The research is identified with interpreting the prevailing accounting standard in Boral limited and connecting the various types of issues existing as per GPFR. Some of the main issues for the discussions are seen with Issues in accounts receivable, Issues in provision for bad debt, Excess valuation of the assets, Evidence of leasing contingent and Issues in taxation/ expenses.
The findings on accounts receivable depicts that the group evaluates the accounts receivable as per fair value method. In addition to this, the “trade and other receivables” are initially recognized at the value of the invoice for the customer and subsequently which are recoverable from the customer’s based on “amortized cost using effective interest rate method”. The problems for bad debt are significant with the accounting judgments estimate and assumptions. It has been identified that for “cash, deposits, payables, short-term borrowings, loans and receivables”, the company does not consider carrying value approximates as per fair valuation method because of short-term nature of these liabilities and assets. The recognition of the leases by the company is based on the valuation standards prescribed as per AASB 16. This method is projected to set the required standard which is set up as per “significant portion of Boral’s operating leases” which are accounted for on balance sheet as a “right of use asset” and “lease liability” based on the acceptance of the standard on 1st July 2019.
Limitation
The main limitation of the research study is identified with the financial reporting issues only for Boral Limited.
Background
“General Purpose Financial Reporting” are issued to aid the investors and the creditors on several types of decision-making process. A set of GPFR includes “balance sheet, income statement, statement of owner’s equity/retained earnings, and statement of cash flows”. Certain financial statement is termed as GPFR as it entails basic financial statements which can be used by a “broad range of people for a broad range of activities” (Henderson et al. 2015). Financial reports such as “production flow” process and market analysis are not included in the GPFR. For instance, both creditors and investors are able to interpret their set of financial statements which is conducive in prediction of future performance and the ability of the company to pay off its future and current debts (Asic.gov.au 2018).
Scope
The main scope of the research is identified with interpreting the prevailing accounting standard in Boral limited and connecting the various types of issues existing as per GPFR. Some of the main issues for the discussions are seen with Issues in accounts receivable, Issues in provision for bad debt, Excess valuation of the assets, Evidence of leasing contingent and Issues in taxation/ expenses.
Issues in accounts receivable
The group has considered the account receivables at the “end of financial year”. It has been further identified that the group evaluates the accounts receivable as per fair value method. In addition to this, the “trade and other receivables” are initially recognized at the value of the invoice for the customer and subsequently which are recoverable from the customer’s based on “amortized cost using effective interest rate method”. Boral Limited requires all the customers to pay the accounts receivables with the settled payment terms. It has been further considered that the group is able to account for the collectability and recoverability of the trade receivables. The various types of provisions are raised from the normal course of business which is related to the claims made “against the group including legal, insurance and other claims”. At the time when the “recoveries are expected in respect of such claims, these are included in other receivables” (Boral.Com. 2018).
However, the main associated risk in terms of accounts receivable is absorbed with credit risk, which happens if the counterparty defaults under a financial instrument contract. In such a case, the group is exposed to severe “credit risk” because of financial activities including “cash at bank, trade and other accounts receivable and other financial instruments”. Additionally, in terms of “foreign currency risk” the group is susceptible to variations in the “foreign currency” based on the purchases of interest expenses, raw materials and non-Australian dollar borrowing which are seen in form of imported plant and equipment and various types of export related receivables along with translation of its investments in the overseas assets (Asic.gov.au 2018).
Issues in provision for bad debt
Company accounts for the provision for bad debts which it does not expect to collect and writes off from the income statement as an expense. As per the significant accounting judgments estimate and assumptions, the group has considered the recoverability and collectability of bad debts. There is a separate allowance made for “doubtful debts” which is made for the estimated irrecoverable trade receivables amounting because of past rendering of services and evaluated by reference to past defaulting experience. The company has been seen to be exposed to a high amount of bad and doubtful debts expense in 2017 with an amount of $ 2.5 million which is an increase from $ 1.1 million in 2016 (Asic.gov.au 2018).
Excess valuation of the assets
As per the depictions of the financial statements, the valuation method for product swaps and options is considered at fair value which is based on the calculation using closing “commodity market prices”. The “forward exchange contracts and cross currency swaps” are also valued at fair value based on a calculation using forward rates applicable to the respective currency and market derived spot rates. The interest rate swaps are also evaluated at per fair valuation method taken from the “present value of the expected future cash flows” for each instrument. It has been discerned that the “future expected cash flows” are taken from that yield curves construct as per the market sources and reflected in term of the maturity. Lastly, the fair value method is applicable for the equity securities which are represented with the market value of the underlying securities. Despite of the assessment of valuation method as per fair value for “commodity swaps and options, forward exchange contracts and cross currency swaps, interest rate swaps and equity securities”, the main issue in the financial report is depicted with “long-term borrowings, cash, deposits, payables, short-term borrowings, loans and receivables”. It has been identified that for “cash, deposits, payables, short-term borrowings, loans and receivables”, the company does not consider carrying value approximates as per fair valuation method because of short-term nature of these liabilities and assets (Christensen et al. 2016).
It needs to be further understood that the long-term borrowings are initiated recognized at “fair value less attributable transaction cost”. The “fair value on inception” for represents the present value for the anticipated “cash flows” using the interest rates which are derived from the market sources and reflected their term to maturity. Subsequently, the borrowings and loans are stated at amortized cost which are taken with the differences “between redemption value” being recognized in the “income statement” over the period of borrowings as part effective interest rate basis. As per the valuation specialists of the company, there were several “valuation methodologies” applied during the “preliminary PPA value inventory, property plant and equipment and identifiable intangible assets”. In addition to this, the company has partially complied to the methodologies against the generally accepted valuation techniques. Due to the absence of the valuation technique as per fair value for “long-term borrowings, cash, deposits, payables, short-term borrowings, loans and receivables”, the different types of risks have been seen in terms of interfering alongside borrowings, financial leases and derivatives. More evidently, the aforementioned areas have increased considerably, thereby posing greater extent of risk for the company (Warren and Jones 2018).
Evidence of leasing contingent
The recognition of the leases by the company is based on the valuation standards prescribed as per AASB 16. This method is projected to set the required standard which is set up as per “significant portion of Boral’s operating leases” which are “accounted for on balance sheet” as a “right of use asset” and “lease liability” based on the “adoption of the standard on 1st July 2019”. The standard would also result in reclassifying the functioning leases expenses into the depreciation and financial expenses. In addition to this, it is aimed to reclassify the “cash flows from operating into financing activities”. Based on the evaluation of the financial statements, and operating leases payments are expensed as “per straight-line basis over the term of the lease”. The exception follows where the alternate basis is more representative for the pattern of assistances which are derived from the leased property. The “minimum lease payments” further include fixed rate increases. Based on the financial statements, the company is bearing higher risk liability in 2017, compared to the previous year. This is evident with financial lease liability of $ 1.3 million in 2016, which increased to $ 9.1 million in 2017. It is also noted that the “financial leases” within Australia are subject to various kinds of lease terms for various maturity dates. The operating leases for the company has also increased which is going to pose a greater threat in 2018. The lease commitments in respect to the operating leases, which “are payable not later than one-year” increase from $ 66.5 million in 2016 to $ 99.6 million in 2017. The leases which are to be paid later than one year but not later than “five years” increased from $ 124.3 million in 2016 to $ 209.8 million in 2017 (Nobes 2014).
Issues in taxation/ expenses
Boral Limited accounts for the income tax expenses based on the “current and deferred tax”. The “current and deferred tax” are considered in the “income statement” “except to the extent that they relate to the items which are recognized directly in other comprehensive income or equity”. The “current tax” is expected to be payable or recoverable as per the “taxable income or loss” for the period and any judgment pertaining to tax payable in the previous years. The significant accounting judgments, estimates and assumptions has stated that there is a considerable amount of risk associated to income taxes for the company. The group is subject to “income taxes in Australia” and several other jurisdictions in which the company operates. The determination of amount of current and deferred tax by the group taken into consideration with the impact of “uncertain tax” positions and whether additional taxes and interests may be due. This assessment relates to the assumptions and estimates which are based on series of judgments about the future events. There are many occasions when the expectations have impacted the amount recognized on the balance sheet and the company has not recognized the temporary differences in the tax losses. Additionally, the current income tax expense has increased from $ 15.5 million in 2016 to $ 76.2 million in 2017. This is considered to pose a significant threat for the company in 2018 (Leuz and Wysocki, 2016).
The group considers the deferred tax on all provisional variances among the “carrying amounts of assets and liabilities” for the “financial reporting and taxation purposes”. The measurement of different tax relates to the “tax consequences” which the group expects to recover and that is based on carrying amounts of assets and liabilities. The different tax asset is recognized that extent which has probable “future taxable profits available against which they can be utilized” (Macve 2015).
In terms of recognizing accounts receivable, the company needs to make several improvements as far as the credit risk is considered, which happens if the counterparty defaults under a financial instrument contract. Management should keep a counterparty credit policy in place handy for mitigating any instance of credit risk. In addition to this, the company should also monitor the credit risk on an ongoing basis. The significant improvements which needs to be brought under the issues in provision for bad debt includes creating an additional allowance for recognizing the doubtful dates which is made as a result of the recoverable trade receivables amounting to increasing amount of rendering services and this should be incorporated as the starting point for any instance of default experience. In addition to this, the company should also seek to reduce the increasing amount of bad debt expense from 2016 to 2017. Excess valuation of the assets needs to be improved by implementing fair value-based valuation for the long-term borrowings. Furthermore, “cash, deposits, loans, receivables, payables and short-term borrowings” needs to completely assess the fair value approximate instead of using approximations.
Leasing contingent needs to include several options for minimizing the present lease expenses. The company needs to safeguard itself from any unprecedented income tax by regular review and monitoring of present income and depicting the areas through which it can offset any irregularities associated with income tax payment.
Conclusion
The important depictions on accounts receivable shows that the group has considered the account receivables at the end of financial year. It has been further identified that the group evaluates the accounts receivable as per fair value method. In addition to this, the trade and other receivables are initially recognized at the value of the invoice for the customer and subsequently which are recoverable from the customer’s based on “amortized cost using effective interest rate method”. Issues in provision for bad debt are significant with the accounting judgments estimate and assumptions. The group has considered the recoverability and collectability of bad debts. There is a separate allowance made for “doubtful debts” which is made for the projected irrecoverable “trade receivables” amounting because of past rendering of services and evaluated by reference to past “default experience”. The company has been seen to be exposed to a high amount of bad and doubtful debts expense in 2017 with an amount of $ 2.5 million which is an increase from $ 1.1 million in 2016. Despite of the assessment of valuation method as per fair value for “commodity swaps and options, forward exchange contracts and cross currency swaps, interest rate swaps and equity securities”, the main issue in the financial report is depicted with “long-term borrowings, cash, deposits, payables, short-term borrowings, loans and receivables”. It has been identified that for “cash, deposits, payables, short-term borrowings, loans and receivables”, the company does not consider carrying value approximates as per fair valuation method because of short-term nature of these liabilities and assets.
References
Asic.gov.au. (2018). 16-205MR ASIC review of 31 December 2015 financial reports | ASIC – Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-205mr-asic-review-of-31-december-2015-financial-reports/ [Accessed 29 Apr. 2018].
Asic.gov.au. (2018). ASICs Financial Reporting Surveillance Program | ASIC – Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/directors-and-financial-reporting/asics-financial-reporting-surveillance-program/ [Accessed 29 Apr. 2018].
Asic.gov.au. (2018). Our role | ASIC – Australian Securities and Investments Commission . [online] Available at: https://asic.gov.au/about-asic/what-we-do/our-role/ [Accessed 22 Apr. 2018].
Boral.Com. 2018. Accessed April 30 2018. https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-2017.pdf.
Christensen, H.B., Nikolaev, V.V. and WITTENBERG?MOERMAN, R.E.G.I.N.A., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning
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