Does the Current Accounting Framework meet the needs of the users of financial reports as prescribed in the objective of the Conceptual Framework of Accounting? How the conceptual framework revision to include Prudence is likely to address the disparity in Corporate Reporting is a requirement in your analysis.
Jetstar Airways Pty Ltd, also known as Jetstar is identified as the one of the low cost airline operating in the Australia, wholly owned subsidiary of Qantas Jetstar is recognized as low cost brand carrying 8.5% of all the passengers in Australia. The Airways is further seen to operate in the extensive home network and the regional international services from the Melbourne Airport operated by a diverse fleet Airbus of A320 family and the Boeing 787 Dreamliner (Qantas.com. 2017).
Virgin Australia Airlines Pty Ltd, formerly known as Virgin Blue Airlines is considered as the second largest after Qantas. The airlines company is seen to be based in Bowen Hills in Brisbane. The Airline Company was established in November 1999 operating in a single route. Virgin Australia Airlines has been expanded to serve in total 29 cities operating in various locations across Melbourne, Brisbane and Sydney (Virginatlantic.com. 2017).
The report is intended to evaluate the current accounting framework and to check whether the company’s financial report adheres to the requirements of the conceptual framework. The study has further measured how the conceptual framework has been able to include prudence to address the possibility of the disparity in Corporate Reporting. The report has been further able to make the discussions based on the consideration of their AGM report, total assets, tangible and intangible assets. It has been further able to suggest why shareholders should invest in the companies.
The consolidation of the accounting is arranged based in accordance with the “Australian Accounting Standards (AASBs)” formulated by AASB and Corporations Act 2001. The consolidated financial statement has been further seen to be prepared in accordance with “International Financial Reporting Standards (IFRS)”. These standards are further issued by the International Accounting Board. The consolidated financial statement of the companies has been able to present the functional currency of the company. It has been also noted that the financial statements of Virgin Australia Airlines Pty Ltd and Jetstar Airways Pty Ltd has been seen to be prepared based on the historical costs, except where assets and liabilities are stated at fair value, except in the areas where the assets and the liabilities has been stated based on the relevant accounting policies (Qantas.com.au. 2017).
The conceptual framework for “Revenue from Contracts” has been evaluated as per “AASB 15 Revenue from contracts with the customers”. The adoption of the conceptual framework for the AASB 15 has been able to determine the various types the consideration which are seen to be associated to the how much and when revenue is recognised. The application of this particular framework has been able to identify whether to replace existing revenue recognition, including the “AASB Interpretation 13 Customer Loyalty Programmes”, “AASB 118 Revenue” and “AASB 111 Construction Contracts”. The companies have been further seen to determine whether they are able to replace the AASB 117 Leases and apply revised framework based on AASB 16. The identification of the Impairment of Assets of the company has been seen with the application of “AASB 136: Impairment of Assets”. The financial guarantees of the contract has been further seen to be associated to the various type of conceptual framework based on “AASB 137 Provisions, Contingent Liabilities and Contingent Assets” (Virginaustralia.com. 2017).
Based on the general theory of prudence it has been observed that the companies do not overestimate the amount of the revenues. It has been seen that both the companies has been seen to be using the prudence concept in their financial statements. Both the companies in particular has been seen to be conservative enough in terms of the recording the total amount of assets not underestimate liabilities. It has been further observed that both the financial statement needs to state conservatively. Another approach of the prudence in both the companies has been seen to be implemented based on the various types of the theories which has been seen to be associated to the recording of the transaction associated to the revenue and the assets with the probable transactions (M?ciuc?, Hlaciuc and Ursache 2015). It has been further discerned that the different types of the considerations of the prudence has been seen to be based on the different types of the concepts which shows that both the companies has been delaying in the recognition of transactions related to the revenues. Some of the important considerations made in the study for this prudence aspect show that whether the company can replace existing revenue recognition, including the “AASB Interpretation 13 Customer Loyalty Programmes”, “AASB 118 Revenue” and “AASB 111 Construction Contracts”. The companies have been further seen to determine whether they are able to replace the AASB 117 Leases and apply revised framework based on AASB 16. The delay in the new standards and interpretations has been further seen with implementation of AASB 9 (2014) to be effective for annual reporting periods beginning on or after 1 January 2018. The companies further intends to recognise “AASB 16 Leases (AASB 16) leases to be effective for annual reporting periods beginning on or after 1 January 2019, with early adoption permitted where AASB 15 is also adopted. Hence, the companies are not willing to adopt the standards until they are able to be sure of the a variety of impacts which it will have to bear on recording of the financial statements. Some of the other consideration for the prudence in the financial reports of both the companies have been further seen with the regular review of the assets and the decline in the value. In particular the most important aspect of the prudence in both the companies has been seen with the concept that both the companies have not been seen to writing down the value of fixed assets (Laing and Perrin 2014).
Total Assets – Total assets for Qantas Airways has been amounting to $ 17708 m in 2016, while the total assets for Virgin Australia is recognised as $ 6886.9 m in 2016. Virgin Australia Holdings Limited is not seen to be having any contingent assets or contingent liabilities at 30 June 2016. The assets of Qantas Airways Limited has been seen to be considered based on the assets classified as held for sale are measured at lower of cost and fair value less costs to sell. The net benefits of Qantas Airways Limited are seen to be measured “fair value of plan assets less the present value” of the defined benefit obligation. The preparation of the financial statements for Virgin Australia for the assets held under the financial leases are initially recognised based on fair value and present value (Virginaustralia.com. 2017).
Tangible Assets and Intangible Assets – The recognition of the intangible and tangible assets for Qantas has been seen to be based on various types of non-current tangible assets has been seen to be based on the revenue generation using the recoverable amount of the assets. The intangible assets are based on for amortisation and impairment losses less cost. The main form of the classification has been seen to be important for indefinite assets which are seen to be stated based on amortisation on a straight-line basis over the useful economic life and assessed for impairment. The amortisations of the intangible assets with finite lives are based on “straight-line basis over the useful economic life”. These are further seen to be assessed for impairment. The different methods for the amortisation have been based for the determination of residual lives and useful lives on the reporting date. The assets which has been further considered based on indefinite lives are not amortised for the impairment done annually, where the assets has shown the indication for impairment (Qantas.com.au. 2017)..
Depreciation – The depreciation is seen to be done based on straight line basis for the property, plant and equipment except for freehold land, as they are considered for the depreciation. The various types o the depreciation rates which are owned assets are further seen to be calculated based on the valuation cost of the assets less the residual values for the asset’s estimation of useful life for the Qantas Group. It has been further seen that the various types of the assets are further seen to be depreciated from the date of acquisition or with internally constructed assets over the remaining useful life. The assets for the finance lease are further seen to be depreciated for the relevant lease, where Qantas Group is having the ownership of such assets (Yong, Lim and Tan 2016).
The ROIC is seen to be derived by adjusting of the EBIT to exclude the non-cancellable aircraft which are seen to be operating with lease rentals and also includes the various types of the notional depreciation of the aircrafts to account for the same as if they were owned by the airline carriers. The USD depreciation for Qantas has been seen to be based on the different movement associated to the USD depreciation, 20%.
Similarly in case of Virgin Airlines the Depreciation and amortisation of the assets ceases from the date they are classified as held for sale. The depreciation on PPE is stated at cost less the “accumulated depreciation and impairment losses”. Similar to Qantas, Virgin Airlines is also seen to recognise the depreciation on straight basis on the estimated useful life by consider the residual value.
Based on the Director’s statement in the annual report of Virgin Airlines published in 2016, the income and the revenue have been seen with an increase of $4,749.2 million to $5,021.0 million. It has been further seen that the comparative period reflects a total equity accounting of 60% of Tigerair Australia to 16 October 2014. The company’s net operating expenditure has been further seen to increase from $4,802.7 million to $5,278.7 million, which has been identified as an increase of $476.0 million. The aforementioned points are seen to be conducive for investing in Virgin Airlines (Deegan 2016).
Similarly based on the CEO’s statement in the annual report of Qantas published in 2016, it has been observed that every part of the group has been able to contribute to the record result in 2015/16. This has been seen to be evident based on the increased operating margin in terms of EBIT for Jetstar Group, Qantas Loyalty, Qantas International and Qantas Domestic. It has been further identified that the two thirds of the total earnings of the group comes from the international operations, loyalty businesses and reduced volatility in the portfolio strategy. The investors should further consider the increase in PBT from $ 975 m in 2015 to $ 1532 in 2016.
Conclusion
The various discussions in the study have been able to show various levels of similarity in conceptual framework, prudence to address the possibility of the disparity in Corporate Reporting, consideration of their AGM report, total assets, tangible and intangible assets. The important consideration of conceptual framework for Revenue from Contracts has been recognised as per AASB 15 Revenue from contracts with the customers. The execution of the conceptual framework for the AASB 15 has been able to determine the various types the consideration which are seen to be associated to the how much and when revenue is recognised. The prudence aspect is seen with the delay in recognising standards for “AASB 16 Leases (AASB 16) leases to be effective for annual reporting periods beginning on or after 1 January 2019, with early adoption permitted where AASB 15 is also adopted. Hence, the companies are not willing to adopt the standards until they are able to be sure of the various types of the impacts which it will have to bear on recording of the financial statements. The investors should be further investing in the companies due to the increase in the operating margin and revenue of both the companies.
References
Deegan, C., 2016. Financial accounting. McGraw-Hill Education Australia.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.
M?ciuc?, G., Hlaciuc, E. and Ursache, A., 2015. The Role of Prudence in Financial Reporting: IFRS versus Directive 34. Procedia Economics and Finance, 32, pp.738-744.
Qantas.com. (2017). Our Company | Qantas. [online] Available at: https://www.qantas.com/travel/airlines/company/global/en [Accessed 11 Aug. 2017].
Qantas.com.au. (2017). [online] Available at: https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf [Accessed 11 Aug. 2017].
Virginatlantic.com. (2017). Our story | Virgin Atlantic. [online] Available at: https://www.virginatlantic.com/gb/en/footer/our-story.html [Accessed 11 Aug. 2017].
Virginaustralia.com. (2017). [online] Available at: https://www.virginaustralia.com/cs/groups/internetcontent/@wc/documents/webcontent/~edisp/2016-asx-financial-report.pdf [Accessed 11 Aug. 2017].
Yong, K.O., Lim, C.Y. and Tan, P., 2016. Theory and practice of the proposed conceptual framework: Evidence from the field. Advances in Accounting, 35, pp.62-74.
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