Advanced Financial Accounting Assignment Report - HA3011, T1 2019

This report examines advanced financial accounting concepts, measurement issues, and qualitative characteristics within the framework of the IASB's conceptual framework. It begins with an introduction to the framework's emphasis on measurement basis for financial reporting, focusing on re...Read More

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HA3011
Advanced Financial Accounting

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Contents
Introduction......................................................................................................................................3
Part 1: Description on accounting concepts and application of same by the selected company.....3
Part 2: Discussion of Measurement Issues in Accounting in reference to Conceptual Framework
and by Using Examples from Selected Company...........................................................................6
Part 3: Analysis of Significance of Relevance and Faithful Representation Qualitative Principles
of Conceptual Framework with Reference to Examples from selected company...........................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
The conceptual framework is being developed by the IASB for enhancing the quality of
financial reports and ensuring that it is able to meet the varying interests of end-users in an
effective manner. As such, the framework has emphasized on using the measurement basis for
reporting the value of assets and liabilities that is able to improve the qualitative characteristics
of relevancy and reliability of financial reporting. The impact on relevance and reliability that are
the two fundamental qualitative characteristics of financial reporting provided by conceptual
framework must be considered before the selection of a measurement basis for valuing the assets
and liabilities. In this context, the report has examined the accounting concepts, measurement
issues and qualitative criteria of conceptual framework by analysis of the annual report of a
selected ASX listed entity of CHTR H LWR FP Units Stapled Securities.
Part 1: Description on accounting concepts and application of same by the selected
company
Accounting concepts is most important concepts that act as the basic assumptions,
accounting principles and rules while performing the recording of business transactions and
drafting the financial statements of the company. The complete accounting process is based on
the accounting concepts and it is also mandatory for the business entities to follow the
accounting concepts. All the major accounting concepts have been discussed below and their
practical applications by Charter Hall Long WALE REIT have also been provided.
Business Entity Concept
The main objective of including this accounting concept is to make the business process
separate from the individual (Owner) so that it helps to perform proper accounting and allow
entity to have separate name, identity and presence. In simple words, this accounting concept
provides that business entity and business owners are two distinct persons and have distinct
identities. For example, if there is contract made with business entity than it implies that such
contract is binding on entity not on the business owner (Damodaran, 2011).

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Charter Hall Long WALE REIT has properly followed the business entity concept and
same has been reflected through the treatment of owner’s contribution in the book of accounts.
Charter Hall Long WALE REIT has shown share capital (Contribution by the owners of the
company) under the liability section and in form of equity capital that clearly states that Charter
Hall Long WALE REIT is required to remit back the investment to the owner at any future date
or upon liquidation (Annual Report, 2018). Same can be seen in the below extract from the
financial statements of the selected business entity:
Consolidated balance sheet (Source: Annual Report, 2018, pp. 25)
Going Concern concept
This accounting concept provides the base for many accounting principles, standards and
guidelines. The going concern accounting concept clearly states that business organization will
continue to carry on its activities for indefinite period. The identity of business entity comes to
an end only when it gets dissolved, liquidated and merged with any other company. It means
business entity has continuity of life and is based on phenomenon that entity will not get
dissolved in near future. This accounting concept act as the base for the valuation of many assets
and liabilities of entity and allow to defer incomes, expenses and other claim that has possibility

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that it will arise but they cannot be recognised as to maintain the economic interest of the
company and business owner as well (Brigham and Michael, 2013).
The application of going concern by Charter Hall Long WALE REIT can be seen in
many accounting transactions such as depreciation on assets, treatment of prepaid and
outstanding expenses and many others. In case this accounting is not available than it will all the
expenses made on fixed assets will be treated as expenses and will be claimed in same year of
purchase. It will adversely impact the financial position of the company and there will great
threat on the existence of company in future (Annual Report, 2018).
Notes to accounts (Section D2) (Source: Annual Report, 2018, pp. 45)
Above image clearly signifies that Charter Hall Long WALE REIT has deferred the
expenses and income for next year that signifies and accounting of company is based on the
going concern concept.

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Money measurement concept
This accounting concept provides that all the accounting business transactions must be
expressed in terms of money and should be reflected in terms of currency of country (Davies and
Crawford, 2011).
Charter Hall Long WALE REIT has reported all its business transactions in terms of
money and represented them in financial statements as AUD $ Millions. It means company is
following the money measurement concept properly (Annual Report, 2018).
Accrual Concept
This accounting concept is very important and it is mandatory for all the business entities.
Accrual accounting concept is very important as it helps to treat the income and expenses in
accounting period to which it relates. It means revenue are being recognised when there is
reasonable assurance that money will be receivable and expenses are recognized when they
become payable. So it can be said that cash payment for expenses and cash received for revenue
has no relation to account for the income and expenses for the relevant period. Accrual concept
gives rise to assets and liabilities with regards to income and expenses such as outstanding
expenses, prepaid expense, unearned income and accrued revenue (Wolk, Dodd and Rozycki,
2016).
Charter Hall Long WALE REIT has based its accounting on accrual basis and shown all
the outstanding expenses, accrued incomes, and prepaid expenses separately in balance sheet
(Annual Report, 2018).
Matching Concept
Matching accounting concept provides that all the incomes and expenses incurred to earn
the particular revenue must be taken to same accounting period to which such revenue is being
recognized. This accounting concept is framed to support the accrual accounting concept and
also to take expenses and revenue of one period at one place (Moles and Kidwekk, 2011).
Realization Concept

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This accounting concept is framed to support many of the accounting standards and all
the accrual basis of accounting. According to this accounting concept revenue should be
recognised by the business entity when there is reasonable assurance that economic benefit will
flow to the company in near future and realization of revenue provide a legal right to the entity to
receive the money (Wahlen, Baginski and Bradshaw, 2017).
All the revenue recognised in the income statement of Charter Hall Long WALE REIT
has reasonable assurance that economic benefits will flow to company in near future or they have
been already been received (Annual Report, 2018).
Part 2: Discussion of Measurement Issues in Accounting in reference to Conceptual
Framework and by Using Examples from Selected Company
There has been the use of single method of measurement, that is, historical cost for
measuring the value of assets and liabilities of an entity. However, there has been a gradual shift
from using traditional basis of measurement that is historical costing towards the use of fair
value method of measurement accounting. This has been largely due to limitations associated
with historical cost of not able to depict the actual value of financial items of income statement
such as profit and expenses. This is because the value is based on past evaluations and does not
reflect the value as per the current market conditions and therefore not very relevant. This is
leading to cause widespread adoption of fair value model of accounting measurement which
reflects the value of financial items as per the current market prices (IFRS, 2017).
Thus, it is able to overcome the limitations associated with historical method of
accounting by recognizing the financial items at their current price and thus able to depict the
actual value. However, the major issue that is faced by businesses towards the use of fair value
approach of measurement is that it is not able to provide reliable outcomes under the conditions
of market volatility. Also, there is lot of subjectivity associated with the use of this method as the
value is obtained on the basis of manager’s judgments and estimations that can have an impact
on the reliability of the financial outcomes obtained (International Accounting Standards Board,
2016). Therefore, the standard-setters are presently facing the issue of determining an accurate
model of measurement that is able to reflect both reliable and relevant value as per the qualitative
objective of financial reporting provided by the conceptual framework. This has resulted in

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developing a mixed model of accounting provided by accounting standard-setters to be used by
businesses for overcoming the issue of measurement in accounting.
The mixed model of valuation has regarded that a reporting entity need to adopt the use
of both historical cost and fair valuation approach to recognize the value of the financial items
whose value cannot be accurately determined due to absence of an active market. As such, the
business entities are reporting the value of their fixed assets on cost basis due to absence of their
active market (Kythreotis, 2014). Also, it would be able to provide a reliable value of fixed
assets that is not possible to provide by the use of fair valuation approach as it involves a lot of
subjectivity which can make the value of fixed assets non-reliable and thus negatively impacting
the interests of investors. On the other hand, the fair valuation approach of measurement is used
for measuring the value of financial items having the presence of an active market such as
financial assets and liabilities. The use of this approach make the value of financial items of
income statement more relevant and supporting the future investment decisions of investors by
providing an estimate of future cash flows of an entity. However, the acceptance of this approach
by the preparers of financial reports has lead to the problem of providing inconsistent and non-
comparable financial information (ICAEW, 2016).
This is because different business entities tend to adopt the use of different methods of
measurement for reporting the value of their financial items on the basis of nature of their
operations and the type of industry. This generally results in making the financial information
obtained with the use of mixed model of valuation to be largely inconsistent and not trustworthy
for to be used in economic decision-making. The issue of measurement in financial reporting can
be demonstrated through the examples from the annual report of CHTR H LWR FP Units
Stapled Securities. The company has adopted the use of nixed model of measurement for
recognition and measuring the value of its different financial items. The consolidated financial
statements have been developed with the use of historical cost basis while derivatives, financial
assets, assets held for sale and investment properties have been recognized at fair value. The key
judgments and estimates have been used in determination of the fair value of different financial
items as depicted below:

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(Source: Annual Report, 2018, pp. 33)
Therefore, it can be said that use of mixed approach for measurement has resulted in generating
incompatibility and inconsistency in the financial reports of the company. This is due to use of
different methods of measurement as per the current market conditions and types of financial
items. The lack of a coherent system of measurement in the financial report of the selected
company has resulted in creating the lack of uniformity among the different financial items and
making it less comparable to be used by investors for decision-making(Annual Report, 2018).
Part 3: Analysis of Significance of Relevance and Faithful Representation Qualitative
Principles of Conceptual Framework with Reference to Examples from selected company
The two major qualitative features of financial reporting as stated by the IASB
accounting framework are relevance and representational faithfulness. These two are the
fundamental criteria’s used by investors for assessing the quality of financial reports and making
them trustworthy to be used for the purpose of economic decision-making. The relevancy criteria
have stated the need for financial information to be capable in making a difference in the
investment decisions of its users. Therefore, it needs to possess a predictive and confirmatory
value for aid in decision-making of users (Mirza and Knorr, 2011). For example, the revenue
information provided by an entity can be used to predict its future financial performance and thus
have a predictive value and also it can be used to confirm the past valuation by comparing the
value for current year with the previous years. As such, both values are interrelated and play a
vital role in decision-making of end-users (Sadowska, 2016). Materiality of financial information

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is also closely related to its relevance which means that it should be materialistic correct to
enhance correct decision-making. On the other hand, representational faithfulness is another
major criterion that governs the quality of financial reports. It has stated that a financial depiction
should be complete, neutral and also free from any type of error. This means that financial
information should provide explanation of the facts and figures related with a financial item and
also should not favor any particular group of users. There should be not the presence of any error
in describing an accounting phenomenon and should be accurate in all aspects (Needles, Powers
and Crosson, 2013).
The business entities as per these qualitative criteria need to make their financial
information both relevant and providing faithful depiction. However, a major issue that is faced
by them in this aspect is that high reliability any significantly reduces the relevance of financial
statements whereas higher relevancy might have an effect on faithful presentation of
information. This is because higher relevancy means the use of fair valuation approach which is
helpful in making an estimate of the future cash flows of an entity. This results in making use of
subjective estimates and assumptions which can result in occurrence of error and significantly
reducing the faithful presentation of information (Horton and Serafeim, 2010).
On the other hand, making financial information more reliable, complete and error-free
requires the use of measurement method such as historical basis that provides an accurate value
of financial items without the use of any type of estimates and assumptions. However, it will
result in negatively impacting the relevancy criteria of financial reporting by making as it would
not able to predict the future earning potential of a company (Riedl, 2010). The same can be
depicted by the use of examples from the annual report of the selected company. The company
has emphasized on achieving a balance between the two characteristics of financial reporting of
the information. It ahs provided relevant financial information through development and
presentation of income statement which includes depiction of values of revenue and expenses
that helps in making forecast about the future growth prospects as depicted below:

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(Source: Annual Report, 2018, pp. 24)
The financial information depicted in the balance sheet helps in ascertaining reliable
information such as those relating to assets and liabilities as it is recognized on the cost basis
mainly that does not take into account estimates and judgments and therefore present error-free
information (Annual Report, 2018).
(Source: Annual Report, 2018, pp. 25)

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Conclusion
It can be said on the basis of overall discussion held that accounting concepts need to be
applied by business entities for reporting their financial information in a fair manner. Also, the
businesses are currently facing the issue of using a coherent system of measurement and
achieving a balance between the qualitative characteristics of conceptual framework. The
businesses such as CHTR H LWR FP Units Stapled Securities are adopting the use of mixed
model of measurement for resolving the issue of measurement. Also, they are trying to attain
congruence between the two characteristics of financial reporting by making the financial statists
in a format so that it depicts both reliable and faithful information.

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References
Annual Report. 2018. Charter Hall Long WALE REIT. [Online]. Available at:
https://www.longwalereit.com.au/docs/default-source/media/fy19/charter-hall-long-wale-reit-
annual-report-2018.pdf [Accessed on: 1 June 2019]
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada: Cengage
Learning.
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Horton, J. and Serafeim, G. 2010. Market Reaction to and Valuation of IFRS Reconciliation
Adjustments: First Evidence from the UK. Review of Accounting Studies 15 (4), pp. 725-751.
ICAEW. 2016. Measurement in financial reporting. [Online]. Available at:
https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-
better-markets/ifbm-reports/measurement-in-financial-reporting.ashx [Accessed on: 31 May
2018].
IFRS. 2017. Measurement uncertainty and the fundamental qualitative characteristics of useful
financial information. [Online]. Available at:
https://www.ifrs.org/-/media/feature/meetings/2017/september/iasb/cf/ap10-conceptual-
framework.pdf[Accessed on: 31 May 2019].
International Accounting Standards Board. 2016. Measurement Bases for Financial Accounting.
[Online]. Available at: https://www.efrag.org/Assets/Download?assetUrl=%2Fsites
%2Fwebpublishing%2FProject%20Documents%2F53%2FDP%20Measurement%20on
%20Initial%20Recognition.pdf [Accessed on: 31 May 2018].
Kythreotis, A. 2014. Measurement Of Financial Reporting Quality Based On IFRS Conceptual
Framework’s Fundamental Qualitative Characteristics. European Journal of Accounting,
Finance & Business, 2(3), pp. 4-29.

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Mirza, A. and Knorr, L. 2011. Wiley IFRS: Practical Implementation Guide and Workbook.
USA: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons.
Needles, B.E., Powers, M. and Crosson, S.V. 2013. Principles of Accounting. UK: Cengage
Learning.
Riedl, E. 2010. Discussion of “Accounting Conservatism and the Temporal Trends in Current
Earnings' Ability to Predict Future Cash Flows versus Future Earnings: Evidence on the Trade-
off between Relevance and Reliability. Contemporary Accounting Research, 27(2), pp.461-467.
Sadowska, B. 2016. Measuring and valuation in accounting – theoretical basis and contemporary
dilemmas. World Scientific News 56, pp. 247-256.
Wahlen, J., Baginski, S. and Bradshaw, M. 2017. Financial Reporting, Financial Statement
Analysis and Valuation. USA: Cengage Learning.
Wolk, H., Dodd, J.L. and Rozycki, J. 2016. Accounting Theory: Conceptual Issues in a Political
and Economic Environment. USA: SAGE Publications.