Conceptual Framework and Prudence in Financial Reporting

The assignment content discusses the accounting practices and financial reporting of two listed companies, Huon Aquaculture Company Limited and Farm Pride Foods Limited, both operating in the food and beverages sector. The report highlights their revenue recognition policies, remuneration structures for executives, and proposed conceptual framework for general-purpose financial reporting. Additionally, it touches upon the concept of prudence and its application in corporate reporting. It concludes by recommending best practices for listed companies to improve transparency and governance.

Executive Summary
We have taken the annual reports of the company belonging to food and beverages sector. Farm
Pride Food is a limited company which grades, packs, processes, supplies and markets shell eggs
and process egg products with in Australia and exporting to Asia. Whereas Huon Aquaculture
Company Limited is Vertically integrated Australian agriculture company. Its main aim is
manage risk, Driving sustainable and long term growth.
Proper analysis of annual report of both the listed companies is done on the basis of elements of
financial statements. We have even understood the concept of conceptual framework its revision
to include prudence to address disparity in corporate reporting.Followed by conclusion and
further recommendations.
Table of content.
1. Introduction……………………………………………………………………………1
2. Analysis of annual report……………………………………………………………….2
2.1. General purpose financial
report………………………………………………………..2
2.2. Analysis of items of balance sheet and profit and loss focusing on
Inventory ,PPE ,
Trade receivables ,Contingent liabilities, Taxation, Revenue and expenses……………2
2.3. Remuneration
Structure………………………………………………………………….3
2.4. Proposed conceptual
framework…………………………………………………………4
2.5. Affect on
reporting……………………………………………………………………….4
2.6. Benefits and
criticism…………………………………………………………………….5
3. Conclusion and recommendation………………………………………………………..6
4. Research requirement……………………………………………………………………6
Introduction
The conceptual framework sets out the concepts which underline the preparation of financial
statements for the external users. It is a system of concepts that flow from an objective of
identifying the purpose of financial reporting. The need of conceptual framework is to see
whether framework meets IASB requirements to provide more consistent and useful

pronouncements and sets of standards, it should be able to solve new and emerging practical
problems, and should build confidence among the financial statements users.
(Lexicon.ft.com, 2016)
Analysis of annual report
General purpose financial reports prepared by both the listed companies have been prepared in
accordance with the companies Act 2001,Australian Accounting standards and interpretations of
the Australian Accounting standard board and International financial Reporting standards as
issued by the International Accounting Standard board. The purpose of general purpose financial
reporting is to provide information about the reporting entity to existing and potential investors,
lenders and creditors in financial decision making.
Difference in the annual reports on the basis of various elements taken from the financial
statements.
1. Inventory of Huon Aquaculture Company Limited is valued at lower of cost (cost is
determined on the average cost basis and comprises the cost of purchase including
transportation cost).and Net realizable value(It is the estimated selling price in the
ordinary course of business less estimated cost of completion and cost necessary to make
the sales.) .Whereas inventory of Farm Pride Foods Limited is valued base upon cost
amortised over the productive life of the flock, which is between 50 & 60 weeks.
2. Trade and other receivables of Huon Aquaculture Company Limited are carried at fair
value of the amount received as due to their short term nature. Whereas Trade and other
receivables of Farm Pride Foods Limited are initially recognized at fair value and
subsequently impairment loss is the receivable carrying amount compared to the present
value of estimated future cash flow, discounted at the original interest rate.
3. Plant property and equipment of Huon Aquaculture Company Limited are valued at
fair market value i.e. historical cost less accumulated depreciation and accumulated
impairment looses. Whereas plant and equipment of Farm Pride Foods Limited is
valued at cost basis i.e. cost less accumulated depreciation less any accumulated
impairment.
4. Huon Aquaculture Company Limited and Farm Pride Foods Limited has no
contingent liabilities at the year end.
5. In case of Huon Aquaculture Company Limited, Marine Farming leases are recorded
at cost, Amortization is based on the term of lease and the expense is charged through
consolidated income statement.All marine leases are held for a term of 30years.The group
even has lease commitments relating to range of equipment and they are driven by
operating lease. Whereas Farm Pride Foods Limited lease payments for operating

leases where substantially all risk and benefits remain with the lessee are recognized as
expense in the period in which they are incurred.
6. Revenue of Huon Aquaculture Company Limited is recognized to the extent that is
probable that the economic benefits will flow to the company and the revenue can be
reliably measured, regardless of the payment being made. Revenue is measured at fair
market value of the consideration received or receivable taking into account contractual
defined terms of the payment and excluding taxes or duty. Whereas Farm Pride Foods
Limited recognises revenue from the sale of eggs at the point of delivery as this
corresponds to the transfer of significant risk and rewards to the ownership of the eggs,
interest revenue is recognized using effective interest method. All revenue is stated net of
the amount of goods and services tax.
7. There is no transfer pricing provision applicable to both the listed companies held under
comparison.
8. As per Huon Aquaculture Company Limited current income tax expense charged to
profit and loss is the tax payable on taxable income and the deferred tax assets and
liabilities are calculated at the tax rates that are expected to apply to the period they are
recovered or settled the carrying amount through sale. Whereas in case of Farm Pride
Foods Limited current income tax expense charged to profit and loss is the tax payable
on taxable income and the current and deferred tax balances attributable to amounts
recognized directly in equity are also recognized directly in equity.
Remuneration structure
The remuneration structure is designed to meet the following outcomes:
1. Retention and motivation of key executives.
2. Attract high quality management to the company.
3. Performance incentives which allow the executives to share in the success of the company.
As per Huon Aquaculture Company Limited short term incentive component given for the
contribution to achievement of the company and business unit outcomes is paid in cash and
short term incentive is calculated on the basis of 40% target of Total financial remuneration
to DCEO. and 30% target of total financial remuneration to CFO.
Whereas as per Farm Pride Foods Limited the remuneration of executives is governed by
service agreements between the company, its controlled entity and each executive director, it
includes monthly fee to be paid by the company and there are no termination benefits
provided but are able to participate in share option based incentive programmes.
Proposed conceptual framework

The conceptual framework describes the objective and concepts for general purpose financial
reporting.It is a practical tool which assists the board to develop IFRS standards based on
consistent approach, assists the preparers to develop consistent accounting policies where no
IFRS standard applies, and assists others to understand and interpret the standards.
(Iasplus.com, 2016)
The Existing framework was revised as some important areas were not covered, guidance on
some areas were not cleared, some aspects of the framework were out of date.
As conceptual framework is not an standard and therefore does not override specific standards.
hence changes in the conceptual framework will not have an immediate effect on the financial
statements of most of the reporting entities. However those entities will be affected by the
changes if they need to use the framework to develop the accounting policies where no IFRS
standard applies specifically.
Prudence is an exercise of caution while making judgments under conditions of uncertainty.
Prudence means that assets and income are not overstated and liabilities and expenses are not
understated as such misstatements can lead to the overstatement of income or the understatement
of expenses in future periods.
(Pwc.blogs.com, 2016)
Revised conceptual framework will focus on:
 Elements of financial statements.
 Recognition and derecognition.
 Measurement.
 Presentation and disclosure
 Reporting entity.
(Ifrs.org, 2016)
Conceptual framework to include the concept of prudence to address disparity in corporate
reporting.
Reference to prudence is reinstated in the conceptual framework due to following
reasons:-
1. As standards both existing and proposed using accounting treatments viewed as
motivated by a desire of prudence so it is important to include the concept of conceptual
framework that can be applied consistently.
2. Prudence is required to reduce management natural bias towards optimism.

3. Prudence focuses on the concern of investors thinking of both down as well as upside
risk.
4. Prudence helps to align the interest of shareholders as well as investors and also reduces
moral hazard.
5. Prudence is described as a caution and it helps in achieving neutrality,while making
judgments under conditions of uncertainty that is it has a role to play in corporate
reporting.
Criticism for inclusion of prudence in the conceptual framework:
1. Prudence is inconsistent with the concept of neutrality.
2. Exercise of prudence leads to greater subjectivity in the financial statements due to which
it could be difficult to assess the entity financial performance.
(Ifac.org, 2016)
Prudence in various areas of corporate reporting, for example:-
1. Impairment of events may result in written down of carrying amount of assets this is
prudent as it overrides the regular apportionment of the cost of non-current assets over its
useful life.
2. The recognition of revenues and profit is also an element of prudence as when such
revenues and profits related provision of services and reflect uncertainties about the
future outcome. Prudence therefore limits the extent to which unrealized profits can be
recognized.
Conclusion
Both the companies are under food and beverages sector and their annual reports have been
analysed properly but there are certain recommendations which should be followed including :
1. Listed company should disclose a process for periodically evaluating the performance of
its senior executives .
2. The board will consider the number of independent directors when considering
appointing additional or replacement directors.
3. A listed company should provide information about itself and its governance to investors
through its website.
Academic Articles:-
1. A conceptual framework for systematic reviews and research in
educational leadership and management.by Philip halinger

2. The purpose of financial Reporting: The case for coherence in the
conceptual framework and standards. By David B. Sutton,Carolyn
J.cordery and Tony Van Zijl.
3. Fair Value and the IASB/FASB Conceptual Framework Project by
Geoffery Whittington.
4. The IASB's Discussion Paper on the Conceptual Framework for
Financial Reporting by Elizabeth A. Gordon, Jannis Bischof,Chika
sake.
5. Use of theoretical and conceptual frameworks in qualitative
approach by HE green.
.
6. Literature reviews ,Conceptual frameworks and theoretical
framework by Tonette S.Rocco .
7. Need for and understanding of a conceptual framewok.by a
member of ACCA team.
8. IASB Proposes changes to conceptual framework by Ken Tysiac.
9. An Evaluation of the FASB’s Conceptual framework from user;s
perspective byPike, Byron, Chui, Lawerence.
10. The equity theories and IASB conceptual framework by carien van
mourik.
References:-
1. Lexicon.ft.com. (2016). Conceptual Framework Definition from
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http://lexicon.ft.com/Term?term=conceptual-framework
[Accessed 11 Dec. 2016].
2. Ifrs.org. (2016). IFRS - Conceptual Framework Exposure Draft
and Comment letters. [online] Available at:
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http://www.iasplus.com/en/projects/major/cf-iasb [Accessed 11
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