Financial Reporting Compliance of Xero Limited: An Analysis

This report provides a detailed analysis of Xero Limited's financial reporting practices, focusing on its compliance with the International Accounting Standards Board (IASB) conceptual framework. The analysis evaluates Xero's adherence to measurement criteria, fundamental and enhancing qualitative characteristics, and the overall requirements of general purpose financial reporting. The report examines how Xero's financial statements meet the needs of end-users, such as investors and lenders, in making informed decisions. It also explores the level of accounting knowledge required by these users. The study utilizes Xero's 2018 annual report and relevant academic research to support its arguments, providing a comprehensive assessment of Xero's financial reporting integrity and transparency.

Contemporary Issues in Accounting: Xero Limited
1

Executive Summary
This report is developed for providing an examination of the annual report of an ASX
listed entity, that is, Xero Ltd, in accordance with the principles of conceptual accounting
framework of IASB. It has been identified from analyzing the compliance of the company that it
has effectively followed all the general purpose financial reporting requirements stated by the
CF. The fundamental and enhancing qualitative characteristics are adequately met and it has met
the general objective of developing the financial statements.
2

Contents
Introduction......................................................................................................................................4
Critical Analysis of General Purpose Financial Reporting by XERO Ltd......................................4
Measurement Criteria Adopted by the Company & its Compliance with Conceptual
Framework Requirements............................................................................................................4
Fundamental Qualitative Characteristics of Conceptual Framework Applied by Xero Limited.5
Enhancing Qualitative Characteristics of Conceptual Framework Applied by Company...........7
Decision Making Relevance of the Financial Report of the Company......................................10
Knowledge required by the end-users of Financial Reports as stated by CF to Assist in
Decision Making........................................................................................................................11
Evaluation whether Xero Ltd has met the requirement of general purpose financial report.....11
Conclusion.....................................................................................................................................11
Recommendation...........................................................................................................................12
References......................................................................................................................................13
3

Introduction
The compliance with the conceptual framework of accounting is becoming essential for
business entities around the world developing their financial statements in accordance with IASB
(International Accounting Standard Board). The AASB (Australian Accounting Standards
Board) have also directed all the ASX listed entities to develop their financial reports as per the
IASB standards. In this context, this report is directed to a selected an ASX listed corporation by
providing an evaluation of its compliance with the essential requirements of the conceptual
framework of accounting. This is undertaken by evaluation of the annual report of the selected
company and examining its compliance with the qualitative and measurement criteria’s stated by
the CF. The Company selected for analysis purpose is Xero Limited, a public software company
involved in providing cloud based software platform for small and medium-sized business.
Critical Analysis of General Purpose Financial Reporting by XERO Ltd
Measurement Criteria Adopted by the Company & its Compliance with Conceptual
Framework Requirements
As per the Conceptual Framework, a listed reporting entity needs to provide information
about the measurement base it chooses to value its assets & Liabilities. A Business entity can
choose measurement approach either historical cost or current value as stated by CF. Current
value is divided into fair value, value in use &current cost. An Entity needs to select an
appropriate measurement approach which meets the requirement and objective of General
Purpose Financial Reporting (Complied Framework, 2015).On the evaluation on Annual Report
it can be said that Xero Ltd. has valued its fixed assets (Property, Plant & Equipment) on
historical cost less Depreciation which is charged on Straight Line basis. Fixed Assets are tested
for Impairment whenever there are indications of it.
4

(Source: Xero ltd: Annual Report, 2018)
Software development cost that meets the criteria of intangible assets has been capitalized and
amortized over its estimated useful life. Intangible asset other than software is valued at
historical cost. Xero Ltd. Measured its Goodwill on historical cost as it represents the excess of
purchase consideration over the fair value of net assets acquired in a Business combination.
(Source: Xero ltd: Annual Report, 2018)
Provisions are measured on fair value as provisions are recognized when the outflow amount can
be reliably estimated (Xero ltd: Annual Report, 2018).
(Source: Xero ltd: Annual Report, 2018)
5

Fundamental Qualitative Characteristics of Conceptual Framework Applied by Xero
Limited
Business Entities listed on ASX should use the two fundamental qualitative
characteristics, relevance and faithful presentation as provided by the Conceptual Framework
(CF) during preparation of their financial statements. The relevance criteria seem to be fulfilled
when the financial information is capable of changes the user’s decision on the financial
statements only when it has predictive value as well as confirmatory value. Investors should be
able to predict and confirm the value stated in the financial items which can be used for
analyzing the present as well as future performance of the company (Christian and Lüdenbach,
2013). A thorough review of the Annual Report of Xero Limited reflects that it has followed
consistently accounting policies. All the material information has been incorporated in the
financial statements as per the Applicable Financial Reporting Framework. Earnings per Share
(EPS) can be used to evaluate present performance as well as to predict future performance of
Xero limited as shown in the below statement (Xero ltd: Annual Report, 2018).
(Source: Xero ltd: Annual Report, 2018)
6

Faithful presentation of information is the second fundamental qualitative characteristics
in financial reporting provided by the Conceptual Framework. The financial information should
be free from material misstatement and errors. It should give a true and fair representation of
company’s financial position (Schroeder, Clark and Cathey, 2016). By analyzing the financial
report and audit report of Xero Limited prepared by E & Y, we can say that the financial
information provided in financial statements is complete and gives a faithful presentation as
stated in below report (Xero ltd: Annual Report, 2018).
(Source: Xero ltd: Annual Report, 2018)
Enhancing Qualitative Characteristics of Conceptual Framework Applied by Company
The Conceptual Framework has provided some enhancing qualitative principles in
addition to the above mentioned fundamental qualitative characteristics that need to be followed
7

by a reporting company listed on ASX during financial reporting. According to the enhancing
qualitative principles, the financial information should be comparable, understandable, verifiable
and timely for providing assistance to the end users in decision-making. Comparability
characteristic states that the company should be consistent in following its accounting policies
(IFRS Conceptual Framework, 2018). An information can be compared only if it is prepared by
following same accounting policy to evaluate performance and growth as compared to other
entities or previous years or industry as shown in the below statement (Xero ltd: Annual Report,
2018).
(Source: Xero ltd: Annual Report, 2018)
Understandable characteristic represents that the financial information in the financial
Report should be in a simplified format and attached to notes to account and explanations so that
an investor can evaluate the same and make a worthy decision (Xero ltd: Annual Report, 2018).
8

(Source: Xero ltd: Annual Report, 2018)
Verifiability characteristic ensures that the information should be easily verifiable by the
decision makers. Timely information represents the updated information on the right time.
Xero Limited has given its financial information pursuant to relevant years in quantitative
format with all the explanations to it to make it comparable, understandable, verifiable and
timely. Xero Limited has properly fulfilled all the requirements of conceptual framework for
enhancing its qualitative characteristics of financial information as can be seen from the below
statements and reports (Xero ltd: Annual Report, 2018).
9

(Source: Xero ltd: Annual Report, 2018)
Decision Making Relevance of the Financial Report of the Company
The general purpose financial report is useful only if it provides the required financial
information at the right time to the right person in the right quantity. The end users of the
financial reports such as investors, potential investors, lenders, bankers are going to use this
financial report to grab the information from the report which is useful for them in decision
making. As such, the company has provided financial statements, business results, revenue
statement to be used by the present and potential investors for developing overview of the
company, and analyze its future growth prospects. The balance sheet has provided information
10

relating to its type of assets and liabilities that is largely useful for the creditors and lenders to
examine the liquidity and solvency position of the company (Xero ltd: Annual Report, 2018).
Knowledge required by the end-users of Financial Reports as stated by CF to Assist in
Decision Making
The CF has stated that end-users of financial report should have basic accounting
knowledge to understand the financial information presented by an entity. It helps the end users
to understand the information provided in the report and use it in their investment decision
making. Thus, end-users of financial reports must have sound knowledge of accounting and
finance to evaluate the present performance of the company and predict future performance.
However, in addition with the basic knowledge of accounting, the investors and financial
analysts need to have accounting expertise to predict the company growth trends by using
analytical techniques such as ratio analysis, horizontal analysis, vertical analysis (Macve, 2015).
Evaluation whether Xero Ltd has met the requirement of general purpose financial report
In general the requirement of general purpose financial report is provide all essential
information to the users of the financial report that helps them to make useful decision and
information provided must complies the legitimacy requirement define in various laws and
regulation. In this context, Xero Ltd has followed all the requirement of general purpose
financial report through providing information such as complete set of financial statements
(Income statement, statement of financial position, cash flow statement and statement of change
in equity) and annual report has also disclosed proper notes to accounts that explains how
accounting of financial statements have been performed and abide with required laws and
regulations. Financial statement of Xero Ltd has been prepared in accordance with generally
accepted accounting practice of New Zealand (NZ GAAP) and this company also complies with
the International Financial Reporting Standards (IFRS). Through looking at the annual report it
can be said that Xero Ltd. has successfully adopted new accounting standards in order to
promote the comparability of financial reports and also to improve the decision making process
of users (IFRS Conceptual Framework, 2018).
11

Conclusion
It has inferred from the overall evaluation of the annual report of the company that it has
followed all the qualitative characteristics provided by the conceptual accounting framework.
The company has met the general objective behind the development of financial reporting as
stated within the conceptual framework of accounting.
Recommendation
It can be recommended from the overall discussion held within the report that company
has adequately followed all the reporting requirements that the conceptual framework of
accounting requires to be adopted by the ASX listed entities. As such, the integrity and
transparency in its financial operations are ensured and therefore it presents less risk for the
investors in respect of occurrence of any error or fraud that can negatively impact the interests of
the investors.
12

References
Christian, D. and Lüdenbach, N. 2013. IFRS Essentials. London: John Wiley & Sons.
Complied Framework. 2015. Australian accounting standards Board. [Online]. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed on: 16
April 2019].
IFRS Conceptual Framework. 2018. Conceptual Framework for Financial Reporting. [Online].
Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-
summary-and-feedback-statement/conceptual-framework-project-summary.pdf [Accessed on: 17
April 2019].
Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision
Tool, or Threat. UK: Routledge.
Schroeder, R.G., Clark, M. and Cathey, J.M. 2016. Financial Accounting Theory and Analysis:
Text and Cases. US: Wiley.
Xero ltd. 2018. Annual Report. [Online]. Available at:
https://www.xero.com/au/about/investors/financial-info/annual-report-2018/ [Accessed on: 17
April 2019].
13