Evaluation of Accounting Concepts in Advanced Financial Accounting

This report provides an in-depth analysis of the AASB Conceptual Framework within the context of advanced financial accounting. It begins by defining and describing key accounting concepts, including financial statements, reporting entities, elements of financial statements, recognition and dereco...Read More

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
Name of the Student
Name of the University
Author’s Note

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Introduction...................................................................................................................2
Description of Accounting Concepts............................................................................2
Conceptual Framework and the Issue of Measurement..............................................3
Fundamental Qualitative Characteristics – Relevance and Faithful Representation...4
Conclusion....................................................................................................................9
References.................................................................................................................10

2ADVANCED FINANCIAL ACCOUNTING
Introduction
Accounting concepts have certain major implications on the business
organizations since it leads to effective financial reporting practice within the
companies (Weil, Schipper and Francis 2013). This is also applicable for the
companies in Australia because of the presence of the Australian Accounting
Standards Board (AASB) Conceptual Framework which provides the Australian
listed companies with the appropriate accounting policies and procedures for
effective continuation of the processes of financial reporting (Schaltegger and Burritt
2017). In addition, the companies can get help from this accounting conceptual
framework for resolving different kinds of accounting issues such as measurement
related issues, valuation and recognition of financial substances related issues and
others. It is needed for all the Australian listed companies to adhere to the AASB
conceptual framework for the purpose of financial reporting. The main objective of
this report is the analysis and evaluation of different crucial aspects of the AASB
conceptual framework for the purpose of financial reporting. This report considers
analyzing different types of accounting concepts in the selected company. After that,
it considers the analysis of the measurement related issues in the company through
the effective consideration of the measurement debate. Lastly, it sheds light in
financial information’s fundamental qualitative characteristics. The company selected
for this report is Speedcast International Limited.
Description of Accounting Concepts
The presence of certain accounting concepts can be seen in the AASB
Conceptual Framework which the companies must consider in financial reporting
(aasb.gov.au 2019). They are discussed below:
Financial Statement and Reporting Entities
As per this accounting concept, the main role of financial statements can be
found in delivering relevant information about the assets, liabilities, equity, income
and expenses of the companies and the companies are needed to use this
accounting concept for the same purpose (aasb.gov.au 2019). It is visible in the
latest annual report of Speedcast International Limited that the firm has provided the
relevant information about the above-discussed economic substances through
different financial statement and notes. In addition, according to this concept,
business organizations must maintain their going concern status which indicates
towards the ability to continue operation for foreseeable future. Speedcast
International Limited has prepared their financial statements on the going concern
basis. In addition, the firm has introduced as well as implemented effective capital
management strategies for securing their ability to continue their business operations
as a going concern (asx.com.au 2019).
Elements of Financial Statements
This is considered as another most important accounting concept as per the
AASB Conceptual Framework. Assets, liabilities, equity, income and expenses are
the main elements of financial statements and AASB Conceptual Framework has
provided the definition of these elements. As per the definitions, assets and liabilities
are the present resources and obligations of the firms respectively arising due to
past events or transactions. Equity is the asset’s residual interests after deducting
the company’s liabilities. Income is the decrease in liabilities or increase in assets
that contributes to increased equity. Lastly, expenses are the decrease in income or
increase in liabilities which contribute to decreased equity (Flower 2018). According

3ADVANCED FINANCIAL ACCOUNTING
to the latest annual report of Speedcast International Limited, the company has used
this accounting concept with the inclusion of all the details and information on their
assets, liabilities, equity, income and expenses. In addition, the company has
provided the recognition as well as measurement criteria of these substances in the
notes to the financial statements (asx.com.au 2019).
Recognition and Derecognition
These two are crucial accounting concept related to the above discussed
elements of financial statement. Recognition refers to the procedures to capture an
element so that it can be included in the financial statements where derecognition
refers to the elimination of a part or a whole element from the financial statements of
the companies, especially from the balance sheets (Ponomareva and Melnikova
2015). It is observable in the latest annual report of Speedcast International Limited
that all the processes as well as procedures of the recognition and derecognition of
the financial statement’s elements are provided by the management of Speedcast
International Limited which indicates towards the adoption of these accounting
concepts by the firm (asx.com.au 2019).
Measurement
According to AASB Conceptual Framework, measurement helps in reflecting
the most relevant value of an element of financial statement. The presence of two
measurement approach can be seen in the AASB conceptual framework; they are
historical cost measurement and current value measurement (Barth 2013). Fair
value measurement and value-in-use measurement are the two measurement bases
under the current value measurement. It is observable in the latest annual report of
the selected company that the management has undertaken the use of both
historical cost and fair value measurement of their assets and liabilities (asx.com.au
2019).
Presentation and Disclosure
This accounting concept is concerned with the proper communication of the
information about the financial elements thorough their effective presentation and
disclosure. As per AASB conceptual framework, the managements of the companies
must effectively present and disclose all the required financial information through
the financial statements (Kieso, Weygandt and Warfield 2016). According to the
latest annual report of Speedcast International Limited, the company has effectively
presented and disclosed the required information by complying with the standards of
Australian Accounting Standard, AASB, Corporations Act 2001 and IFRS
(asx.com.au 2019).
Conceptual Framework and the Issue of Measurement
Conceptual Framework – It is crucial for the companies to adopt the appropriate
measurement base for the financial elements. In the AASB conceptual framework,
two measurement approaches are mentioned that are historical cost measurement
and fair value measurement under the current value method (aasb.gov.au 2019).
AASB conceptual framework states that fair value is the price received a firm due to
the sale of an asset or any payment or trainer of any liability at the measurement
date between two parties. The present value of an asset or liability reflects when the
companies adopt the fair value measurement base (Palea 2014). On the other hand,
the cost of an asset or liability at the date of acquisition can be obtained under the
historical cost accounting (Ellul et al. 2015). It is fair enough to mention the fact that
there are some major differences between these two measurement bases.

4ADVANCED FINANCIAL ACCOUNTING
Measurement Debate – Over the decade, it can be seen that there has been the
continuation of a major debate regarding the superiority of the above mentioned two
measurement bases. People who support the fair value measurement base states
that fair value id the most relevant measurement base since factors like depreciation,
market trend and others are considered by it. In this manner, fair value becomes
more relevant in the current market situation. On the other hand, there are many
people who are in the support of the historical cost accounting through this method is
considered as the conservative method of measurement since it considers the cost
of the elements at the acquisition date. Vast use of fair value measurement could be
seen in the nineteenth and twentieth century. Due to the tendency of the fair value
measurement of overstating the asset values, most of the people blamed this
particular measurement base at the time of the economic collapse of 1920
(Christensen and Nikolaev 201). For this reason, there is significant doubt over the
use of fair value accounting measurement base. It is crucial to mention the fact that
the use of both the fair value measurement base and historical cost measurement
base is permissible as per AASB conceptual framework.
Example – The example of Speedcast International Limited can be provided in this
situation. As per the Note 2 (a) of the 2018 Annual Report of Speedcast International
Limited, both the use of historical cost accounting as well as fair value measurement
can be seen in the company. The financial statements of the company have been
prepared in accordance with the fair value accounting, but there are some
exceptions where fair value measurement has been used by the company
(asx.com.au 2019).
Note 2 (l) of the 2018 Annual Report of Speedcast International Limited shows
that the inventories of the firm are valued at the lower of cost and net realizable
value when the company determines the cost on the basis of average cost method.
After that Note 2 (m) of the latest annual report states that the property, plant and
equipment are stated at the historical cost less accumulated losses of impairment
and accumulated depreciation (asx.com.au 2019). The company has also used the
fair value measurement base in their financial reporting. Note 2 (j) of the annual
report shows the use of fair value for the initial recognition of trade receivable; fair
value is also used for the initial recognition of loans and receivable as per Note 2 (K)
(i). As per Note 2 (o), the initial recognition of trade payables is done at fair value.
Note 2 (r) (ii) shows the use of fair value for the capitalisation of finance leases. After
that, as per Note 2 (s), the initial recognition of the borrowings is done on the basis of
fair value (asx.com.au 2019).
The above discussion shows the effective use of both the historical cost and
fair value measurement by the management of Speedcast International Limited.
However, the company has provided effective justification behind the use of fair
value or historical cost in the notes to the financial statement in order to avoid the
effects of measurement debate.
Fundamental Qualitative Characteristics – Relevance and Faithful
Representation
Financial information must contain both the fundamental qualitative
characteristics of relevance and faithful representation in order to be useful in the
decision making process of the users. These are considered as crucial aspects in
appropriate financial reporting (aasb.gov.au 2019). The following discussion shows
the details of these two qualitative characteristics.
Relevance

5ADVANCED FINANCIAL ACCOUNTING
The availability of relevant financial information is required with the aim to
positively influence the decision-making process of the users. It needs to be
mentioned that the inclusion of both confirmatory value and predictive value makes
the information relevant to the users of the financial reports. Usefulness of the
financial information is increased by the confirmatory value though giving feedback
of previous evaluation. After that, usefulness of financial information is increased by
the predictive value through providing the prediction n the future financial outcome of
the companies. Under this characteristic, it is required to take into consideration the
materiality aspect and the aspect of uncertainty in measurement (Palea 2013).
Faithful Representation
In order to increase the usefulness of financial information to the users of the
financial reports, the managements of the companies should faithfully represent the
financial information of different elements of financial statements. The important
factors that are complete, neutral and error-free needs to be there in the financial
statements in case the companies want to present the information in faithful manner.
Financial information which is complete, free of error and neutral is of great help for
the users of the financial statements to make different decisions about the
companies (Tsoncheva 2014).
In order to verify the presence of these fundamental characteristics of
financial information, there are three steps which need to be followed. They are as
below:
1. Consideration of the essential elements of financial statements required for
decision-making process;
2. Identification of the type of information about the elements which is most
relevant to the users of the financial statements; and,
3. Determination of the fact that whether the company has provided this relevant
information about the financial element in faithful manner (Wang 2013).
Example
This part considers the analysis of thee major economic phenomena of
Speedcast International Limited’s annual report in order to assess the presence of
fundamental characteristics of financial information; they are Property, Plant and
Equipment, Inventory and Borrowings.
Property, Plant and Equipment – In the non-current assets of Speedcast
International Limited, property, plant and equipments form a crucial part which is
relevant to the uses for ascertaining the financial position of the firm. Most relevant
types of information on these assets are their book value and adopted accounting
policies.

6ADVANCED FINANCIAL ACCOUNTING
(Source: asx.com.au 2019)

7ADVANCED FINANCIAL ACCOUNTING
According to the above extracts of the latest annual report of the company
shows that all the relevant information on the property, plant and equipment is
provided by the management such as net book value, reasons for the change in net
book value and policies related to measurement, depreciation, impairment and
others about these assets (Braam and Beest 2013). This is essential for the users of
the financial statements.
Inventories – Information about the inventories of the companies is essential for the
users due to the fact that they form a major part of the current assets of the
companies and their analysis helps in gauging the liquidity position as well as
working capital movement of those firms. Value of the inventories along with the
valuation methodology is most relevant information about this asset.
(Source: asx.com.au 2019)
It can be seen from the above that Speedcast International Limited has
disclosed all the relevant information on inventory in their latest annual report.
Borrowings – It is required for the users to acquire relevant information on the
liabilities of the companies in which borrowing form a major part (Hasan, Abdullah
and Hossain 2014). The types of relevant information on borrowings are their values
and recognition as well as measurement methodology adopted by Speedcast
International Limited.

8ADVANCED FINANCIAL ACCOUNTING
(Source: asx.com.au 2019))
It is evident from the above extracts of the latest annual report of Speedcast
International Limited that all the relevant information on borrowings is disclosed by
the company in their latest annual report (asx.com.au 2019).
On the basis of the above-discussed steps for the assessment of the
presence of fundamental qualitative characteristics of financial information, it can be
said that Speedcast International Limited has ensured the faithful representation of

9ADVANCED FINANCIAL ACCOUNTING
all the relevant information about the above-discussed three major economic
substances of their financial reporting. This information is crucial for the users of the
financial statements for making required decisions on Speedcast International
Limited.
Conclusion
The above discussion sheds light on some of the most crucial accounting
concepts that the companies are needed to consider for the purpose of financial
reporting. It can be seen from the above discussion that the management of
Speedcast International Limited has ensured the application of these accounting
concepts in the financial reporting for increasing the efficiency of financial reporting.
The above discussion also sheds light on the debate around the measurement
bases regarding the use of historical cost accounting and fair value accounting.
Proper examples from the 2018 Annual Report of Speedcast International Limited
are provided where it can be seen that the company has utilized both the
measurement bases on the basis of the nature of financial elements while complying
with the requirements of the AASB conceptual framework. The last part of the report
sheds light on the importance of two fundamental qualitative characteristics of
financial information which are relevance and faithful representation. Evidences from
the latest annual report of Speedcast International Limited are provided that support
the notion that the company has well complied with these two fundamental
characteristics in order to increase the usefulness of the financial information of their
business to the users of the financial statements.

10ADVANCED FINANCIAL ACCOUNTING
References
Aasb.gov.au. 2019.Conceptual Framework for Financial Reporting. [online] Available
at: https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf
[Accessed 25 May 2019].
Asx.com.au. 2019. Speedcast International Limited: Annual Report 2018. [online]
Available at: https://www.asx.com.au/asxpdf/20190418/pdf/444f26fjf56yz5.pdf
[Accessed 27 May 2019].
Barth, M.E., 2013. Measurement in financial reporting: The need for
concepts. Accounting Horizons, 28(2), pp.331-352.
Braam, G.J.M. and Beest, F.V., 2013. A conceptually-based empirical analysis on
quality differences between UK annual reports and US 10-K reports.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-
financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-
775.
Ellul, A., Jotikasthira, C., Lundblad, C.T. and Wang, Y., 2015. Is historical cost
accounting a panacea? Market stress, incentive distortions, and gains trading. The
Journal of Finance, 70(6), pp.2489-2538.
Flower, J., 2018. Global financial reporting. Macmillan International Higher
Education.
Hasan, M., Abdullah, S.N. and Hossain, S.Z.H., 2014. Qualitative characteristics of
financial reporting. The Pakistan Accountant, 50(1), pp.23-31.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting,
Binder Ready Version. John Wiley & Sons.
Palea, V., 2013. IAS/IFRS and financial reporting quality: Lessons from the
European experience. China Journal of Accounting Research, 6(4), pp.247-263.
Palea, V., 2014. Fair value accounting and its usefulness to financial statement
users. Journal of Financial Reporting and Accounting, 12(2), pp.102-116.
Ponomareva, S.V. and Melnikova, A.S., 2015. Financial instruments reflected by
organizations in accordance with international standards of financial accounting of
public sector. Mediterranean Journal of Social Sciences, 6(3 S3), p.213.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting:
issues, concepts and practice. Routledge.
Tsoncheva, G., 2014. Measuring and assessing the quality and usefulness of
accounting information. Izvestiya, (1), pp.52-64.
Wang, J.L., 2013. Accounting conservatism and information asymmetry: Evidence
from Taiwan. International Business Research, 6(7), p.32.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction
to concepts, methods and uses. Cengage Learning.