Relevance of Financial Information
Corporate and financial accounting is taken into account as one of the significant aspects for ensuring the success of the business entities. The primary area of concern for financial accounting is to provide the overview, assessment and reporting of the financial transactions of the organisations in order to assist the investors to understand the financial position and performance of the entities. When the financial statements are prepared, the entities are needed to adhere to certain financial accounting principles and standards in order to ensure the presence of qualitative characteristics mentioned in financial reporting (Macve 2015). The organisations are required to disclose their sustainability activities along with their financial aspects. In the current era, the significance of environmental reporting could not be ignored, since it is a significant parameter for the investors before investment decisions are undertaken. It needs to be stated that the organisations need to adhere to various accounting regulations in relation to business consolidations and combinations. For conducting this report, CSR Limited is chosen as the organisation, which is a leading Australian industrial firm involved in the production of building products (Csr.com.au 2018).
It is necessary for the corporate entities to disclose financial information containing qualitative features so that the investors could make appropriate decisions. There are six qualitative features inherent in the financial statements, out of which relevance and comparability would be discussed in this paper in the context of CSR Limited.
If the financial information of an organisation is relevant, it possesses the capability of creating difference in the user decision making process. Therefore, for ensuring relevance, it is necessary to have confirmatory value as well as predictive value in the financial information of the entities (Abernathy et al. 2014). Feedbacks could be gathered from the past assessment when confirmatory value is present. On the contrary, the users could gather accurate financial information with the help of predictive value.
According to the annual report of CSR Limited in 2018, it has been found that the organisation has disclosed the financial results of the past year in its latest annual report in order to assist the users to obtain feedback regarding its past financial performance. Moreover, CSR Limited has disclosed the relevant financial information regarding its economic phenomena such as assets, equity, liabilities, expenses and revenues, which are deemed to be relevant for the users. Furthermore, the organisation has developed and represented its financial statements in accordance with Corporations Act 2001, AASB, IASB and IFRS. When all these aspects are present, relevance is ensured in the financial information disclosed by CSR Limited.
Comparability of Financial Information
The purpose of the financial statements needs to be enhanced so that the investors are able to contrast a group of information with identical information disclosed by other organisations and the same entity over a group of years (Henderson et al. 2015). For CSR Limited, it could be stated that the organisation discloses the financial results of two years in a single annual report for better comparison for the users. Besides, the results could be compared with those of other organisations by gathering the annual report from the company website. Thus, it could be said that CSR Limited ensures that comparability aspect is inherent in the financial reports of the organisation.
In accordance with the annual reports of CSR Limited in 2017 and 2018, it could be observed that the organisation has revealed information regarding its initiative of minimising the adverse impact of business operations on the environment. The following two instances would help in
- Based on the latest annual reports of CSR Limited, the organisation has made certain environmental commitments and one of them is to minimise the effect of business operations on the environment. This is fulfilled mainly by setting particular targets like minimisation of greenhouse gas emissions, waste reduction, reduction in usage of water for production purpose and others. In addition, the latest annual report of the organisation states that it has made considerable progress for meeting its target of minimising 20% per tonne saleable product in waste, energy and water usage (Csr.com.au 2018). Moreover, CSR Limited intends to minimise its carbon dioxide emission so that better environmental sustainability could be maintained (Domingues et al. 2017).
- The similar aspects could be observed from the 2017 annual report of the organisation in terms of similar environmental commitments. According to the environmental report, the greenhouse gas emissions have been minimised by 20%, while the same percentage is applicable in case of potable consumption and production of solid waste. Moreover, it has entered into long-term contracts so that greater security related to energy supply could be ensured for its factories.
According to the annual reports of CSR Limited, it could be stated that all the necessary financial information is provided needed to undertake investment decisions for the users. Moreover, the organisation has developed various financial statements for providing all the financial information like income statement, balance sheet statement, statement of changes in equity and cash flow statement (Adams 2015). Furthermore, the values of the items disclosed in the financial statements are supported by adequate explanations and justifications in the form of notes to accounts. Due to the presence of all these aspects, the financial statement users could be able to contrast the financial information.
However, certain inadequacies are deemed to be observed in terms of environmental reporting of the organisation. Based on the evaluation of environmental reporting of CSR Limited for 2017 and 2018, a major section of the same comprises of the target details that CSR Limited is required to accomplish within a particular year. However, the organisation has placed considerable focus on publishing information regarding its environmental initiative along with the accomplished outcomes. It could be considered as a significant drawback in the environmental reporting of CSR Limited.
In order to address the above-stated issues, the following recommendations are provided to CSR Limited:
- The higher-level management of the organisation needs to maintain adherence to the new and updated accounting standards in order to ensure relevance and faithful representation of the financial information. It could be identified both IFRS and AASB formulate amendments in the current standards of accounting and it is necessary for CSR Limited to conform to the same for maintaining compliance (Greiling, Traxler and Stötzer 2015).
- The aspect of environmental reporting framework needs considerable attention so that the users could gather necessary information regarding environmental initiatives. Due to this reason, the management of the organisation has the alternative of adopting Integrated Reporting Framework in terms of sustainability reporting. This is because the framework would enable the organisation to publish pertinent financial information regarding its environmental initiatives.
In order to restrict the counting of double asset, counting of double asset and profit recognition on bargain purchase of the business entity, it is necessary to use the pre-acquisition entries. This could be explained by the following instance where B Limited was acquired by A Limited. The statements of financial position of these two organisations after their foundations are represented as follows:
Sustainability Activities Disclosure
Table 1: Balance sheet statements of A Limited and B Limited after their establishments
(Source: As created by author)
The balance in the share account of B Limited denotes the interest of A Limited in the net assets of the previous entity. The consolidated balance sheet statement considers the cash and shares in B Limited, which is identified as double counting of assets. Under such circumstances, for avoiding double counting, it is necessary to remove the account of investment on consolidation (Tan and Lim 2017). The balance sheet statement consisting of the share capital of B Limited is not accurate. The reason is that these shares are not held by the outside parties, rather the group members hold then. Therefore, this mandates the need of eliminating the investment in contrast to the acquisition of net assets and it is represented by equity as follows:
Thus, the consolidated statement of financial position is represented as follows:
Table 2: Consolidated balance sheet statement
(Source: As created by author)
At the acquired data, it is necessary to pay two types of dividend and they include ex div and cum div. If the shares are acquired depending on cum div, the parent firm has entire right to dividend date when it is acquired (Fornaro, Lange and Lucido 2016). Moreover, to determine dividend to be paid, the fair value of consideration should be taken into account, which implies the need for deduction to be obtained from the cost of acquisition. Thus, the effect of journal entry on acquisitions in parent records under all probable circumstances is to be taken into account. For instance, Firm A has acquired all shares of Firm B in lieu of $1,000,000. When the firm was acquired, Firm B had recorded $25,000 as dividend payable. Therefore, the following conditions would be taken into account in this situation:
- The effect of acquisition analysis
- The difference in pre-acquisition entries at the acquired date, if the base of acquisition is cum div and not ex div
- The cum div entry necessitates the need of removing the dividend to be obtained collected by the parent firm and the dividend to be paid by the subsidiary (Carvalho, Rodrigues and Ferreira 2016)
Due to a number of reasons, it is necessary to contrast pre-acquired dividends with post-acquired dividends. They take into account the description of the acquired date coupled with equity values both before and after acquisition, According to “Paragraph 38A of AASB 127”, it is possible for an organisation to recognise dividend from a subsidiary in its statement of financial performance as revenue regardless of the acquisition nature (Aasb.gov.au 2018).
For recoding goodwill at the acquired date, the difference between internally generated goodwill and that during acquisition coupled with the effect of worksheet related to goodwill needs to be identified (Bragg 2017). For instance, if the subsidiary records goodwill amounting to $50 and the parent has acquired all subsidiary shares for $4,050, the equity value of the subsidiary would be $3,950.
Recommendations for CSR Limited
In order to calculate the net fair value of the assets and liabilities identified at the acquired date, it is necessary to adjust the assets not identified, as this would assist in computing acquired goodwill as well. With the help of pre-acquisition entries, the business combination valuation reserve would be eliminated as pre-acquisition equity (Macve 2015). During consolidation, the necessary adjustments need to be included in the adjustment columns of the worksheet in order to reflect the group goodwill in the balance sheet statement. The amount is arrived at by including the recognition of subsidiary’s goodwill at the date of acquisition and goodwill recognised on consolidation. This is identical to goodwill amount, which is made by the parent when the subsidiary is acquired.
“Paragraph 18 of AASB 3” states that all the assets and liabilities, which could be identified, are needed to be stated at fair values (Aasb.gov.au 2018). The reason is that these values assist in delivering effective information to the financial statement users based on the standard setter opinions. Even though cost allocation in business combination is denoted in this standard, it restricts the assets as well as liabilities acquired to be stated at cost. The only exception is goodwill acquired, as it is not measured at fair value (Hoyle, Schaefer and Doupnik 2015). The required accounting in relation to bargain purchase assists in laying stress on the method of fair value. The accounting treatment is not formulated as a reduction in fair values of assets and liabilities for recognising the same at cost. Hence, no change could be observed in fair values and the excess amount is recognised as gain.
Conclusion:
It is identified from the above discussion that CSR Limited has conformed to the necessary qualitative features of financial reporting by depicting financial information in order to assist the users for undertaking relevant decisions. However, the environmental reporting practices suffer from certain drawbacks and accordingly, appropriate recommendations are provided to the management of CSR Limited. Finally, this report has covered different aspects about the business consolidations and combinations.
References:
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB127_08-11.pdf [Accessed 25 Aug 2018].
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB3_03-08_ERDRjun10_07-09.pdf [Accessed 25 Aug 2018].
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Adams, C.A., 2015. The international integrated reporting council: a call to action. Critical Perspectives on Accounting, 27, pp.23-28.
Bragg, S.M., 2017. Fixed Asset Accounting. AccountingTools LLC.
Carvalho, C., Rodrigues, A.M. and Ferreira, C., 2016. The Recognition of Goodwill and Other Intangible Assets in Business Combinations–The Portuguese Case. Australian Accounting Review, 26(1), pp.4-20.
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Csr.com.au., 2018. CSR Building Products – a leading building products brand in Australia & New Zealand. [online] Available at: https://www.csr.com.au/ [Accessed 25 Aug. 2018].
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Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
Macve, R.H., 2015. Fair value vs conservatism? Aspects of the history of accounting, auditing, business and finance from ancient Mesopotamia to modern China. The British Accounting Review, 47(2), pp.124-141.
Tan, P. and Lim, C.Y., 2017. Heineken’s Acquisition of Asia Pacific Breweries: Accounting for Business Combinations and Changes in Ownership Interests. Issues in Accounting Education, 32(4), pp.101-127.
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