ACC00712 Essay: Australian Accounting Standards and Xero Company

This essay analyzes the concept of fair value within the context of Australian accounting standards, specifically referencing IFRS 13 and AASB guidelines. It examines the requirements for fair value measurement and disclosure of assets and liabilities, emphasizing the importance of market-based va...Read More

1. Comment of the aforementioned statement.
In reference to IFRS, IFRS 13 requires the measurement and disclosure of assets and liabilities at
their fair value. Fair value refers to current market price of an asset or the amount of money to be
transferred from an organization for the settlement of debt at a hand length transaction.
Therefore, the company needs to revalue its asset and recognize the revaluation value by taking
the market price of the asset less the net book value as per the advice from its accountant.
AASB in seeking to increase the consistency and compatibility in fair value measurement related
its disclosure with the fair value hierarchy. These input levels include;
The level 1 Inputs- This refer to the quoted prices in the current and active market for assets and
liabilities which are identical and that an entity can be able to access in helping the measurement
and comparability at the date of measurement. The price provides unbiased evidence of the fair
value of an as asset or liability and is used in measuring the current market price of identical
assets and liabilities with much adjustment and with limited exceptions.
For instance if a given entity holds assets or a liabilities and they are traded in the active market,
the fair value fair of the asset or liability is measured within level 1 as the commodity of quoted
price of that given asset or liability, even if the market supply is not enough to absorb the
quantity demanded and to sell a single position might affect the quoted price.
The level 2 inputs-This refer to the other inputs other than quoted market prices included in
level 1 and which are observable for particular assets and liabilities directly or indirectly.
Inputs of level 2 include; prices quoted for similar assets or liabilities in the active market,
quoted prices for similar or identical assets or liabilities in an inactive market, inputs other than
quoted prices that are observable for instance interests implied volatilities and credit cards,
(Australian Accounting Standards Board (AASB), 2010)
The Level 3 inputs- Consist of inputs for assets and liabilities that are not observable and which
may include the company's own research and taking into consideration all market participation
assumptions and factors that might be reasonably available.

Fair Value Measurement
The main aim of fair value measurement is to measure and disclose the price at which an asset
can be sold at an orderly transactions or the price to pay in order to transfer the liability between
market participants at the measurement date, holding all things conditions constant.
In order to measure the fair value of an asset or liability, the following are the requirements to an
organization.
Determination of the particular asset or liability whose fair value is to be measured considering
that with unit of account
For instance, Goodwill and other non tangible assets, proper valuation must be done, this is
appropriate for the measurement of fair value.
Choose the advantageous or rather the principal market for the given asset or liability.
Finally determine the most appropriate method for measuring fair value of asset and liability
putting into consideration the available data.
Techniques used measure the fair value of assets and liabilities.
Market Approach-uses relevant information’s including prices provided the market of similar or
identical assets and liabilities or a group of assets and liabilities.
Cost approach- reflects the amount required to replace the current service generated by an asset
that is the current replacement cost.
Income approach-converts future amount (cash flows or income and expense) to a single current
discounted figure reflecting current market expectations about those future amounts, (AASB,
C.A.S., 2014)
The objective of disclosure and measurement of the fair value of an asset or liability

The assets and liabilities are measured at fair value on a recurring or non-recurring basis in the
statement of financial position after initial recognition; the valuation is done and presented in the
financial statements.
The fair value measurements using significant unobservable inputs as per level 3, affects the
profit or loss and other financial information of a company, (Kober, Lee and Ng, 2010.)
Therefore the disclosure and measurement of fair value aim at providing the correct information about
the company's financial position and performance.
2. Fundamental characteristics of accounting information in Australian Business practices
Relevance- Information provided should be relevant and not irrelevant. This may involve
reporting particularly relevant information or information whose omission or misstatement could
influence negatively the economic decisions of users. For accounting information to be able to
assist the financial user to make a financial decision for instance allocation of resources, it must
assist them to make predictions about future and form expectations about the future based on
previous experience
Reliability- For information to be reliable it should be free from material errors as it may
mislead the user. There must be a faithful representation of transactions and other events.
Information should reflect the underlying substance of events, and prudently represent estimates
and uncertainties through proper disclosure.
Accounting information should put into consideration the current state of economy and type of
industry under which it is operating.
Prudently representation estimates refer to being careful when handling uncertainties in the
process of recognition and measurement in that you should not underestimate liabilities nor
overestimate assets.
Comparability- The information must be comparable to the financial statements presented for
other accounting periods so that users can identify trends in the performance and financial
position of the reporting entity. That means the accounting policies used should be consistent to
ensure uniformity in financial reporting for proper comparability. Also, the accounting policies

should be flexible to accommodate the changing market conditions. This will enable comparing
the organization performance over a period of time and also comparing its performance with that
of other firms in the same industry.
Understandability-Accounting information should be understood by the users whereby their
understanding is based on their own capabilities and how the information is presented. Preparers
of financial statements should ensure that the information is understandable without
compromising reliability and relevance of the information.
3. Examples of Fundamental characteristics in
XERO COMPANY Annual Report FOR YEAR ENDED AT 31ST MARCH 2018.
Relevance- Revaluation of assets is done to determine whether the assets have appreciated or
depreciated. This will help shareholders to decide whether to continue holding the shares or sell
them because revaluation of assets means positive effects on the profit margin which in turn
increase the share value.
In the financial position, the company reports total assets of $289078000 and liabilities of
$61077000. This information is important to debt holders to assess the creditworthiness and its
ability to settle debts using its assets before lending the company.
Reliability- the information is free from bias or significant if any. This has been facilitated by
reporting done by various stakeholders of the company. There is a director’s report, a report
made by an accountant and also Auditors report. This has been used to avoid bias in the annual
report. Net assets value in determination the fair values of assets and liabilities has been
determined by taking regards to principles which include provision of clear reconciliation of net
assets and consolidated balance sheet in the directors’ report, (AASB, 2014.)
There is auditor's independent report which has been used to increase the reliability of the report.
Compatibility- preparers of the report annual report has included the report of the Year 2017 has
enabled the trend comparison of each element of accounting. This will enable the company to
know where there is improvement, deterioration or stagnant in its performance.

Also, it has provided the performance of specific departments and companies in the group to
determine to assess the performance of each individual company or department thus enabling in
assessing which is performing better or worse than another and come up with ways of improving
where necessary, (Fischer, M. and Marsh, T., 2013)
Understandability- the vocabulary used in the reporting is understandable to the users
comprehend.
Also, the format used is which is required and outlined by the conceptual framework of
accounting AASB and which is familiar to the users of information. This increases the
Understandability of accounting information.
Additional information provides support in making report clear and understandable. For instance,
in determining the fair value of assets the assets of the company, additional information outlines
the technique used in the determination of that.
4. Effects of the information disclosed to the investors and the securities market.
Revaluation of assets will encourage investors in buying more shares since there is a likelihood
of the increase in share value in the future. Also, lenders because of the decrease in debt will
increase their confidence with the company and be willing to lend more because a decrease in
liabilities shows that the company is settling a significant amount of liabilities. Security market
will seek to find more customers to buy and sell shares and debentures of the company since the
company is doing well as pertains to share growth.
Auditor's report increases the reliability of the report and thus increasing the credibility of the
report to the investors and can use it to make a reasonable financial decision. Securities market
will use the report to advertise the company shares and thus using it as a tool of marketing,
(Aliberch and Blandón, 2012)
5. Demonstration of logic communication and effective presentation of financial
information
Accounting information is presented in form of tables of number or even sometimes as the print
out of software spreadsheets. However this may not be the most appropriate way of presenting

and communicating the financial information. There must be some key information that needs
keen analysis and comparability with other related information which cannot be done without
use of graphs and charts or other sophisticated presenting tools. Some key information should be
shown as relationships between certain figures should be emphasized, or trends identified.
Appropriate presentation of data in the form of graphs or charts is a useful analysis tool and if the
data is effectively interpreted facilitates proper decision-making process.
When data is appropriately presented in the form of graphs or tables it provides a useful analysis
tool which will lead to the proper interpretation of accounting information and thus proper
financial decision making, (De George and Shivakumar, 2016)
For instance, the income statement is a method of presenting accounting information in a way
that highlights the performance of a business to show whether it is making profit or loss.
Statement of comprehensive income shows income and expenses in an orderly manner and
indicates how much profit a business generated once expenses were subtracted over the given
duration of time. This information is important to the users of accounting information as the
previous performance can be used to predict future performance. Also helps to know whether the
management has expensed the cash in an economical manner.
The statement financial position shows the snapshot of the company's status financially as at a
given date. A proper balance sheet should communicate logically the assets of the company both
current and noncurrent assets as well as who financed the assets that our shareholders and debt
holders. The arrangement of the financial position items should be neat and presentable to
increase the Understandability of the statement.
The statement of cash flow is used to show cash movements in and out of the company over a
given period of thus helping to determine how much the cash generates apart from overall
profitability and how it is disbursed from the company.
Shareholders' equity statement helps to determine how the net worthy of shareholders. Presents
the shareholders' claim in the market, (Argilés, Garcia-Blandon, and Monllau, 2011)
The Xero Company presented each statement of the report in tables and additional information to
support the statement. Breakdown of auditor's remuneration and other detailed information of

financial statements elements help to provide intensive information required by the users of
financial position information for sound decision making.

References
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Argilés, J.M., Garcia-Blandon, J. and Monllau, T., 2011. Fair value versus historical cost-based
valuation for biological assets: predictability of financial information. Revista de Contabilidad,
14(2), pp.87-113.
Australian Accounting Standards Board (AASB), 2010. AASB 1053: Application of Tiers of
Australian Accounting Standards.
De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption literature.
Review of Accounting Studies, 21(3), pp.898-1004.
Kober, R., Lee, J. and Ng, J., 2010. Mind your accruals: perceived usefulness of financial
information in the Australian public sector under different accounting systems. Financial
Accountability & Management, 26(3), pp.267-298.
Vazakidis, A., Stergios, A. and Laskaridou, E., 2010. The importance of information through
accounting practice in an agricultural sector-European data network. Journal of Social Sciences,
6, pp.221-228.