Australian Accounting Standards and Financial Reporting

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Advanced Financial Accounting
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Contents
Introduction...........................................................................................................................................................3
1............................................................................................................................................................................. 4
2............................................................................................................................................................................. 7
3............................................................................................................................................................................. 9
Conclusion..........................................................................................................................................................11
References.........................................................................................................................................................12
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Introduction
A company's financial statements are prepared and presented as per the accounting
standards issued by the Australian Accounting Standards Board, which provides guidelines
and rules which companies are required to follow to make the financial information more
relevant and transparent. For these companies are required to follow Generally Accepted
Accounting Principles (GAAP) and prepared financial statements as per the applicable
conceptual frameworks specified by the Board. The financial information of the companies
needs to be a relevant and faithful representation of the subject matter to help to make the
financial statements, understandable and comparable to the management and the external
users and the make the decision-making process effective and efficient.
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1.
Financial Statements are the systematic representation of the financial data and transactions
carried on over a period, prepared as per the applicable reporting and presentation
framework. Their role is to disclose the financial position and performance of the company to
the management, to enable them to assess the operational efficiency and financial health and
thus enable them to formulate and implement managerial policies as a measure to address
these issues. The financial statements also provide external users with the desired
information, enabling them to make alert and effective decisions. For financial statements to
be truthful and fair, and relevant for the decision-making process, they need to be prepared
as per the applicable reporting framework and need to follow all the applicable guidelines and
accounting standards. Such accounting standards are issued by the Australian Accounting
Standards Board. AASB 101 ‘Presentation of Financial Statements’, lays down certain
guidelines, enabling the management to prepare and present financial statements without
ambiguity and with complete transparency(AnnualReports.com, 2019).
In the given case study, for the purpose of discussion of accounting requirements and
concepts, Nanosonics Limited has been chosen, The Company has complied with all the
accounting concepts and financial statements are prepared and presented as per the
applicable reporting framework. The statements have been reported as per the requirements
of the SAC 1 ‘Definition of the Reporting Entity', such that all the disclosures have been made
as per the requirements of the Generally Accepted Accounting Principles'. These principles
are laid down by the Australian Accounting Standard Board, such that they bring clarity and
transparency in the reporting and communication of the financial statements. Hence, both
SAC 1 and AASB 101, requires the company to incorporate different accounting concepts into
their financial statements such as:
 Going Concern Concept: Going concern concept is based on the assumptions, that
the company will continue to operate for foreseeable future and hence the financial
statement are prepared to take that assumption into consideration. Future expenses
and liabilities are taken into books of accounts, such that they may be taken at an
estimated price. Basic recognition criteria for Assets are that such assets should lead
to generations of benefits in the near future. This recognition criterion involves using
the going concern concept.Nanosonics limited in its financial statements have specified
historical cost recognition criteria and have made provisions for future possible
expenses that could be incurred(Standard, 2015).
 Business Entity Concept: This concept focuses on the distinction in the company
and the shareholders of the company. Thus this assumption creates a transparent veil
between the company and the shareholders, such that the liability of the shareholders
is limited to the extent of unpaid shares (in case company limited by shares) or to the
amount guaranteed in the beginning (a company limited by guarantee). Personal
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expenses are not to be considered as the business transaction and hence while
charging expenses in the income statement, such expenses shall be attested and
validated by proof documents. Nanosonics Limited is the company limited by shares,
such that the company has issued $112,713 (‘000) worth of fully paid shares and thus
shareholders have no role to play in the liability of the company.
 Money Measurement Concept: This concept suggests that the transactions are to be
reported in the monetary values in the books of accounts. Such monetary value should
be the appropriate monetary unit currency of the country in which the company
operates. All the transactions are to be recorded in the monetary units and not
physical units, such that various financial components of the company are capable of
being measured and compared in the later period(Jackling, et. al., 2012). Nanosonics
Limited operates in Australia and accounts and reports transactions in its books at
Australian Dollar, such that it is consistently used for reporting all the transactions and
hence promoting uniformity and consistency in the data of the financial statements.
 Accounting period Concept: This concept assumes that the company prepares
financial statements on regular intervals such that the transactions are recorded in
such a manner that they represent the financial performance of that particular period. It
requires that the Income Statement and Statement of Financial Position be prepared
on a regular basis. Nanosonics Limited follows SAC 1 guidelines and thus prepares its
financial statements on a yearly basis on June ending every year.
 Historical Cost Concept: Historical cost concept requires companies to report and
recognize assetsat purchase price adjusting for all the expenses required to bring the
asset in its desired condition for it to be used in the operations of the business. As per
the disclosures in the Significant Accounting Policies of Nanosonics Limited, the assets
are recognized at historical costs and then later are revalued in case of impairment of
increase in the value of the asset.
 Duality Aspect Concept: For every transaction, two simultaneous adjustments of an
equal amount are made in the books of the accounts, such that the debit entries are
matched with the credit entries of the transactions. This concept enforces the basic
accounting understanding such that the assets of the company should be equal to the
liabilities of the company(AASB, 2013).
 Realization and Accrual Concept: This concept focuses on the time of the
recognition of income and expenses in the books of accounts of the company. Both the
items are classified on an accrual basis, such that they are reported not when they are
paid or received, but when an obligation is created on the company to receive or pay
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them. Both the transactions will be recorded in the accounting period to which they
relate and not in the period in which they are received or paid. Company has created
provisions for the outstanding liabilities such as Employee benefits Liabilities of $2,748
(‘000) in its financial statements, which are to be settled in the future.
 Matching Concept: This concept requires that the expense of a particular accounting
period should be matched with the expenses of theta period. In other words, it can be
said that the expenses should be reported in those accounting periods, in which
benefits/income are reported. Nanosonics Limited has been depreciating fixed assets
on SLM basis, such that the depreciation has been expensed out on the basis of the
life of the assets(Mazhambe, 2014).
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2.
As per ‘Conceptual Framework for Financial Reporting' issued by Australian Accounting
Standard Board, different measurement base may be adapted for different financial
components, such that each base has different characteristics and hence have different
advantages and disadvantages. Also, there are certain factors, both internal and external
affecting the feasibility and applicability of different measurement bases in different situations.
An asset or liability may be classified and measured in following different manners:
 Historical cost:Historical cost basis of measurement is adopted when assets are to be
recognized in the books of accounts for the first time. Historical cost includes not only
the purchase price but also certain expenditures incurred to bring asset in its desired
state to be used in the operations of the business. E.g. Nanosonics Limited‘s assets
are carried forward at historical costs, such that the depreciation is accumulated
separately under a different heading(Horngren, et. al., 2012).
 Current value: It requires the company to record assets and liabilities at current value
and not at historical cost. Current value signifies the depreciated value or an amount
for which the said assets and liabilities can be sold in the market (salvage value). Such
value can be derived by taking into consideration the accounting treatment that has
been done on such assets and liabilities. E.g. Debtors may be carried at the net value,
such that the provisions for doubtful debts are reduced from their amount and the net
amount is reported in the set side of Statement of Financial Position.
 Fair Value: It is the value for which the assets can be purchased from the market and
represents the inherent costs associated with such assets. This value is ascertained by
taking into consideration different market factors affecting the economy and hence the
value of assets on a micro level. Usually, assets being carried in the books of
accounts at historical cost are required to be remeasured to the fair value. Such re-
measurement may be a result of either the provisions of the accounting standards or
may be done by the company on their own(Edgley, 2014). E.g. Goodwill is reported at
fair value, such that the externally generated goodwill is the result of either merger or
business combination and hence the excess payment over the market value of the
business acquired, is taken as goodwill in the books of the acquirer.
 Value of Asset in use: another measurement basis for assets could be the value of
an asset such that this value signifies the present value of the future benefit that the
asset in use will generate. This measurement basis does not rely on the external
market process but on the internal operational efficiency of the company. The value in
use will be determined by the internal rate of return generated by the company from its
business operations, making use of such assets. E.g. On valuation of a business, the
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free cash flows may be calculated to arrive at the current market value of the company.
Such free cash flows are brought down to the present value and then are capitalized
for the purpose of the calculation of the market value of the company.
Application of the above-mentioned measurement basis may differ from situation to situation
or financial component of the company. In most of the cases, the most relevant and
understandable way would be the application of one measurement basis in both the income
statement and statement of financial position, whereas under the disclosures the same item
has been presented and measured using a different measurement basis. In fewer cases,
different measurement basis may be adopted in the income statement and statement of
financial position. To bring clarity and transparency in the reporting, such a method is more
useful and relevant(Ryan, et. al., 2014).
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3.
The purpose of the financial statements is to help the management and external users take
alert and effective decisions after considering the information available in the financial
statements. For this, such information must be relevant and should impact the decision-
making process of all the interested users. Hence, it can be said that the information must be
relevant and play its part in the decision-making the process. Framework for the
Preparation and Presentation of Financial Statements requires that any information not
involved in such a process would be considered irrelevant. Faithful representation, on the
other hand, means that the information contained in the financial statements is complete,
error-free and unbiased. It suggests that the information reflects the real world situation and
hence is the faithful representation of the subject matter which is the issue in the discussion
and for which the users require such information. The concept of faithful representation can
be classified into the following:
 Completeness: For information to be a faithful representation of a subject matter, it
needs to be considered in totality, so that the information makes sense and provides
users with sufficient tools and solutions to address the issue faced regarding the
subject matter(Andon, et. al., 2015).
 Neutrality: The information to be able to influence and aid the users must be neutral
and unbiased. It should be free from errors and reflects an objective view of the subject
matter discussed. Neutrality ensures that all the parties can depend on the information
and take decisions as per their own understanding and needs.
 Error-free: The information needs to be free from error, to enable the users to make
error-free decisions, which would make the decision-making process effective and
efficient. The error-free information will gather more confidence from the users, which
is of the utmost importance for them to depend on such information.
The concepts of relevance and faithful representation go hand in hand, such that neither have
an edge over the other and both play an important role to make the financial information more
dependable and transparent for the purpose of the decision-making process. Users cannot
deny the importance of one over the other as both of them together make the information
comparable, understandable, verifiable and timely(Cohenand Karatzimas, 2017).
In the recognition and measurement criteria of the fixed assets, the information is both
relevant and is a faithful representation of the subject matter involved. The assets are
recognized and valued as per the Generally Accepted Accounting Principles (GAAP) such
that the assets reported are relevant and important to the overall information presented in the
financial statements of the Nanosonics limited. At the same time, the measurement is the
faithful representation of the best estimate of its value in the market. Faithful representation
doesn't need to be accurate completely, it should be the best estimate made on the basic
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knowledge of the subject matter, such that the person responsible for the measurement of the
asset to be true and faithful.
Similarly, on the reporting for the provision in the liabilities, the provision is quantified on the
basis of the best estimate, made on the basis of the past experience and other valuation
techniques. Also, the provisions are only made when the probability of the event occurring is
more than not happening of the event i.e. the reporting of the provision is relevant and
important in the decision-making process(AnnualReports.com, 2019).
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Conclusion
The purpose of the assignment is to understand and assess the different principles and
guidelines laid down by the Australian Accounting Standards Board (AASB) in the
presentation and the preparation of the financial statements of the company. Such principles
and guidelines help make the information more relevant and understandable and hence help
in the decision-making process of the management and the external users. For the purpose of
this assignment, Nanosonics Limited has been chosen for discussing the implications of the
accounting concepts, conceptual frameworks and the GAAPS on the information available in
the financial statements.
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References
 AASB, C.A.S., 2013. Fair Value Measurement. May2009.
 Andon, P., Baxter, J. and Chua, W.F., 2015. Accounting for stakeholders and making
accounting useful. Journal of Management Studies, 52(7), pp.986-1002.
 AnnualReports.com. 2019. Nanosonics Ltd. [Online] AnnualReports.com. Available at:
http://www.annualreports.com/Company/Nanosonics-Ltd [Accessed on 31st May 2019]
 Cohen, S. and Karatzimas, S., 2017. Accounting information quality and decision-
usefulness of governmental financial reporting: Moving from cash to modified
cash. Meditari Accountancy Research, 25(1), pp.95-113.
 Edgley, C., 2014. A genealogy of accounting materiality. Critical Perspectives on
Accounting, 25(3), pp.255-271.
 Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D., Tan, R. and Willett, R.,
2012. Accounting. Pearson Higher Education AU.
 Jackling, B., Howieson, B. and Natoli, R., 2012. Some implications of IFRS adoption
for accounting education. Australian Accounting Review, 22(4), pp.331-340.
 Mazhambe, Z., 2014. Review of International Accounting Standards Board (IASB)
Proposed New Conceptual Framework: Discussion Paper (DP/2013/1). Journal of
Modern Accounting and Auditing, 10(8).
 Ryan, C., Mack, J., Tooley, S. and Irvine, H., 2014. Do not‐for‐profits need their own
conceptual framework?. Financial Accountability & Management, 30(4), pp.383-402.
 Standard, I.A., 2015. Presentation of Financial Statements. Balance Sheet, 54, p.80A.
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