Importance of Conceptual Framework for Accounting

This document discusses the importance of conceptual framework for accounting and its impact on financial reporting. It includes a case study on Telstra and Spirit Telecom to illustrate the application of accounting standards. The document emphasizes the need for financial information to have qualitative characteristics to be useful to stakeholders.

Running head: BUSINESS ACCOUNTING
Business Accounting
Name of the Student:
Name of the University:
Authors Note:

1
BUSINESS ACCOUNTING
Summary:
Every country has conceptual framework for accounting. The accounting in an organization must
be in accordance with the applicable conceptual framework of the country. Companies operating
in Australia are under obligation to comply with the Australian Conceptual Framework for
Accounting. Accounting standards issued by Australian Accounting Standards Board (AASB)
are the standards to be followed by the companies operating in the country to comply with the
conceptual framework for accounting in the country. A clear picture has emerged from this
document that suggests that the conceptual framework of accounting is the prime consideration
to be kept in mind while recording financial transactions in the books of accounts and preparing
financial statements. Accordingly the validity of accounting treatment of two practical entities
namely, Telstra and Spirit Telecom is discussed below with respect to certain aspects of
accounting treatments.

2
BUSINESS ACCOUNTING
Contents
Summary:.........................................................................................................................................1
Introduction:....................................................................................................................................3
Part 1:...............................................................................................................................................3
Part 2:...............................................................................................................................................4
Part 3:...............................................................................................................................................6
Part 4:...............................................................................................................................................7
Conclusion:......................................................................................................................................9
References:....................................................................................................................................11

3
BUSINESS ACCOUNTING
Introduction:
Telstra has purchased a land in 2010 at a cost of $52 million. The market value of the land in
2018 stands at $200 million. As per the accountant of the company it is important to revalue the
land to reflect the economic reality of the asset at the present date. Also the compliance with
conceptual framework of accounting by Spirit Telecom Limited shall be discussed here by taking
examples from its Annual Report 2018.
Part 1:
Australian Accounting Standards Board, here in after to be referred to as AASB in this
document, has issued accounting standards to be followed in recording, summarizing and
maintaining books of accounts of entities operating in the country. The objective behind
introduction and implementation of these standards is to improve the quality of financial
reporting in the country. The fair and true representation of financial performance and position of
an entity in the financial statements is achievable when the financial statements are in
compliance with the accounting standards issued by the country (Barker and Teixeira, 2018).
The accountant of Telstra while suggesting that the land should be revalued to reflect the current
financial value of the asset in the books of accounts stated that this notion is consistent with
qualitative characteristics of faithful presentation (BOYMAL, 2007).
The above statement is correct. The reason for confirming with the statement of the accounting
on the notion of consistency in qualitative characteristics of faithful presentation is because the
objective of financial statements is to state the true and fair financial performance and position of
an organization through financial reports. AASB 13, Fair Value Measurement, issued by the
AASB clearly outlines the importance of fair value accounting in reflecting the actual financial

4
BUSINESS ACCOUNTING
state and performance of an organization in its financial statements. The importance of fair value
measurements to reflect the true and fair financial position of an organization is extremely
important to the qualitative characteristics of faithful presentation.
In this case especially, the fact that Telstra acquired the land in 2010 at a cost of $52 million has
significantly higher value in 2018. Thus, to continue to show the land at $52 million despite
knowing that its value at present is $200 million is against the basic principle of true and fair
representation of financial performance and position in financial statements of the company.
Thus, the suggestion of the accountant to revalue the land at current market value is consistent
with fundamental principle of accounting and financial reporting (Craig, Smieliauskas and
Amernic, 2016). By revaluing the land at its current market value of $200 million the actual
economic reality of the asset will be reflected in the financial statements of the company. Thus,
the statement, “This notion is consistent with the qualitative characteristic of faithful
presentation” is correct from the true and fair representation of point of view of financial
statements.
Part 2:
Fundamental characteristics of financial information:
The stakeholders of a business often have no other alternative source of information apart from
financial statements of the business to assess the financial state and performance of an
organization. The financial statements in order to be effective must have certain fundamental
qualitative characteristics. A brief discussion about these fundamental qualitative characteristics
are explained below.

5
BUSINESS ACCOUNTING
Relevance: The financial statements in order to be useful to the stakeholders of an organization
must provide relevant information to the stakeholders. Thus, relevance of financial information
provided in the financial statements is essential to the overall objective of financial statements.
Only if the information is capable of influencing the decision of users of such information that
it’s relevant.
Faithful presentation: Financial information must be complete, free of error and neutral to
represent the financial performance faithfully. Thus, by not disclosing the correct and present
value of an asset the relevance of financial information of Telstra will be reduced greatly
(Dennis, 2018).
Comparability: The information provided in financial reports must be comparable with an
organizations own information over time as well as with the information of similar organization.
Understandability: The information to be provided in the financial statements by an organization
must be understandable to the users of financial information. Without understandability the
utility of financial information to the stakeholders would be less. Thus, financial information
must be understandable to the users of financial information.
Timeliness: The utility and usefulness of financial information to the users such information will
be dependent on the timeliness of the information. Thus, the information must be provided to the
users on correct time to allow them to take correct decisions using these information.
Verifiability: Information must be verifiable by an audit to assure the users of financial
information about its credibility and reliability.

6
BUSINESS ACCOUNTING
AASB conceptual framework is very much established on the above fundamental qualitative
characteristics of financial information. The entire process of issuing accounting standards and
ensuring these are followed is mainly to ensure that the financial information has the above
qualitative characteristics as mentioned (Dragomir, 2011). AASB 1 first time adoption of
accounting standards has specifically mentioned the reason to comply with the accounting
standards in preparing and presenting the financial statements is to ensure that the financial
information has the fundamental qualitative characteristics required to ensure the usefulness of
the information to the stakeholders of an organization.
Part 3:
The annual report of an entity is prepared to provide the stakeholders of the entity with all
information about its operations and performance in the last financial year. Spirit Telecom
Limited has prepared and issued its annual report 2018 containing all the information about the
company and its performance including financial statements and audit report of the company.
The company has mentioned in its annual report about the method and standards issued in
preparing and presenting the financial statements of the company.
Firstly, it is important to state that the company has prepared complete set of financial statements
as per the accounting conceptual framework in the country including notes to accounts. As per
notes the company has followed AASB 15 to recognize and measure revenue in the books of
accounts of the company. As per the notes revenue has been recognized and measured at the
expected fair value received or receivable in the future. One of the important characteristics of
financial information is faithful presentation. By measuring the revenue in fair value received or
receivable the company has ensured that the qualitative characteristic of faithful representation is
upheld. The screen shot from the annual report of the company attached below shows that the

7
BUSINESS ACCOUNTING
company has complied with AASB 15 (Financial Accounting and Reporting Standards for
Private Entities, 2006).
Inventory is one of the most important elements of financial information and must be properly
accounted for in the books of accounts of an organization. Inventories must be valued properly as
incorrect valuation of inventories could lead to misrepresentation of financial performance as
well as position of an organization as at the end of a financial year. AASB 102 provides that an
entity must value its inventory at the lower of cost or net realizable value. As a result any entity
if not comply with the requirements of AASB 102 to value the closing inventories would not
comply with the concept of maintaining qualitative characteristics of financial information
(Samuel, 2018). As per the annual report 2018 of Spirit Telecom, the inventories of the company
has been valued at lower of cost and net realizable value to comply with the requirements of
AASB 102. Hence, two of the most important elements of financial statements have been
recorded as per the applicable accounting standards to improve the qualitative characteristics of
financial information. Using snipping tools the extract of annual report of the company is
attached below to assess the compliance with AASB in this regard.

8
BUSINESS ACCOUNTING
Hence, it is clear from the verification of revenue and inventories stated in the financial
statements of the company that the company has followed AASB to ensure these the financial
information has all the qualitative characteristics necessary to be useful to the stakeholders of the
company.
Part 4:
The investors and securities market are external stakeholders of an organization they have very
limited sources available to gather credible financial information about a company. One of the
main sources to get financial information about an organization for these external stakeholders is
the annual report of the company. These stakeholders take important decisions affecting their
interests in the company by using the financial information provided in the annual report. In case
of Spirit Telecom Limited let’s analyze the reaction of the securities market investors to the
information provided in the annual report of the company (Spraakman and Jackling, 2014).
Extract below shows the statement of profit and loss of the company as at the end of the financial
year 2018 along with comparative figures of preceding year 2017.

9
BUSINESS ACCOUNTING
As is clear from the above profit and loss statement of the company, the financial performance of
the company for the year 2018 has improved from the previous year. Both gross revenue and net
profit after tax of the company have increased in 2018 from 2017. In 2018 the company has
earned a net profit of $570,605 on a gross revenue of $16,200,241 as compared to net profit after
tax of $468,392 and gross revenue of $11,468,993 of 2017.
Thus, considering the improvement of financial performance of the company as per the financial
statements of the company along with expected future improvements both the securities market
and investors have positively reacted to the financial information contained in the annual report
of the company. The revenue of the company has been reported by complying with AASB 15.
Thus, the gross revenue of $16,200,241 reported in 2018 is the fair value of revenue received and
receivable. Considering the importance of revenue for the survival of the company in the long

10
BUSINESS ACCOUNTING
run the increase in revenue has certainly motivated the investors to invest in the shares of the
company. This has certainly influenced the securities market positively (Stevenson, 2012).
Similarly, the fact that the company has valued its inventories at lower of cost and net realizable
value as per AASB 102 is a matter that has certainly influenced the net profit of the company as
reported in the statement of profit and loss. The profit after tax for the company in 2018 is
$570,605 has also positively influenced the behavior of the investors as well as that of the
securities market. Thus, complying with accounting standards to improve the quality of financial
reporting is certainly essential to the proper disclosure of financial performance and position as
on a particular date (Walton, 2018).
Conclusion:
Discussion in this document shows the importance of financial information to have necessary
qualitative characteristics to be useful to the users of financial information. The accounting
standards issued in the country is in line with the conceptual framework of accounting and must
be followed to improve the quality of financial reporting. In case of Spirit Telecom Limited the
annual report of the company confirms that the financial statements of the company have been
complied with the accounting standards in the country.

11
BUSINESS ACCOUNTING
References:
Barker, R. and Teixeira, A. (2018). Gaps in the IFRS Conceptual Framework. Accounting in
Europe, 15(2), pp.153-166.
BOYMAL, D. (2007). The Work Program and Priorities of the AASB. Australian Accounting
Review, 17(42), pp.3-7.
Craig, R., Smieliauskas, W. and Amernic, J. (2016). Estimation Uncertainty and the IASB's
Proposed Conceptual Framework. Australian Accounting Review, 27(1), pp.112-114.
Dennis, I. (2018). What is a Conceptual Framework for Financial Reporting?. Accounting in
Europe, 15(3), pp.374-401.
Dragomir, V. (2011). Accounting for sustainability: the quest for a conceptual
framework. International Journal of Critical Accounting, 3(4), p.384.
Financial Accounting and Reporting Standards for Private Entities. (2006). Accounting Horizons,
20(2), pp.179-194.
Samuel, S. (2018). A conceptual framework for teaching management accounting. Journal of
Accounting Education, 44(54), pp.25-34.
Spraakman, G. and Jackling, B. (2014). A Conceptual Framework for Learning Management
Accounting. Accounting Perspectives, 13(1), pp.61-81.
Stevenson, K. (2012). The Changing IASB and AASB Relationship. Australian Accounting
Review, 22(3), pp.239-243.

12
BUSINESS ACCOUNTING
Walton, P. (2018). Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual
Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the
IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, 15(2), pp.193-
199.