Adherence Of General Purpose Financial Statements Of Sonic Healthcare To Conceptual Framework And AASB Standards

Conceptual Framework Principles

The general purpose financial statements are developed by a business organization at the end of a year in order to disclose its financial growth and stability. The information is utilized by investors and creditors in the decision-making process regarding their investment in a particular business organization. The general purpose financial statements prepared by a business organization include balance sheet, income statement, cash-flows and equity statement.   The IASB ( International Accounting Standards Board) has developed the conceptual reporting framework that establishes the international accounting concepts to be maintained by businesses at the time of financial reporting. The adoption of conceptual framework ensures that financial statements developed provide useful, relevant, comparable and consistent information to the end-users.  The AASB (Australian Accounting Standards Board) is an independent organization in Australia that holds the responsibility of ensuring that business within the country develops their financial reports as per the principle of conceptual framework (Hoffman, 2016). In this context, the present report analyzes the adherence of general purpose financial statements of Sonic Healthcare in accordance with the principle of conceptual framework and AASB. The remuneration report, director’s and auditor’s report are analyzed in the report for identifying the issues that are impacting the financial performance and growth of the company. Also, the report discusses about the impact of including prudence in the conceptual framework on the financial reporting.

The conceptual framework principles provides theoretical basis for developing the financial statements of a business organization. The main principles of conceptual framework are relevance, reliability, comparability and consistency. The relevance principle of conceptual framework states that financial statements should provide easy and precise information to the end-users. The reliability principle states that financial statements should disclose error-free financial facts and figures to the investors and creditors. The financial figures disclosed in the financial reporting must be compared and analyzed with respect to previous year financial results as per comparability principle. This is necessary to demonstrate the net profit or loss obtained by an organization in the current year as compared to previous financial year. The consistent principle of conceptual framework states that financial statements prepared by an organization on yearly basis must adopt a consistent and uniform pattern (Macve, 2015).

The adoption of all these principle of conceptual frameowrk by Sonic Helathcare is analyzed in the report through examining of its remuneration, auditor and directors report. Sonic Healthcare is recognized internationally to be renowned healthcare entity that emphasizes on providing quality services in medical and diagnostic field (Sonic Healthcare, 2017).

Adherence to Conceptual Framework by Sonic Healthcare

The remuneration report of the company provides information relating to Board’s remuneration policy and the compensation received by the directors and executives at the end of the financial year 2016. The company has stated that its remuneration report is developed in accordance with the section 300A of the corporations Act 2001 of AASB (Knight, 2004). The company has effectively structured its remuneration packages in order to motivate and retain the directors and executives and thus improving its financial performance. Thus, the remuneration strategy of the company is well-aligned with the creation of value for shareholders. The shareholders are provided the right to participate in the decisions regarding remuneration of executives and directors as per the AASB standards (Concise Annual Report 2016, 2016).

The remuneration of directors and executives is determined by the board as per the maximum amount approved by the shareholders. The remuneration policy of the company is developed by linking the remuneration of the executives and directors with the annual performance of the company. The reward received by the executives and directors is linked with the shareholder’s value creation. The performance of the directors and executives are reviewed annually and their remuneration is determined by their performance goals developed at the start of the financial year. The remuneration packages of the company include base salary, fringe benefits, and performance linked bonus and equity grants. The company has also effectively followed all the principles of conceptual framework by disclosing all relevant and reliable information related to the compensation of key management personnel (Concise Annual Report 2016, 2016). The company has also presented comparable and consistent information about the remuneration of board members with no concealing of information (Mazhambe, 2014).

Source:https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2016-annual-report-online.pdf

However, as analyzed from the remuneration report of the company the compensation of the key management personnel is directly linked with its profitability. Thus, this may include the desire within the executives and directors to obtain maximum bonus payments by enhancing the company’s profitability through manipulation of accounts. The company, although, has linked the remuneration package of the executives and directors with the creation of value for shareholders but need to link the remuneration with the share price instead of company’ s profitability. This will ensure that company’s executives and directors are acting in an ethical way to maximize profitability and there is no incorporation of unethical accounting practices. The main issues in remuneration policy that can occur with the linking of the compensation of board members with the company’s profit is self-interest, short-term decision making and unhealthy pursuit of personal goals. The proper review and monitor of the remuneration policy is required by the company on a regular basis in order to ensure that there is adoption of ethical practices in determination of remuneration. In this context, the deontological ethical theory states that morality of an action can be ensured by proper compliance with the ethical standards and rules. Therefore, the development of remuneration policy that is in accordance with the AASB standards and conceptual framework principles will ensure that the compensation provided to executives and directors promotes maximizes shareholders value creation (Concise Annual Report 2016, 2016).

Remuneration Policy of Sonic Healthcare

Source:https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2016-annual-report-online.pdf

The accounting standard for valuation of inventories as per AASB states that they should be valued in accordance with their net realizable value (Compiled Accounting Standard AASB 108, 2014). Sonic Healthcare has effectively complied with the AASB standards of inventory valuation as it disclosed adequate information regarding valuation of inventories in its director’s report. The inventories of the company such as store stock are valued at lower cost or at net realizable value through the use of first in, first out (FIFO) method (Sonic Healthcare Limited: Annual Report, 2016).

Thus, as depicted in the above table the company has implemented adequate provisions for valuation of impairment losses that can occur due to bad and doubtful debts. The loans and receivables are included in the accounts receivables in the balance sheet of the company. They are classified as non-derivative financial assets by the company that will provide fixed payment in the future period of time. They are included in current assets that have maturities less than 12 months and those having above 12 months are included in non-current assets. The company has valued its trade debtors at its fair value and at its amortized cost though the adoption of effective interest method. The bad and doubtful debts are stated in the financial period of their identification as per the AASB standards (Sonic Healthcare Limited: Annual Report, 2016).

The company has also disclosed information about the depreciation of its assets in its director’s report. The depreciation and amortizations of leased assets have enhanced about 16.3% as compared with the previous year due to acquisitions and development of the company. The company has disclosed the information relating to Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) as an indicator of its operational performance (Sonic Healthcare Limited: Annual Report, 2016).

Source: https://www.sonichealthcare.com/media/3042/annual-report-2016-updated-for-website-october-2016.pdf

The goodwill or intangible assets of the company are not valued through amortization but instead they are measured at cost less than any accumulated impairment losses. The goodwill is allocated to the cash-generating units of the company and is recognized through the use of business-segment and country of operation. The profit and loss associated with each cash-generating unit determines the carrying amount of goodwill.  In addition to this, other intangible assets are valued at their fair value on the date of their acquisition. The finance leases are capitalized at the fair value of the corresponding leased asset. Their value is depreciated over the useful life of the asset if there is uncertainty regarding achieving its ownership at the end of the lease term. The operating lease payments are categorized as expenses in the income statement of the company.  The company has also disclosed the provisions regarding maintaining of its contingent liabilities. The company and its subsidiaries have made an agreement as per which a company guarantees the debt of others. Also, the annual report of Sonic Healthcare provides adequate information relating to the reserves and retained earnings of the company as per the relevance and reliable principle of conceptual framework (Sonic Healthcare Limited: Annual Report, 2016).

Issues with Remuneration Policy

Source: https://www.sonichealthcare.com/media/3042/annual-report-2016-updated-for-website-october-2016.pdf

Thus, as examined from the annual report of Sonic Healthcare limited it has effectively followed and complied with all the principle of conceptual framework by providing complete, concise and error-free information to the investors and creditors. The auditor’s report of the company also states that the financial report of Sonic Healthcare Limited is developed in accordance with the Corporations Act 2001 by complying with the Australian Accounting Standards.  The corporate governance statement of the company also states that it has adopted ethical standards and practices fir conducting its operational activities. Therefore, as examined from the annual report Sonic Healthcare Limited has effectively followed all the principle of conceptual framework and AASB standards (Sonic Healthcare Limited: Annual Report, 2016).

The concept of ‘prudence’ in the conceptual framework refers to presenting fair and trustworthy information to the end-users of financial reports. The incorporation of prudence in conceptual framework ensures that a business entity does not overstate its income or understate its expenses during the preparation of its financial statements. The principle is developed as per the conservatism principle of accounting that states that a business entity should be conservative in reporting the information about its assets and not to underestimate its liabilities. Thus, the term ‘prudence in accounting refers to an accounting principle according to which businesses are required to record its expenses and liabilities at their recognition but only report the revenuers after their actual realization. This is done to produce conservative financial statements that are able to protect the stakeholder’s interests (Malley, 2014).

The principle of ‘prudence’ was initially removed from the conceptual framework as it was stated by the financial experts to contradict the accrual principle of accounting. The accrual principle of accounting states that revenues and expenses should be reported by a business entity in its financial statements as soon as they are incurred. The term’ accrual’ in accounting refers to reporting revenue or expense in the financial reports without the presence of any cash transaction. This was the reason behind the removal of principle of prudence from the conceptual framework. However, the revision of conceptual framework by IASB has incorporated the accounting principle of ‘prudence’.  The occurrence of accounting scandal in business entities due to manipulation of accounting transactions has caused the need of its incorporation again in the conceptual framework (Araujo and Gomes, 2015). There exist numerous examples of business entities such as Enron, 7-Eleven and many others that have unethically overstated their business performance in the absence of prudence principle in conceptual framework. Therefore, IASB has included again the concept of prudence to conserve the interest of stakeholders and protect them from any type of fraudulent activities. There are various benefits associated with the inclusion of prudence in conceptual framework such as protection of stakeholder’s interest and prevention of occurrence of any type of unethical accounting practices in business organization. On the other hand, the major criticism of prudence principle is that restricts business entities to create retained earnings for meeting any contingency condition (Prudence and IFRS, 2014).

Inventory Valuation

Conclusion

Thus, it can be stated from the annual report analysis of Sonic Healthcare Limited that the reason of its sound financial performance on year-to-year basis is effective compliance with the principles of conceptual framework and AASB standards.  Therefore, it is stated that businesses need to prepare and disclose their financial reports as per the conceptual framework principles and AASB standards. This is required for promoting the long-term growth and development of business entity through achieving trust of the stakeholders. The promotion of transparency and integrating in the financial reports of a business entity helps in achieving confidence of investors. The report has also illustrated that inclusion of prudence principle in conceptual framework is necessary to overcome the occurrence of corporate scandals due to misrepresentation of financial statements.

The overall discussion held in the report has illustrated the effective compliance with conceptual framework and AASB standards are mandatory for businesses worldwide for promoting their sustainable growth and development. It is recommended to business entities around the world that they should abide by the international accounting standards and practices as that followed by Sonic Healthcare Limited for achieving investor’s and creditors confidence and trust. This promotes goodwill of a business and thus strengthening its brand image on a global platform. This can be achieved by a business entity through implementing strong corporate governance rules that mandates the business executives and directors to adopt ethical accounting practices during financial reporting. The proper disclosure of financial facts and principles as per the conceptual framework principles is necessary to achieve the trust of stakeholders and thus improving the business performance (Mbira and Tapera, 2016). Also, the business are recommended to abide by the principle of ‘prudence’ during financial reporting as it will help them to conserve their financial statements and maintain the neutrality of the financial information disclosed to the stakeholders (Araujo and Gomes, 2015).

References

Araujo, V. and Gomes, A. 2015. Analysis of Opinions Issued in Comment Letters on the Term Prudence. Journal of Education and Research in Accounting 9(2), pp. 209-225.

Compiled Accounting Standard AASB 108. 2014. [Online]. Available at:-

https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPdec09_01-11.pdf[Accessed on: 29 April 2017].

Concise Annual Report 2016. 2016. Sonic Healthcare Limited. [Online]. Available at:-

https://investors.sonichealthcare.com/FormBuilder/_Resource/_module/T8Ln_c4ibUqyFnnNe9zNRA/docs/Reports/AR/sonic-healthcare-limited-2016-annual-report-online.pdf [Accessed on: 29 April 2017].

Hoffman, C.W. 2016. Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism. World Journal of Business and Management 2 (1), pp. 1-32.

Knight, J. 2004. Internationalization Remodeled: Definition, Approaches, and Rationales. Journal of Studies in International Education 8 (5), pp. 5-29.

Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat. Routledge.

Malley, A. 2014. Opinion: Is prudence still a virtue? [Online]. Available at: https://www.theaccountant-online.com/news/is-prudence-still-a-virtue-4276220 [Accessed on: 29 April 2017].

Mazhambe, Z. 2014. Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework. Journal of Modern Accounting and Auditing 10 (8), pp. 835-845.

Mbira, L. and Tapera, J. 2016. Key Success Drivers for Microfinance Institutions in Zimbabwe: Developing Core Competences for Financial Inclusion. International Journal of Business and Social Science 7 (3), pp. 128-136.

Prudence and IFRS. 2014. [Online]. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf[Accessed on: 19 April 2017].

Sonic Healthcare Limited: Annual Report. 2016. [Online]. Available at: https://www.sonichealthcare.com/media/3042/annual-report-2016-updated-for-website-october-2016.pdf [Accessed on: 29 April 2017].

Sonic Healthcare. 2017. [Online]. Available at: https://www.sonichealthcare.com/ [Accessed on: 29 April 2017].

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