting uncertainties or risks, company’s accounting practices, disclosures and policies and the outcome and scope of external audits (Northington, 2011). According to the disclosure policy, Dicksmith is bound to disclose any information to the ASX that is not basically available and which can have a material effect on the share value. Under this policy, the CEO and Managing Director are bound to comply with continuous disclosure needs.

(Source: Dicksmith Holding Annual report, 2015)

The Company Secretary is called the Disclosure Officer of the company who serves as a major contact between ASX and the company (Libby et. al, 2011). This policy is easily accessible to the public at the investor centre in the website dicksmithholdings.com.au under ‘Corporate Governance’. Any announcements prior to continuous disclosure requirements are first made available on the website under ‘ASX Announcements’. A Disclosure Committee is appointed in BHP Billiton Ltd whose motive is to assist the CEO of the company in security dealings, periodic and regular disclosure needs that include review of information that can need disclosure to stock exchanges and overseeing the disclosure procedures so that the information is accurate, complete and timely disclosed (Brealey et. al, 2011). For IFRS purposes, the disclosure of demerged assets is done in the annual report as they are considered ‘Discontinued’ and hence material. Any information that is commercially sensitive and can cause reputational destruction is also disclosed taking into account various safety requirements. Disclosure about the hydraulic fracturing is made mandatory by the regulatory authorities that also include disclosure of water and chemical use, wellbore integrity etc (Horngren, 2013). Furthermore, responding to climate change is also a necessary step by the company and hence it openly discloses about the accountability performance against emissions of GHG with public, government and investors. If there is any conflict of interests among the directors, then it is the duty of non-conflicted directors to disclose about the conflict (Brealey et. al, 2011). A Document Review Committee is established so that it can approve the materiality principles applied for preparing disclosure documents, reviews the documents, finalizes the document and reports it to the Board. For high quality and relevant information to investors, a copy of market disclosure and communication document is made available at www.bhpbilliton.com/aboutus/ourcompany/governance (BHP Billiton, 2015).

(Source: BHP Billiton Annual report, 2015)

The UK requirements, AASB and IFRS etc requires the company to disclose about directors and KMP. Material information regarding the remuneration policy, ordinary shareholdings and transactions must also be disclosed (Everingham et. al, 2007). The Remuneration Committee has set a minimum threshold of $7500 in association with disclosure of payments to past directors. The disclosure of Board members independence, their interest in a transaction which prohibits them from voting helps third parties to place emphasis on the company (Horngren, 2013). Assumptions on asset’s useful life, amortization of intangible assets ensures stakeholders that the company complies with standard requirements. Thus, material information must be disclosed as it helps in decision-making (Brigham & Daves, 2012).

Going by the very discussion and the report, it can be aid that disclosures are of paramount importance because through it a prospective decision can be taken. With the due passage of time, business is becoming vulnerable to risks and hence any information can turn out to be crucial. Such risks can be reduced if proper decision is taken and highlighted. After an evaluation of annual of BHP Billiton and Dicksmith Holding it can be recommended that companies must provide an adequate emphasis to the principle of disclosure.

Therefore, it can be stated that the concept of disclosure is a strong tool in the decision-making process.  The comparison of the annual report of BHP Billiton and Dicksmith clearly indicates that judgment depends upon the level of disclosure. Moreover, conceptual framework is essential for a balanced approach because it helps the company to function smoothly. Overall, the disclosure principle and conceptual framework is a strong indicator as it helps in enhancing the goodwill and lays a strong foundation. The report above clearly signifies that both the companies have adhered to the principle of disclosure and is reflected in their annual report.

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