ACCG224: Financial Accounting - Australian Corporate Sector - Case Study Assessment Answer

Financial Accounting Assignment

Assignment Task

Financial Reporting Disclosures in the Australian Corporate Sector

As a new accounting graduate, you have just joined the financial reporting unit of a listed company* when your manager, the Chief Financial Officer (CFO), approaches you with your first task.

In their last meeting, the Board of Directors of your company discussed the importance of ensuring that their financial reports meet the objective of general purpose financial reporting and qualitative characteristics of useful financial information as outlined in the IASB September 2010 ‘Conceptual Framework for Financial Reporting’ (CF). Board members are concerned about the company's reputational standing in the market relating to deviations from these objective and qualitative characteristics, specifically in the area of Property, Plant and Equipment (PPE).

Therefore, the Board decided to have a review of the relevant disclosures in the company's latest annual report pertaining to PPE and whether these disclosures are aligned with the CF's objective and qualitative characteristics.

Required;

Based on the Board's decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following:

• Explain in your own words the objective of general purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting (covering OB1-OB21 and QC1- QC39)
• Critically analyse to what extent the latest annual report of your company meetsthe disclosure requirements for PPE as per AASB 116
• Based on your findings in part b, critically analyse to what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information
• Based on your findings in part c, critically discuss to what extent the disclosures on PPE align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement

A.

Objectives of general purpose financial reporting

The objectives of general purpose financial reporting is said to be the foundation of Conceptual Framework and forms an integral part of it. The objective of the general purpose financial reporting is presenting the potential investors, creditors and lenders with required financial information which is essential for them for making decisions such as buying, holding or selling of equity or debt instruments, etc. The users not only assess the future net inflow of cash of the company but also how effectively the management is discharging their responsibilities (Stevenson, 2012). Users need to consider other sources if they require complete information. Although the market regulators consider this to be the best possible way of extracting information, however the Board does not consider this to be consistent. This comprises of the economic resources and claims, changes in economic resources and claims and financial performance reflected through accrual accounting. Information regarding change in economic resources of the company arising out of events other than financial performance is necessary to be accounted for to reflect the change.

Qualitative characteristics of useful financial information

This is required for identification of the types of information which seem to be useful to the users for decision making based on information in financial report. This is equally applicable to financial information in general purpose as well as in other ways. Its effectiveness gets improved if it is verifiable, understandable, comparable and timely. Relevance of information is an integral part of qualitative characteristics as this is capable enough for making difference in decisions in case they have confirmatory value or predictive value or even both (Laing and Perrin, 2014). Relevance and materiality of information is very essential for faithful representation. Enhancement of qualitative characteristics is needs to be maximized to the required extent. In fact that information which seems to be irrelevant or unfaithful can be made useful. It will be considered by the IASB whether different reporting requirements are justified by different sizes and entities.

B.

According to AASB 116 an organization is required to file the annual reports pertaining to the organization be it a profit making organization or a not for profit making organization. However this standard does not apply on assets which are held for sale or are biological in nature or exploration assets. In addition to the above mentioned this standard also does not apply to mineral rights and reserves or the property that is in the process of being constructed.

Recognition

According to this standard an organization has to select from the cost model or the revaluation model. According to the cost model the organization should recognize the assets at the amount that has been paid in cash or cash equivalents or the fair value of any other asset the organization has given up in consideration of the same. In the case of not for profit organizations where the asset has been acquired for no or low consideration, the asset is recognized at the fair value (Laing and Perrin, 2014). For the subsequent measurement the organization needs to select between the cost or the revaluation model

According to the annual report of the organization the organization has mentioned about the basis at which the assets have been recognized. In addition to the same the components of the cot have also been clearly mentioned by the concern. Telstra Corporation according to its annual report of 2015 has mentioned the fact that the assets are depreciated on a straight line basis. It has also made a mention of the fact that the assets of the concern are depreciated when the same are ready to be put to use. As a consequence the disclosures made by the organization are in line with the requirements of the AASB 116.

C.

Disclosure requirements

According to this the organization needs to mention the basis at which the assets have been recognized at the gross carrying amounts. In addition to the same the organization also needs to mention the method that has been employed for calculating the depreciation and the useful lives assumed of the assets under consideration. The organization also needs to make a mention of the carrying amount of depreciation in the books. Apart from the carrying amount the entity also needs to prepare a reconciliation statement of the carrying amount of depreciation at the start and at the end of the period. The qualitative information which the organization needs to mention is in regards to the assets that have been pledged and the particulars of the revaluation obtained (Telstra, 2016). As is evident from the figure below which is an extract of the notes to accounts pertaining to the plant, property and equipment the organization has clearly made a segregation of the value of the assets. In addition to the same the organization has also mentioned about the fact that a particular asset costing $598 million is under construction (“As at 30 June 2015, the Telstra Group has property, plant and equipment under construction amounting to $598 million (2014: $550 million). As the assets are not installed and ready for use, there is no depreciation being charged on these amounts”).

However since the organization has not made a disclosure in regards to the pledged assets it can be assumed that the organization does not have any assets pledged as liability. The organization in addition to the above mentioned disclosure requirement of the AASB 116 has not mentioned anything about the revaluation of the assets. Considering the same it can be assumed that the organization does not have anything in regards to the revaluation of the plant property and equipment and hence the organization i.e. Telstra has complied with the qualitative and the quantitative requirements of the AASB 116.

D.

The purpose of the general purpose financial reporting is to ensure that the information presented in the financial statements is true and depicts a fair view of the operations and the financial position of the concern (Charteredaccountants AU, 2016). In this regards it can be ascertained that the concern has abided by the rules set out in the standard. The organization has made ample disclosures in terms of the qualitative facts and the quantitative figures. The fact that the organization has disclosed the cost base, the methods used in arriving at the depreciation and the useful lives of the asset signify that the concern has presented a true and fair view of its financial operations and its financial position. In addition to the same the organization has also given a line by line item breakup in its notes section which allows the user to analyze the additions made during the year, the initial opening value of the assets and the closing amount in the books of the concern. As a consequence it can be claimed or affirmed that the concern has met the requirements of the standard i.e. AASB 116 and that the same is in line with the objective of the general purpose financial reporting. In regards to the financial statements of Telstra no course of actions has been recommended as the same has already been prepared within the scope of the accounting standards and the accounting framework.