Describe about the Financial Accounting for Concepts of Accounting.
The following study examines the various concepts of accounting and its relevance in Australian as well as the global market. Besides this, it assesses the issues in measurement of costs. For the purpose of this study, Caltex Australia has been selected. The brand supplies quality lubricant products that include engine oils, driveline fluids as well as hydraulic oils and industrial products. The annual report of the year 2015 has been evaluated to measure the accounting policies and the strategies of the company.
According to Brinca et al. (2016), the accounting concepts encompass a broad range of transactions and accounting activities in the business entity. However, there have been issues in the measurement of accounting relating to the assets, liabilities as well as costs. In the context of Caltex Australia, there have been issues relating to the measurement of remuneration offered to the business enterprise (De Simone 2016). As such, the management of the business entity has to take the necessary measures so that the remuneration policy adheres to the AASB framework. In this regard, it can be stated that attributes like the alterations in the accounting methods adopted by a business enterprise as well as the volatile market conditions can have an impact on the operational policies of the business entity. According to Bull (2014), the valuation of assets as well as the costs is the essential factors that would have an impact on the operational strategies of a business enterprise. In addition, the valuation of the costs is another issue in the context of globally reputed companies operating in Australia.
Bull (2014) mentioned that the brand has been following the fair value measurement concept that measures the financial assets of the company based on the existing market condition of the business enterprise. As such, in the present global market the fair value measurement concept is the most relevant tool in the measurement of the assets present in a business enterprise. According to Hartmann and Mouritsen (2013), the measurement of cost is one of the most pertinent issues that has been affecting the financial and the operational strategies of the business entity. Therefore, it remains necessary to measure costs in an appropriate manner that would be relevant and as per the changing accounting measures in the business entity.
There have been issues relating to measurement for business entities that have traditionally followed the IASB/AASB standards in preparing the year-ended financial statements. These factors have led to financial as well as operational issues for the business entity.
Alterations in the Market Conditions- Kaplan and Atkinson (2015) stated that the alterations in the market conditions should have an adverse impact on the measurement issues of the business entity. A volatile market condition shall lead to financial instability for the business entity and shall lead to measurement issues for the business entity. According to Cortesi et al. (2015 the business entity shall have to adjust to the changing market conditions and would lead the business enterprise to financial stability in the international market. In the context of Caltex Australia, the brand operates in an extremely vulnerable market environment. As such, it is essential for the business entity to develop measurement issues that can adjust towards rapid changes in the global market.
Accounting Method – Frequent changes in the accounting method would have an impact on the financial strategies of the business entity. De Simone et al (2016) stated that the alterations in the accounting method would prevent effective comparison with the past years of the organization. Ineffective accounting method for the business entity would hamper the existing business functionalities for the business enterprise and wastage of the financial resources for a business enterprise. The organization adheres to the AASB guideline in preparing its year-ended financial statements for the business enterprise. In the context of Caltex Australia, the brand has been following the AASB accounting method over a period. However, frequent changes in the accounting method would lead to financial irregularities.
Variable expenses – Deegan (2012) stated that it is normal that the variable expenses would not remain constant with each successive year. As such, it is necessary that variable expenses of the organizations have to be accounted for and the year-ended financial statements be prepared accordingly. In the case of Caltex Australia, the variable expenses have been a substantial part of the expenditure in executing the operational functionalities of the business entity (Gray 2014). Therefore, Caltex Australia has made structural changes to the existing business functionalities of the organizations to determine its variable expenses in a half-yearly and annual manner.
Recognition of Assets and Liabilities- In AASB standards the assets and the liabilities of the organization can have to be recognized only when it incurs benefits and expense to the business entity (Holmes 2012). As such, the recognition of assets depends on the financial benefits it brings towards the organization. Thus, it becomes necessary that the financial benefits arising from the assets can be measured and defined in monetary terms. Such assessments are not always possible and this leads to issues in the measurement of the assets and the liabilities in a business enterprise. Fues et al. (2013) mentioned that Caltex Australia has faced issues in the recent times regarding the recognition and the assessment of the assets as well as the liabilities of the business organization.
Gray (2014) mentioned that non-compliance with the AASB standard would have an impact on the financial authenticity as well as relevancy of the accounting data entered in the financial statements of the business entity. Such measurement processes have been developed to ensure that the financial statements reveal the exact details of the financial condition of a business enterprise. According to Haider (2015), the non-compliance with the AASB standard would lead to the disproportionate allocation of expenses in a business organization. Besides this, the non-compliance with this standard can also result in inaccurate assessment of the financial condition of the business entity. These are the issues in the measurement of accounting, which has been affecting the economic condition of globally reputed business enterprises operating in Australia.
In the context of Caltex Australia, the measurement in accounting shall have to depend on two factors, which includes the unit of the measurement and the pertinent attribute that is required to be measured. According to Hartmann and Mouritsen (2013), the different monetary units that can be measured are historical cost, and the net realizable value. Besides, this includes the present value method in assessing the existing cash flows in the business organization. Therefore, reputed business entities as if Caltex Australia has been adopting the fair value method as well as the present value method in assessing the financial state and identifying the relevant financial measures that can be adopted to take corrective action. However, Hodgson and Russell (2014) noted that the present value tool is a recent innovation from the FASB statement that helps in identifying the cash flows in the organization. As such, the pertinent accounting issue in the case of Caltex Australia is to identify the measurement tool that would be most suitable for the brand in assessing the existent cash inflows and the cash outflows in the business entity.
Accounting principle- The most relevant accounting principles that are adopted by global business entities operating in Australia is the realization accounting principle. Holmes (2012) stated that the realization accounting principle relates to the accrual method of accounting in preparing the year-ended accounting statements for a business entity. However, Hopper (2012) noted that the realization accounting principle has certain drawbacks. Besides this, the management of the business entity has failed to develop the realization accounting principles as per the existing needs of the business enterprise. In addition, the realization accounting principle can be only met if certain conditions are fulfilled. These include the following:
The earning process shall have to be completed
There should be a reasonable certainty or assurance to gather revenue for the business entity
Therefore, the realization accounting principle can be only applicable if the above conditions are attained. Therefore, this accounting principle has a restricted scope.
The annual report of Caltex Australia has been prepared considering its relevance and authenticity to the relevant parties in a business enterprise. According to Ismail and King (2014), Caltex Australia has been maintaining due diligence and authenticity in the preparation of the financial statements. Therefore, the management of the business organization has to take the relevant measures to develop the operational as well as the financial measures in retaining the authenticity of the financial statements prepared in a business entity. Besides this, the business entity has been making due efforts in checking each of the transactions to increase authenticity. Ismail and King (2014) stated that representational faithfulness relates to preparing the accounts with authenticity and trust, and without having any bias to any party.
Thus, the financial statements would reflect the actual financial condition of the business entity and help the stakeholders making informed financial decisions. Kaplan and Atkinson (2015) mentioned that Caltex Australia uses the fair value method in measuring the assets and the liabilities of the business entity. Therefore, the assets as well as liabilities in the business organization would be measured in an appropriately and would reveal the actual market value. Another essential aspect is the recognition of revenue in the business organization. According to Deegan (2012), the identification of the revenue would have to be strictly as per the IASB/ AASB framework.
Therefore, the brand has made pertinent efforts in ensuring transparency and representational faithfulness in the development of the financial statements of the business organization. Gray (2014) stated that relevance has been an effective feature in developing an effective positive impression on the stakeholders and making effective business decisions for the stakeholders of the business entity. Caltex Australia has implemented an effective internal auditing team for identifying any discrepancy in the financial processes of the business entity.
The financial statements of the business entity shall consist of detailed financial data and would have an impact on the financial position of the business entity. This includes the remuneration measures that has been implemented that awards the employees solely based on their performance. Besides this, the business organizations consider its essential responsibility towards the society in establishing transparency as well as authenticity in its financial policies that would prevent any financial manipulation. According to Haider (2015), the management of the business entity would have an influence on the marketing and the operational policies of the business entity. Therefore, relevancy and representative faithfulness are two essential characteristics of the financial statements that would help the stakeholders to make informed financial decisions.
Conclusion
There has been certain measurement issue in accounting that has considerably hampered the financial assessment of Caltex Australia. These include the alterations in the market conditions as well as frequent changes in accounting method. Besides this, it includes the non-compliance with the accounting standards and thee recognition of the assets and the liabilities of a business enterprise. However, relevance as well as representational faithfulness is one of the essential characteristics of the financial statements prepared by a business entity. Thus, relevant financial data has been stated in the financial reports that would assist the investors in making informed financial decisions.
References
Brinca, P., Chari, V. V., Kehoe, P. J., & McGrattan, E. (2016). Accounting for Business Cycles (No. 531). Federal Reserve Bank of Minneapolis.
Bull, R. J. (2014). Accounting in business. Butterworth-Heinemann.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I., & Castoldi, S. (2015). Advanced Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA spa.
De Simone, L. (2016). Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?. Journal of Accounting and Economics, 61(1), 145-165.
Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.
Fuest, C., Spengel, C., Finke, K., Heckemeyer, J., & Nusser, H. (2013). Profit shifting and’aggressive’tax planning by multinational firms: Issues and options for reform. ZEW-Centre for European Economic Research Discussion Paper, (13-044).
Gray, S. J. (Ed.). (2014). International accounting and transnational decisions. Butterworth-Heinemann.
Haider, S. (2015). Exploring the Relationship between Changes in Accounting Policies and Valuation of Australian Banking Firms (Doctoral dissertation, Victoria University).
Hartmann, B., & Mouritsen, J. (2013). Inscribing the future: goodwill accounting at the nexus of financial and management accounting. In 2nd Workshop on Financial Reporting and Auditing as Social and Organizational Practice (pp. 1-43).
Hodgson, A., & Russell, M. (2014). Comprehending comprehensive income.Australian Accounting Review, 24(2), 100-110.
Holmes, K. (2012). 14 Taxation and accounting issues in development policies. Handbook of Accounting and Development, 245.
Hopper, T. (2012). Handbook of accounting and development. Edward Elgar Publishing.
Ismail, N. A., & King, M. (2014). Factors influencing the alignment of accounting information systems in small and medium sized Malaysian manufacturing firms. Journal of Information Systems and Small Business,1(1-2), 1-20.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
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