BUACC 5930 - Accounting Concepts and Practices
Added on 2019-11-08
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Running Head: ACCOUNTING CONCEPTS AND PRACTICESAccounting Concepts and Practices
ACCOUNTING CONCEPTS AND PRINCIPLES2Question-1a: Discussion on the Implication of Three ItemsThe financial statements of the companies are prepared according to the instructions provided in the generally accepted accounting principles (GAAP). The GAAP of different countries is different, for example, the Australian companies follow AASB GAAP, the companies in USA follow US GAAP, and there is international GAAP also being prescribed by IASB. The generally accepted accounting principles are set by referring to the basic accounting concepts and principles such as cost and fair value principle, concept of accrual and prudence, principles of double entry etc. The principles of historical cost state that the assets of an entity should, for first time, be recorded based on the historical cost (Broadbent & Cullen, 2012).Further, there are few assumptions that are required to be made in preparation of the financial statements of the entities. The primary among them are the assumption of monetary unit and economic entity. As per the monetary unit assumption, the accounting records should include only the transactions capable of being expressed in monetary terms. The assumption of economic entity states that the activities of an entity are separate and distinct from those of its owners. It implies that the entity has a legal status separate from its owners (Broadbent & Cullen,2012). Further, the historical cost convention provides a basis for measurement of the financial items such as assets and liabilities. As per the historical cost model, an item of asset is recorded in the financial statements at the cost at which it was acquired. The historical cost convention assumes that the value of an item of asset being recognized in the books at the historical cost would remain unchanged over the period of time. However, this assumption of historical cost convention does not seem to be appropriate because the value of items of assets may change in future (Lee, 2007).
ACCOUNTING CONCEPTS AND PRINCIPLES3The impact on comparison of the financial statements of three items such as accounting convention and accounting standard, consolidation, and foreign currencies is significant. In particular if one is looking compare Nestle (USA) with Patties Food Limited (Australia), the provisions of GAAP will play a significant role. The consolidated financial statements of Nestle are prepared under the IASB GAAP while that of Patties Food Limited are prepared under AASB GAAP (Nestle, 2016). The accounting conventions and accounting standards provided under the US GAAP are different from that provided under the AASB GAAP. Although the basics are same but differences exists in presentation and measurement of certain items of financial statements.Further, while comparing the financial statements of two entities, it should also be seen that the financial statements are consolidated or standalone. The consolidated financial statements comprises of the financial statements of parent and all its subsidiaries (Robinson et al., 2015). The comparison of two entities would not be fruitful if one’s financial statements are consolidated and other’s are standalone. Further, the foreign currency transactions in the financial statements are also crucial to be taken into account for comparison purposes. The financial figures may substantially differ due to involvement of the foreign currencies. The profitor loss on account of foreign currency translation may affect the financial position of the company severely. Question-1bExplanation of Similarities and Differences
ACCOUNTING CONCEPTS AND PRINCIPLES4The consolidated financial statements of Nestle have been prepared based on the GAAP prescribed by IASB. Thus, in preparation of the financial statements of Nestle, the international accounting standards have been followed. On the other hand, the financial statements of Patties Food Limited have been prepared applying AASB GAAP (Pattiesfoods, 2015). Thus, the financial statements of Patties Food Limited have been prepared on the basis of Australian Accounting Standards. The provisions of accounting standards under two GAAPs may be different but the basic principles and concepts are same. Both the accounting frameworks such asIASB as well as AASB follow the accounting concept of accrual and historical cost basis in preparation of the financial statements.The consolidated financial statements of Nestle are being prepared under the IAS 27 while the consolidated financial statements of Patties Food Limited have been prepared under theAASB 127 (AASB 127, 2007). The provisions of the IAS 27 and AASB 127 are similar, thus, the consolidation processes would be same for Nestle (under IASB framework) and Patties Food Limited (under AASB framework). In regards to foreign currency transactions, it has been observed that AASB 121 has been framed on the same lines of IAS 21. However, there are few presentation requirements in AASB 121 which have been set differently as compared to IAS 21 (AASB 121, 2015).Changes in IFRSNestle prepares its consolidated financial statements under the IASB framework thus the changes in the international financial reporting standards would affect the financial statements ofNestle. There have been a series of changes in the IASB financial reporting standards over the past few years (EY, 2016). The major changes have been observed in the areas of accounting for
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