Importance of Conceptual Accounting Framework for Developing High Quality Financial Reports

This report analyzes the compliance of Carsales.Com Ltd with the principles of conceptual accounting framework for developing high quality financial reports for entities listed on Australian Securities Exchange (ASX). The report examines the usefulness of financial reports, fundamental and enhancing qualitative characteristics used by the company in financial reporting, and recommendations for the company to meet the qualitative characteristics of financial reporting.

Contemporary Issues In Accounting
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Executive Summary
This report has been undertaken to demonstrate the importance of implementing the
principles of conceptual accounting framework for developing high quality financial reports for
the entities listed on Australian Securities Exchange (ASX). The analyses of the financial reports
of Carsales. Com Ltd has depicted that it has complied with the standard framework of
conceptual accounting appropriately. The financial information is useful for the end-users to take
investment decisions as it is relevant and faithfully presented.
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Contents
Introduction......................................................................................................................................4
General Purpose of Conceptual Framework Met by the Selected Company..................................4
Usefulness of the Financial Reports as per the Requirements of the Target Audience...................5
Fundamental Qualitative Characteristics Used by the Company in Financial Reporting...............7
Enhancing Qualitative Characteristics Used by the Company in Financial Reporting...................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
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Introduction
Conceptual accounting framework is developed for making the accounting information
more useful by providing standard guidelines and procedures for developing the financial
statements. It has been developed by IASB (International Accounting Standards Board) for
developing a uniform process of presenting the financial information to the end-users. The
framework has helped the IASB in developing standard accounting rules and procedures to
improve the quality of financial information disclosed by the entities worldwide. As such, AASB
(Australian Accounting Standards Board) is also directing the entities listed on ASX to develop
their financial reports as per the principles and characteristics of conceptual accounting
framework (Mazhambe, 2014). In this context, the present report is developed for examining the
compliance of a selected entity listed on ASX with the framework of conceptual accounting. The
business entity selected for this is Casales,Com, an online automotive company of Australia
involved in purchasing and selling of cars and motorcycles listed on ASX.
General Purpose of Conceptual Framework Met by the Selected Company
The main objective of developing financial reports as per the standard framework is to
disclose the financial information that facilitates the investors to make decisions whether to
invest in the stock of a particular business entity or not. The financial statements should be able
to provide an estimate of the future profitability position of an entity through predicting its future
net cash flow position. The future growth and development prospects of an entity can also be
analyzed through examining the efficiency of the management and the governing board in
carrying out their responsibilities (Rezaee, 2003). The annual report analysis of Carsales.Com
that company has adequately disclosed all the required financial information for decision-making
to end-users in its financial reports. The company has developed and presented its consolidated
financial statement as per the AASB standards and the conceptual accounting framework as
stated in its notes to financial reports section of the annual report (Van der Meulen, Gaeremynck,
and Willekens, 2007). The financial statements have provided the value of all the financial
elements such as assets, liabilities and equity and also stated the accounting methods and rules
applied for measurement of their value. The financial report has also provided separately the
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performance of each business segment of the company so that investors can easily gain
understanding of its highest performing area (Soderstrom and Sun, 2007).
The company has appointed a competent leadership team for carrying out its operational
activities as depicted in the annual report. The annual report ahs adequately disclosed the key
roles and responsibilities of the leadership team of the company. In addition to this, the key
financial performance required by the investors for investment decisions as presented clearly in
the directors report of the company. Therefore, it can be said that the company has adequately
met the general purpose of conceptual accounting framework for developing financial reports
(Carsales Com Ltd: Annual Report, 2017).
Usefulness of the Financial Reports as per the Requirements of the
Target Audience
The target audience is the end-users of the financial reports developed by a reporting
entity such as investors, creditors and lenders. They need to analyze the current and past
financial information provided by an entity so that they can predict the future growth position on
its basis (Tarca, 2004). The financial report of Carsales. Com can be stated to be developed as
per the needs and requirements of the end-users. The key financial highlights are presented in the
starting of the annual report of the company along with its cumulative annual growth rate. The
report is presented in a simplified format having a systematic flow of information so that it can
easily understand by the end-users. The company has incorporated the use of accrual accounting
practices for reporting the impact of the financial transactions occurred on the economic
resources in the period in which it occurred as per the principle of conceptual accounting
framework. The use of accrual accounting has helped in assessing accurately the past and future
ability of the company in generating net cash flows (Rezaee, 2003). The impact of the changes in
the market conditions on the financial information of the company by reflecting their impact on
the market price and interest rates have also been sufficiently explained in its financial report.
The consolidated financial statements are prepared in compliance with the standard accounting
framework and principles as stated in the auditors report. This ensures that financial information
disclosed is free from any material errors and can be used in decision-making process of the end-
users (Carsales Com Ltd: Annual Report, 2017).
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Recognition Criteria
The application of the standard framework of conceptual accounting requires companies
to clearly state the measurement and recognition criteria used for reporting the value of different
elements of the financial statements. The different financial elements are identified and
recognized during the process of preparation of financial reports by business companies only
when they are expected to provide some future economic benefits as per the standard framework
of IASB (Psaros and Trotman, 2004). Carsales. Com has sufficiently explained and stated the
identification and recognition criteria used for reporting the values of financial elements. For
example, the recognition and measurement criteria used for reporting the revenue is at the fair
value for its major business activities such as advertising, goods sale, finance, dividends, R&D
rebate.
The expenses are recognized in the profit and loss and the past services are identified and
measured through the use of straight-line basis. It has also classified the investments in major
categories of financial assets at fair value, loans, receivables and held-to-maturity investments.
The borrowings of the company are also recognized and measured at the fair value that is overall
transaction cost incurred. The difference between the proceeds and the redemption amount is
reported in the profit and loss over the accounting period through the use of interest method. The
income tax expense or revenue for the accounting period is recognized through the use of
applicable income tax rate. The cash and cash equivalents are reported and measured at their
value of maturity or less when the assets are readily converted to cash (Carsales Com Ltd:
Annual Report, 2017).
Fundamental Qualitative Characteristics Used by the Company in
Financial Reporting
The conceptual accounting framework has provided that fundamental qualitative
characteristics of financial reporting are relevance and faithful presentation. The financial
information for meeting the criteria of relevancy need to have a confirmatory and predictive
value in order to make a difference in the decision-making process of the end-users (Maines and
Wahlen, 2006). Carsales.com as per these characteristics of framework has provided both
confirmatory and predictive value of financial elements in its financial reports. The confirmatory
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of different elements are stated in the financial statements whereas the accounting estimates and
assumption used for measuring the predictive value of the financial elements are also disclosed
in the report. For example, the assumptions used by the company for determining the recoverable
amount of CGU’s and income tax is disclosed in its annul report that can be depicted as follows:
The second qualitative characteristics of conceptual accounting framework is faithful
presentation that is the information provided in the financial statement by a reporting entity
should be free from any error and complete in all respects (McDaniel, Martin and Maines, 2002).
The company financial information can be regarded as faithfully presented on the basis of the
auditor’s report. The company has carried out its auditing and the auditor’s statements have
disclosed that its financial information is free from any material error and complete in all
respects (Carsales Com Ltd: Annual Report, 2017).
Enhancing Qualitative Characteristics Used by the Company in Financial
Reporting
The financial information should be comparable, verifiable, understandable and timely as
per the enhancing characteristics of the financial reporting stated in the conceptual accounting
framework. As per the comparability characteristic, the information presented in the financial
statements for the current year can be compared with that of the previous year for depicting the
percentage increase or decrease in the financial performance (Gerber, Gerber and Van der
Merwe, 2014). It can be depicted from the financial statements of the company as follows:
The company in accordance with the verifiability characteristic of financial reporting has
provided the quantitative information in its financial statements that can be measured and
verified. The investor can assess the verifiability of the financial information through the use of
ratio analyses with the help of quantitative value stated of different elements in the financial
information. The different ratios such as profitability, liquidity, efficiency can be used for
verifying whether the information presented is accurate or not (Gore and Zimmerman, 2007).
The company reports its financial information on an annual basis ensuring that it is latest and
available to the end-users in time. It has also provided all the information in the notes to financial
statements section that ensures it is understandable to the end-users (Carsales Com Ltd: Annual
Report, 2017).
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Recommendations
It is recommended to the company on the basis of the overall analysis that it should
adequately met the fundamental and enhancing qualitative characteristics of financial reporting
as provided in the conceptual accounting framework. The company should adequately disclose
all the accounting policies and practices used for evaluation of different financial elements in its
notes to financial statements section. The accounting policies and practices adopted should be as
per the AASB standards and any change in the accounting policies must be disclosed in the
financial reports for meeting the qualitative characteristics of financial reporting.
Conclusion
It can be stated form the overall discussion held in the report that Carsales. Com
effectively complies with all the principles of conceptual accounting framework. It has met the
varying needs and requirements of the target audience through providing the financial
information as per the qualitative characteristics of the standard framework of accounting
developed by the IASB.
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References
Carsales Com Ltd. 2017. Annual Report. [Online]. Available at:
http://shareholder.carsales.com.au/FormBuilder/_Resource/_module/NwbnH0pKFk-
uPGxM7cmTrw/docs/reports/annual/Annual_Report_2017.pdf [Accessed on: 17 April 2018].
Conceptual Framework. 2017. IFRS Foundation. [Online]. Available at:
http://www.frascanada.ca/international-financial-reporting-standards/resources/unaccompanied-
ifrss/item71833.pdf [Accessed on: 17 April 2018].
Gerber, M. C., Gerber, A. J., and Van der Merwe, A. J. 2014. An Analysis of Fundamental
Concepts in the Conceptual Framework Using Ontology Technologies. South African Journal of
Economic & Management Sciences 17 (4), pp. 396–411.
Gore, R., and Zimmerman, D. 2007. Building the Foundations of Financial Reporting: The
Conceptual Framework. The CPA Journal 77(8), pp. 30–34.
Maines, L. and Wahlen, J. 2006. The Nature of Accounting Information Reliability: Inferences
from Archival and Experimental Research. Accounting Horizons 20(4), pp. 399- 425.
Mazhambe, Z. 2014. Review of International Accounting Standards Board (IASB) Proposed
New Conceptual Framework. Journal of Modern Accounting and Auditing 10 (8), pp. 835-845.
McDaniel, L., Martin, R. and Maines, L. 2002. Evaluating Financial Reporting Quality: the
Effects of Financial Expertise vs. Financial Literacy. The Accounting Review 77, pp.139-167.
Psaros, J. and Trotman, K. 2004. The Impact of the Type of Accounting Standards on Preparers’
Judgments. Abacus 40(1), pp. 76-93.
Rezaee, Z. 2003. High-quality financial reporting: The six-legged stool. Strategic Finance 84(8),
pp.26-30.
Soderstrom, N. and Sun, K. 2007. IFRS Adoption and Accounting Quality: A Review. European
Accounting Review 16(4), pp. 675-702.
Tarca, A. 2004. International Convergence of Accounting Practices: Choosing between IAS and
US GAAP. Journal of International Financial Management and Accounting 15(1), pp. 60-91.
Van der Meulen, S., Gaeremynck, A. and Willekens, M. 2007. Attribute differences between
U.S. GAAP and IFRS earnings: An exploratory study. The international Journal of Accounting
42, pp.123-142.
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