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HA3011 Advanced Financial Accounting - Holmes Institute
Learning Outcome: 1. On understanding of the various theoretical models of accounting
Learning Outcome: 2. On applying knowledge and understanding to specific financial reporting issues to AASB accounting standards
Learning Outcome: 3. On discussing the theoretical constructs of contemporary financial accounting
Learning Outcome: 4. On evaluating and explaining the need for the development of a conceptual framework for accounting, and discuss the influence of such a framework on accounting practice.
Learning Outcome: 5. On Understanding of the Australian accounting regulatory framework and the conceptual framework
Learning Outcome: 6. On understanding of how to account for assets, non-current assets and liabilities
Learning Outcome: 7. Be able to calculate for revaluations and impairments of non-current assets, and then journalise, and
Learning Outcome: 8. Account for leases for both lessees and lessors.
Company - Pilbara Min Limited
Introduction
Accounting is defined as the art of recording and reporting financial transactions in a systematic manner in terms of interpreting results of performance showed within a financial year. The function of accounting does not get restricted only in the recording of financial transactions; it also provides the basis for financial analysis in order to facilitate the decision-making process. Accounting concepts and principles are introduced to regulate accounting activities of an organisation so that every organisation can record transactions accurately. In Australia, accounting standards are regularized by the Australian accounting standard board. This government agency has provided guidelines for the treatment of each transaction related to business activities. This assignment will shed light on the accounting concept used by Pilbara minerals in terms of making treatment for their business transaction. It will further analyse annual reports of the company to understand about conceptual framework and issue of management.
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Question: From the annual report of your allocated company and in addition, to providing examples identify and describe the accounting concepts used.
Description of accounting concepts
Accounting concepts are basically termed as rules and regulations provided by a governing body which should be followed in the structuring of books and accounts and financial transactions. As opined by Hristov and Dimitrova (2016, p.42), over the years, there are various accounting concepts have been evolved on the basis of basic accounting standards provided. Basic accounting standards are supported by generally accepted accounting principles which provide a detailed description of treatment for each transaction. Some of the fundamental concepts of accounting include accrual concepts, going concern concepts, and consistency concept. All these concepts revolve around the recording of transactions in a significant manner (Bryce et al. 2015, p.168). Pilbara mineral is a mining company based in Australia who is indulged in the mining of lithium within the country.
The company publishes an annual report each financial year in order to showcase its financial performance that took place within a particular financial year. According to Guthrie and Parker (2016, p.7), accounting measure taken by the company is related to the preparation of financial statements which will disclose assets, liabilities, working capital, and equity owned by the company. Financial statements of subsidiary and parent companyare prepared with accordance to complying of regulations provided by AASB as well as Corporation Act 2001 (Pilbara minerals, 2019). In addition to this, the combined financial statements are also prepared as per international accounting standards. All the accounting concepts which have been used by the company is related to accounting standards for recording and preparing financial statements. One of the accounting standards used by the company is AASB 15, which provides guidelines for recording transactions related to revenue from contract with customers. As opined by Murray et al.(2017, p.370), the objective of this accounting standard is to establish principles which will be used by business entities in terms of recording transactions related to amount, quantity, uncertainty, and timing of revenue collected from a customer with the mode of contract (AASB, 2019). Application of AASB 15 starts with the identification of contract which can be done by using the definition of identification of contract mention in the guidelines of AASB 15. Next step would be the identification of performance obligation where the contract will highlight kind of tasks is necessary to perform in order to satisfy the needs of the customer.
In the third step of the calculation of revenue collected from contracts with the customer as per AASB 15, the company will determine the transaction price of contracts. According to Banerjee et al. (2016, p.278), after evaluating the transaction price of contracts, the company will assign transaction price relating to performance obligation mentioned in the contracts. The last step of calculation of revenue will include recognition of revenue when the performance obligation mentioned in the contracts is completely satisfied. Revenue for the company will be measured at the fair value of the amount received in exchanges of products or services provided by the company (Nobes and Stadler, 2015, 578). The amount of revenue will be recorded in the income statement in order to calculate gross profit as well as the net profit of the company. In addition to accounting concepts of AASB 15 used in preparing a financial statement, the company also applies AASB 9 for classification and measurement of financial instruments used throughout the financial year (AASB, 2019). Application of this accounting standard is related to the impairment of assets, hedging contracts, as well as classification and measuring of assets and liabilities owned by the company.
The objective of AASB 9 is to establish principles which will be applicable in preparing financial statements for accurate assessment of future cash flows of a business entity. Next accounting concept, which is being applied in accounting measure of Pilbara minerals is AASB 16 for regulating lease financing within the organisation. As per AASB 16, some arrangements have to be made in including the operating lease of the company. It has been mentioned that under the accounting standard of AASB 16, operating leases taken by the company will be required to report in the balance sheet of a company (AASB, 2019). Previous accounting standard for lease financing of AASB 117 did not allow Lessee Company to show its transaction related to operation leased amount in financial statements; rather, it was shown as a part of off-balance sheet item. As opined by Loughran and McDonald (2016, p.1182), only rent expenses born in exchange of utilising asset was recorded in the income statement as lease expenses. It has been observed that as per old accounting standard, financial investors were not able to value assets and liabilities of an organisation accurately because of not showing leased property even though the company was fully utilising that particular asset. The company has recorded an amount of 29586000 AUD of non-cancellable operating lease in the balance sheet will have a direct impact on the debt as well as EBITDA level (Pilbara minerals, 2019).
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Question: With reference to the conceptual framework, and the debate over measurement in accounting. Using your allocated company discuss the issue of measurement and provide examples.
Conceptual framework and issue of measurement
A conceptual framework is provided by the Australian accounting standard board in order to provide guidelines within which every organisation will be required to maintain its accounting activities. Accounting measures are taken in order to avoid any false treatment of transactions or any missing information that has not been recorded by the accounts manager. As opined by Agyemang and Broadbent (2015, p.1020), measurement of financial figures depends upon the correct application of accounting standards as well as taking utilization of appropriate accounting concept whenever required. A conceptual framework is associated with dealing with financial reporting issues. It focuses on the purpose of financial statements along with its users. It is mainly developed by international accounting boards in order to ensure that there is uniformity in terms of interpretation of accounting information recorded in the books of accounts. As opined by Vardon et al.(2016, p.148), the conceptual framework works as an underlying theory for organisations in order to structure their financial statements in accordance with complying with accounting standards. It describes each step to be followed in order to make accounting information right and useful.
A conceptual framework for accounting in Australia is regulated by AASB by incorporating rules and regulations provided by international accounting boards. The draft released by AASB in relation tothe conceptual framework has mentioned some key areas on which organisations need to emphasis on while preparing and recording of financial transactions. One of the key areas is the measurement in accounting. Measurement in accounting for the structuring of financial statements is significant as it is directly related to recording accurate financial performance. According to O'Dwyer and Unerman(2016, p.35), if correct measurement technique is not applied that results recorded in the financial statements will be considered false and it will deviate internal stakeholders as well as external stakeholders in making sound financial decisions. It is being observed that the main issue related to measurement in accounting is its high level of uncertainty that can make information mentioned in the financial statements less relevant (AASB, 2019). Measurement base is categorised based on historical cost, fair value, and current market value. Measurement in accounting is interrelated with the usefulness of accounting information. Selection of basis of measurement should produce useful accounting information by keeping as relevant as it can be. In addition to this, the issue of measurement also arises when an organisation uses only one basis of measurement to interpret all the relevant accounting information (Alraziet al. 2015, p.48).
It can be observed in the annual report of Pilbara minerals that, the company uses just a historical cost basis in terms of preparing its consolidated balance sheet (Pilbara minerals, 2019). In addition to this, for the calculation of assets, the company prefers to measure it by applying cost less accumulated depreciation method. As per the conceptual framework provided by AASB, it is being mentioned that the interpretation of accounting information will be more relevant if organisations use more than one basis of measurement. As it is being identified that the issue of measurement is focused on a high level of uncertainty, which has a direct impact on the relevance of accounting information. Measurement uncertainty mainly arises due to less direct observation of measure related to assets and liabilities (Coad et al. 2016, p.1140). It is being stated that the assets and liabilities must be estimated with corrective tools in order to maintain the relevance of accounting information.
As per annual reports of Pilbara minerals, the company uses the fair value method in order to measure its financial assets and liabilities. With the use of various basis of measurement, the company can eliminate the chance for reducing the high level of uncertainty associated with the measurement of financial instruments. As opined by Mendolia and Siminski (2016, p.362), measurement in accounting is not only applicable in the assessment of assets and liabilities, and it is also used in measuring income and expenses. In the case of measurement of the item, it is essential to recognise the items first as per the definition provided by AASB. Pilbara minerals estimate its financial instruments first by recognising the item as per guidelines provided by AASB and them uses various measure basis such as historical cost and fair value in order to maintain the relevance of accounting information (Pilbara minerals, 2019).
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Question: As fundament qualitative characteristics state your understanding of relevance and representational faithfulness in relation to the useful information of the financial statements and if one is more important than the other, in accounting for assets and liabilities.
Fundamental qualitative characteristics
Fundamental characteristics of accounting information emphasize on maintaining an adequate level of quality while recording in financial statements. Accounting information disclosed in the financial statements is used by both internal stakeholders' as well as internal stakeholders in order to assess the financial health of a company. As opined by Dillard and Vinnari(2017, p.89), it is essential to provide financial information with high qualitative characteristics so that investors and management can take the best possible decisions. There are two most significant characteristics that accounting information must possess in order to maintain the quality of information. The first one is the relevance of the information which focuses on the level of use of accounting information provided in the financial statements in terms of facilitating the decision-making process. As per AASB guidelines, every organisation must produce relevant information in their financial statements in order to avoid any unwanted circumstances (AASB, 2019). As for relevance characteristics of accounting information, there are two factors that organisations need to take care of first being confirmatory value and second being predictive value. As per confirmatory value, it is essential to record past financial performance whereas as the predictive value, it must contain predictive power of future performances. According to Nobes(2015, p.415), accounting information will be considered relevant if it contains relevant information about past performances as well as predictive tools so that future performances can be evaluated easily. In case of maintaining the relevance of accounting information in preparing financial statements of Pilbara minerals, it can be observed that the company has reported performance of 2017 in the annual report of 2018 to show changes occurred in the performance of the company (Pilbara minerals, 2019). By providing financial information of 2017, it can be determined that investors will find it very useful in terms of measuring their performance of the current year by comparing it with the previous year. Through such representation of financial statements, the company portrayed that it has identified the importance of relevance in accounting information and has highlighted useful information so that the quality of accounting information can be maintained.
The second fundamental characteristics are as important as relevance is representational faithfulness (Simnett and Huggins, 2015, 32). Faithful representation of accounting information highlights the quality of showcasing reliable accounting transaction in financial statements. As per this characteristic, accounting information is being measured on the basis of its accurate reflection of a company's financial transactions. This is completely based on the fact that all the accounting information disclosed in the financial statements should be true and must not contain any false information which might influence decisions of investors in a negative way. As opined by Lodhia and Stone (2017, p.20), reliability character of accounting information will be based on some factors which include completeness, being neutral, and error free. The first factor highlights the fact of disclosing all the financial transactions that took place within a financial year. Whenever an external investor is looking at the financial statements should be able to get all the necessary information which assists them in taking sound investment decision (Henry and Leone, 2015, p.155). Next factor of reliability emphasizes on being neutral while recording financial transactions. It can be observed that often accounts managers provide information which is portrayed out of biases. Such biases can pose a threat to the organisation in terms of manipulating information. Accounting standards provided governing body clearly mentioned that each and every transaction should be recorded without getting influenced by some other means (Sorrentino and Smarra, 2015, p.11). Another factor included in maintaining reliability is error-free information. It is essential to record financial information without making an error; otherwise,the outcome of the result will not be correct. However, in a real-world scenario, it is not possible to make the process completely error free. That is why organisations take proper measures in order to control errors. In case of Pilbara minerals, it can be observed that the company records each and every transaction that took place within a specific financial year and demonstrate it in notes to consolidated financial statements (Pilbara minerals, 2019). It shows that the company does not prefer to hide any information from external investors and believes in maintaining a high quality of accounting information.
Conclusion
Thus it can be concluded that accounting standards play an important role in terms of accurate structuring of financial statements. With the usability of accounting standards, organisations will be able to comply with guidelines provided by the governing body. Accounting standard in Australia is regulated by Australian accounting standard boards, and this government agency has provided some guidelines relating to conducting accounting activities in order to bring uniformity in the interpretation of results. In order to understand the functionality of accounting standards,the annual report of Pilbara mineral has been analysed. It has been observed that the company follows various accounting standards such as AASB 15, AASB 9, AASB 16, and many more in order to provide accurate and useful information to its external stakeholders. In addition to this, it has also been observed that the accounting standards board has provided some conceptual framework in order to address problems associated with measurement in accounting. It has been stated that measurement in accounting can often show a high level of uncertainty, which can affect the relevance of accounting information. Furthermore, it can also be concluded that Pilbara minerals have shown fundamental characteristics of accounting information such as reliability and relevance so that the quality of information can be obtained.
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