Analysis of Conceptual Framework: A Case Study of AMA Group Limited

This report analyzes the theory of Conceptual Framework in the context of AMA Group Limited, an Australian company specialized in the operation and development of complementary businesses in the automotive aftercare market. The report delves into the compliance requirements, qualitative characteristics, and limitations of the Conceptual Framework and its impact on general purpose financial reporting.

AN ANALYSIS OF CONCEPTUAL
FRAMEWORK
A CASE STUDY OF AMA GROUP LIMITED

Executive Summary
Financial accounting is regarded as the language of the business as the same provides an
overview of the financial health of the business after taking into consideration the stakes of all
the stakeholders associated with the business. Therefore, financial accounting plays a crucial role
in corporate reporting. The theory of Conceptual Framework (hereinafter may be referred to as
“CF”) provides the holistic direction on the objectives and goals of such reporting. The given
report delves into the analysis of the theory of CF in the context of a real-world company; AMA
Group Limited (hereinafter may be referred to as “AMA”, or the company or the firm, as the
case may be).
At the outset of the report, the researcher provides an overview of both the organisation and the
theory of CF, in brief, followed by the analysis of the theory in the organisational context. Based
on the evaluation and findings, necessary recommendations are also presented subsequently. The
report is wrapped up finally by the researcher by way of concluding note.
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Table of Contents
1.0 Introduction...........................................................................................................................................4
2.0 Conceptual Framework: An Overview..................................................................................................5
3.0 Organisational Overview.......................................................................................................................6
4.0 Analysis of Organisational Conceptual Framework..............................................................................7
4.1 Compliance Requirements for Conceptual Framework.....................................................................7
4.2 Qualitative Characteristics of Conceptual Framework: Compliance and Enhancement.....................8
4.3 Limitations of Conceptual Framework and Compliance of General Purpose Financial Reporting....9
5.0 Conclusion...........................................................................................................................................11
References.................................................................................................................................................12
Appendices................................................................................................................................................14
Appendix 1: Consolidated Income Statement........................................................................................14
Appendix 2: Consolidated Statement of Financial Position...................................................................15
Appendix 3: Consolidated Statement of Cash Flows.............................................................................16
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1.0 Introduction
Financial accounting and corporate reporting are two important aspects of business studies as
both the elements require consideration of several business-critical aspects. CF, on the other
hand, is considered to be the standards and guidelines for the preparation of financial statements
as per the given norms and principles. Since the financial reporting adds value to the firm’s
brand and market positioning to an extent, it becomes imperative for the management to prepare
the same with utmost efficiency and complying with all the existing and applicable prescribed
guidelines (Herath, McCoy, Lucas, and Mensah, 2011). It may be stated that a successful and
effective adoption and application of theories of enhances the quality of financial statements in
terms of recognition of financial items, their respective treatments in the books of accounts and
also their disclosure in the financial statements (Fasb.org, 2018).
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2.0 Conceptual Framework: An Overview
The conceptual framework developed and issued by the International Accounting Standards
Board (hereinafter may be referred to as “IASB”) is regarded as the foundation of corporate
reporting by way of laying down the standards guidelines as to the treatment, presentation and
disclosure of various financial events and transactions (Haslam, 2017). Since the financial
information and data are technical, it may not be understandable for all the stakeholders
associated with the business. On the other hand, financial statements provide an estimate about
the overall financial health of the business in which stakes of all the stakeholders are invested.
Therefore, it becomes a very challenging task for the management to prepare financial statements
abiding by certain guidelines and standard which primarily enhances the quality of disclosure
and understandability of the financial statements. There arises the need of CF which pronounces
directions as to how the different financial events and transactions should be measured,
recognised and recorded in the books of accounts. The primary objective of CF, therefore,
revolves around making the financial statements relevant, reliable, comparable and timely for the
prospective investors and stakeholders (Kampanje, 2013).
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3.0 Organisational Overview
The report attempts to analyse the implication of CF in the context of a business, as stated earlier
and for the purpose, AMA has been chosen. AMA is an Australian company specialised in the
operation and development of complementary businesses in the automotive aftercare market. The
focus area of the business is the wholesale vehicle aftercare and accessories segment including
the cable accessories and automotive component remanufacturing. The company has received
several awards for providing quality services in the specialised segment. As per the annual report
of 2017, the company’s reported revenue has been $382,165 thousands with reported EBITDA
of $37,205 thousands and total asset base of $292,396 thousand. The shares of the company are
listed in Australian Stock Exchange (ASX) and trading at 97.00 cents as on 30th June 2017
(https://amagroupltd.com, 2018).
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4.0 Analysis of Organisational Conceptual Framework
Analysis of CF requires the identification of basic elements of financial statements which are
consolidated income statement, consolidated statement of comprehensive income, consolidated
statement of financial position, consolidated statement of changes in equity, consolidated
statement of cash flows and also the notes to the financial statements. Annual report for the year
2017 has been considered for AMA to identify those elements therein and thereafter the
necessary analysis and evaluation has been carried out. The subsequent sections of the report
briefly present such analysis and examination.
4.1 Compliance Requirements for Conceptual Framework
CF requires few compliances to be met in terms of the objective of financial statements,
qualitative characteristics of financial statements, the definition, recognition and measurement of
the elements of financial statements and also the) concepts of capital and capital maintenance. To
explain further, it may be stated that the CF demands that the elements of financial statements a
mentioned earlier are prepared in accordance with the applicable laws of the country. In addition,
the definition, measurement, recognition and treatment of various financial events should be
performed as per the standards set for the purpose and these should be appropriately disclosed as
laid down in these directives and standards (HAMPTON, 1999). Besides, it may also be
observed that principles of capital maintenance (be it the financial capital or the physical capital)
has also to be adhered by the firm. In other words, how the assets and liabilities are valued and
re-valued and corresponding increase or decrease in such values affect the equity of the firm
should be properly measured in the backdrop of relevant accounting standards (Lion, 2012).
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In the case of AMA, it has been identified that the firm has included all the elements of financial
statements in their corporate reporting purpose. Income statement presents the results of
operations for the period; the balance sheet depicts the state of affairs of the business in terms of
assets and liabilities position and so on. Since the accounts of the firm are being audited by the
independent auditors with an unqualified opinion (as may be reflected in the annual report), it
may be construed that the financial statements are prepared in accordance with the Australian
Accounting Standards (AASs) and also the Corporations Act 2001 (https://amagroupltd.com,
2018). Moreover, it may also be observed that the business has presented an explanation of all
critical items of financial statements in the form of notes which occupy a major portion of the
annual report.
4.2 Qualitative Characteristics of Conceptual Framework: Compliance and Enhancement
As per the CF, the financial statements should contain certain qualitative characteristics. These
are relevance and faithful representations. However, in order to be a faithful representation, the
statements should also be reliable and timely for the stakeholders. Also, there remains a concept
of materiality that should be abided by the management while preparing the financial statements
If any material elements are omitted from the booms of accounts, the statement may not depict
the true and fair view of the state of affairs of the business and hence may not be faithful (He,
Evans and He, 2016).
In the case of AMA, it has been noted that the company maintains policy charters and manuals
which clearly lays down the principles of corporate governance including the guidelines for the
preparation of financial statements. There have been declarations by the directors that the
company has not adopted AASB-9: Financial Instruments which will be applicable later on.
However, the same may not have any material impact on the group’s financial statements. In
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addition, there have been events after the balance sheet date on account of the declaration of
fully franked dividend. The management has accordingly treated and disclosed the same in the
books of accounts as the same as a material impact and significant bearing on the business for
the given reporting period.
CF provides for certain approaches for enhancing the qualitative characteristics of financial
statements. These are comparability, verifiability, timeliness and understandability. It is to be
noted that comparability would primarily mean the compliance with respect to IFRS which is a
set of harmonised accounting standards. Verifiability should be read in conjunction with the
consistency framework which suggests that the accounting principles and methods and valuation
techniques should be used consistently on a yearly basis. Timeliness, on the other hand, denotes
the punctuality in terms of reporting (Jhunjhunwala, 2014).
The report investigates that the AMA management has prepared the financial statements in
accordance with IFRS as well, which has been clearly mentioned in their annual report.
Moreover, there have not been any major changes in accounting policies or assumptions as
asserted by the management. Also, the annual report has been published in three months after the
balance sheet date, which may be regarded to be fairly timely (https://amagroupltd.com, 2018).
4.3 Limitations of Conceptual Framework and Compliance of General Purpose Financial
Reporting
CF is alleged to be non-practical at times especially about its application in the reality when the
definitions of main elements of financial statements are dependent on unspecified rules and
conventions (Smith, Haniffa and Fairbrass, 2010). Moreover, the complex items like fair value
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measurement, deferred tax and tax credit have not been lucidly explained in the CF
(Jhunjhunwala, 2014).
However, AMA has provided detailed disclosure regarding its fair value measurement for two
larger acquisitions namely Geelong Consolidated Repairs and Smash Repair Canberra in its
annual report (https://amagroupltd.com, 2018).
On the other hand, GPFR is the basis of financial statement preparation activity. Though there is
a number of stakeholders with varying degree of their individual needs, financial statements
serve as the base for all to assess about the basis and its capacity to act as per its pre-set
objectives and corporate goals. The annual report of the firm exhibits that AMA has complied
with all the relevant standards while preparing the accounts and also the necessary
Interpretations in force as issued by the standards setters and regulators from time to time.
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5.0 Conclusion
Based on the discussion and analysis performed in the preceding sections of the report, it may be
construed that the CF acts as a support to the management’s responsibility of preparation of
financial statement. Management should consider both financial as well as non-financial
elements of the business while reporting the financial elements of the business sot the investors
and CF will guide them in the process (Rihanna and Dr.B.Mahadevappa, 2011).
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References
Fasb.org. (2018). The Conceptual Framework. [online] Available at:
https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774#section_1 [Accessed 5
Dec. 2018].
HAMPTON, G. (1999). The Role of Present Value-based Measurement in General Purpose
Financial Reporting. Australian Accounting Review, 9(17), pp.22-32.
Haslam, C. (2017). International Financial Reporting Standards (IFRS): Stress Testing in
Financialized Reporting Entities. Accounting, Economics, and Law: A Convivium, 7(2), pp.105-
108.
He, L., Evans, E. and He, R. (2016). The Impact of AASB 8 Operating Segments on Analysts’
Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), pp.330-340.
Herath, S., McCoy, R., Lucas, S. and Mensah, E. (2011). Understanding international financial
reporting standards (IFRS): a review and evaluation of IFRS research. International Journal of
Managerial and Financial Accounting, 3(3), p.304.
https://amagroupltd.com. (2018). Annual Report. [online] Available at:
https://amagroupltd.com/wp-content/uploads/2017/09/Annual-Report-to-shareholders-1.pdf
[Accessed 11 Dec. 2018].
https://amagroupltd.com. (2018). Our Businesses. [online] Available at:
https://amagroupltd.com/our-businesses/ [Accessed 11 Dec. 2018].
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Jhunjhunwala, S. (2014). Beyond Financial Reporting-International Integrated Reporting
Framework. Indian Journal of Corporate Governance, 7(1), pp.73-80.
Kampanje, B. (2013). Bridging Gap between IAS 1 and IASB Conceptual Framework on Users
of Financial Statements. SSRN Electronic Journal.
Lion, J. (2012). How the IASB Interacts with Domestic Standard Setters - A Network of
Standard Setters. Australian Accounting Review, 22(3), pp.244-245.
Rihanna, R. and Dr.B.Mahadevappa, D. (2011). The Conceptual Framework Of Corporate
Social. Indian Journal of Applied Research, 1(4), pp.40-50.
Smith, J., Haniffa, R. and Fairbrass, J. (2010). A Conceptual Framework for Investigating
‘Capture’ in Corporate Sustainability Reporting Assurance. Journal of Business Ethics, 99(3),
pp.425-439.
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Appendices
Appendix 1: Consolidated Income Statement
(Source: https://amagroupltd.com, 2018)
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Appendix 2: Consolidated Statement of Financial Position
(Source: https://amagroupltd.com, 2018)
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Appendix 3: Consolidated Statement of Cash Flows
(Source: https://amagroupltd.com, 2018)
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