An Exploration of the Conceptual Framework and Prudence in Financial Reporting

The assignment content discusses the annual reports of two companies, Australian Agriculture Company and Abundant Produce Limited, which operate in the agriculture sector. The report highlights their financial statements, remuneration structures, and conceptual frameworks. It is observed that both companies have different remuneration structures aimed at motivating executives to contribute to the company's success. Additionally, it is noted that the current conceptual framework is amended due to un-coverage of some important areas, outdated framework, and improper guidance of some areas. The concept of prudence is also highlighted as an exercise of caution used under uncertainty conditions. It is recommended that the process of performance evaluation of senior executives be disclosed, the number of independent directors considered for appointment, and company information provided to investors through its website.

Contemporary Issues In Accounting

Executive Summary
The analysis of annual reports of two listed companies is done which comes under the
agricultural sector. The Australian agricultural company serves the beef cattle production in an
effective manner by considering the usage of land and natural resources. The main activities of
the company include pastoral properties development, marketing of products and services in
order to promote the brand in the eyes of the customers. The Abundant Company engages in the
commercialization of seeds for many types of food crops in Australia, development and
acquisition.
The analysis of the annual report is done on the main elements of financial statements. The
revised conceptual framework is understood in order to include addressing the prudence in
corporate reporting which is followed by the recommendations and conclusion.

Table of Contents
Executive Summary.........................................................................................................................1
Introduction......................................................................................................................................3
Annual report analysis.....................................................................................................................3
Remuneration structure....................................................................................................................6
Proposed conceptual framework......................................................................................................6
Reasons of reference to prudence in the conceptual framework.....................................................8
Criticism..........................................................................................................................................8
Conclusion.......................................................................................................................................9
Recommendations............................................................................................................................9
References......................................................................................................................................11

Introduction
The conceptual framework is defined as the concept which was developed for the financial
reporting. It is mainly the practical tool which assists the board to make the IFRS standards
which are based on the concepts which are consistent (Lexicon.ft.com et al., 2016). It also assists
the analyst in order to interpret the standards. It also supports the policies development of
accounting policies when the IFRS are not applied to the specific transaction. The main objective
is to improve the financial reporting through giving the clear, complete and update policies.
Annual report analysis
The general purpose financial reports of both the companies are organised according to the
companies Act, 2001, international financial reporting which is issued by the international
accounting standard board, Australian Accounting Standards and its interpretations. The aim of
general purpose financial reports is to give the information regarding the reporting entity to the
potential and current investors, financial decision makers, creditors and lenders.
The difference is annual reports is explained below which is done on the basis of main elements
from the financial statement:
1. Inventory valuation
The inventory valuation of Australian Agriculture Company is done at the lower of cost and
the net realizable value (AACo et al., 2016). The cost is calculated on the basis of average
cost which includes the transportation costs. The net realizable value is calculated by
deducting the estimated cost of consumption from estimated the price of selling in the

ordinary course of business. The quality of inventories is considered at the time of
assessment whereas the abundant produce limited valued the inventory at the fair market
value in which the cost at the time of selling are taken upon the initial recognition as
inventory and then afterwards at net realizable value.
2. Trade and other receivables
The trade and other receivables of abundant produce limited is recognized as the fair value
in the initial stage then afterwards the trade is calculated at amortized cost by applying the
effective interest method minus provision for impairment whereas Australian Agriculture
Company has valued the trade and other receivables at the fair value of the amount which
will be received and afterwards it is calculated at the amortized cost by applying the method
of effect interest minus doubtful debts allowance.
3. Plant, equipment and property
The valuation of plant and equipment of Abundant produce limited is done on the cost basis
in which the accumulated depreciation and impairment is deducted from the cost
(Abundantproduce.com et al., 2016). The property is valued at the fair value in which the
accumulated depreciation is deducted from the cost whereas the valuation by Australian
Agriculture Company is done through at fair value. The plant and equipment are calculated
at historical cost minus accumulated depreciation and any accumulated loss of impairment.
4. Contingent liabilities
The Abundant produce limited is having no contingent liabilities whereas the Australian
agriculture company has considered the goodwill as a contingent liability and the valuation
is done at fair value.
5. Operating lease

The valuation of operating lease of Australian Agriculture Company is done through
straight-line basis over the period of lease. The incentive of operating leases is recognized as
the liability at the time of receiving and afterwards it is deducted from lease payment
between the reduction of liability and rental expenses whereas abundant produce limited
lease the payments for operating lease where the risk and benefits have remained with the
lessee and they recognized it as the expense within the particular time period.
6. Revenue
The revenue valuation of Australian Agriculture Company is done to the extent as it is
possible that the economic benefits will come to the company and the revenue is calculated
reliably without considering the number of payments. The calculation of revenue is done at
fair value of the consideration received by taking into account the duration of payment
whereas the abundant produce was limited.
7. Pricing provision
There is no provision of pricing in both the companies.
8. Income tax expenditure
The income tax expenses of Australian Agriculture Company is calculated on the
accounting profit after allowing the nondeductible and nontaxable items based on the
expected amount to be paid in the future whereas the abundant produce limited recognise
the tax related items directly in equity which are related to equity but not in the income
statement.

Remuneration structure
The remuneration structure is mainly designed to ensure that the balance of rewards and fixed is
maintained in which the long term and short term incentives are included which are weighted
towards the performance elements which taken into account for corporate and individual
performance. The aim of remuneration structure includes motivation of main executives; attain
appropriate quality management and contribution of executives towards the success of an
organization.
In the Australian Agriculture Company, the short-term incentive is rewarded to the executives in
order to contribute towards the success of an organization. The incentive is calculated on the
eighty percent financial performance metrics of the company and twenty percent of the
performance metrics of an individual whereas in the abundant produce limited the incentive is
governed through service agreement which is created between the executives and an
organization. It comprises of the monthly fee which is paid by the organization, and the
termination benefits are not provided by the company, but the executives are able to contribute in
the share option which is an incentive programme.
Proposed conceptual framework
The main aim of the conceptual framework is to provide a complete and clear picture of the
financial statement. It underlined the statement of financials which is used by the external users.
The conceptual framework helps to check that the IASB requirements are meet by the framework
or not which enables to provide a more consistent framework to the company (Ifrs.org et al.,
2016). The conceptual framework should have the capability to solve the financial problems, and
it should develop the confidence among the users of the financial statement.

The current framework is amended due to un-coverage of some important areas, outdated
framework and improper guidance of some areas.
There is no standard of conceptual framework due to which it does not override any particular
standards. Thus the amendments in the conceptual framework will not reflect the instant effect
on the statement of financials of various reporting entities. However, the entities will be
impacted by the amendments to the conceptual framework when it is applied to develop the
accounting principles in which the standard of IFRS is not applied (Pwc.blogs.com et al., 2016).
The prudence is defined as an exercise of caution which is used at the time of making judgments
under the uncertainty condition. It mainly states that the assets should not be overstated and the
liabilities should not be understated.
The conceptual framework must include the concept of prudence in order to address the disparity
in reporting of corporates.
The focus of revised conceptual framework:
1. Entity of reporting
2. Disclosure and presentation
3. Statement of financials elements
4. Measurement
5. De-recognition and recognition

Reasons of reference to prudence in the conceptual framework
1. The current and proposed standards are motivated by the presence of prudence so it is
significant to include the concept of prudence in the conceptual framework which can be
applied consistently.
2. The natural bias towards the optimism is minimized by the concept of prudence due to
which the concept of prudence must be added in a framework (Iasplus.com et al., 2016).
3. The investors down and upside risk are considered by the prudence.
4. The interest of shareholders and investors are aligned by the prudence. It also minimizes
the moral hazards.
5. The achievement of neutrality is enabled by the prudence which helps to take the decision
under the uncertainty condition which shows that the concept of prudence has played a
role in corporate reporting.
Criticism
1. The prudence is inconsistent in nature with the neutrality concept.
2. The greater subjectivity in the statement of financials enabled through the exercising of
prudence because of that the financial performance is difficult to examine.
The prudence is present in many areas of the corporate reporting. For example,
1. The events impairment results in the written down of carrying an amount of the assets
which is known as prudence because it overrides the regular appointment of non-
current assets costs over its valuable life (Ifac.org et al., 2016).

2. The elements of prudence comprise of profit and revenue recognition as when the
provisions related to the profit and revenue reflects uncertainties regarding the future
outcome then the prudence limits the unrealized profit which can be easily
recognized.
Conclusion
From the above analysis of annual reports it can be concluded that both the companies comes
under the agriculture sector and the companies are variant from each other on the basis of critical
elements of the financial statement. Both the companies have different remuneration structure
which is used to motivate the executives in order to maximize their contribution to the success of
the company. The present conceptual framework is changed because the important areas are not
covered in the framework. Secondly, the present conceptual framework neglects the clear
guidance of some areas. The prudence is the exercise of caution which enables to take the
judgment under the conditions of uncertainties. The revised conceptual framework focuses on
the disclosure and presentation, elements of a financial statement, measurement, report entity,
measurement and, recognition and de-recognition. The produce must be added to the conceptual
framework because it helps to minimize the natural bias towards the optimism, helps to achieve
the concept of neutrality, considers the investor's risk and motivates both the standards but it is
inconsistent with the neutrality concept.
Recommendations
From the above conclusion some recommendations has been made for both the companies:

1. The process of performance evaluation of senior executives which is done in a
periodically that must be disclosed by the listed companies which help to disclose the
information regarding the contribution of executives in the success of the company.
2. The number of independent directors must be considered at the time of appointing
directors to the board.
3. The company’s information must be provided to the investors by its website which helps
to attract a large number of investors by knowing the financial stability of the company
within the particular time period.

References
Pwc.blogs.com. (2016). Dear Prudence - IFRS. [online] Available at:
http://pwc.blogs.com/ifrs/2015/06/dear-prudence.html [Accessed 11 Dec. 2016].
Abundantproduce.com. (2016). www.abundantproduce.com | Abundant Produce Australia Pty
Ltd. [online] Available at: https://www.abundantproduce.com/ [Accessed 14 Dec. 2016].
AACo. (2016). Australian Agricultural Company - AACo. [online] Available at:
https://aaco.com.au/ [Accessed 14 Dec. 2016].
Lexicon.ft.com. (2016). Conceptual Framework Definition from Financial Times Lexicon.
[online] Available at: http://lexicon.ft.com/Term?term=conceptual-framework [Accessed 11
Dec. 2016].
Ifrs.org. (2016). IFRS - Conceptual Framework Exposure Draft and Comment letters. [online]
Available at: http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/
Pages/Conceptual-Framework-Exposure-Draft-and-Comment-letters.aspx [Accessed 11 Dec.
2016].
Iasplus.com. (2016). Conceptual Framework — Comprehensive IASB project. [online]
Available at: http://www.iasplus.com/en/projects/major/cf-iasb [Accessed 11 Dec. 2016].
Ifac.org. (2016). The Never Ending Story of Prudence and IFRS | IFAC. [online] Available at:
https://www.ifac.org/global-knowledge-gateway/business-reporting/discussion/never-ending-
story-prudence-and-ifrs [Accessed 11 Dec. 2016].