Developing Suitable Accounting Policies for Financial Reporting

This report covers the Australian Accounting Framework for the making and presentation of Financial Statements. It discusses the defining of elements of financial statements, recognition, measurement, and disclosure. The report also covers the IASB’s proposals for a revision in the conceptual framework that can be helpful to make financial reporting better by giving a further comprehensive, clear and restructured set of conceptions.

MA601 Theory and Current Issues in Accounting
Unit Code MA601
Unit Title Theory and Current Issues in Accounting
Trimester Trimester 2, 2018
Assessment
Author
Dr Jayasinghe HewaDulige
Assessment
Type
Assignment [Group}
Assessment
Title
Assessment Task 4 – Report [Group]
Name:
Student ID:

Table of Contents
1. Executive Summary.............................................................................................................................2
2. Introduction.........................................................................................................................................2
3. The elements of financial statements..................................................................................................2
4. Comparison among the definition and the recognition of elements in the financial statements........3
5. Nature of the essential characteristics of assets..................................................................................4
6. Measurement criteria for assets that were recognized in Accounting Framework 2014....................5
7. Arguments usually advanced to support the measurement of assets.................................................6
8. Accountants still prefer to measure the historical cost of assets........................................................6
9. No reference to disclosure practices in financial reporting in Framework 2014.................................7
10. Analysis of financial statement/ notes of Virgin Atlantic.................................................................7
11. Conclusion.......................................................................................................................................8
12. References APA 20...........................................................................................................................9
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1. Executive Summary
The report covers 4 basic issues of developing the suitable accounting policies for the
transactions and contracts in financial reporting, namely the defining of elements of financial
statements, recognition, measurement and disclosure. These issues are resolved by the Australian
Accounting Framework for the making and presentation of Financial Statements.
2. Introduction
In December 2013, the Australian Accounting Standards Board (AASB) did amendments to the
AASB structure for the Preparation and Presentation of Financial Statements (AASB
Framework) to include Chapters 1 and 3 of the International Accounting Standards Board’s
(IASB) Conceptual Framework for Financial Reporting, as laid down in September 2010
(Morris, 2017). Awaiting the more amendments to the IASB conceptual framework, at that
juncture the AASB made a decision to keep hold of the existing AASB Framework, changed to
the point essential to include the IASB’s Chapters 1 and 3 like an Appendix to the structure, and
did not give out a new framework document (Bauer, O'Brien & Saed, 2014). This report covers
the IASB’s proposals for a revision in the conceptual framework that can be helpful to make
financial reporting better by giving a further comprehensive, clear and restructured set of
conceptions.
3. The elements of financial statements
Conceptual framework of accounting is structured theory which lays down the goal and scope of
financial reporting (Draz, 2012). It also recognises and lays down the qualitative features of the
financial information like understandability, reliability, timeliness, relevance and compatibility
point it also lays down the key elements of the accounting information like the equity, profit,
expenses and income, Assets and liabilities. As per the AASB framework the elements of
financial statements are Assets and liabilities, income and expenses and equity.
 The paragraph 49a states that asset is a resource which is managed by the business or entity
because of the previous happenings and by which the future economic earnings are
anticipated to come to the entity.
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 Paragraph 49b states that liability is the correct obligation of the business which arises as of
the previous happenings, which is anticipated to settle by an outflow from the resources of
the business embodying economic benefits (Amiram, Bozanic & Rouen, 2014).
 Paragraph 49c states that the equity is the remaining interest in Assets of the business after all
the liabilities have been deducted.
 As per paragraph 70a, the income is an increase of economic benefit within the accounting
phase which is achieved by the inflows or increase of assets or a reduction in liabilities which
lead to a raise in the equity which is apart from the contributions made by the equity holders
(Keykhaei & Jahandideh, 2015).
 The paragraph 70b states that expenses are the deductions in economic benefits in the
accounting face because of the assets getting depleted, outflows in the business or any
liability being increased leading to decline in equity apart from the contributions made by
equity holders (Kim, 2017).
 As per paragraph 83, the elements' definition is dependent on 2 aspects that it is possible that
the future conomic earnings linked with the item will come to or go out from the business
and the item can be valued or has a linked cost that can be evaluated with reliability.
4. Comparison among the definition and the recognition of elements in the financial
statements
Recognition is the procedure to incorporate in the balance sheet or income statement any item
which fulfils the criteria of definition of element and also the criteria for recognising laid down
in the paragraph 83 (Kabalan, 2016). It includes depicting that item in monetary amount as well
as in words and including it in the form of income statement and balance sheet. Items which
fulfilled by recognition criteria must be recognised in these two statements and the inability to
recognise these items is not rectified by disclosure of accounting policies utilised and not even
by the explanation or notes (El-Tawy & Tollington, 2013).
However there was a proposal by IASB for defining the elements of financial statements as
given below:
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 Paragraphs 4.5-4.23 and BC4.23 -BC4.44 lay down that an asset is the current economic
resource management business because of the past happenings. Such economic resources
are right which is capable of producing economic benefits (Rayman, 2013).
 Paragraphs 4.24-4.39 BC 4.4-BC4.22 and BC 4.45-BC 4.81 lay down that liability is the
current application of entity for transferring economic resource because of the past
happenings.
 Paragraphs 4.43 4147 and BC 4.93 PC 411039 that equity is the remaining interest in
Assets of the entity once the liabilities have been deducted
 Even the definition of income has been given in paragraphs 4.48-4.52 BC4.2-BC4.3 and
BC 4.104-BC 4.105 and the definition of expenses has been given in paragraphs 4.48-
4.52, BC4.2-BC 4.3 and BC4.104 BC4.105 lay down the same definition for income and
expenses as given in AASB. Even this draft defines income and expenses with respect to
changes in the Assets and liabilities however stress is given at different places that
significant choices for the measurement and recognition are done by understanding the
kind of resultant information regarding the financial positioning and financial
performance of the entity. The reason for this is explained by IASB in paragraph BC4.3
(JENY & Moldovan, 2018).
As per IAS be there is no proposal for changing the definition of equity and liability for dealing
with the issues that come up in classification of instruments with features of the equity and
liability both. It is looking into those issues in the financial instrument with the features of equity
research project this would be useful for deciding if it has to start with a project for amendment
of standard, the conceptual Framework or both to the present agenda.
5. Nature of the essential characteristics of assets
The definition of assets is important therefore concepts statement 6 gives careful wording
definition with three key aspects, 9 paragraphs giving out the features of Assets and also the
elaboration of the concept of acids is given in appendix B to the statement. All these form as the
definition of assets altogether. As per Putra (2018), the essential characteristics are given out in
paragraph 26 which lays down features that must be there in any item to be qualified as an asset:
 It includes the possible future benefit which has a capability, solely or combining with other
assets, for contributing indirectly or directly to the possible net cash inflows.
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 A specific business or entity can get the benefit and also it can control the accessibility of
that item by others.
 There has already been any transaction or any at which has given rise to the control of benefit
by the entity or entity's right on the item (Lim, 2013).
6. Measurement criteria for assets that were recognized in Accounting Framework 2014
In 2014 the Measurement Concept gave clarification with respect to measurement uncertainty
(Accounting Framework, 2018). These are now seen as per faithful representation and not with
respect to relevance of the financial details. It is so because the Faithful representation of the
reports does not indicate that information has to be totally true (Zhang & Andrew, 2014). the
conceptual framework recognises that the usage of estimations and approximates value which
means a specific amount of uncertainty is important element for preparing financial information
and it is not necessary that this will make the reliability or usefulness of the information to be
weak. However for this the approximate values have to be clearly and rightly explained and
noted.
However there has been this question by the stakeholders for free introducing the idea of
measurement reliability which was one of the refrigeration benchmark for the assets and
liabilities in the past conceptual framework and in a few of the present IFRS (Wiley CPAexcel
Exam Review 2014 Focus Notes, 2014).
It was also seen that IASB has the concept of reliability to be different from the idea perceived
by the stakeholders. The stakeholders generally considered the reliability to be a synonym of
verifiability or independent of any material errors. The Faithful representation concept is quite
broad and as per the IAS board, the reliability concept gets covered in it only.
The measurement includes two key measurement types that are on the basis of current value and
historical cost.
 Historical cost measurement: For any asset the usage of some part of economic resources that
is the amortization, depreciation, payment got for some part of asset, historical cost which is
not recoverable anymore and accrual of interest are all the financing elements of the asset.
 Current value measurement: as per the conceptual framework there are three kinds of current
value, the current cost, the fair value and value in use. Fair value is the price that would be
caught by selling of any asset or paid for transferring a liability in an arranged transaction
among the market contributors at the measurement date.
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For finding out the value in use the present value of the cash flows which is anticipated to be
attained from utilising asset and from its final disposal involving the disposal cost and
transaction cost. However the current values cannot be seen directly and they are decided by
applying cash flow based measurement tools.
7. Arguments usually advanced to support the measurement of assets
There have been lot of debates around this because by definition and acid has to be controlled by
the entity for it to be recognised into the financial statements. So, there has been this question
whether a highly skilled and loyal work force has to be considered as the Asset or not. Usually a
motivated and skilled workforce also dedicated, is the most valuable asset for a successful
business (Carlin and Minch, 2010). So it can be considered as an acid. However the entity has no
control on its workers as the workers then quit anytime I look for job into any other company so
this kind of asset might not be recognised into the financial statements. Also Framework advised
that the measurement criteria cannot be fulfilled for such workers.
A lot of the relevant measurement methods include that the fair value has to be included as it is
the amount that would be attained for an item point sofa prices the right measure to be used for
the Asset because Market price is laid out by the forces which are exterior to the entity and
cannot be Biased by judgement and can't be influenced by the managers. However fair value is
useful when Market price is not there and many items of the entity are not generally traded in the
active market and therefore the estimation cannot be made accurately. For this the fair value has
to be used for the asset measurement.
8. Accountants still prefer to measure the historical cost of assets
The Accountants still prefer historical cost accounting because it is easy to understand as it is as
per the fixed price that is forever fully known particularly the real price that the business has paid
(Intellectual assets and innovation, 2011). It is easier to follow the historical cost accounting
method as it is on the basis of permanent and specific inputs. It removes the uncertainty from the
initial valuation decisions point even in comparison to the fair value method; the historical cost
method is less volatile because the value of items alters at a lower rate. The stewardship theory
has aim to protect, safeguard, uphold and maintain the social, economic and natural assets for the
use of communities and the stakeholders (Machado, 2014). It was created as a challenge to the
idea that managers are usually self-interested national maximizes point as for this theory, the aim
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of the board of directors and management are in alignment and the managers are interesting clay
motivated to perform in such a way which is beneficial to the business. This theory states that the
board and the management place stress on intangible rewards like opportunities for personal
development and accomplishments (Argilés, Garcia-Blandon & Monllau, 2011). Therefore the
management preferred historical cost as it is simple and more resources required for finding the
current price on market value of the items because historical cost would not be impacted by any
future changes. It is easy to just note down the original cost of the items and therefore quick and
easy preparation can be done commodores saving the cost and time for the business. It is also
simple and therefore users can quickly understand and interpret the financial reports even if there
is no financial background. The main motive of using historical cost is that it is reliable, can be
verified and is objective in nature. There can be invoices original receipts which can be utilised
for tracking the initial cost of the item.
9. No reference to disclosure practices in financial reporting in Framework 2014
There has been no reference to disclosure practice and financial reporting in the Framework 2014
because for seeking ways to enhance disclosure in IFRS financial reporting, in 2013 the IASB
started a broad based initiative for looking for the alternatives. It focuses on cutting the clutter so
that the complications linked with the disclosure can be handled. This is an attempt to improve
the existing presentations and disclosure needs. This has been done to deal with the issue of
disclosure overload. There has been an exposure draft issued, as per FRS 101, which is a
proposed statement of financial accounting concepts and a new chapter for the conceptual
framework which is focused on improving the process for setting out the disclosure
requirements.
10. Analysis of financial statement/ notes of Virgin Atlantic
As per the annual statement Virgin Atlantic (2017), there has been preparation of reports with the
historical cost convention admit respect to UK accounting standards. The financial reporting
standard 101 was utilised therefore there was a reduction in disclosure Framework. The
transition date for such usage of FRS101 was 2016 January. The company has also benefited
from section 408 of Companies Act 2006 and there has been no publishing of a different income
statement and linked notes for the organisation. The outcome for the year with respect to
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company is given in disclosures with the company statement of changes in equity. As per the
transition to IFRS 101 from the applied IFRS, the business has not measured and recognised any
adjustments. The company has proposed and has been using the reduced disclosure framework of
FRS 101. The Group financial statements have been made as per the historical cost basis, apart
from for a few financial instruments which are recorded at fair value. These financial statements
are shown in pounds Sterling as it is the currency of the main economic location in which the
Group functions. All estimates are rounded to the nearby million pounds (£ million), apart from
where it is shown.
11. Conclusion
There have been huge numbers of international standards which allow and require utilisation of
fair value accounting for financial reporting. The IAS board sets of standard definition for fair
value that is used for finding the value of Assets and liabilities and market value is not
considered. In recent past, there has been huge debate on the usage of fair value accounting
introduction to the historical cost technique. As the reference of a business for accounting
treatment for different acids can have huge effect on the financial statements and management
decisions therefore it is significant that right method is utilised for evaluation of the assets.
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12. References APA 20
Accounting Framework. (2018). Retrieved from
https://www.aasb.gov.au/admin/file/content105/c9/Framework_07-04_COMPjun14_07-14.pdf
Amiram, D., Bozanic, Z., & Rouen, E. (2014). Financial Statement Irregularities: Evidence from
the Distributional Properties of Financial Statement Numbers. SSRN Electronic Journal.
Argilés, J., Garcia-Blandon, J., & Monllau, T. (2011). Fair value versus historical cost-based
valuation for biological assets: predictability of financial information. Revista De Contabilidad,
14(2), 87-113.
Bauer, A., O'Brien, P., & Saed, U. (2014). Reliability Makes Accounting Relevant: A Comment
on the IASB Conceptual Framework Project. SSRN Electronic Journal.
Carlin, T., & Finch, N. (2010). Evidence on IFRS Goodwill Impairment Testing by Australian
and New Zealand Firms. SSRN Electronic Journal.
Draz, D. (2012). IFRS or IFRS-Based Domestic Standards: Implications for China’s Future
Accounting Reforms. SSRN Electronic Journal.
El-Tawy, N., & Tollington, T. (2013). Some thoughts on the recognition of assets, notably in
respect of intangible assets. Accounting Forum, 37(1), 67-80.
JENY, A., & Moldovan, R. (2018). Recognition and Disclosure of Intangible Assets - A Meta-
Analysis Review. SSRN Electronic Journal.
Kablan, A. (2016). Swap transactions as a financial tool, their recognition as international
accounting standard 39 and display in financial statements. International Journal Of Finance &
Banking Studies (2147-4486), 2(2), 8.
Keykhaei, R., & Jahandideh, M. (2015). Free Assets and Their Relations with Riskless Assets.
British Journal Of Mathematics & Computer Science, 10(6), 1-15.
Kim, J. (2017). Reported Profits And Effective Tax Rate Following Accounting Standards
Changes Analysis Of Consolidated Financial Statements And Separate Financial Statements.
Journal Of Applied Business Research (JABR), 33(6), 1171.
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Lim, W. (2013). Liquid Assets, Illiquid Assets and Sunspots. SSRN Electronic Journal.
Machado, M. (2014). RELIABILITY IN FAIR VALUE OF ASSETS WITHOUT AN ACTIVE
MARKET. Advances In Scientific And Applied Accounting, 319-338.
Morris, R. (2017). Discussion of: The Phoenix Rises: The Australian Accounting Standards
Board and IFRS Adoption. Journal Of International Accounting Research, 16(2), 155-157.
OECD. (2011). Intellectual assets and innovation. Paris.
Putra, L. (2018). Definition of Assets [FASB Concept Statement 6]. Retrieved from
http://accounting-financial-tax.com/2009/08/definition-of-assets-fasb-concept-statement-6/
Rayman, R. (2013). Accounting Standards. Hoboken: Taylor and Francis.
Virgina Atlantic Annual statement (2018). Retrieved from
https://virginatlanticannualreport17.com/pdfs/Financial-statements-VA-2017-ARA.pdf
Wiley. (2014). Wiley CPAexcel Exam Review 2014 Focus Notes. Hoboken.
Zhang, Y., & Andrew, J. (2014). Financialisation and the Conceptual Framework. Critical
Perspectives On Accounting, 25(1), 17-26.
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