Conceptual Framework: An Overview
Accounting is also considered to be the language of the business as the same includes the consideration of stakes of different stakeholders associated with the business. An efficient financial reporting is the key to the corporate responsibility towards the larger stakeholders and society as a whole (Herath, McCoy, Lucas, and Mensah, 2011). Therefore, it is quite expected that the reporting should follow a standard and benchmark protocol for the companies. A conceptual framework has been developed by the standard setters in order to provide a general overview about the functionality of the standards and also the scope and objective of financial reporting for the organisation (Fasb.org, 2018).
The conceptual framework is issued by the International Accounting Standards Board (hereafter may be referred to as “IASB”) may be construed to be the basis of corporate reporting by way of laying down the standards guidelines as to the treatment, presentation and disclosure of various financial events and transactions. In short, it provides the overall structure of the financial reporting for a firm (Haslam, 2017). Since the financial data and information may be technical, the regulators have pronounced certain guidelines as to the qualitative characteristics of the financial statements in terms of relevance, reliability, comparability and timelines which jointly help management to make the financial reporting more useful to the users (Kampanje, 2013). Conceptual framework provides a holistic approach as to how to perform such preparations and make the reporting effective to the stakeholders.
For the purpose of the report, a business organisation has been chosen in respect of which the application of the conceptual framework has been analysed. The organisation is 1300 Smiles Limited (hereinafter may be referred to as “the business’ or “the firm”, as the case may be) and listed in the Australia Stock Exchange (ASX). The principal activity of the business is to provide dental facilities across the country through own setups and acquired dental facilities as well. The core objective of the management is to maximise the returns of the shareholders and reward of the employees by increasing profit through the provision of efficient dental facilities to the people of the nation.
In the conceptual framework, there are certain compliance requirements for the management which must be followed in order to ensure the efficient corporate reporting. Such requirements may be segregated in a few different types. The first type of requirements revolves around the qualitative characteristics of the financial statements which will include the reliability, relevance, understanding ability and comparability of the financial data as contained in the financial statements (HAMPTON, 1999). In other words, the financial statements should be made in such a manner that the users may take their respective decisions based on the financial data therein. The second type of compliance requirements attempts to ensure that the recognition and measurement criteria of the financial items are in line with the standards set for them and in accordance with the generally accepted accounting principles (GAAP) and any other directives and regulations in force for the time being (Lion, 2012). In addition, the use of present value consideration in the financial data is also a critical component which the conceptual framework advocates to apply (HAMPTON, 1999). In case of the stated company, it has been noted that the firm prepares its financial statements on the accrual basis of accounting method and in line with the Australian Accounting Standards (AASs) and also the Corporations Act 2001. Therefore, it may be noted that the company has been able to meet with the basic compliance requirements in terms of the basis for preparation of financial statements.
Organisational Overview
In the case of the firm, it has been observed that the management has adopted AASB-9: Financial Instruments for the classification, measurement and de-recognition of financial assets and financial liabilities. The new impairment model, as suggested by given AASB has also been applied in valuing the assets. However, the management expects that new pronouncement will not have material impact on the results of the business as there remains lesser scope for change in the value of financial liabilities. AASB-16; Leases which will replace existing AASB-17: Leases will have, on the contrary, significant impact on the booms of accounts of the firm as there have been considerable amount of lease commitment of the company. However, it has been asserted that the all the leased assets have been properly valued and recognised in the booms complying with the standards in force. In this context, it may be construed that the qualitative characteristics like materiality has been satisfied in the given scenario as the management has already performed an impact assessment of adoption of new accounting standards.
The qualitative characteristics, as mentioned earlier, are an important part of the financial statements preparation process. In terms of relevance and reliability, it may be observed that the audit report is unqualified with special reference to the key audit matters. In the words, the financial data has been asserted to be reliable by the independent auditors. Moreover, the same has been in compliance with the International Financial Reporting Standards (IFRSs) and hence the same is considered to be comparable. Another critical point is faithful representations which may be corroborated from the fact of verifiability of the books by way of referring to unqualified audit opinion issued by the auditor. Besides, the notes of the accounts exhibit that the fixed assets like property, plant and equipment have been valued as per the historical cost methods, less depreciation which is in line with the respective standards in force. In case of complex accounting assumptions like the assessment and recognition of liabilities arising out of the termination benefits for the employees, the firm has complied with AASB 137: Provisions, Contingent Liabilities and Contingent Assets which establishes the fact that the business has been in compliance with the relevant accounting standard and thereby applying the given framework in practice.
As per AASB framework 2004, the definitions of main elements of financial statements like assets, liabilities, incomes, expenses and equities are provided in terms of their future economic benefit (Jhunjhunwala, 2014). In other words, how the business may get future economic benefit out of these elements or absorb the same into the operations decides the criteria for them to be selected under specific terminology (He, Evans and He, 2016). In the case of the given case study, the annual report shows the notes to the financial statements consist of a detailed discussion and compliance related disclosure relating to AASB pronouncement on various matters such as financial instruments and revenue from contracts and adherence with respect to those pronouncements.
Firstly, the researchers question about the applicability of conceptual framework in practical scenario especially when the definitions of main elements of financial statements are dependent on unspecified rules and conventions (Smith, Haniffa and Fairbrass, 2010). In addition, there have been issues regarding the clarity on the explanation provided for items like deferred tax credits or even current value accounting (Jhunjhunwala, 2014). In the case of 1300 Smiles Limited, there is no reference to the current value accounting as far as the valuation of investment in securities as per equity method is concerned.
Analysis of Organisational Conceptual Framework
As per the Annual Report 2018, the business prepares its books of accounts as per the AASs and Corporations Act 2001 and thereby performs compliance with respect to the regulations and legislations. A perusal of the annual report establishes that the Board has always been proactive in assuring the higher returns to the stakeholders in the form of dividend and the scenario shows adequacy of control over resource and strong financial position of the firm. In addition, the cash flow statement shows the financing and investing activities in details that helps the stakeholders to evaluate the financial health of the business on a holistic basis in line with the cash flow from operating activities. Besides, the report shows the managerial perspective about the future plans and expansion strategies which are based on the efficient utilisation of financial resource and solvency of the firm. Therefore, it may be construed that the management has been accountable to the general stockholders, who are not in a position to command the preparation of financial statement tailored to their individual needs, in terms of compliance and transparent reporting.
The management should consider the market trend and assess the investment and equity value under current value accounting method. In addition, the social aspect of the business should also be exhibited in the corporate reporting to make it exhaustive. Lastly, the management should also consider the disclosure about the non-accounting regulatory compliance in the report so that the stakeholders, while evaluating, may also consider such observance with the legality and legislation.
Conclusion
The conceptual framework provides a holistic guidance as to the overall preparation process of financial statements. The management should make every attempt to prepare the financial statements of the company in such a way that the same will render to be useful to the users of financial statements. Finally, it is concluded that a well-designed approach as to the preparation of financial statements considering the conceptual framework and relevant direction and guidelines as provided by the regulated and standard setters will significantly contribute towards the enhancement of usefulness of the financial statements and help the business to attain its goals of attaining sustainability in the long-run (Rihanna and Dr.B.Mahadevappa, 2011).
References
Fasb.org. (2018). The Conceptual Framework. [online] Available at: https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774#section_1 [Accessed 5 Dec. 2018].
HAMPTON, G. (1999). The Role of Present Value-based Measurement in General Purpose Financial Reporting. Australian Accounting Review, 9(17), pp.22-32.
Haslam, C. (2017). International Financial Reporting Standards (IFRS): Stress Testing in Financialized Reporting Entities. Accounting, Economics, and Law: A Convivium, 7(2), pp.105-108.
He, L., Evans, E. and He, R. (2016). The Impact of AASB 8 Operating Segments on Analysts’ Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), pp.330-340.
Herath, S., McCoy, R., Lucas, S. and Mensah, E. (2011). Understanding international financial reporting standards (IFRS): a review and evaluation of IFRS research. International Journal of Managerial and Financial Accounting, 3(3), p.304.
Jhunjhunwala, S. (2014). Beyond Financial Reporting-International Integrated Reporting Framework. Indian Journal of Corporate Governance, 7(1), pp.73-80.
Kampanje, B. (2013). Bridging Gap between IAS 1 and IASB Conceptual Framework on Users of Financial Statements. SSRN Electronic Journal.
Lion, J. (2012). How the IASB Interacts with Domestic Standard Setters – A Network of Standard Setters. Australian Accounting Review, 22(3), pp.244-245.
Rihanna, R. and Dr.B.Mahadevappa, D. (2011). The Conceptual Framework Of Corporate Social. Indian Journal of Applied Research, 1(4), pp.40-50.
Smith, J., Haniffa, R. and Fairbrass, J. (2010). A Conceptual Framework for Investigating ‘Capture’ in Corporate Sustainability Reporting Assurance. Journal of Business Ethics, 99(3), pp.425-439.
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