Evaluation of Conceptual Framework of Financial Reporting and Sustainability Reporting

This report evaluates the conceptual framework of financial reporting and sustainability reporting, including its history, application, and quality concerns. It also compares the Global Reporting Initiative with the International Integrated Reporting Framework and examines the reporting practices of Ingenia Communities Group and a South African company.

ACCT20074 Contemporary Accounting Theory
Term 1 Assessment 3: Practical report (Major assignment)
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Executive Summary
This report has undertaken an evaluation of the conceptual framework of financial
reporting by analyzing its history of development; concerns related to its adoption and also
demonstrated its application with the selection of financial reports of an ASX listed entity. In
addition to this, it also presented an examination of sustainability or integrated reporting
framework of businesses. It includes comparison of GRI with integrated reporting, discussion of
CF for sustainability reporting, application of theories for developing content of sustainability
reporting and examined the various components of integrated reporting systems in reference to a
South African company. Also, the comparisons of the components are done with the selected
Australian company to identify the differences between the types of disclosures in relation to
sustainability by the two companies.
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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................5
Part A: Conceptual Framework.......................................................................................................6
A: Review of Literature Regarding History and Development of Conceptual Framework for
Financial Reporting in the USA, UK, Australia..........................................................................6
B: Application of the IASB/IFRS Conceptual Framework for Financial Reporting...................7
C: Quality Concerns of the Conceptual Framework of Reporting...............................................8
D: Application of conceptual framework by Ingenia Communities Group.................................8
D(i): Financial Statements and their components........................................................................8
D (ii): Recognition principles and measurement basis used to present revenue, assets and
liabilities by Ingenia Communities Group...................................................................................9
D (iii): Qualitative characteristics of financial information used in financial report of Ingenia
Communities Group...................................................................................................................10
Part B: Integrated and sustainability reporting..............................................................................13
A: Comparison of GRI (Global Reporting Initiative) with International Integrated Reporting
Framework.................................................................................................................................13
B: Strengths and Limitations of the Conventional Accounting.................................................13
C: Applicability of Theories to Explain Content of Sustainability and Integrated Reporting...14
D: Evaluation of NEPI RockCastle (South African Company) on the grounds of different
components of integrated reporting through use of index (Table or check list)........................15
E: Comparison of reporting practice of selected Australian Company with the index and
reporting practices of selected South African company............................................................17
Conclusion.....................................................................................................................................19
Reference.......................................................................................................................................20
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4

Introduction
The conceptual framework has been developed as per the normative theory of accounting
that has been developed for providing recommendations to the policy makers such as IASB
(International Accounting Standards Board) regarding the development of accounting policies on
the basis of theoretical principles. On the other hand, the term ‘Corporate Social Responsibility
Reporting’ or ‘sustainability reporting’ implies to satisfying information against social, economic
and environmental indicators of an organization. It requires business to provide adequate
disclosures about the ways in which their different operational activities are impacting the
abilities of future generations for meeting their varying needs. As such, this report has discussed
and analyzed various aspects related to conceptual framework and sustainability reporting with
including `examples from a selected Australian and South African entity.
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Part A: Conceptual Framework
A: Review of Literature Regarding History and Development of Conceptual Framework
for Financial Reporting in the USA, UK, Australia
The Conceptual Framework (CF) has been applied by business entities across the world
complying with IASB or FASB for development of their financial reports. The development of
the conceptual framework in the USA can be traced back to early 1960s by the development of
Accounting Principles Board (APB). However, the accounting framework of the country has
received criticism on account of lack of an appropriate framework. As such, there has been the
development of Trueblood Committee in the year 1971 that produced Trueblood Report which
has outlined the accounting objectives and the required qualitative features to be present within
financial information. However, these initiatives undertaken have not led in improving the
quality of financial reporting system which leads to the replacement of APB by FASB. FASB
has then introduced CF into the financial reporting system of the US business entities by working
in co-operation with IASB and developing a revised conceptual framework in the year 2005
(Barth, 2008).
Similarly, in the UK there has been development of the Corporate Report in the year
1976 that has placed emphasis on meeting the rights of the users by providing them access to the
accurate financial information. However, the content provided by it is not accepted by the
accounting professionals. ASB in the UK has replaced by IASC (International Accounting
Standards Committee’s) but it was regarded as inconsistent with the US framework and thereby
finally replaced by the IASB framework and as such lead to the adoption of the CF (Macías and
Muiño, 2011).
The development of a coherent system of financial reporting was rather very slow in
Australia and here has been presence of only four accounting statement concepts that are,
defining reporting entity, stating the objectives of purpose of developing financial reports,
qualitative features of financial reports and recognition of varying elements of financial
statements (Chua, Chee and Cheong, 2012). The deficiencies in the reporting framework of
Australia have lead to the adoption of IASB CF as per the Financial Reporting Council decision
(Dean and Clarke, 2003). The IASB and FASB are working together in co-operation for
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convergence of the accounting standards and developing a uniform set of accounting principles
and policies to improve comparability across the financial information. The project undertaken is
meant for global acceptance and adoption of CF by business entities worldwide (Seng, 2014).
B: Application of the IASB/IFRS Conceptual Framework for Financial Reporting
There has been increasing emphasis placed from various countries across the world for
driving improvement in the financial reporting through making it more comparable and useful in
decision-making. However, there have been various challenges faced by Australian entities to
comply with the conceptual framework of IASB are discussed as follows:
Gaining Understanding of the International Financial Reporting Practices
The main issue that is being faced in the Australian context relating to the framework of
IASB is that it involves many complexities and difficulties in the adoption phase. The
accountants need to be provided with relevant training for making them understand the ways of
implementing various accounting concepts as per the conceptual framework. It is difficult task
for the Australian businesses entities to providing understanding of IASB standards to the
accountants as it will incur higher cost and time (Wong, 2004).
Legal and Regulatory Issues
It has been stated by the Institute of Chartered Accountants in Australia (ICAA) that less
than half of the surveyed entities are able to adopt the conceptual framework of accounting. As
per the regulatory bodies such as CPA’s (Certified Public Accountants) and ICAA that
adherence to IFRS is posing difficulty among the business entities in Australia mainly due to
legal implications. The business entities have to bring major changes within their legal system in
order to comply with new legal systems and processes under the IASB standards. This may lead
to creating complications in the financial reporting system and therefore restricting business
entities to integrate IASB standards (AASB adoption of IASB standards by 2005, 2004).
Lack of Competent Accounting Professional
The limited availability of competent and experienced accounting professionals within
Australia is also posing a major challenge towards the integration of IFRS. They have to be
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provided with the knowledge of accounting policies and standards as per the IASB framework
(Lonergan, 2005).
C: Quality Concerns of the Conceptual Framework of Reporting
It can be examined by evaluation of the significant benefits and limitations associated
with the use of CF for reporting. The major benefits that are associated with its integration are
enhancing the uniformity and consistent in the financial reporting system across the world
(Silvia, 2016). It would lead in improving the international comparability of financial reporting
and also improve accountability to support the logical decision-making. As such, it would lead in
making standard-setters more accountable for the decision-making and assist them in
development right accounting policies (Fajard, 2016). The reduced need for developing a
separate framework for different countries would help in saving both time and costs for the
standard-setters. Also, its adoption would place emphasis on improving the decision-usefulness
of the financial reporting system rather than previous frameworks that placed importance on
achieving stewardship. It has also enhanced the ability of the standard-setters for regulating the
financial reporting and reduces the role of government intervention (Tschopp and Nastanski,
2014). However, the benefits can be outweighed by thee significant limitations that are
associated with its adoption. The major drawback is that is has placed importance on enhancing
economic performance as compared to social performance of entities. Also, it is highly
troublesome for small and medium-sized entities to comply adequately with all the reporting
requirements due to constraints of financial resources. Therefore, it is essential to compared both
benefits and costs associated with the CF before its implementation (Pacter, 2013).
D: Application of conceptual framework by Ingenia Communities Group
D (i): Financial Statements and their components
According to conceptual framework, entities are required to provide information about
five major elements and they are assets, liabilities, income, expenses and equity. In addition to
this entities are required to provide information in equity balance has been increased or decrease
during the year. So following financial statements have been prepared by Ingenia Communities
Group:
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 Consolidated Income statement (Statement of financial performance): This statement is
prepared to provide the details of income and expenses of the parent company as well as
its entire subsidiaries.
 Consolidated Balance Sheet (Statement of financial Position): This statement provides all
the details of recognised assets and liabilities. Notes to financial statements provide
information on how they are recognised and estimated.
 Consolidated cash flow statement: This statement provides information on cash flows
during the years from the operations, investment and financing activities.
 Consolidated statement of change in Equity: This statement provides information on all
the contributions made by the holders of equity shares and any distribution to them.
The major components that have been included in the financial statements prepared by
Ingenia Communities Group are assets, liabilities, equity, income and expenses. Assets include
current assets and non-current liabilities, liabilities include current and non-current liabilities
(Ingenia Communities Group-Annual Report, 2018).
D (ii): Recognition principles and measurement basis used to present revenue, assets and
liabilities by Ingenia Communities Group
 Revenue: The major sources of revenue for Ingenia Communities Group rent, interest
and distributions. All these revenue has been recognised to the level it is probable that the
economic benefits will flow and has already received to entity. Another criterion of
recognition is that revenue must be reliably measurable. Revenue that has not been
received till the balance sheet date is shown as accounts receivables under current assets
section. Interest income is recognised through using the effective interest rate method and
rental income is recognised through using straight line basis over the operating lease
term.
 Assets: Inventory is measured at lower of cost and net realizable value. Inventory is
recognised when it is physical present with the company and it has some market value on
the date of balance sheet. Cash & cash equivalent includes cash in hand, cash at bank and
short term deposits that are readily convertible into cash in short period of time. Cash and
cash equivalent are easily measurable and have fixed value as on balance sheet date.
Company derives major part of the income from the investment properties that includes
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land & buildings, building under construction, and other amenities. Investment properties
are measured initial at cost and after that they are measured at fair value. They are
recognised when properties come into existence and their value can be determined.
Intangible assets initial recognised at total expenditures occurred for the development of
intangible assets. Subsequently they are measured at cost less accumulated depreciation.
 Liabilities: Trade payables and other payable are recognised when it is probable that
economic benefits will flow out from entity and they are measured amortized cost.
Borrowings are recognised initially at fair value of amount received less any transactions
cost and after that they are measured at amortized cost (Ingenia Communities Group-
Annual Report, 2018).
D (iii): Qualitative characteristics of financial information used in financial report of
Ingenia Communities Group
Relevance: Relevance states that financial information should have capability to influence the
economic decision of users which means that it should possess predictive and confirmative
value. For example, Ingenia Communities Group has provided revenue as the financial element
that has ability to impact the decision of users regarding the past and future performance of the
company.
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(Ingenia Communities Group-Annual Report, 2018)
Faithful Representation: It states that financial statements should have three characteristics i.e.
it should be complete, neutral and free from error. Ingenia Communities Group has confirm that
its financial statements are complete, neutral and free from error through providing the auditors
statement in the annual report.
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(Ingenia Communities Group-Annual Report, 2018)
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Part B: Integrated and sustainability reporting
A: Comparison of GRI (Global Reporting Initiative) with International Integrated
Reporting Framework
There has been development of various voluntary reporting frameworks for providing
guidance to businesses regarding the manner in which they disclose the sustainable information.
There has been the development of Sustainability Reporting Guidelines that has provided the
Global Reporting Initiative (GRI) that is a comprehensive framework for reporting the
sustainability information. On the other hand, the International Integrated Reporting Council
(IIRC) has provided an Integrated Reporting framework for disclosure of CSR information. The
GRI framework has provided the standards that intend to provide sustainability information on
areas such as greenhouse gas emissions, energy and water usage and labor standards (GRI,
2017). On the other hand, the IR framework is mainly developed for integrating the financial and
non-financial information of reporting entities that includes the components such as governance,
business model, risks and opportunities, strategy and resource allocation, performance, outlook
and basis of preparing the reports (The IIRC, 2017).
B: Strengths and Limitations of the Conventional Accounting
The conventional accounting practices are based on the principles of financial reporting
through has the benefit of improving the decision-usefulness of business disclosures for the users
such as investors, suppliers, customers, government and other interested parties. However, it has
been criticized for not able to prove useful to report non-financial information regarding the
social and environmental risks associated with a reporting entity. The limitations associated with
each features of conceptual framework for reporting the contents of sustainability as well as
integrated reports are discussed as below:
Objective of General Purpose Financial Reporting
The CF has provided that the major purpose of providing the financial disclosures is to
give useful information to its present and potential users. However, it has not placed nay
importance on explicit consideration of the wider needs of all its users and thus recognizing the
importance of non-financial information related with business operations (Dragomir, 2011).
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Materiality Aspects
Materiality criterion provided by the CF is not relevant for providing social or
environmental disclosures as assessment of social and environmental performance cannot be
quantified in monetary terms. Thus, it is not possible for assessing the materiality correctness of
such non-financial data. Therefore, materiality consideration provided by the CF framework does
not hold any significant for sustainability reporting (Ivan, 2009).
Elements of Financial Reporting
It has been provided by the CF that an asset or its associated liabilities can be controlled
by a reporting entity. Recognition of assets is relied upon its control but the environmental
respires such as air or water are not controlled by an entity and thus cannot be regarded as assets.
As such, their use or misuse is not recognized as expenses and not required by an entity to be
reported. Therefore, it is inappropriate for measuring the social expenses or cost associated with
business operational activities.
Problem of ‘Reliability’ and ‘Probability’
The recognition of elements of financial reporting as per the framework is dependent on
the associated future economic benefits however the social costs and its associated obligations
cannot be measured reliably and therefore it is not possible to estimate the future economic
benefits (Information Resources, 2015).
C: Applicability of Theories to Explain Content of Sustainability and Integrated Reporting
The legitimacy theory can be applied in context of explaining the development of
sustainability and integrated reports. The major contribution of the theory is that it has identified
the need for a reporting entity to conducts its operations as per the acceptable norms and values
of society (Manetti, 2011). This is essential for developing a legitimate image in the eyes of the
stakeholders and thus gathering support from them to sustain long-term performance of an entity.
Therefore, voluntary disclosures regarding the social and environmental performance helps a
business entity to meet the need of different stakeholders such as customers, governments,
communities and investors (Faisal, Tower and Rusmin, 2012). However, the limitation
associated with the use of the theory is that it has not provided relevant explanation regarding the
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type of non-financial information to be provided by an entity for developing its legitimate image.
In addition to this, stakeholder theory that has highlighted the importance for a reporting entity to
meet adequately the needs and expectations of all its stakeholders’ has also proved to be highly
beneficial in developing the framework of sustainability reporting. The theory however limits in
disclosing the needs of its community members and the type of information to be provided for
meeting the community needs and expectations (Villiers and Maroun, 2017).
D: Evaluation of NEPI RockCastle (South African Company) on the grounds of different
components of integrated reporting through use of index (Table or check list)
S.No. Components of
integrated reporting
Compliance by NEPI RockCastle
1 Organizational overview
and external
environment
This component requires presentation of information on
organization culture, ethics and values, principle activity,
market positioning, and position with the value chain.
NEPI RockCastle has presented all this information in its
annual report (Integrated report) with proper headings and
disclosures. NEPI RockCastle has disclosed only some part
external environment by providing information under key
risk areas.
2 Governance All parts of corporate governance have been well discussed
under separate heading (Corporate Governance). Some of
important components of corporate governance that have
been included in the report are composition of board and
committee, relationship with stakeholder, compliance with
law, ethics, leadership, delegation of duties etc. It also
explains how each element of governance creates value for
the company.
3 Business Model No information has been disclosed regarding the business
model. There is no information how company transform
the inputs through business activities into the output.
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4 Risk and Opportunities All the risks impact the business and risk management
process has been properly disclosed in the annual report of
NEPI RockCastle. There is no proper information about the
business opportunities as there is no plan for the bigger
investment plan by the company.
5 Strategy and resource
allocation
Various strategies have been disclosed but not in proper
manner. Strategies have been provided under different
heading depending upon the types of strategy. Detailed
information about the resource allocation was provided for
each activity under the sustainability process. In addition to
this information on how the financial resources have been
used for creating the value has been disclosed but few areas
create the question of accountability as no cost allocation
has been provided and discussed.
6 Performance Both quantitative and qualitative performance has been
highlighted in the report. Financial statements disclose all
the quantitative aspects of financial performance. It was
expected that company should disclose quantitative
information in interactive form in more detail. But nothing
can be seen in report.
7 Outlook Very narrow information has been provided related to
challenges and uncertainties that NEPI RockCastle will
face while pursuing its strategies.
8 Basis of preparation and
presentation
Information on how NEPI RockCastle has decided to
include various matters has not been included in report but
company has Audit Committee that looks after the process
of integrated reporting and check the compliance of it.
(IIRC, 2013)
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E: Comparison of reporting practice of selected Australian Company with the index and
reporting practices of selected South African company
Ingenia Communities Group does not prepare the integrated reporting but it provides
corporate governance report separately. No information has been disclosed regarding the
sustainability practices by the company (Ingenia Communities: Investors Relation, 2019).
S.No. Components of
integrated reporting
South African Company
(NEPI RockCastle)
Australian Company
(Ingenia Communities
Group)
1 Organizational
overview and
external
environment
All the details have been
presented in the single report
(Annual Report). It helps the
user to get overview of the
company and its external
environment at one place.
There is very less disclosure
about the organizational
overview and information such
as number of employees,
operating structure, and market
positioning and value chain is
missing. It can be said that
qualitative information is
lacking but detailed disclosure
of quantitative information.
2 Governance Corporate governance, board
information and remuneration
details have been provided in
annual report itself.
This company has provided all
such information in separate
reports under corporate
governance section in
investors’ relation link.
3 Business Model This information is missing No such information has been
provided in annual report and
any other report.
4 Risk and
Opportunities
Well discussed and presented
with proper classification of
each risk that impacts the
business.
Information of financial risks
has been provided but no
information about the non
financial risks has been
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disclosed.
5 Strategy and
resource allocation
Well discussed strategies and
few sections provide how
resources have been done.
Information missing in annual
report. Even other reports does
not provide company current
and future strategies.
6 Performance Both Financial and non
financial performance has been
provided such as sustainability
performance.
Only Financial information no
sustainability performance. No
information on climate and
sustainability performance
(Ingenia Communities Group-
Annual Report, 2018).
7 Outlook Very less information Part Missing
8 Basis of preparation
and presentation
It uses IIRC framework and
IFRS Framework to present
the report (NEPI RockCastle:
Annual Report, 2018).
It uses AASB standards and
IFRS framework to present the
report.
(IIRC, 2013)
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Conclusion
It can be stated on the basis of report discussion that financial and sustainability reporting
are two important aspects of external reporting practices of business corporations. The business
entities across the world are tending to adopt the use of IASB CF for financial reporting whereas
there has been development of voluntary reporting framework such as GRI for sustainability
reporting. On the other hand, there has also been development of integrated reporting formwork
that requires the integration of both financial and non-financial information in a single report.
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