Financial Accounting
The aim of this part is to discuss about the qualitative characteristics of the financial information and also how they make the information useful for making economic decisions by the users of the financial information.
This assignment will discuss about the concepts of qualitative characteristics of the financial information. At the same time, it will also discuss how these qualitative characteristics make the information useful for economic decision making of the users of financial information.
Concepts of qualitative characteristics
Comparability
Any information regarding the reporting entity is more significant when it can be compared with the other entities having alike information and also with alike information regarding the same entity for different period and date. It is stated that, the decision of an individual involves choosing between different options or alternatives, for example, investing in one reporting entity or another. The Comparability is one of the qualitative characteristic of financial information which helps or enables the users to recognize the similarities or differences among items. Comparability is one of the characteristic which doesn’t relate to particular item alone. The reason behind this is that for doing any comparison there is a requirement of at least two items which are to be compared (Ewert & Wagenhofer, 2012). Little degree of comparability is achieved by providing satisfaction to the basic qualitative characteristics. There is also a need for representing of a relevant economic phenomenon which must have some degree of comparability. If alternative accounting methods are allowed for the same economic phenomenon than it will diminish the comparability whereas, a particular economic phenomenon can be truly or honestly presented in alternative ways. It is also not enough that the financial information is relevant or reliable at a single time, in a specific situation or for a specific reporting entity. The general purpose financial reporting users should be able to compare the features of a specific entity at a time or over time. One of the important consequences of this concept is that the users or parties are required to be informed regarding the policies which are made in the establishment of the general purpose financial reports, also any changes or the effect these policies will cause should be needed to be informed to the users.
Materiality test
Information is referred to as the material which if omitted or misinterpreted can persuade the user’s decisions which they make on the basis of the financial information in the context of a particular reporting entry. Also, materiality is an entity-particular feature of relevance which is builds on the nature of the items to which the information is related. It is further described as the test which helps ion assessing the degree to which the information which is relevant or reliable can be omitted or not individually disclosed without causing severe impact on the decisions regarding the scarce resources made by the users. Materiality is a test in regard of which the relevant and reliable financial information must be excluded from the financial report of an entity. The assessment of the materiality must be done not only in context of items individually but also in the context of the similar items.
Relevance
The financial information which is relevant is able to make a contrast or difference regarding the decisions which are made by the users. The information is expected to be competent of creating a difference in the decision still when some of the users decide not to take the benefit of it or are previously aware regarding it from any other source. If the financial information has a predictive value or confirmatory value or even both of them, then it is possible that difference in the decisions can be established. It is said that the financial information contains a predictive value when it is used as an input to determine the future outcomes by the users. There is no general requirement for financial information to forecast to have a predictive value. The users use the predictive value for making their own predictions. On the other hand, financial information will have confirmatory value if it gives feedback regarding the previous evaluations. Both the values, i.e. predictive value and also the confirmatory value are interrelated (Gordon & Gallery, 2012). It is also known that the financial information which has the predictive value also has the confirmatory value. For example, the current year’s information regarding the revenue can be used for forecasting the revenues in coming future years, and can also be compared with the current year’s revenue predictions that were already made in the past years (Aasb, 2013). The outcomes obtained from the comparisons will help a user to improve and rectify the processes that was used in making the previous predictions. The financial information can be relevant due to its nature, its nature and also magnitude or also because of the magnitude in aspect of its nature. It is true that sometimes both the nature as well as the magnitude in context of the financial information is a significant element in relevance.
Reliability
The financial information will be discovered or ascertained by the level of correspondence between what is been communicated by the information to the users as well as the transactions or the events which are underlying that have resulted and measured or exhibited. The information which is reliable will always demonstrate the true and honest transaction ort events without being bias or any sort of errors. It is very significant that the information should be reliable. The information should be of a kind that depends or lies upon the decision-making of the user’s that is relevant, but also should be so unreliable in its nature so as to be useless. For example, if an entity took a legal action against another for some damages caused to him by another, and when the amount of the damages caused are also serious in nature then it is inappropriate to identify the face value of the claim before the judgment. There is a need that there should be minimum recognition or identification criteria which are to be met prior the assets, liabilities or any other elements are identified in the financial statements (Kober, et al., 2010). The users can predict some level of consistency for these elements. At the same time, if all the financial or other related information is demonstrated honestly which also includes all the possible uncertainties around it, and then it may be possible for it to be noted as reliable. There is a need to make difference among the honest depiction of the events and transactions and the effective depiction of them.
Understandability
When the information is presented, classified and characterize clearly then it is easily understandable. There is further possibility that some of the phenomenon is very complex and hence not easy to understand by the users. If that information is removed from the financial reports then the information will become easy to understand. However, those reports will be incomplete. It depends upon the ability of the users to have a in depth understanding of the financial information and also how the information is been depicted to the users.
It can be concluded that the qualitative characteristics are having a significant consideration in the financial information. The various characteristics like reliability, relevance, understandability, comparability, etc. Further, it can also be concluded that these qualitative characteristics make the information useful for economic decision making of the users of financial information.
Aasb (2013) [Online] Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf (Accessed: 23 September 2017).
Ewert, R., & Wagenhofer, A. (2012). Using Academic Research for the Post‐Implementation Review of Accounting Standards: A Note. Abacus, 48(2), 278-291.
Gordon, I., & Gallery, N. (2012). Assessing financial reporting comparability across institutional settings: The case of pension accounting. The British Accounting Review, 44(1), 11-20.
Kober, R., Lee, J., & 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), 267-298.
The aim of this part is to understand the concept of fair value and also the various limitations of the fair value accounting in providing useful decision related information to the users of the financial statements.
This section discuss about the concept of fair value as per the given standards (AASB13). In addition to this, the limitations of the fair value accounting system is also study in which it is determined that what all are the lacking in the fair value accounting transactions. It is also identify that how such limitations would influences the decision making of the user under the financial statement.
AASB 13 fair value measurements accounting is the issued by the IASB board with the aim to create the fair transaction in the business environment. The fair value accounting is become possible with the AASB 13 standards as it defines the fair value as a price that would received after to sell an assets or paid to transfer of liability between the market participants on the particular transaction date. Basically, the transaction is performed by the participants based on the market price as it is consider as a market based measurement. The main objective of the development of the fair value accounting is to estimate the price of each assets and liabilities so that transaction will be done as per the current market trends. The fair value measurements enable to capture changes in assets and liabilities values which changes over time. Thus, this concept of fair value accounting proves to be effective for the business. However, fair value provides the accurate assets and liabilities valuation which helps the users of the business to record the correct financial information. Furthermore, fair value measurement is also assisting the company at the time when the price of the assets and liabilities is expected to be increase. In such case, the company marks up the value of the asset or liability to its current market price. This will help the company to compensate their loss. Thus, this concept is contributing high to the company in terms to perform the fair transactions.
Limitation to the fair value accounting towards the users for taking appropriate decision
The limitations of fair value accounting are as follows:
This method of accounting doesn’t suits to all types of businesses and they hardly get any benefit out of this method. These types of businesses have assets in large amounts that fluctuate largely. Volatile assets also create losses for the firms in the short-term as well as it also make some variations in the income which are not also accurate enough in long-term. The fair value accounting method is also not much reliable as if compared with the historical costs it is less reliable. For example, it there are different values of an item in different regions then the accountants should make judgment on valuing the items on the books of accounts as they take a look of the market while searching for a new value for the assets. At the same time, the business firms which are having same assets values the items differently as compared to another then problems arise due to the valuation method been adopted by the accountant. Also, if this method of accounting is adopted then it can result in investor instability that will in return create the overall economics of the industry instable.
This method of accounting also provides dissatisfaction among the investors as if there is loss in net income value them there will be loss in the income for the investors also. As many of the investors is making use of these commodities despite of using it as an investment purpose, it led to a hit on their portfolio and force many of the investors to stay disconnected from their business. There are chances that the information provided is often misleading or misguiding and it is even possible that what asset’s value is observed in the market is not its fundamental value. The market is not always sufficient enough to reflect the estimates of the information accurately. There are various elements that have an impact on the estimates of the market such as the behavior of the investors, their bias nature, irrationality, etc. The liquidity of market is also a major concern as spreads may cause initial uncertainty in the context of the fair value and establish large value variations in the financial statements of the company.
There is also a chance of having alteration or manipulation by the business firms in regard of the prices which will bring a state of risk in acquiring the fair and true value estimates. This is because in illiquid markets the trading done by the business firms will create an impact on both quoted and traded prices. The fair value accounting method doesn’t have an historical perspective. It is important to have historical perspective as it helps to get accuracy in tracking the results as assets might have a down year and also reduce the net profits of the business firms and thus can reduce the success of the business firms. The option among the fair value accounting and the historical costs results in the trade-off between relevant and reliable financial information. As these qualities are not inclusive mutually, increasing relevance of the financial information results in compromising of the reliability and vice versa. This will further generate a state of issue as the information will not provide significant information to the users of the financial statements in generating effective economic decisions.
Also if the users are not aware about the use of this fair value accounting method then it will be of no use for the business firms and if the business firms want to adopt this method of accounting and want to gain a in depth and clear understanding of the financial reports then it is required that they teach and educate the users regarding this accounting method.
The fair value accounting method is also not very reliable as it lacks objectivity. This problem is related to what kinds of inputs are been used. With having low objectivity it will also increase the capability of the managers in the business firm to manipulate the financial statements.
The use of the fair value accounting method will result in preparation of the financial reports moiré aggressively which will result in reducing its usage to the creditors who are one of the important users of this financial information. So many of the users prefer the conservative accounting in comparison of the fair value accounting method as this method offsets the biasness on the part of the management.
It happens quite that if the market is not stable and it is volatile than any value of an item changes often. This will have an impact on the value and earnings of the business firms. This creates problem for the investors as they find it difficult to value a business entity which is having such swings. Also at the same time, this will result in audit problems for the business firms as well. It also results in creating gaps for the pricing deviations.
It can be concluded from the above assignment that fair value accounting method is adopted by many of the business firms to create the fair transaction in the business environment. At the same time, it is also concluded that this accounting method is not much reliable and has many limitations in providing decision-useful information for the users of financial statements.
Aasb (2015) [online] Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf (Accessed: 23 September 2017).
Amazonaws (2008) [Online] Available at: https://s3.amazonaws.com/academia.edu.documents/40163389/Fair_value_accounting_and_Financial_stability.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1506169854&Signature=5mqdDd6zhVDLHZCbsbPocwgkexI%3D&response-content-disposition=inline%3B%20filename%3DFair_value_accounting_and_Financial_stab.pdf (Accessed: 23 September 2017).
Research gate (2011) [Online] Available at: https://www.researchgate.net/profile/Karl_Muller2/publication/220534415_Mandatory_Fair_Value_Accounting_and_Information_Asymmetry_Evidence_From_the_European_Real_Estate_Industry/links/0c96052277a459fd31000000/Mandatory-Fair-Value-Accounting-and-Information-Asymmetry-Evidence-From-the-European-Real-Estate-Industry.pdf (Accessed: 23 September 2017).
The aim of this part is to discuss about the recognition and measurement of the intangible assets. In addition to this, it also review the financial statements of a Australian firm and give discussions regarding the measurement and recognition disclosure provided by the firm in compliance with the intangible assets.
This section discusses about the measurement and recognition of intangible assets. In addition to this, the financial statements of a listed Australian firm will be reviewed and discussion will be provided about the measurement and recognition disclosure provided by the company in compliance with the intangible assets.
Measurement and recognition of intangible assets
Recognition
For an item to be recognized as intangible asset it need an entity to depict that the item meets: the definition of the intangible asset and the recognition criteria. The nature of the intangible assets is that they are less chances of doing any changes, additions or replacements of any parts of it. An intangible asset is recognized only when, it is probable than the future benefits expected that are attributable to the asset will flow to entity and also the cost can be measured reliably of the particular asset.
Separate acquisition
The price paid by an entity to obtain an intangible asset will depict the expectations regarding the probability that the future economic benefits which are expected in the asset will flow to the entity. At the same time, even if there is an uncertainty in the context of timing of the inflow, the entity expects there to be inflow of future economic benefits. An intangible asset’s cost can also be measured reliably. It is when the purchase situation is in the state of cash or another monetary asset. Further, the cost of intangible asset involves import duties, the purchase taxes which are not refundable and also the cost of preparing the asset.
Acquisition as part of a business combination
In regard of AASB 3 Business Combinations, if there is any intangible asset which is obtained in the business combination then its cost is its fair value at the acquisition date. The fair value of the asset will demonstrate the expectations of the participants in the market at the acquisition date regarding the probability that the future economic benefits expected which are included in the asset will flow to the entity.
Acquisition by way of a government grant
There are cases when an intangible asset is obtained for free without incurring any charge by the way of a government grant. It happens when the government transfers to the entity intangible assets like import licenses or the right to use other resources which are restricted. In accordance with the AASB 120 Accounting for Government Grants and Disclosure of Government Assistance, the entity has a chance to select and identify the intangible asset and the grant at fair value. At the same time, if the entity selects not to identify the asset at their fair value then the entity will identify it at the nominal amount as well as including any of the expenditure that is associated directly with preparing the asset for its usage.
Exchange of assets
There is a need of one or more intangible asset in the exchange for a non-monetary asset, or even a combination of the monetary or the non-monetary assets. The cost of such an intangible asset will be measured at the fair value except if the exchange transaction is not having any commercial substance or if the fair value of any asset received or given is measured reliably. Also, if the asset which is obtained is not measured at its fair value then the cost is measured at the carrying amount on which the asset is provided.
Measurement after recognition
An entity has two options to select out of, the cost model or the revaluation model as its accounting policy. If an intangible asset is adopting the revaluation model then all the other remaining assets are forced to adopt the same model until there is no market active for the assets. A class of intangible asset is referred to as the group of assets which are having same nature and usage in the entity’s operation. The items which are in the intangible assets class are valued again to avoid the revaluation of the assets and also to avoid the reporting of the amounts which depicts the combination of costs and values in the financial statements.
Cost model
Once the initial recognition is done, then the intangible asset must be carried at its cost less any accumulated impairment losses.
Revaluation model
When the initial identification is done, then the intangible asset must be carried at a revalued amount, which is its fair value at the date of the revaluation. For revaluation purpose, the fair value must be measured by the reference of an active market. The revaluation should be made or done continuously so that chances are less that the carrying amount of the particular asset is not different from its fair value at the end of the reporting period. There are also things which are not included in the revaluation model such as, the revaluation of the intangible assets are not be identified as assets previously and the current identification of intangible assets at the amount which is other than the cost.
According to the AASB standard, it is essential to disclose the requirements of the financial reports. In this, the entity must disclose the information under the head of disclosure which is not mention by them in any of the accounting calculation. Under the disclosure, the notes of the financial information should be disclosed as additional information. Other than that the following must be disclosed as per the Australia accounting standards:-
- The auditors of the entity
- Auditors review of the financial report
- Name of the entity on which there is an economic dependency
- The accounting policy for restoring cost related to non-current assets.
- The intangible assets addition information is mention
Thus, these all information must be discloses in the financial report of the company. Similar, Woolworth who is the Australian retail company is also followed the Australia accounting standard practices. However, Woolworth in the area of intangible assets, it discloses the goodwill of the company, mention their brands, computer software etc. Such activities are mention by the Woolworth in their disclosure or additional information.
Figure: 3.1 (in Millions)
In the above mention analysis, it can be stated that the Woolworth brand, customer and database has increased in 2016 comparatively to 2015 with 7292 million and computer software cost is also rise with 1105 M because company install ERP, CRM system into their business operation for regaining its market position. Thus, overall goodwill of the Woolworth get enhances in 2016 with 10460 M and in total with 18965 M.
In addition to this, Woolworth follows the AASB standards to represent the intangible accounting disclosure which is provided by the company.
Intangible assets entry into the financial accounting with the below mention disclosure:
Figure: 3.2
From the disclosure, it can be interpreted that the Woolworth goodwill indicates that company has high cost of acquisition over the fair value of the share. But at the same time, it is estimated that Woolworth is failing in the goodwill and in brand name recognition as it is clearly mentioned in the (figure 3.2) that company is declining in their product offering and services due to less investment in the system and little focus on the quality of the company products. Besides that, it is also identified that in the Australian market, Woolworth performs well in liquor and gaming sector as compare to their other sectors. Thus, it can be summarized that Woolworth is performing effectively in only some of the sectors and it is losing the portion in the Australia market.
In context to the disclosure of intangible accounting, Woolworth follows the accounting policies under the Australian standards. In this, they mention the goodwill first by explaining their intangible assets and the reason of declining/ rising of the goodwill in particular year comparatively to another year. It is also mention the amount of impairment which occurs under intangible assets such as Woolworth has impairment in 2016 with $320.0 million. Thus, it gives sign of loss in intangible assets for the Woolworth. Therefore, through this way Woolworth discloses their adjustment as per the Australia accounting policy.
It can be concluded from the above scenario that, the measurement and recognition of intangible assets are important in the preparation of the financial statement if any business firm. Also, the Australian firm has provided the measurement and recognition disclosure in compliance with the intangible assets.
Teluq (2011) [Online] Available at: http://r-libre.teluq.ca/368/1/Z%C3%A9ghal%20and%20Maaloul%20(2011)%20-The%20accounting%20treatment%20of%20intangibles%20%E2%80%93%20A%20critical%20review%20of%20the%20literature%20-%20Accounting%20Forum.pdf (accessed: 23 September 2017).
Woolworthsholdings (2016) [Online Available At: Http://Www.Woolworthsholdings.Co.Za/Downloads/2016/Whl-Audited-Annual-Financial-Statements-2016.Pdf (Accessed: 23 September 2017).
Wow2016ar (2016) [online] Available at: https://wow2016ar.qreports.com.au/xresources/pdf/wow16ar-financial-report.pdf (Accessed: 23 September 2017).
