HA3011 Advanced Financial Accounting: Conceptual Framework & AASB

This essay delves into advanced financial accounting, examining core accounting concepts such as the business entity, money measurement, going concern, accounting period, cost, and dual aspect concepts, with references to Aristocrat Leisure's financial statements. It further explores the conceptual framework, addressing the debate between historical cost and fair value accounting, referencing IFRS 13 and AAS 13. The essay highlights the importance of relevance and faithful representation as fundamental qualitative characteristics of financial information, emphasizing predictive and confirmatory value, materiality, and the need for completeness, neutrality, and freedom from bias in financial reporting. This document is available on Desklib, a platform offering a wide range of study resources including past papers and solved assignments to support students.

Running Head: Advanced Financial Accounting
Advanced Financial Accounting

Advanced Financial Accounting
Contents
Introduction......................................................................................................................................................2
Accounting concepts........................................................................................................................................2
Conceptual Framework and Issue of Measurement.........................................................................................3
Relevance and Representational Faithfulness- Fundamental Qualitative Characteristics................................5
Conclusion........................................................................................................................................................6
References........................................................................................................................................................7
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Advanced Financial Accounting
Introduction
The financial statements and books of accounts are like the lifelines for successfully
operating the business organisation. Financial reporting is the most important part on
which the entire business activities are dependent. The decision of the potential investors,
shareholders, creditors, suppliers etc. depends largely upon the financial information
depicted in the Balance sheet, income statement, cash flow and statement of changes in
equity. So, all these financial statements should entail the qualitative characteristics like
relevance and faithful representation as given in the conceptual framework. There is also a
confusion of whether the firms should value their assets and liabilities at historical cost or
at the fair value because each measure of accounting has its own advantages and
disadvantages. Therefore, the account preparers need to look at the accounting concepts,
the guidelines in the conceptual framework and also need to maintain the quality of the
information included in the financial statement for facilitating better understanding for the
users of these statements.
Accounting concepts
Business Entity Concept- It is a concept which says that the business and the owner of
the business are two separate entities. The financial statements of the companies are
prepared based on the business entity concept as a result the expenditure related to
business transactions are recorded separately from the expenditures of the owner. The
personal expenses of the business owner like travelling expenses is not recorded in the
income statement of the company and any liability paid by the owner out of the business’
assets is recorded as drawings in the statements.
In case of Aristocrat Leisure, the amount of share capital which stands at $715.1M
contributed by the company’s owners is shown at the liability side of Balance sheet. This
treatment clarifies the fact that the capital contributed by the owners for the business
operation is a liability for the business on which it has to generate a good return.
Money Measurement Concept- The concept says that only those transactions are
eligible to be recorded in the financial statements of the company which can be expressed
in terms of money. The events like strike, management overhaul, skills and competency of
workforce etc. affects the profit and performance of the business but since a reliable value
cannot be assigned to such events thereby it cannot be recorded in the financial
statements.
We could not find any transaction or event of non-monetary nature recorded in the
financial statements of Aristocrat Leisure. By doing so the company is following the
concept of money measurement at the time of preparing their financial statements.
Going Concern Concept- This concept states that the owner of the business is optimistic
about his business and assumes that his business will continue to run for an indefinite
period of time. Companies report their profit and loss only for a particular period of time
instead of calculating the overall return it had earned from the first day till the present time.
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Advanced Financial Accounting
This practice reflects the positive attitude of the owner towards the existence of the
company.
Aristocrat Leisure has prepared its financial statements while keeping this concept. As a
result it has prepared all its financial statements for a particular time period. In the Annual
Report of 2018, Balance Sheet is suffixed with “As at 30th September, 2018”. This shows
the tentative nature of the Balance Sheet and showcases the financial position of the
company for a particular period of time.
Accounting Period Concept- In order to know about the performance of the company,
the indefinite life of the entity is made definite and for this purpose usually entities prepare
its financial statements once in a year. This one year is termed as an accounting year.
This division facilitate the companies in making comparison of performance over the years
and make necessary and significant decisions.
If we look at the Annual Report of Aristocrat Leisure then it prepare the financial
statements for a time period of 12months and it is depicted in the Income statement,
Statement of changes in equity and Cash Flow Statement which are suffixed with “For the
year ended 30th September, 2018”.
Cost Concept- As per this concept, organisations record their assets and liabilities in the
books of accounts at the cost price or at the price of purchase or sale. The price remains
the same over the years only the amount of depreciation is deducted every year.
Aristocrat Leisure reported everything on the basis of historical cost except for few classes
of Property, plant and equity, financial assets and liabilities like derivative instruments.
Dual Aspect Concept- This is one of the golden rules of accounting which says that “for
every debit there should be a corresponding credit”. This means that each monetary
transaction will have two-fold effect and therefore the recording will be made at two places.
Example- If a business is purchasing an asset for cash then Asset account will be credited
whereas cash account will be debited. This concept is based upon the accounting
equation wherein there are assets and liabilities side and here assets are always equal to
liabilities.
Aristocrat Leisure is following the dual aspect concept as a result its assets and liabilities’
side are balanced in the Balance Sheet.
Conceptual Framework and Issue of Measurement
Conceptual framework, accounting concepts and accounting conventions they together
form the accounting theories. Conceptual framework often helps the users of financial
statements in understanding and interpreting them efficiently by citing enough
explanations relating to statements. Accounting standards explains the manner in which
financial reporting could be efficiently done and conceptual framework supports the
International Financial Reporting Standards (IFRS) in the execution of these standards.
Conceptual framework is a kind of constitution for the person who is responsible for the
preparation accounts and financial statements in the company. With the help of conceptual
framework the management of the organisation is able to make more significant and better
decision as this framework promotes transparency by giving more reliable facts and
figures. If we look from an investor’s view point then the framework assist them in drawing
a better decision of capital allocation.
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Advanced Financial Accounting
There are certain issues relating to the measurement in accounting; however the most
debated one is whether the assets and liabilities of the entity should be recorded at a
market price or at the purchase price. This market price is also termed as fair value or
mark-to-market price (Laux & Leuz, 2010).According to IFRS 13, the goal behind recording
the asset and liabilities at fair value is nothing but to compute the exit value of assets and
liabilities during the time of sale of asset or liability transfer. IFRS ask Australian banks and
other financial institutions to compute their assets and liabilities at the market price and not
at the cost or historical price (rba, 2006).Financial Reporting Council in the year 2001,
instructed the Australian Accounting Standards (AASs) to follow IFRS. So after such an
instruction, all the organisations operating in Australia were mandated to follow IFRS and
AASs (aasb.gov.au, N.D.).IFRS 13 (CPA Australia, N.D.) and AAS 13 (aasb.gov.au, 2014)
made it compulsory for the Australian entities to record their assets and liabilities at the
market price. So, fair values cannot be considered as the entity based measurement
rather could be defined as a market based measurement. There are few assets and
liabilities for which fair values cannot be evaluated and there are some for which significant
information related to market is available to compute the market price. Financial liabilities
of the organisation have to face a massive impact of the Fair value accounting. At the time
when credit risk rating of a company declines the fair value of financial liabilities will also
decline and in case of rise in credit risk rating there will be a rise in the fair value of
financial liabilities too. (Socoliuc, 2018)The importance of historical cost can never be
ignored completely even though fair value accounting has its own value and importance.
In the annual report of 2018, Aristocrat Leisure had disclosed the basis of preparation of
financial statements. They had stated that except the financial assets, financial liabilities
and few classes of assets, the information in the report are based on historical cost basis.
The company had evaluated the revenue at fair value of the amount received or is
receivable. Trade receivables are valued at fair value initially and after that valuation was
done at amortised cost. Trade names are also evaluated at fair value because they have
indefinite life period. In the Initial stage, game names, technology and software are
estimated at fair value and then amortised later in the subsequent years.
The financial assets of the company are estimated at fair value like derivatives (Aristocrat
Leisure Annual Report, 2018). For the financial regulators and account preparers the fair
value has turned out to be a very controversial topic (Marra, 2016). For the investors and
management of the company, the fair value helps them to evaluate their actual return but
there are users of the financial statements who wish to know the actual cost of investment.
The risks like over valuing the assets, undervaluing the liabilities, reducing the net profit
falsely etc. are attached with the fair value of accounting. After the credit crisis in 2007, a
more serious need of fair value accounting was felt (Bockova & Skoda, 2014). Fair value
accountings gives clearer picture and make the things transparent for the investors.
However, at times these investors remain unsatisfied even after incorporating the fair
value accounting like at the time company will generate less profit, it will adversely affect
the investors’ income too.
So the issue of measurement related to fair value has been a matter of discussion and
debate from the last many decades. Fair value accounting is beneficial if we talk about the
scenario in which the present businesses are operating, a scenario demanding a better
transparency in estimating the assets, liabilities ,income, expenses etc. but then because
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Advanced Financial Accounting
of unethical practices like manipulation of figures forces the companies and account
preparers to continue with historical cost valuation.
Relevance and Representational Faithfulness- Fundamental Qualitative
Characteristics
In order to increase the usefulness of the accounting information for better decision
making there are two fundamental qualities which are required, one is relevance and the
other one is faithful representation.
RELEVANCE: When the accounting information are capable enough to influence the
decision of the financial statement users then only it can be considered as relevant. The
change in the decision of the users can only be brought if the financial information has a
predictive value or confirmatory value or have the qualities of both. When the users of the
financial information are able to anticipate or predict the result of past, present or future
events, it is considered to have predictive value. When the users have the facility of
correcting or confirming their prior set expectations, it is considered to be confirmatory.
The concept of materiality is somewhat related to relevance wherein the application of
materiality depends upon the entity. Single information which is useful for one organisation
might not be equally helpful for the other organisation, and that is the reason behind calling
materialistic concept as entity-specific.
Faithful Representation: Most of the users and readers of financial statements neither
have the expertise nor have the sufficient time to go through each of the information
incorporated in the statement. So it becomes really necessary for the account preparers to
present all the real time and authentic information instead of hiding or manipulating the
same. The information or data should be such that it reflects those facts and figures which
had actually taken place in the company. The information should be real, complete,
biasness free and neutral in order to qualify for faithful representation (IFRS, 2018). The
characteristics of faithful representation are:
1. Completeness
2. Neutrality
3. Free from error (AccountingVerse, 2018).
Now, if we talk about accounting of assets and liabilities then both relevance and faithful
representation are necessary and should be applied in a systematic manner. Firstly,
economic phenomenon should be identified which could prove to be useful for the users of
the financial statements. At the second step, identify the possible kind of information
relating to the acknowledged economic phenomenon, which could prove to be very
relevant for the financial statement users if available. Then at the third step, decide
whether the information is actually available or not and also is it qualified enough for
faithful representation. If the answer comes out to be yes, then the procedure of satisfying
the qualitative characteristics ends then and there. In case, the information type does not
turn out to be relevant and qualified enough for faithful representation then the same
procedure will be repeated with the other most significant information type. Therefore, no
trade-off is possible between relevance and faithful representation. Both of these are
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Advanced Financial Accounting
important characteristics which must be considered at the time of preparing the financial
statements of the company. The conceptual framework states that even though the
relevance should be considered first but at the same time faithful representation should be
attained before recording any of the information in the financial statements of the
organisation (EFRAG, 2013).
Again, if we talk about the fair values then it could prove to be reliable if it is faithfully
represented by disclosing the method of evaluating and arriving at the fair value. Aristocrat
Leisure had explained the judgements and the estimates carried out in identifying the fair
values of the financial instruments in its Annual report of the year 2018. This shows that
the company had maintained the fundamental qualitative characteristic of faithful
representation. As a result the financial statement users can rely on the data and since the
steps of evaluation are clearly mentioned the data and information could be considered as
relevant.
Conclusion
So, now we know that the financial statements is considered reliable and true when it
meets the guidelines given in the conceptual framework set by International Accounting
Standards Board. Apart from this the companies can never ignore the basic accounting
concepts while preparing their financial statements. The issue of measuring the assets and
liabilities at fair value or historical cost is something which is still a controversial topic.
However, in order to avoid the risk related to fair value measurement the companies
should clearly explain the steps of determining the fair value of any asset or liabilities. By
doing so, the financial statements would be considered relevant as well as faithfully
represented.
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Advanced Financial Accounting
References
aasb.gov.au (2014).IFRS 13 Fair Value Measurement. [Online] Available 21 May, 2019
https://www.aasb.gov.au/admin/file/content105/c9/AASB13_09-
11_COMPjun14_07-14.pdf
aasb.gov.au (N.D.).Frequently asked questions. [Online]. Available 21 May, 2019
https://www.aasb.gov.au/About-the-AASB/Frequently-asked-questions.aspx
Accounting Verse (2018). Qualitative Characteristics of Financial Information. [Online].
Available 21 May, 2019
https://www.accountingverse.com/financial-accounting/introduction/qualitative-
characteristics.html
Aristocrat Leisure Annual Report (2018).Aristocrat Annual Report 2018. [Online]. Available
21 May, 2019 https://aristocratleisurelimited.gcs-web.com/static-files/9527b2df-e411-4c49-
8067-d2f391a0fbe0.
Bockova, K.H. & Skoda, M. (2014).Has Financial Crisis Been the Crisis of Fair Value
Accounting?. International Journal of Advances in Management and Economics
[online] 3(5), p.13-22. Available 21 May, 2019
http://www.managementjournal.info/index.php/IJAME/article/view/470
cpaaustralia.com.au (N.D.).IFRS 13 FAIR VALUE MEASUREMENT FACT SHEET.
[Online] Available 21 May, 2019
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/
professional-resources/ifrs-factsheets/factsheet-ifrs13-fair-value-
measurement.pdf?la=en.
EFRAG (2013). Getting a Better Framework Reliability of Financial Information Bulletin .
[Online]. Available 21 May, 2019 https://www.efrag.org/Assets/Download?assetUrl=
%2Fsites%2Fwebpublishing%2FSiteAssets%2FBulletin%2520Getting%2520a%2520Better
%2520Framework%2520-%2520Reliability%2520of%2520Financial
%2520Information.pdf&AspxAutoDetectCookieSupport=1
IFRS (2018). Conceptual Framework for Financial Reporting. [Online]. Available 21 May,
2019 https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-
summary-and-feedback-statement/conceptual-framework-project-summary.pdf.
Laux, C. & Leuz, C. (2010). Did Fair-Value Accounting Contribute to the Financial
Crisis?. .Journal of Economic Perspectives. [Online]. 24(1), p.93-118. Available 21
May, 2019 https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.1.93
Marra, A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized Economy:
A Never Ending Debate. Journal of Accounting, Auditing & Finance [online] 31(4),
p.583-591. Available 21 May, 2019 DOI: 10.1177/0148558X16667316
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rba.gov.au (2006). Box A: International Financial Reporting Standards. [Online]. Available
21 May, 2019 https://www.rba.gov.au/publications/fsr/2006/sep/box-a.html
Socoliuc, M.(2018). FAIR VALUE VERSUS HISTORIC COST: ADVANTAGES AND
DISADVANTAGES. Ecoforum Journal [online] 7(2). Available 21 May, 2019
http://www.ecoforumjournal.ro/index.php/eco/article/viewFile/817/499
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