Enhancing Qualitative Characteristics And Features Of Financial Statements

Importance of Accounting Standards

1.The enhancing qualitative characteristics and features provides the base of accounting for the decision-making by improving the qualitative characteristics of financial statements. The financial reporting and accounting standards regulates and controls the accounting standard bodies. The need for the accounting standards is that there is a transparent way of representing the information presented in the financials of the company. The information presented in the financials is used by the end user of the information such as the stakeholders for investment relating decisions. The main purpose and the primary objective of the financial statement should be well converging with the accounting standards and guidelines. The framework for setting up and presentation of the financial statements and reports should incorporate and include the Conceptual framework of the financial report that is guided by the International Accounting Standard Bodies. The framework sets up and gives the accounting guidelines in assisting the Australian Accounting Standard Bodies in giving an overviewing and oversight of the existing guidelines and principles (Miti, Myftaraj & Zenuni, 2018).

The framework helps in converging of different accounting standards and regulations set up by the different accounting bodies for common financial reporting and harmonizing the rules and regulations. The framework also helps the auditors of the company in giving an opinion about the financial statements about the company regarding the accounting principles and the company in their financial reporting met regulations (Macve, 2015). The framework helps the stakeholders the end users if the financial statements that the informations and reports presented by the company in their financial statement is fair and material. The materiality of information is useful for the stakeholders of the company in order to avoid misrepresentation of financial statements. The scope of the framework is dealing with the objectives of the financial information, the quality and materiality of informations presented in the financial statements, the recognition and measurement and different concepts of the financial elements should be well defined. Accounting standards and regulations for the same brings down the choices available to the management of the company in the financial reporting and the different methods of recording accounting transactions (Cheng, et al. 2014). The framework should be such that the information provided in the financial statements help the company in proper security analysis and company valuations. 

The informations presented in the financial informations should be comparable in nature, which must provide the feature of comparability in the financial statements among different companies in the sector. The feature of comparability provides the investors to assess the financial report of the company in an efficient manner for analyzing and valuation of the company and security of the company. The features of comparability is important to assess the performance of the companies performing in the same industries across different geographical boundaries. The feature could only be only available to the investors when there is a global reporting standards among the different accounting standards and the framework for such bodies provide a common way of recording financial and accounting transactions. The verifiability feature in the financial reporting could be done when the information presented in the financial statements are material and error free. The auditor of the company should verify the report presented in the financial statements properly. The framework for the company should be such that the financials of the company is prepared and scrutinized by the regulatory framework (Flower, 2015).

The Conceptual Framework of Financial Reports

The presentation of the financial report should be according to the accounting standard body’s guidelines, which would provide the user of the financial statement the qualitative features of a financial reporting such as comparability, verifiable and timely financial data of the company, which would provide the users of the financial reporting a common and a better understanding (Simnett & Huggins, 2015). The financial reported should be reported to the concerned regulatory department to ensure that the informations are presented to the investors in a timely manner. This ensures proper and timely use of the financial data presented by the company by the investors and the stakeholders of the company in analyzing and scrutinizing the data presented by the company. The financial data, the quarterly data, the compliance report and other various sustainability and corporate ethics report should be presented in a timely manner to the exchange board or the concerned corporate ministry board. The features of understandability includes the common understanding of the financial reporting among the users of the financial data. The features could be incorporated in the financial data by the efficient framework and guidelines set up by the accounting standard bodies (Gaynor, et al. 2016).

The enhancing qualitative features improves the quality of financial information presented by the companies. The common way of recording transactions and having a common financial presentation among the companies provides the features of comparability to the investors, which further help the investors of the company in security and company valuation (AICPA. 2017).

2.The Statement of Accounting Concepts (SAC 1) provides a detailed analysis about the identification of the dependent users by identifying factors, which makes an entity a reporting entity. The statement of accounting concepts SAC 1 explains the concept of the reporting entity and it establishes the benchmark for the entities for the minimum amount of qualification required of financial reporting for the entity (Schaltegger & Burritt, 2017). The statement of the accounting concepts SAC 1 gives and defines the objectivity of the general need of financial reporting, which states that the purpose of preparation of the financial report is to provide the users with the relevant information about the company, which is useful for decision making and assessing the financial data of the company. There are a number of different approaches and concepts, which define the financial reporting of the financial data, should be in general nature. The concept underlying the same should that be of the legal conceptuality that binds the legislation in the private sector. The reporting entity as defined by the accounting concepts SAC1, which has a reasonable for the existence of the users of that are dependent on the financial statements, which help them make economic decisions (Libby, 2017).  The factors, which help in determining the dependent users, are through separation of the management from the economic interest of the company.  The economic or political influence, which directly influences the operations of the company. The financial characteristics is another major reason for determining the factors of the base for the dependent users (Weygandt, Kimmel & Kieso, 2015). Entities, which are entitled as reporting activities, should prepare and give the financial statements of the company, which complies with the various accounting standards and that should be made public to the stakeholders and to the public. The information presented will further help them in decision-making. It is important to note that not every entities, which makes the financial statements, are not entitled to report it to the public. The statement gives a concept of the reporting entities that is tied up with the information required by the nature of reporting of financial reports and for the users of the financial data. The concept states that the entities, which reports individually is identified as one, which has users and are dependent on the financial information and data provided. The entities may be defined as a reporting entity if required by the law; the legal concept comes into play in such cases. The legality functions enables some of the companies from financial data producer to financial reporting entity. Whether, a company will be entitled as a reporting entity or not based on the sector under, which the company operates it may be pubic or a private company (Penman, 2016). The entity can be business entity or an nonprofit organization the term reporting entity comes into play for the company when the users of the financial data is determined and the evaluation for the same is analyzed. There are certain disclosures and norms, which are to be followed by a reporting entity. The entities are required to disclose this information as this will assess the financial performance and position of the company. The disclosures should be made regarding the resources controlled by the entities and the other entities, which the entity controls. It should be also note that the reporting entity will compose of an individual form entity. In the cases the reporting entity may compose of different group entities, which themselves may form a common reporting entities. The group, which comprises these entities, should have a common financial reporting for the purpose of decision making and analyzing the company. It is crucial to note that the entities, which are in capacity to deploy resources and which are not able to meet there objectives does not fall in the category of the economic entity. Thus for every entity to be entitled as an reporting entity the substance of the company’s transactions and the end users of the financial data by the company should be carefully analyzed by the company (Henderson, et al. 2015). 

3.Historical costs are a method of measurement by which the assets are recorded on the basis of their cash amount or cash equivalents. These cash equivalents have had been either paid or have been given fair consideration to acquire the assets at the time of acquisition. Liabilities however are recorded mostly by the amount received in exchange of the obligation and sometimes they are also measured in cash amount or cash equivalents that are expected as payments to satisfy the liability in the usual working of the business (Peirson, et al., 2015). The Australian Accounting Standards Board (AASB) uses a definition of historical cost, which is slightly different from the one internationally, used. However, there have been discrepancies on basis of measurement of the historical costs. The nature of the differences and various modifications are considered for various analysis requiring alternative measurement bases with comparative attributes.

Enhancing Qualitative Characteristics

Over the years historical cost has become the most commonly used measurement basis used by different entities in the preparation of financial statements and it is usually combined with other measurement bases (Penman & Zhang, 2017). Different entities however, are measured using different bases where some use the current cost basis as a response to their inability to deal with the effects of the non-monetary assets’ changing prices by the historical cost accounting model (Wang, et al., 2015). This method faces various limitations. The limitations are as follows:

• Changes in price level: Since financial statements that are prepared under the historical cost accounting method are mere statements of historical facts, therefore, changes in the value of money caused due to changes in general price level are taken into account (Nørreklit, Raffnsøe-Møller & Mitchell, 2016). Hence a true and fair picture of the condition of the organization is not portrayed.
• Depreciation has insufficient provision: Depreciation is the method by which fixed assets are replaced for fund generation as their time of replacement comes close. This depreciation in the method of historical cost accounting is charged on the basis of historical cost of the fixed assets instead of the price at which these assets were acquired. The provision that the depreciation charge on the original cost makes is not sufficient for the replacement of the other assets.
• Unrealistic Profit: The true profit does not get revealed under the income statement that has been prepared using historical cost accounting. The revenues get recorded on the basis of current values while the costs are recorded on the basis of historical costs. This leads to the profits being overstated during the time of inflation.
• Fixed assets have unrealistic values: In the historical cost accounting method, fixed assets are presented and recorded at the price in which they had been acquired and any changes in the market value of the assets are ignored.
• Holding gains and operating gains: The method of historical cost accounting mixes up with gains or losses in operating inventories and in holding inventories. To actually determine the actual operating performance, holding gains and losses and operating gains and losses must be segregated.
• Fairness in the financial position representation: Monetary and non-monetary items together comprise the balance sheet. Monetary items are represented at their current money values whereas, non-monetary items are represented on the basis of their historical costing and not their current value. This means that there is a discrepancy in the balance sheet representation and the actual and fair presentation of the value of the financial position is not made.

Despite all its limitations the historical cost accounting model is the most widely used and efficient measuring base for the measurement of the cost of assets and liabilities and is well identified under the AASB framework. 

4.Comparison of AASB 15 Revenue from Contracts with Customers with the abolished AASB 18 standards regarding revenue and measurement and recognition of the revenue comes into play from 1 January 2018. The new standard provides a wide range of variety for revenue recognition and this can change fundamentally the time of recording the revenue. The revenue recognition is compared with the current practices, which changes the systems and procedures used by the company. The key important factor while incorporating the new standard AASB 15 is that there are a different way of recording and classifying the transactions and gives the flexibility in recording the transactions (Holland, 2016). The different ways for transition to AASB 15 are:

• The Treatment via the retrospective way
• The recording of transactions via the practical expedients methods.
• The clubbing or cumulative method

It should be noted that under the retrospective method of recording accounting transactions the ASSB 15 applies the retrospective effects in each of the reporting period or year presented in the financial statements of the company. The adjustment or the correction for the same from the older AASB 118 to AASB 15 will be that the comparative assessment period will be disclosed regarding every contracts the company enters (Komninos & Cameron, 2017). Under the retrospective method, the entity is entitled to choose over the four practical expedients presented and the same can be applied by the company by using the retrospective approach of accounting. The company also can record under the cumulative method, which states that the cumulative or the additive effect of the transition will be shown by the company as an adjustment  with the retained earnings of the company at or from the date of the application under, which the standard enforces that is from 1^st January 2018. The cumulative or the additive method is a lot easier and the applications for the same are general and easy in nature. The cumulative process is efficient as it covers all the components of the expenditure and is less time consuming from the previous standards (Joubert, Garvie & Parle, 2017). The cumulative effect methods impairs the features of comparability in the financial report and data presented by the company. The new standards provide the users of the financial data with the trend analysis in the financial data and with the variance analysis of the same. The entity in compliance with the standards may face burden initially as the reporting will be in accordance with the AASB 118 and with the AASB 15 in the first year of application for observing the changes by the new accounting standards. The retrospective methods of accounting requires more of advanced planning, which will provide a clear and a better representative of the financial report of the company. The current year and the comparative year financial data is presented under the new AASB 118 (Lowe & Campbell, 2017). The four practical expedients available to the entities in applying the retrospective approaches is that the ease of the transition to the AASB 15. The entity has the option of applying one or the other kind of practical expedients mentioned:

• To use the case or the term completed contracts the contract the company is operating must state and include that the goods and services under the defined contract period must be successfully transferred. The contract must begin or end in the same accounting or annual period of the company.
• For using the term, completed contracts there must be a variable consideration of the same, where the entity can use the transacted price decided at the initiation of the contract.
• For contracts that have been revised or modified many times the company has the option of not restating for the modified contract, instead the company or the entity has the option of reporting the revised terms of the contract.
• The disclosure from the comparative period is relieved for the company; the amount, which is expected to be realized from the contract, must state that the company should perform the necessary obligations. 

AASB 15: Revenue Recognition Standards

The transition date for the AASB 15 is approaching for the company to comply with the new standards and entities need to determine the material impact for the new standards as well. The new standard will provide flexibility to the company in recording accounting transactions and classifying the various revenue contract the company operates. The trend analysis to be performed under the cumulative method will also provide a comparison to the stakeholder of the company (Dunbar & Laing, 2017). 

References

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