BAO2202 Financial Accounting Report: ASX Listed Companies Compliance

This report, prepared for senior management at Moody Corporation, evaluates the financial reporting compliance of BHP Limited and Quanta's Airways Limited, both listed on the ASX. The analysis focuses on their adherence to General Purpose Financial Reporting standards, specifically addressing leasing, liabilities, earnings per share, intangibles, tax effect accounting, and the concept of physical capital maintenance. The report examines the application of the reporting entity concept for government organizations and assesses compliance with AASB 137 concerning provisions, contingent liabilities, and assets. The evaluation includes a detailed review of the companies' financial statements and disclosure requirements, culminating in recommendations to enhance transparency. The report also explores physical capital maintenance through cash flow analysis and provides insights into the companies' financial health and compliance with accounting standards.

Accounting
Assignment
2019

1
By student name
Professor
Date: 17thSeptember, 2019.
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Executive Summary
This report is primarily intended for the senior level management of Moody Corporation which
has assigned the responsibility to the members of its mid-level management team so that to
present an evaluation of the Compliances made by the two ASX listed companies naming, BHP
Limited and Quanta’s airways limited in relation to the General purpose financial reporting
standards, particularly leasing, liabilities, earning per share, intangibles and tax effect accounting
etc. It further discusses the concept of physical capital maintenance. It also provides an analytical
review of the disclosure requirements complied with by both companies in relation to provisions,
contingent liabilities and contingent assets as per AASB 137.At the end of the after making the
detailed evaluation of the above, the major recommendations have been made to bring or ensure
more transparency in the financial statements prepared by the entity.
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Contents
Characteristics of a reporting entity............................................................................................................5
Application of the concept of reporting entity for the Government organization.......................................6
Physical Capital maintenance......................................................................................................................7
Compliances to AASB 137............................................................................................................................8
Suggestions for the improvement.............................................................................................................10
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Characteristics of a reporting entity
As per SAC 1 an entity shall be considered as reporting entity only if it has users who are going
to be dependent on its General-purpose financial report to gain the understanding of the financial
position and financial performance of the entity based on which they are going to make the
financial decision. It is the SAC 1 that determines that whether the entity should be considered as
a reporting entity or not.
In the given case we have taken two Australian listed companies for whom we are going to
evaluate the fact that whether these companies have complied with the requirements of the SAC
1 in relation to the preparation of its general-purpose financial report intended to be used by its
users.
We are going to start our evaluation from the BHP Limited.
The basis of the preparation of the financial statement of BHP as per the general-purpose
financial report can be made clear from the following:
1. The financial statement of the entity has been prepared in accordance with the
International financial reporting standards that incorporates the interpretations and
standards as has been prescribed by the international reporting standard board, Australian
Accounting standards prescribed by the AASB along with the IFRS adopted by the
European Union.
2. It has been prepared on the going concern basis.
3. It measures the items of assets as per the principle of Historical cost.
4. The significant accounting policies used in the preparation and presentation of Financial
Statement are clearly disclosed in the notes to the accounts part.
5. It adopts the new and amended reporting standard too.
6. Its accounting policies have been consistently applied within the entity and the group
entities while preparation of the financial statements.
7. The major accounting estimates, assumptions and judgements are made based on the
critical accounting policies adopted by the organization.
Now we need to move towards the Annual Report of the Quanta’s Airways limited for the
financial year 2019 to check its level of compliance.
1. It has complied with the requirements of the Applicable accounting standards while
preparing and presenting its financial information.
2. It has too clearly disclosed the accounting policies followed by the same while preparing
the financial statement.
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3. The policy followed by the same to recognize the revenue has been clearly stead.
4. The policy for the recognition of the property, plant and equipment has been clearly
recognized by the same. Apart from the relevant accounting standard, it also adopts the
newly applicable accounting standards.
Hence the above analysis makes it clear that as per the requirements of the General-purpose
financial reporting framework, the financial statements of both above entities have been
prepared. Further once upon a time it was the requirement prescribed by the SAC 1 that if a
private entity has a legal status then it should be considered as a reporting entity. But the later
concept rejected this notion in SAC 1 and said that if there are the users of the financial
statement of an entity then such entity should be considered as the reporting entity irrespective of
its nature of business. Hence it could be clearly seen from the above detailed analysis that both
companies have presented their financial statement in a way that is more beneficial for its users.
It is the reason that the criteria of reporting entity have been fulfilled by the BHP limited and the
Quanta’s Airways Limited.
Application of the concept of reporting entity for the Government
organization
1. Most of the government bodies and the statutory organizations shall be considered as
the reporting entity on the basis the principle that separation between those who are
having the economic interest in the activities undertaken by the concerned
government entity and those who are responsible for the management of these
activities (Sherwood, 2019).
2. The government should be considered as the reporting entity irrespective of the fact
that it is the central, state, territorial or the local level. Because users of the general-
purpose financial statement would like to know the resource allocations made by
these governments along with the accountability of these government.
3. Similarly, at the lower level like single statutory body or the single government
department too can be considered as a separate reporting entity if it has the dependent
users group associated with it who can make significant decision based on the same.
Physical Capital maintenance
In the accounting and business world we cannot say that there is a straightforward definition
available for the concept known as the physical capital maintenance. But as per the Blackwell
encyclopedic dictionary of accounting, A Rashad Abdel – Khalik has defined this term as the
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ability of an entity to sustain its future cash inflows (Abdullah & Said, 2017). This concept is
particularly important for the small business owners who often must struggle for the same and
often due to this reason they even bring their survival in long term in a critical position.
Now we are going to evaluate the position of BHP Limited and Quanta’s Airways Limited to
decide that how these companies are ensuring the maintenance of their physical capital and how
the information supplied by them provides the valuable insight to its users about their physical
capital maintenance position (Zeng, et al., 2019).
We are going to start with BHP limited whose cash flow statement for the financial year ending,
2019 has been showing the fact we can overview a comparative picture of three years of the cash
flows generated by the same. The overall view states that the cash and cash equivalent balance
for the year ending 2017,2018 and 2019 were 14108$M,15813$M and $15593$M respectively.
But the major focus we need to put on the net cash flow generated by the same from its operating
activities if we see the trend of last three years then it is seen that 16804$M,18461$M and
17871$M respectively. It simply says that the ability of the BHP Limited in terms of cash flow to
be generated from the use of its assets has decreased (Boghossian, 2017).
Then we need to see the position of Quanta’s Airways limited by making an evaluation of the
cash flow position of the same. In case of Qantas Airways limited we have been provided
herewith the status of last five years. The data for the year 2018 and 2019 in respect of the net
cash flow generated by the entity were 1694$M and 2157$M respectively. The last five years
data in terms of generation of net operating cash flows for the years were 2015,2016,2017,2018
and 2019 were 2048$M,2819$M,2704$M,3413$m and 2807$M respectively.
When we see the size of the cash inflow generated by both entities, then it becomes quite clear
that BHP limited has higher cash inflow then the Quanta’s Airways limited. But the cash flow
generated from operating activities has been decreased in case of both companies. It means that
the status of the physical capital maintenance in case of both companies are in danger (Wilson, et
al., 2018).
Physical capital maintenance is always meant to estimate the revenue generated by the entity
through the utilization of its Assets so that after the recovery of the replacement cost of the asset,
the organization can start to generate the revenue from the use of the asset that can ensure its
long-time survival.
If we go for making an evaluation of the fact whether the financial statement of the BHP limited,
and the Quanta’s Airways limited has fulfilled the requirement of the information in relation to
its physical capital maintenance then it could be seen that they have justified this purpose.
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Compliances to AASB 137
In the given case we have selected two ASX listed companies, i.e., BHP Limited engaged in the
business of resource provider and the Quanta’s Airways Limited in the aviation sector and the
annual report of both of the companies for the financial year 2019 has been used to evaluate the
compliances made by the companies in terms of the requirement of the AASB 137 that is
disclosure requirements of provisions, contingent liabilities and contingent assets.
It seems better to know the requirements prescribed by the AASB 137 in relation to the
disclosure requirements of Provisions, Contingent assets and contingent liabilities as it shall form
the part of the parameter for both companies on the basis on which they may be evaluated (Coate
& Mitschow, 2017).
At first it needs to be kept in mind that it is only the provision that is required to be recognized
only when it meets that recognition criteria, but when we talk about the Contingent asset and the
contingent liability they just need to be disclosed but not to be reported. The major recognition
criteria for the provision is that the amount of the obligation cannot be reliably estimated along
with the uncertainty of the timing of occurrence of such obligation that arise because of past
obligation, which may result the outflow of resources embodying economic benefits (Michaela,
2017).
A contingent liability is a possible or present obligation whose occurrence is contingent on the
occurrence of some future event not completely within the control of the entity.
Similarly, the contingent asset is a probable asset who existence is contingent on the occurrence
of some future event not completely within the control of the business entity.
While making disclosures in relation to the provisions, for each class of provisions, the opening
balance and closing balances of such provisions, the reason of any change in the same, the nature
of the obligations giving rise to such provision, the reason why the uncertainty is associated with
the amount of provision, if there is any future event that is going to impact the amount of
provision along with the prospects of any reimbursement in the future are to be disclosed
(Hellmann, et al., 2019).
In relation to the contingent liability and assets the estimation of the financial impact along with
the uncertainties involved and if there is any possibility of ant reimbursement exists then all of
these are to be disclosed.
If all the above cannot be disclosed, then the reason for the same should be clearly disclosed.
We are going to start with the BHP limited which has formed a risk and Audit committee, which
has made the detailed disclosure of contingent liabilities and provisions stating the fact that this
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committee has reviewed the updates relating to Samardo dam Failure along with the
developments on the existing and new legal proceedings, change in the estimated cost of
remediation and the provisions in respect of decommissioning the Samardo dam. It has
accordingly recognized an additional amount of the Samardo dam failure.
Similarly, the tax and royalty liabilities of BHP group along with the provisions and contingent
liabilities relating to the same has been separately disclosed. Similarly, adequate recognition and
disclosures for these provisions and contingent liabilities have been made. Similarly, the
treatment of the closure and rehabilitation provision has been found. The provision for dividend
and other liabilities too shall form the part of the compliance with the AASB 137.again it has
made the clear division between the provisions relating to employee benefits and the
restructuring provisions. Similarly, in both cases the basis for such recognition has been clearly
stated (Coate & Mitschow, 2017).
The contingent liability disclosures too have been made in the notes to the financial statements. It
has made the disclosures in respect of contingent liabilities under two separate headings, naming
Associates and joint ventures and Subsidiaries and Joint operation. Similarly, the contingent
liabilities relating to uncertain tax matters, Samardo dam failure and demerger of South32 have
been separately disclosed (Gridneff, 2019).
Now we are coming to the Quanta’s Airways Limited and in respect of the same the major
observations are provided in the following section.
Quanta’s Annual reports for the year ending 2019 to make the category wise disclosure in
relation to the provisions in its notes to the financial information. The first one is employee
related benefits like Annual leave, long service leave, and redundant and other employee benefits
related provision. Similarly, under the head other category of provisions onerous contracts, make
god on leased assets and Insurance, legal and other provisions have been included (Cayon, et al.,
2017).
In respect of Contingent liabilities enough disclosures have been made by it in its financial
statement.
Hence when we go for making a comparative study between BHP Limited and Quanta’s Airways
Limited in relation to their compliances of AASB 137. The presentation and the way of
disclosure of BHP Limited seems to be much better. It is because it provides the category wise
disclosures of provisions with the adequate reasons for such recognition. Even in case of
disclosure of the contingent liability the reason for such categorization has been clearly detailed
in the Notes to the financial information part of the financial information. The disclosure made
by Quanta’s airways in respect of such provision is much limited. Moreover, BHP Limited has
clearly mentioned the requirements of AASB 137 in relation to provision and contingent
liabilities and shown its corresponding compliances (Bosi, et al., 2018).
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Suggestions for the improvement
In our report the scope for the improvement is clearly visible for the Quanta’s Airways limited. It
is because it has complied with the requirement of category wise disclosure of provision. But the
other aspects to be complied with in respect of such compliances as prescribed by the AASB like
the nature of obligation giving rise to provision, the reason why uncertainty is associated with the
amount of provision, the probability of occurrence of any future event that may cause the
significant change in the amount of provision along with the prospect of reimbursement has not
been incorporated by the Quanta’s Airways Limited. At the same time, it was the responsibility
of the statutory auditor of the later Company to see the extent of compliances made by its client
and if it is found that there are non-compliances or even it is the case of partial compliances
present then it is required to be reported. Again, this scope of improvement finding should be a
continuous process.
Conclusion
From the analysis of the above three aspects strongly associated with the presentation and
preparation of the financial statements of the two ASX listed companies it can be concluded that
the first two aspects while determining the status of an reporting entity as per SAC 1 and the
concept of the physical capital maintenance, the entities need to be much aware for the
applicability of these concepts as per which their reporting criteria and the future survivals are
going to be decided. But when we come to the third aspect being the compliances in relation to
the AASB 137 though in AASB itself clearly states that what should be the requirement of
disclosure, but still the entities for whom it is mandatorily applicable simply ignoring the
prescription made by the AASB. In this regard the role of the statutory auditor becomes doubtful
and negligible too. Hence there is a strong need to accept that the requirements of the AASB are
still not fully met by the ASX listed companies. Hence to assist the correct or accurate decision
making to the users of the financial information it becomes mandatory to ensure that the
provisions of the AASB needs to be followed by these entities.
One more thing to be added here is that sincere effort is required to remove the difficulties
associated with the calculation of the physical capital maintenance too. In this regard whatever
difficulties are being faced should immediately be resolved.
The concept of the recognition criteria for the reporting entity has been well followed by the
companies chosen in our case. Further its financial statement provides the information relating to
their physical capital maintenance too. Finally, in terms of compliance with the AASB 137, it is
found that the position of the BHP Limited is much better in comparison with the Quanta’s
Airways limited.
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References
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