Analysis of API as a Reporting Entity and its Characteristics

This report provides a comprehensive analysis of Australian Pharmaceutical Industries (API) as a reporting entity within the context of advanced financial accounting. It begins by defining the reporting entity concept as outlined in Statement of Accounting Concept (SAC) 1, emphasizing the dependency of users on general-purpose financial reports for decision-making. The report then identifies API as a reporting entity, supported by its separation of management from economic interests, significant economic and political influence, and substantial financial characteristics including size and indebtedness. Furthermore, the report explores fundamental qualitative characteristics, specifically relevance and representational faithfulness, and their importance in financial reporting. It examines how these characteristics apply to API's financial disclosures, such as property, plant, and equipment, and loans and borrowings. The analysis highlights the significance of these characteristics in ensuring the usefulness of financial information for investors and other stakeholders. The report concludes by summarizing API's status as a reporting entity and the application of qualitative characteristics in its financial reporting practices.

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
1. Introduction...............................................................................................................2
2. Reporting Entity Concept..........................................................................................2
2.1 Definition.............................................................................................................2
2.2 Necessary Facets Associated with the Identification of Reporting Entity...........2
2.3 Identification of API as a Reporting Entity..........................................................3
3. Fundamental Qualitative Characteristics..................................................................4
3.1 Relevance and Representational Faithfulness...................................................4
3.2 Importance of Fundamental Qualitative Characteristics.....................................4
3.3 Examples from API.............................................................................................5
4. Conclusion................................................................................................................5
5. References...............................................................................................................6

2ADVANCED FINANCIAL ACCOUNTING
1. Introduction
Financial reporting is considered as an important facet for the business
organizations where the required financial statements are published with the aim to
disclose the information on the firm’s performance and position (Gomariz and
Ballesta 2014). This requires the companies undertake the concept of ‘reporting
entity’ that ensures that adequate information on financial performance and position
is disclosed in order to ease the process to make decisions by the investors and
other users of financial reports. Correct preparation and presentation of financial
reports is another major facet of financial reporting that requires the companies to
disclose all the necessary information. Managements of the companies are required
to ensure the presence of fundamental qualitative characteristics in the disclosed
financial information in order to make them more useful to the investors and other
users. There are two parts of the report. Discussion on the concept of reporting entity
along with the identification of Australian Pharmaceutical Industries (API) as the
reporting entity is the first aim of the report. Discussion on the necessary aspects
associated with fundamental qualitative characteristics in respect of the chosen
company along with example is the second aim of this particular report.
2. Reporting Entity Concept
2.1 Definition
The presence of the definition of reporting entity can be seen in Statement of
Accounting Concept (SAC) 1. According to SAC 1, reporting entities are considered
as all the entities in respect of which there is a reasonableness in the expectation
that there is the presence of users having large dependency on the general purpose
financial reports of those entities for the extraction of required information that will be
of crucial use of their decision making process associated (aasb.gov.au 2020).
It is required for the reporting entities to prepare the general purpose financial
reports by complying with the rules and regulations of Statements of Accounting
Concepts and Accounting Standards (aasb.gov.au 2020).
2.2 Necessary Facets Associated with the Identification of Reporting Entity
The process to identify whether a firm is a reporting entity or not is associated
with the information need of the users of the general purpose financial statements.
There are many business organizations where it can easily be understood that
whether there is the presence of dependent users on their general purpose financial
reports or not. At the same time, there are many companies where it is not possible
to readily ascertain whether there is the presence of independent users on their
general purpose financial statements. For these companies, the Australian
Accounting Standards Board (AASB) has provided three criteria for the identification
of reliant users on their general purpose financial statements. These are outlined
below:
1. The first requirement is the separation of management from the economic
interest. Greater ownership spread along with the greater parting between the
management and owners indicates towards the greater likelihood of the
presence of needy users on the general purpose financial reports of the
companies for making the relevant decisions (Potter, Ravlic and Wright 2013).
2. The second requirement is the economic or political effect of the companies
which can be considered as a business’s capability for majorly impacting
wellbeing of different outside stakeholders. High the economic or political
significance of the firms, higher the possibility of the presence of reliant users

3ADVANCED FINANCIAL ACCOUNTING
on the general purpose financial reports of these companies. Business
organizations with major political or economic influence have a leading
position in their respective industries (Carey, Potter and Tanewski 2014).
3. The third requirement is the presence of certain financial characteristics within
the business organizations. The main components of financial characteristics
are size of the business organizations or indebtedness of the business
organizations. High the overall size of the business organizations, higher the
overall indebtedness of those companies. Business organizations of larger
size along with higher amount of indebtedness indicates the presence of
reliant users on the general purpose financial reports (Howieson 2013).
2.3 Identification of API as a Reporting Entity
API is one of the leading healthcare companies in Australia and it is also the
parent company of Priceline Pharmacy, Soul Pattinson Chemist and Pharmacist
Advice. The main services of the company include wholesale product delivery, retail
services, marketing programs and advisory services (api.net.au 2020). The following
discussion shows the application of the requirements of reporting entity for the
identification of API as a reporting entity.
1. Owners or shareholders of API are responsible for the appointment of the
management team or Board of Directors in order to carry out the necessary
business activities (api.net.au 2020). Both the parties have economic interest
within the company as the aim of the senior management is to ensure well
performance of the company so that they can get the remuneration and the
interest of the owners is to get good return from their investments. This aspect
separates the interests of the senior managements from the interest of the
owners (Howieson 2013).
2. API is one of the largest companies operating in the pharmaceutical industry
of Australia and New Zealand; and this puts the company in a dominant
position in this industry (api.net.au 2020). Moreover, API has a major political
influence because it works with the Government for minimizing commercial
impact while involves in monitoring the changes in PBS medicines. Moreover,
API also has the responsibility of close monitoring the costs associated with
the Community Service Obligation. All these clearly indicate towards the
aspect that API has major economic and political effect on the wellbeing of the
outside stakeholders (Stuchbery 2017).
3. The business of API is of large size as there has been a continuous increase
in the revenue of the company from 2015 to 2018, there is a small fall in
revenue in 2019. Total asset position of the company has also increased over
the years. Most importantly, API has a large indebtedness with the major
increase in loans and borrowings in the present year (api.net.au 2020). Loans
and borrowings of the company include bank overdraft, finance leases, cash
advances, securitisation and interest bearing loans. In the presence of all
these aspects, it can be said that the indebtedness of API is high (Kabir,
Rahman and Su 2017).
Outcome of the above analysis support the fact that there is presence of parties
dependent on the general purpose financial reports of API for extracting information
in order to make scarce resource related decisions. Hence, it is provided that API is
a reporting entity.

4ADVANCED FINANCIAL ACCOUNTING
3. Fundamental Qualitative Characteristics
3.1 Relevance and Representational Faithfulness
Relevance is such a fundamental qualitative characteristic that creates
positive change in the decisions of the users. The requirement of this characteristic
is that the financial information is related to the economic decisions made by the
users. Otherwise, there is no use of the information. Financial information can be
considered as useful when both the predictive value and confirmatory value are
there in them. These are two crucial facets of the financial information. Predictive
value of the financial information provides major assistance to the users to predict or
anticipate future outcome (aasb.gov.au 2020). On the other hand, confirmatory value
provides assistance to the users to check and confirm the forecasts or assessments
that were made earlier. Materiality is a crucial aspect associated with relevance and
it is considered as entry-specific. It implies that what is material to a business
organization may not be material to another business organization. Financial
information needs to be considered as material in case it has major significance that
can influence the procedures to make decisions. Nature and magnitude of the items
majorly affect materiality. It can be assessed based on the above analysis that
financial information of a company has the capability to make change when it has
both predictive value and confirmatory value (aasb.gov.au 2020).
Representational faithfulness is such a fundamental qualitative characteristic
which states that financial information must represent the substance of what it
purports to represent on faithful basis. It implies that the financial information should
be able in showing what actually are present and what actually occurred, as the case
may be. Three crucial characteristics of representational faithfulness can be seen.
They are completeness that is sufficient disclosure of all required and relevant
information; neutrality that is fairness and free from bias; and free from error that is
the absence of any omission and inaccuracies. It requires to be mentioned that the
extent of measurement uncertainty affects faithful representation of financial
information in the financial statements (ifrs.org 2020). Presence of these two
fundamental qualitative characteristics make financial information useful to the users.
3.2 Importance of Fundamental Qualitative Characteristics
The accounting for assets and liabilities requires the use of the fundamental
qualitative characteristics of relevance and representational faithfulness. Both these
characteristics have equal role to assist the decision-making process of the users.
Relevant information helps the users in acquiring the exact information they need
about the assets and liabilities to make the decision (Herath and Albarqi 2017). This
information enables the users to predict the future performance of the companies
and also helps them in determining the accuracy of earlier prediction. Therefore, it is
not possible for the users to make appropriate decisions in case the information is
not relevant and material. Along with relevance, representational faithfulness
ensures that the relevant financial information of assets and liabilities is adequately
and fairly disclosed in the absence of any bias, omissions and inaccuracies. It
implies that both relevance and representational faithfulness balance each other.
This is because relevant financial information of assets and liabilities without
representational faithfulness fails to disclose all information in bias free, error free
and accurate manner. On the contrary, there is no benefit to the users in case
irrelevant information is represented faithfully (Birt, Muthusamy and Bir 2017).
Therefore, both the fundamental qualitative characteristics are of equal importance
for the financial information to be useful.

5ADVANCED FINANCIAL ACCOUNTING
3.3 Examples from API
Disclosure of the financial information on API’s assets and liabilities reflect the
fundamental qualitative characteristics of relevance and representational
faithfulness. This can be proved with the help of the following examples:
1. Property, plant and equipment forms a major part of the total assets of API
and therefore, information associated with this asset is relevant as well as
material. In the note of property, plant and equipment, API has disclosed all
the relevant information on this asset which include disclosure of information
on its acquisition and disposal, depreciation, impairment and leases. This
reflects both the fundamental qualitative characteristics of financial
information (api.net.au 2020).
2. Loans and borrowings form a major part of the total liabilities of API and
investors use information of this liability to assess the overall financial position
of API. API has disclosed information on this class of liability in the
consolidated balance sheet and notes. Disclosed information includes
information on accounting policies and different financial facilities (api.net.au
2020).
3. The auditors have provided true and fair view on the financial statements of
API which implies that the disclosed financial information is free from bias,
error and they are accurate. This also reflects both relevance and
representational faithfulness (api.net.au 2020).
4. Conclusion
The above discussion shows that API is a reporting entity and this is because
the it has users dependent on its general purpose financial report for extracting
information to make decision regarding its scarce resources. Moreover, the above
discussion also shows that API has dependent users as it has great separation
between the management and owners, key economic and political influence and
great as well as indebtedness. It can also be seen from the above analysis that both
the fundamental qualitative characteristics of relevance and representational
faithfulness are important for information to be useful to the users. Considering the
accounting for assets and liabilities of API shows that the company has maintained
the fundamental qualitative characteristics through adequately disclosing all the
relevant information in the financial statements and its associated notes. This makes
the financial information on the assets and liabilities of API useful to the users of
general purpose financial statements as the investors can know about the financial
performance and financial position of the firms.

6ADVANCED FINANCIAL ACCOUNTING
5. References
Aasb.gov.au. 2020. Conceptual Framework for Financial Reporting. [online]
Available at:
https://www.aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-
19.pdf [Accessed 31 Jan. 2020].
Aasb.gov.au. 2020. Definition of the Reporting Entity. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf [Accessed
31 Jan. 2020].
Aasb.gov.au. 2020. Qualitative Characteristics of Financial Information. [online]
Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC3_8-
90_2001V.pdf [Accessed 31 Jan. 2020].
Api.net.au. 2020. [online] Available at: http://www.api.net.au/about-us/ [Accessed 31
Jan. 2020].
Api.net.au. 2020. Annual Report 2019. [online] Available at:
http://www.api.net.au/wp-content/uploads/2019/12/Australian-Pharmaceutical-
Industries-Limited-Annual-Report-2019.pdf [Accessed 31 Jan. 2020].
Birt, J.L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics
of useful financial information. Accounting Research Journal.
Carey, P., Potter, B. and Tanewski, G., 2014. Application of the Reporting Entity
Concept in A ustralia. Abacus, 50(4), pp.460-489.
Gomariz, M.F.C. and Ballesta, J.P.S., 2014. Financial reporting quality, debt maturity
and investment efficiency. Journal of Banking & Finance, 40, pp.494-506.
Herath, S.K. and Albarqi, N., 2017. Financial reporting quality: A literature
review. Int. J. Bus. Manag. Commer, 2(2), pp.1-14.
Howieson, B., 2013. Defining the reporting entity in the not‐for‐profit public sector:
implementation issues associated with the control test. Australian Accounting
Review, 23(1), pp.29-42.
Ifrs.org. 2020. Conceptual Framework for Financial Reporting. [online] Available at:
https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-
summary-and-feedback-statement/conceptual-framework-project-summary.pdf
[Accessed 31 Jan. 2020].
Kabir, H., Rahman, A. and Su, L., 2017. The association between goodwill
impairment loss and goodwill impairment test-related disclosures in Australia. In 8th
Conference on Financial Markets and Corporate Governance (FMCG).
Potter, B., Ravlic, T. and Wright, S., 2013. Developing accounting regulations that
reflect public viewpoints: the Australian solution to differential reporting. Australian
Accounting Review, 23(1), pp.18-28.
Stuchbery, T.V., 2017. The Reporting Entity Concept in Australia: An Exploration of
the Impact and Comparison to International Standards (Bachelor's thesis, Università
Ca'Foscari Venezia).