Accounting Concepts and Measurement Issues in Advanced Financial Accounting

This report discusses the accounting concepts used in advanced financial accounting and analyzes the issues of measurement. It also explores the fundamental qualitative characteristics of financial information. The case study focuses on the A2 Milk Company Limited.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student:
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1ADVANCED FINANCIAL ACCOUNTING
Executive Summary:
The Australian organisations have to adhere to the various requirements of the
conceptual framework developed by the “Australian Accounting Standards Board
(AASB)” for financial reporting purpose. It has been found that that the management of
the A2 Milk Company Limited has taken into account the necessary accounting
concepts of the conceptual framework mentioned in AASB. The organisation is
observed to have adopted different concepts of accounting that include the reporting
entities and the financial statements, financial statement components, measurement,
disclosure and presentation, recognition and de-recognition along with capital and
capital management concepts. A critical evaluation of the debate between historical cost
accounting and fair value accounting has been made in this report. It has been found
that the A2 Milk Company Limited has used fair value accounting as well as historical
cost measurement depending on business requirements. In addition, it has been
analysed that financial information contains two fundamental qualitative features, which
include relevance and faithful representation. Finally, it has been analysed that the
management of the the A2 Milk Company Limited has included these two features by
disclosing relevant information and accordingly, the same has been represented
faithfully.

2ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Introduction:.......................................................................................................................3
1. Identification and explanation of the accounting concepts used:..................................3
2. Analysis of issues of measurement:..............................................................................5
3. Fundamental qualitative characteristics:.......................................................................6
Conclusion:........................................................................................................................9
References:......................................................................................................................10

3ADVANCED FINANCIAL ACCOUNTING
Introduction:
It is essential for the management of an organisation to take into account a
number of accounting concepts in the financial reporting procedure and these concepts
play a pivotal role to ensure business success. The Australian organisations have to
adhere to the various requirements of the conceptual framework developed by the
“Australian Accounting Standards Board (AASB)” for financial reporting purpose
(Flower 2018). With the help of this aspect, the organisations are able to address the
issues related to measurement. According to the conceptual framework of AASB, it is
crucial for the organisations to emphasise on the fundamental qualitative features
related to financial reporting and the accounting treatments of the business assets and
liabilities (Acharya and Ryan 2016). By taking into account such aspects, it is possible
to develop sound systems of financial accounting within the organisations. The report is
divided into three major sections. The initial section of the report lays stress on the
various concepts of accounting along with relating them with the chosen organisation.
The second section highlights the measurement issues related to AASB in relation to
the chosen organisation. The final section of the report sheds light on the fundamental
qualitative features of financial information of the chosen organisation. For this report,
the A2 Milk Company Limited is considered, which is involved in producing in milk and
associated products in Australia, New Zealand, Asia, UK and US (The a2 Milk Company
2019).
1. Identification and explanation of the accounting concepts used:
From the above discussion, it could be observed that the Australian firms are
needed to adhere to the AASB conceptual framework for financial reporting purpose. In
this method, the organisations have to adopt the accounting concepts described in the
AASB conceptual framework. Such concepts mainly include the reporting entities and
the financial statements, financial statement components, measurement, disclosure and
presentation, recognition and de-recognition along with capital and capital management
concepts (Aasb.gov.au 2019). The explanations of these concepts from the general
perspective and from the perspective of the A2 Milk Company Limited are provided as
follows:
Reporting entities and financial statements:
This concept is involved in dealing with the concept of reporting entity as well as
the role of the financial statements. It denotes that the primary goal of the financial
statements is to deliver information on the liabilities, assets, income, equity and
expenses of the organisation (Baker and Burlaud 2015). In accordance with the annual
report of the A2 Milk Company Limited in 2018, the organisation has presented its
financial statements that include income statement, cash flow statement, balance sheet
statement, comprehensive income statement and statement of changes in equity.
Another significant concept of accounting is deemed to be the going concern, which
cites that the reporting organisation is a going concern and it would continue in future as
well (Zhang and Andrew 2014). Based on the annual report of the A2 Milk Company
Limited in 2018, the primary goal of capital management of the organisation is to protect
its ability for continuing in the form of going concern.

4ADVANCED FINANCIAL ACCOUNTING
Financial statement components:
The major elements of the accounting system mainly comprise of the definition of
liabilities, assets, expenses, income and equity. Based on the conceptual framework of
AASB, an asset is deemed to be the current resource of an organisation owing to the
past events. Liabilities could be taken into account in the form of present obligation in
order to transfer an economic resource owing to the historical events (Francis et al.
2015). After this, equity is deemed to be a residual asset interest after subtraction of all
liabilities. Income could be adjudged as the rise in assets or fall in liabilities resulting in
rise in equity. On the contrary, expenses are deemed to be increase in liabilities or fall in
assets leading to the decline in equity. From the annual report of the A2 Milk Company
Limited in 2018, it has been observed that liabilities, expenses, assets, expenses and
equity are disclosed by the organisation in its financial statements.
Measurement:
The measurement concept is deemed to be one of the significant concepts for
the organisations. Based on the conceptual framework of AASB, measurement could be
categorised into current value and historical cost. In accordance with the AASB
conceptual framework, it could be stated that with the help of the measurement base
related to historical cost, monetary value could be obtained regarding liabilities,
expenses, assets, equity and expenses with the information obtained from the event or
transaction (Frias‐Aceituno, Rodríguez‐Ariza and Garcia‐Sánchez 2014). This states
that the current value denotes value-in-use as well as fair value measurement. From the
2018 annual report of the A2 Milk Company Limited in 2018, the organisation has
utilised historical cost along with fair value measurements in order to gauge its various
assets and liabilities.
Disclosure and presentation:
Based on the conceptual framework of AASB, disclosure and presentation could
be deemed as the communication tools in order to provide information regarding the
realised liabilities, assets, equity, expenses and income (Aasb.gov.au 2019). Hence,
sound disclosure of information supported by effective presentation of the financial
components is required for the business organisations. From the latest annual report of
the A2 Milk Company Limited, all relevant information has been disclosed by the
organisation and the same is presented effectively like liabilities, expenses, assets,
expenses and equity to the users of the financial reports.
Recognition and de-recognition:
These are deemed to be the two crucial accounting concepts in compliance with
the conceptual framework of AASB. Recognition could be defined as the method of
capturing any item, which fulfils the definition of a component with the intent of
incorporating that component in the income statement as well as the balance sheet
statement (Gebhardt, Mora and Wagenhofer 2014). Along with this, de-recognition is
deemed to be the procedure of eliminating a portion or the entire portion of a pre-
recognised asset or liability from the balance sheet statement of an organisation. From
the annual report of the A2 Milk Company Limited in 2018, the organisation has utilised
the concept in the financial reporting procedure along with appropriate realisation of its
liabilities and assets.

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2. Analysis of issues of measurement:
One of the vital concepts in financial reporting of the organisations is issues
related to measurement. Based on the conceptual framework of AASB, measurement
bases could be observed, which constitute of fair value measurement and historical cost
measurement (Gordon et al. 2015). In accordance with the conceptual framework of
AASB, fair value could be considered as the price, which an organisation receives in
order to sell an asset or passing over or paying a liability in orderly manner between the
participants in the market at the date of measurement. In this regard, it is noteworthy to
state that the measurement of fair value represents the real market values of liabilities
and assets at the existing date. On the contrary, the measurement base of the historical
cost represents the asset and liability values at the date of transaction or acquisition
(Leuz and Wysocki 2016). Hence, differences are apparent between the bases of
historical cost measurement and fair value measurement.
A significant debate could be observed about the debate and the concept of
measurement could be seen between the measurements of historical cost and fair value
(Newberry 2015). According to the fair value accounting concept, it is a more pertinent
measure, since it captures aspects such as depreciation, market trend and others and
hence, this assists in updating the values and relevance of assets and liabilities.
However, the measure related to historical cost accounting is deemed to be a highly
conservative idea, which is deemed to be reliable. The use of fair value accounting has
been made massively in the 19th and the initial 20th centuries. However, during the US
economic collapse in 1920s, the entire blame was on fair value accounting, as it has the
tendency of overstating the asset values. It is noteworthy to mention that this debate is
ever-increasing. However, permission has been provided by AASB to the organisations
in using the measurement bases based on the nature of their operations and
requirements (Nobes 2014).
From the 2018 annual report of the A2 Milk Company Limited, it is evident that
the organisation has utilised both fair value accounting and historical cost accounting
depending on its business requirements. According to “Note A Basis of Preparation in
the Annual Report” , the consolidated financial statements of the organisation
have been prepared depending on historical cost accounting. However, it has used fair
value accounting as well for listed investments (Thea2milkcompany.com 2019).
Based on the annual report of the A2 Milk Company Limited in 2018, it has been
found that the organisation has gauged its inventory at the minimum of either net
realisable value or cost. Moreover, the valuation of property, plant and equipment is
made at cost less impairment losses and accumulated depreciation. The similar aspect
could be identified for goodwill as well at cost after the subtraction of accumulated
impairment losses.
Along with this, the investments are gauged at fair value by the A2 Milk Company
Limited through direct addition of transaction costs. After this, the organisation has
made the initial realisation of trade and other payables at fair value after subtracting the
attributing cost of transactions. Moreover, the organisation has realised its listed
investments at fair values and the measurement is carried out using fair value
accounting. It has to be stated that the A2 Milk Company Limited has used the fair value
model having three tiers for conducting the valuation of its particular liabilities and
assets.

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Hence, it is apparent from the above analysis that the management of the A2
Milk Company Limited has addressed the measurement issue by adopting the bases of
measurement for its particular liabilities and assets. These methods have been adopted
by the organisation depending on its business requirements.
3. Fundamental qualitative characteristics:
For ensuring the usefulness of financial information, the same needs to have the
aspects of relevance and faithful representation (Pelger 2016). It is noteworthy to state
that these two features are valuable for ensuring the usefulness of financial information.
They are represented as follows:
Relevance:
Positive difference could be made in the process of undertaking decision for the
users, if there is relevancy of information. Relevance in information could be ensured in
the presence of predictive value as well as confirmatory value. The value of information
is increased with the use of confirmatory value by providing feedback regarding the past
judgements (Pelger 2016). On the other hand, predictive value ensures the usefulness
of information by increasing the ability of the decision-makers to estimate the possible
outcome of the organisation. The measurement of uncertainty and materiality are
deemed to be other significant aspects in order to enhance the value of information.
Faithful representation:
The management of the organisation is needed to assure faithful representation
of financial information coupled with depicting the pertinent phenomena so that the
information carries value to the decision-makers. Different crucial components are
mandatory to assure the faithful representation of financial information, which comprise
of neutrality, completeness and error-free. Any economic phenomenon containing the
above aspects is significant to the financial statement users so that they could make
sound investment as well as other decisions (Ryan et al. 2014).
For the investors, certain steps have to be followed to assure that whether the
organisation has represented the above two characteristics of financial information.
Firstly, a crucial economic phenomenon has to be considered regarding the
organisation. Secondly, they have to identify the kind of information, which are most
pertinent, if they are available and they could be presented faithfully. Thirdly,
ascertainment needs to be made whether this information is included in the financial
statements based on which it is possible to make faithful representation of the same.
Such steps fulfil the process of meeting the two features of financial information
(Wahlen, Baginski and Bradshaw 2014).
Based on the annual report of the A2 Milk Company Limited in 2018, it is evident
that the organisation has fulfilled two fundamental qualitative features pertaining to
financial information and certain examples are provided as follows:
The financial statements of any business organisation contain three important
aspects, which include current assets, non-current assets and liabilities. The latest
annual report of the organisation makes it apparent that its financial statements contain
all pertinent information, which is depicted faithfully to the users. For instance, one of
the significant current assets of the A2 Milk Company Limited includes inventories that
assist in ascertaining the liquidity and efficiency position of the organisation. In case of

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inventory, the pertinent information is the value and business policies in relation to
valuation.
As evident from the above extract, the organisation has made detailed evaluation
of its inventories, since they contain information regarding raw materials, finished goods
and goods in transit. There has been disclosure of measurement and recognition-
related information as well that assures this asset is relevant and it is represented
faithfully (Van Mourik and Katsuo 2014).
Property, plant and equipment are a significant non-current asset of the
organisation that determines the financial condition. The pertinent information on this
asset includes reconciliation items, book value and policies and procedures related to
measurement.

8ADVANCED FINANCIAL ACCOUNTING
From the above table, it could be observed that the organisation has reported all
pertinent information on this group of non-current assets faithfully, in which the
information associated with book value, reconciliation amounts related to carrying value,
methods of measurement and depreciation, impairment and other aspects.
For liabilities, trade and other payables is a vital item in case of any business
organisation (Van Mourik 2014). In case of trade and other payables, the pertinent
information is the value and business policies in relation to valuation.

9ADVANCED FINANCIAL ACCOUNTING
From the above analysis, it could be witnessed that the A2 Milk Company Limited
has disclosed detailed information of its current liabilities as well as its assets.
Conclusion:
The above discussion makes it apparent that the management of the A2 Milk
Company Limited has taken into account the necessary accounting concepts of the
conceptual framework mentioned in AASB. The organisation is observed to have
adopted different concepts of accounting that include the reporting entities and the
financial statements, financial statement components, measurement, disclosure and
presentation, recognition and de-recognition along with capital and capital management
concepts. A critical evaluation of the debate between historical cost accounting and fair
value accounting has been made in this report. It has been found that the A2 Milk
Company Limited has used fair value accounting as well as historical cost measurement
depending on business requirements. In addition, it has been analysed that financial
information contains two fundamental qualitative features, which include relevance and
faithful representation. Finally, it has been analysed that the management of the the A2
Milk Company Limited has included these two features by disclosing relevant
information and accordingly, the same has been represented faithfully.

10ADVANCED FINANCIAL ACCOUNTING
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