Detailed Report: Financial Accounting Practices of Spark New Zealand

This report provides a comprehensive analysis of the financial accounting practices of Spark New Zealand. It begins with an introduction to the importance of high-quality financial reporting and the role of the IASB and AASB in establishing accounting standards. The report then details several key accounting concepts used by Spark New Zealand, including the business entity concept, money measurement concept, going concern concept, accounting period concept, accounting cost concept, dual aspect concept, realization concept, and accrual concept. Furthermore, it delves into the measurement debate within accounting, examining different measurement bases such as historical cost and fair value, and their impact on financial reporting, with specific examples from Spark New Zealand's annual report. The report also discusses the importance of relevance and representational faithfulness in the conceptual accounting framework. The report concludes by summarizing the key findings and referencing the sources used.

Advance financial accounting
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Contents
Introduction......................................................................................................................................3
Description of accounting concepts used by Spark New Zealand to prepare the annual report......3
Measurement Debate in Accounting in Reference to the Conceptual Framework and Examples
from the Selected Company.............................................................................................................7
Understanding of Relevance and Representational Faithfulness of Conceptual Accounting
Framework.....................................................................................................................................10
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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Introduction
The business entities are required to develop and provide high quality financial reports
for communicating its key financial results and figures to the end-users such as investors,
creditor, lenders and others. It is highly necessary that the business develop the financial reports
in compliance with the relevant accounting standards and policies to ensure that high quality
information is disclosed as it provides basis for the end-users to take various type of decisions.
The IASB (International Accounting Standards Board) has provided the conceptual accounting
frameworks in this context for ensuring that business entities worldwide develop high quality
financial reports by complying with the accounting concepts and principles provided by it. The
AASB (Australian Accounting Standards Board) also complies with the IASB standards and thus
have directed the business entities to follow the principles of conceptual accounting framework
in development of their financial reports.
This report has been prepared in the context of examining the annual report of a selected
ASX listed entity, that is, Spark New Zealand Foreign Exempt, a telecommunication company
involves in providing telephone and internet services across New Zealand. This report examines
the accounting concepts used by the company in addition with the measurement issues faced as
stated by the conceptual accounting framework. Also, it has discussed the importance of
relevance and representational faithfulness in the financial accounting framework as provided by
the conceptual accounting framework with the use of examples from the selected company.
Description of accounting concepts used by Spark New Zealand to prepare the annual
report
There are various accounting methods and valuation techniques available to perform
accounting of same financial items. So, it is very important to bring in uniformity and
consistency in recording the accounting transaction so that book of accounts maintain by
companies all over the world can have some sort of comparability. In order to maintain the
uniformity and consistency in books of accounts, international accounting bodies have developed
certain rules or principles and they are classified as accountings concepts and conventions. The
role of accounting concepts is to provide the basic accounting assumptions, rules and principles
to the accountants which act as the basis for recording accounting transactions and preparation of
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financial statements (Mirza and Knorr, 2011). Below are some important accounting concepts
that are mandatory for the companies all over the world to apply while performing the process of
financial reporting:
Business Entity Concept: As per this accounting concept, it is assumed that business enterprise
and business owners are two separate bodies or entity and it is important to keep personal
transactions and business transactions separate. It can be understand from the example that,
Spark New Zealand has shown owner’s capital or share capital under heading equity and liability
not as the asset of the company.
Money Measurement Concept: As per this accounting concept it is mandatory for all entities to
record only those transactions that can be measured in terms of money and should record them in
Country’s Currency. For example, company established in Australia will use Australian Dollar to
record all the transactions. It means company cannot record transactions that cannot be expressed
in books of accounts. In case of Spark New Zealand, all the transactions have been shown in
Australian Dollar and there are no transactions that have expressed as non monetary items. The
purpose of this accounting concept is to help the accountants to know what transactions have to
be recorded and what not to record (Needles, Powers and Crosson, 2013).
Going Concern Concept: This concept states that entity will continue forever for an indefinite
time period and it cannot be liquidated unless there is requirement to do so. This concept is most
important accounting concept as it provides the basis for calculating the value of assets and
liabilities. It can be understood from example that total value of purchases of plant and
machinery is being charged as depreciation up to the life of asset not as the expense in first year
itself. Spark New Zealand has followed this accounting concept as it deferred many expenses
and income in form of assets and liabilities in the balance which is a clear indication that
company based its accounting process through using going concern concept (Wahlen, Baginski
and Bradshaw, 2017).
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(Annual report, 2018)
The above balance sheet of Spark New Zealand shows that expenses occurred to
purchase of fixed assets such as property, plant and equipment has been deferred and has been
charged as depreciation every year till the life of asset. It is only possible due to the going
concern accounting concept.
Accounting Period Concept: According to this concept accounting transactions of specific
period is considered to ascertain the financial performance of the company and accounting
transactions that are not related to specific period must be adjusted through use adjusting entries
and should be taken into balance sheet for future reference. This accounting concept is very
important as it helps the company to predict the actual performance of the company for the
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specific period and also helps in ascertaining tax for current period only (Wolk, Dodd and
Rozycki, 2016).
Spark New Zealand has recorded those transactions in the income statements that are
related with the current period and has taken all the future transactions such as prepaid expenses,
unearned income and other items to the balance for future reference. In this way, Spark New
Zealand has ascertained the current year profit through not including the future transactions in
current period income statement.
(Annual report, 2018)
Accounting Cost Concept: This accounting concept provides that company should reflect all
their assets at cost not at market value. For example, cost of any fixed asset such as plant,
property and equipment must include only purchase price such as cost of acquisition,
transportation and installation cost. Company cannot record the market value of plant, property
and equipment in the balance sheet.
Spark New Zealand has recorded all its fixed assets on historical cost basis which means
cost paid to acquire the machine less any depreciation or amortisation.
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(Annual report, 2018)
Dual Aspect Concept: This accounting concept can be said to be basis of complete accounting
process. This accounting concept provides that every business transactions must be based on dual
effect which means each transaction impacts two accounts. It means every business transaction
should be recorded at two places whether it can be asset, liabilities, income, expenses or equity.
As per this accounting concept “Assets= Liabilities + Equity”.
Realization Concept: This accounting concept provides that entity must record the revenue in
the books of accounts when it has been realised not when the transactions has been performed.
Realization means legal right to receive the money, for example, selling goods can be said to be
realization of money but receiving order cannot be said to be realization.
Accrual Concept: As per this accounting concept all the revenue and expenses should be
accrued that are not related with current period and those are outstanding in the current period. It
helps to make proper balance in books of accounts and helps to record only those transactions
that are related in current period.
Measurement Debate in Accounting in Reference to the Conceptual Framework and
Examples from the Selected Company
The conceptual accounting framework as provided the following measurement basis to be
use during the time of financial reporting. These are known as historical cost, value to the
business, fair value, realizable value and value in use. The last four forms the basis of current
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value measurement and it along with historical cost method is used generally by the business for
measuring and reporting the value of assets and liabilities (ICAEW, 2016). However, the
measurement issue that is generally faced during financial reporting is use of an adequate
measurement approach that is able to meet the qualitative characteristics of conceptual
framework of relevance and reliability. The different measurement basis provided by the
conceptual framework has varying uses, costs and extent of relevance and reliability for
reporting of assets and liabilities (IFRS, 2017). It is required on the part of business managers to
select adequate measurement approach as per the nature of assets and liabilities (Conceptual
framework — Measurements and elements of financial statements, 2013). However, the major
issue that is present in the selection of an adequate measurement approach that is able to provide
both relevant and reliable financial information for meeting the conceptual accounting
framework principles. The IFRS has provided the use of different basis for measuring different
items within accounts. This results in generating inconsistency between different items of
financial reporting and thus there requires a need for eliminating the inconsistency in the
financial reporting that exists with the use of different method of measurement. The financial
items of balance sheet such as assets and liabilities are measured with the use of different
measurement method while the financial items of income statements are measured with the use
another measurement approach (Filipova, 2016).
The issue of measurement basis is present as there are particular strengths and
weaknesses associated with each measurement approach of accounting that are provided by the
conceptual framework of accounting. For example, fair value method of cost measurement may
seems to be ineffective in the absence of active markets while method of historical costing does
not have significance in valuing certain items such as financial instruments that does not have
any historical cost (Sadowska, 2016). Therefore, the use of a measurement approach can results
in producing significant value for one financial item while may fail to depict the actual value of
others. As such, the business entities tend to use different method of measuring for valuing of
different assets and liabilities and this often results in generating inconsistency in the financial
reporting (International Accounting Standards Board, 2016).
The same has been examined from the analysis of the financial report of Spark New
Zealand Foreign Exempt that has also adopted the use of different measurement basis for
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reporting of value of different financial items. The financial items presented within the balance
sheet are valued at historical cost while that depicted in the income statement are valued at fair
value. The historical cost method has been used to record the value of plant, property and
equipment and it can be seen from the below image from the annual report (Annual report,
2018).
(Annual report, 2018)
Spark New Zealand Foreign Exempt has used fair value measurement to calculate the
value of account receivables as value of account receivables should be adjust to the current
realization amount and has to be adjusted for any bad debts recognised during the accounting
period.
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(Annual report, 2018)
Understanding of Relevance and Representational Faithfulness of Conceptual Accounting
Framework
The conceptual framework of accounting has stated the two major qualitative
characteristics that must be used by business entities during the development of their financial
reports. These two characteristics are relevancy and faithful representation of information. The
relevance characteristics have required that the financial information need to be capable of
making a difference in the decision-making of the users such as investors, creditors and others.
This requires them to make predictions about the past, present and future outcome events of an
entity (Grüber, 2014). As such, it needs to be predictive that is able to predict the future cash
generation capability of a business entity also a feedback value which regards providing value
about the past and present activities of an entity to provide confirmatory value for taking
decisions. On the other hand, the faithful representation of information depicts that the
information must be materialistically correct, free from any error and must also be verifiable by
independent observers such as auditors (Hopwood, 2013). These two qualitative characteristics
need to be adopted by the business entities at the time of financial reporting for developing high
quality financial reports (Ashford, 2011).
However, there exists a tradeoff between relevance and reliability as giving importance
on one aspect during financial reporting may result in negatively influencing its other aspect.
This is because both are important to be applied for generating high quality financial outcomes
and therefore it requires developing a trade-off between them so that emphasis placed on one
does not negatively impact the other (Dye and Sridhar, 2010). For example, under the use of
accrual method the sales that are done on credit are recognized as revenue and thus making the
financial reports more relevant while it will impact the financial reports less reliable as it fails to
depict the actual value of an entity to the end-users (Gassen and Schwedler, 2010).
Similarly, under the method of reserve recognition accounting, the business entities
recognizes the present value of proven reserves in the net income and thus the information can be
regarded as more relevant. On the other hand, the fluctuations in the future value of proven new
reserve due to volatility in the market may impact their current value and thus making the
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information less reliable (Conceptual Framework for Financial Reporting, 2018). The business
entities also tend to adopt the use of different measurement basis in recognition of their assets
and liabilities to achieve a trade-off between relevance and reliability. The historical method of
costing used in measurement of assets and liabilities may result in making the financial
information more reliable while fair value that helps in assessing the future financial position of
an entity helps in making the financial statements more relevant (Albrech, Stice and Stice, 2010).
The investors emphasizes on relevance in forecasting the future financial position of an
entity while auditors during reviewing the materialistic correctness of the financial information
emphasis on reliability. Thus, investors prefer that financial statements are developed with the
use of fair value while auditors place more emphasis on historical costs to be used for
development of the financial statements (Burlaud, 2013). The business entities are placing large
emphasis on improving the relevancy of the financial reporting to meet the needs and
expectations of the investors. As such, businesses are developing their financial statements more
on the basis of fair value but it does not mean ignoring the reliability, Therefore, they tend to
adopt a trade-off between the two qualitative principles of the conceptual accounting framework
and use measurement approach at fair value for financial items that requires more relevance and
other at historical cost that requires more reliability (Bellandi, 2017).
The same can be depicted form analyzing the annual report of Spark New Zealand Foreign
Exempt which has adopted the use of both historical and fair value methods to develop its
financial reports. The use of historical basis is done for reporting the value of fixed assets that
requires more reliability while operating expenses and revenue and financial instruments are
valued at fair value that are requires to depict more relevant information. The items of income
statements need to depict the future performance of an entity and therefore required to be
developed with the use of fair value as analyzed from Spark New Zealand Foreign Exempt. On
the other hand, the balance sheets are developed with the use of historical method of financial
reporting as they tend depict the reliable value to used by prepares for assessing the materiality
correctness of the financial information (Annual report, 2018)
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Conclusion
The above report has inferred that the conceptual accounting framework of reporting is
very important to be used by the business entities for development of their financial reports. The
accounting framework provides relevance and representational faithfulness as the major principle
of financial reporting. However, it requires a trade-off to be developed between the two for
meeting the objective of financial reports development.
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