Analysis of Accounting Concepts and Framework: Invocare Limited

This report provides a comprehensive analysis of the financial accounting practices of Invocare Limited, an Australian Stock Exchange-listed company in the funeral services industry. It begins by exploring fundamental accounting concepts such as accrual accounting, conservatism, and the going concern principle, demonstrating how Invocare Limited applies these in its financial statements. The report then delves into the conceptual framework of accounting, examining its impact on financial reporting and measurement issues, particularly the valuation of assets and liabilities. The analysis highlights the importance of fair value accounting and the application of AASB standards, such as AASB 136 on impairment of assets. Furthermore, the report assesses the fundamental qualitative characteristics of relevance and faithful representation in Invocare Limited's financial statements, emphasizing their significance for stakeholders. The report concludes by summarizing the key findings and implications of the accounting practices of Invocare Limited.

ADVANCED FINANCIAL ACCOUNTING
1

Contents
Introduction................................................................................................................................3
Accounting concept....................................................................................................................4
Conceptual framework of accounting and measurement issues................................................6
Fundament qualitative characteristics........................................................................................8
Conclusion................................................................................................................................10
References................................................................................................................................11
2

Introduction
Financial accounting concepts are those concepts which are used in preparation, disclosure
and presentation of financial statements of business organisations. There are many points to
be considered while preparing and presenting financial statements like accounting treatment,
discloses and use of appropriate formats. Invocare Limited is the business organisation which
has been considered in this report. Invocare Limited is listed in Australia Stock Exchange and
is engaged in providing services of funeral homes. In this is report analysis of various
accounting concepts related to Invocare Limited has been undertaken. This report contains an
analysis of basic accounting concepts i.e. going concern, conservatism concept, etc. Another
section of this report includes an analysis of the conceptual framework and issue of
measurement in the figures of financial statement has been analysed and reported. The last
section of this report includes an analysis of fundamental qualitative characteristics that
should be presented in financial statements. Analysis of fundamental qualitative
characteristics defines relevance and faithful representation in the financial statement of
Invocare Limited.
3

Accounting concept
There are some fundamental rules and regulations that are important for a business
organization while preparation of books of accounts and financial accounts. These rules and
regulations can be considered as building blocks for the accounting process and these rules
and regulations are also called accounting concepts. These are basic accounting concept that
will help the business organization to make sure that relevancy and accuracy in financial
statements and accounting process is maintained throughout the financial year (Henderson
et.al, 2015). Following are some of the accounting concepts along with the manner in which
management of Invocare Limited has followed such accounting concepts-
Accrual concept - There are two types of accounting that can be followed by any business
organization i.e. cash accounting and accrual accounting. Accounting standard issued by
AASB has prescribed to each and every Australian organization to follow the accrual basis of
accounting as it helps in following the concept of timeliness and matching concept. It is
important that the business organization is recording business transactions as they occur in
the organization. Apart from this contention, accrual accounting concept as its own advantage
of recording all business transaction whether cash is involved or not. This represents the
correct position of business organisation during the year and can be compared with other
business organisations. Delaying the process of recording a business transaction due to non-
receipt of non-payment of cash can have a negative impact on the accuracy of financial
statements.
Evidence of accrual basis of accounting in the financial statements of Invocare Limited can
be identified with the help of outstanding expenses, account payable and account receivables
at the end of the financial year (Hoyle, Schaefer and Doupnik, 2015). Balances of accounts
payable and accounts receivable at the end of the financial year that sales and purchase made
by the business organization are recorded in financial statements irrespective of the fact
management has not received cash against sales and made payment against purchase.
Conservatism concept- Conservatism concept is one of the most important concepts that are
used by the business organization in the recording of revenue and expenses. According to this
concept, all the revenue should be recorded only when there is an assurance that such revenue
will be collected from the customer and all the expenses should be recorded even when there
4

is an indication of expense due to different factors. With the help of this method, overall
management will be able to identify the profitability of the organization more realistically
(Nobes, 2014).
Provisions prepared by the organization is a clear indication that conservatism concept has
been followed with efficiency by the management. Provisions are created on the basis of
estimation of expenses rather than an actual business transaction that has resulted in such
expense. On the other hand, management has also provided a note to financial accounts that
accounting standard 15 i.e. revenue recognition has been followed by the organization which
adopts the principle of conservatism concept.
Going concern concept- Out of all the accounting concepts this concept can be considered as
most essential to analyse from the perspective of investors and stakeholders. Surety in
relation to the existence of business in future is evaluated by shareholders and other
stakeholders with the help of the description provided by management in annual reports
regarding going concern concept. According to this concept management of the organization
is required to conduct an overall evaluation of business processes for identification of
different factors that can have a negative impact on the operability of company in the future
(Warren and Jones, 2018). If there are some factors that can result in the dissolution of
business organization, then management should disclose such factors in an annual report. In
addition to that of financial statements should be prepared as if the company is under the
process of liquidation.
Management of Invocare Limited has followed this concept also as they have described the
process of following the principles of going concern concept at the end of the financial year
2018. According to the director's report published along with annual reports, management has
conducted the process of identifying negative factors that can have a negative impact on
operations and existence of the company (Kaplan and Atkinson, 2015). In addition to that
auditor has also examined such process adopted by the organization and given an unmodified
audit opinion.
After evaluating the above three important accounting concepts, it can be said that Invocare
limited is following the basic principles of accounting effectively and efficiently. Adopting
these concepts in accounting helps the business organization to represent factual data in
5

financial statements (Jeter and Chaney, 2014). This process will also help stakeholders to
take investment decisions more accurately.
6

Conceptual framework of accounting and measurement issues
Combination of rules and regulations applicable to the business organization with relation to
the preparation of financial accounts and representing such accounts to shareholders can be
defined as a conceptual framework of accounting. Representation of accurate and relevant
image of the company through financial statement is one of the primary objectives of the
accounting process in a business organization (Beams et.al, 2016). In addition to that
importance of financial accounts for investors and other stakeholders is also increasing due to
increased management accounting frauds in the past 2 decades. This is one of the primary
reasons that regular amendments in the conceptual framework of accounting are introduced
by AASB. Regular update in the conceptual framework of accounting helps in satisfying the
needs and requirements of investors.
On the basis of the annual report and director’s report issued by Invocare Limited, it can be
said that management has given significant importance to following the principles of a
conceptual framework of accounting. One of the primary objectives of conducting an external
audit is to examine the conceptual framework of accounting followed by the organization
from an external perspective (Macve, 2015). Audit of Invocare Limited for the year ending
2018 has been undertaken by PWC which is one of the big 4 audit firms in the world. PWC
has provided an unqualified opinion on financial statements which means that all the rules
and regulations established by the Australian Accounting Standard Board have been
effectively followed by the company. In addition to that management has also established
Audit committee that is responsible for ensuring accuracy and relevance in financial accounts
by conducting internal audits in regular interval of time (Zhang and Andrew, 2014).
Measurement issues
One of the primary issues that arise in the accounting process for a business organization is
the valuation of assets and liabilities. One of the primary objectives of a financial statement is
to make sure those Assets and liabilities are represented at their actual value on the balance
sheet date. There are various views presented by experts in the field of accounting on
historical costing method and fair value accounting method. Some of these experts have
opined that the historical costing method would be more appropriate in representing the
actual value of the business as the amount paid for the purchase of assets should be
7

represented in the balance sheet (Hoque, 2018). On the other hand, other experts have stated
that fair value of accounting is much more appropriate as the current value of assets and
liabilities can be evaluated with this concept.
Australian accounting standard board is Indore fever of using the fair value of accounting
rather than historical cost method which is represented through different accounting standards
issued by them such as AASB 136 i.e. impairment of an asset. Management of Invocare
limited has also followed the concept of the fair value of accounting. There is different
evidence that can be extracted from the financial statements that show that the valuation of
assets and liabilities is Undertaker with the help fair value accounting (Kanodia and Sapra,
2016).
According to AASB 136 i.e. impairment of asset, all business organizations are required to
undertake impairment analysis of non-current assets at the end of every financial year. The
main objective of this analysis is to make sure that financial statements are valued at their fair
value on the balance sheet date. According to the note to a financial statement provided by
management at the end of 2018, impairment testing was undertaken on all non-current assets
but please no change in impairment provisions prepared by the organization at the end of
2017. It means that there is no impairment loss on non-current assets during the financial year
2018. Total impairment loss recorded by Organization in 2017 was 10.9 million. The
impairment loss of 10.9 million recorded in 2017 clearly shows that all non-current assets are
valued at their fair value (Magnan, Menini and Parbonetti, 2015).
8

Fundament qualitative characteristics
It is a well-known fact that financial statements of every business organisation should be free
from every material miss-statement and should be clear in all sense. Financial statements of
business organisation include income statement, statement of financial position, cash flow
statement and statement of equity. Preparing and presenting financial statements has many
objectives and all these are to be achieved. These statements are used by various stakeholders
like prospective investors, government or other regulatory bodies, employees, customers,
trade organisations and other stakeholders. It is the responsibility of the business organisation
to provide true and fair value related to business operations and financial position to their
interested stakeholders. This information should not be misleading, misstated and should be
free from all material error or frauds.
For the same purpose, the concept of fundament qualitative characteristics will come into
play. According to fundament qualitative characteristics, financial statements of business
organisations should have two major characteristics that are relevance and faithful
representation of information.
Relevance in the financial statement is the state when financial statements have complete and
relevant information in the financial statements. Relevance is present in a financial statement
when stakeholders of business organisation are able to consider the financial statement in the
decision-making process (Robinson, Henry, Pirie and Broihahn, 2015). Faithful
representation is the state when financial statements represent a true and fair view of
financial performance and position during the year. Presence of faithful representation in a
financial statement also indicates that information of financial students is unbiased and is free
from errors. In the present case of Invocare Limited, financial statement analysis has been
conducted in order to identify whether those are prepared on fundamental qualitative
characteristics or not. Following are some points that should be present in information
provided via a financial statement of Invocare Limited:
Timeliness: In this concept, every business organisation should issue and present their
financial statements on regular time intervals as per regulatory bodies and as decided by the
board. Another important consideration related to timeliness is that business organisation
should issue or make public their financial statement on regular intervals i.e. in most cases it
9

is 12 months or a year. From the analysis of financial statements of Invocare Limited of
previous years, it is observed that management is able to issue or present financial statements
at regular intervals. The main reason behind this concept is that stakeholders should possess
adequate and timely information for making decisions about the business organisation.
Verifiability: This is another important consideration that every business organisation should
have to achieve fundamental qualitative characteristics related to financial statements.
According to this point, the financial statement of business organisation should be audited
and the auditor has issued their positive audit report. This is included in fundamental
qualitative characteristics because while auditing various steps are undertaken to clear all
material misstatements, misleading figures and verify the correctness of financial statements
(Kimmel, Weygandt, Kieso and Trenholm, 2016). In the present case of Invacare Limited,
annual report of past years included dully audited financial statements. It can be assessed that
audited financial statements have more reliance and values as compared to unaudited.
Comparability: Comparability characteristics of financial statements reflects characteristic
of financial statements in terms of their standard format. That means, the format of financial
statements should be standard and can be used to compare with other financial statements.
Standard formats of the statement of financial position, income statement, statement of cash
flow, etc. has been issued by regulatory bodies. These formats are to be used by every
business organisation in order to present financial and non-financial information by each and
every business organisation. From the analysis of Invocare Limited’s financial statements, it
is observed that all financial statements are in the correct format as prescribed (Invocare
limited, 2018).
Understandability: As per this characteristic, the financial statement of business
organisations should be easily understandable for stakeholders or for users of financial
statements. Information or all the disclosures should be clearly presented, supported with
relevant figures or calculations (where required) for the users of financial statement.
Understandability also stands for full disclosure of financial performance and position in the
financial statement of the business organisation. In the case of Invocare Limited, since
financial statements are presented in the prescribed format, are supported with relevant notes
to accounts and items of financial statements are backed with correct figures or disclosures
(Invocare limited, 2018).
10

Therefore it can be said that Invocare Limited has been able to achieve Fundament qualitative
characteristics in their financial statements as per the above analysis.
11

Conclusion
After revaluation of this report, it can be said that incorporation of accounting concept
accounting standards and overall conceptual framework of accounting is very essential to
represent the true value of a business through financial statements. The main focus of this
report was on accounting concept, issues in measurement and qualitative characteristics of
accounting and this entire concept evaluated from the perspective of Invocare Limited. after
analysing financial statement audit report and management report issued along for the year
2018 it can be said that management has followed all these concepts efficiently which will
help investors to take their investment decisions on the basis of accurate and relevant data.
From the analysis of Fundament qualitative characteristics conducted for Invocare Limited, it
can be concluded that management is able to present correct financial statements for the
users. It can be said that to both of these qualitative characteristics have their own importance
and one qualitative characteristic cannot be given more priority as compared to others.
Following both of these qualitative characteristics together will help Invocare Limited to
achieve overall objectives of financial statements and satisfy their stakeholders.
12