Objectives of Conceptual Framework
Conceptual framework in the process of accounting refers to the systematic process of entering financial information in the books of accounts which are prepared by the business. The main purpose of Conceptual framework is to improve the overall reporting structure of the business such that the content which are reported are easily understood by the users of such information (Zhang and Andrew 2014). In this changing business environment, conceptual framework ensures that the financial information is clearly disclosed without any ambiguity or complex presentation.
The company which is to be assessed for this purpose is Liquefied Natural Ltd which is a publicly owned Australian company which is also listed in the Australian stock exchange. The company is engaged in the process of liquefaction of natural gas projects which are done at a comparatively lower costs (Liquefied Natural Gas Limited 2018). The company mostly operates in Australia, however has a global presence as it operates in certain parts of US and Canada.
Conceptual Framework in any business is crucial because financial reports are prepared and published following such a framework (Cheng et al. 2014). The annual reports which is prepared by the management of Liquefied Natural ltd comply with all relevant standards of accounting and principles which are followed in Australia as per regulations of Australian Accounting Standard Board (AASB) and Corporate Act 2001.
The objectives of Conceptual framework which can be identified and are the core objectives of Conceptual framework are explained below:
- Thee main objective of the conceptual framework of a business is to provide valuable financial information to the users of the financial reports to take vital business decisions. The conceptual framework requires businesses to present information in the formats of Profit and loss account, Balance sheet and Cash flow statements. All financial estimates are shown in the above three statements and notes to accounts are also provided to support the information provided in the financial statements (Owen 2013).
- The conceptual framework also requires business to supply financial information to the users in a timely manner. In most cases, businesses publish annual reports in one year intervals which contains the performance for the entire year (Baumgartner 2014). In addition to this, business also publish half yearly reports and quarterly reports as well which are generally of profit and loss statements. An extract of the profit and loss statement of Liquefied Natural ltd is shown below:
- The conceptual framework also classifies and summarizes financial information in a presentable manner which is a bit less complex in nature and easier to understand for the users of the financial statements.
The financial information which are to be presented in the annual reports of the business needs to be first identified appropriately as per the nature of the item. The item which is recognized can be an expense, income, asset or liability (Smith 2017). The conceptual framework ensures that the information are properly recognized and recorded in the correct statement. The important items which are to be recognized are listed below:
- Assets: The assets of the business are shown in the balance sheet of the company. In the annual reports of Liquefied Natural Ltd, the assets are shown under subhead current assets and non-current assets. This classification is on the tenure during which the assets will be used by the business.
The fixed assets of the business only comprise of property plant and equipment as shown in the above image.
- Liabilities: The liabilities of the business are also shown in the balance sheet of the company (Henderson et al. 2015). The annual report of the company shows that the business has both short term and long-term liability which the management of the company needs to take care.
- Equity: The equity of the company mainly comprises of contributed equity which are made up of shares, reserves and accumulated losses of the business. The equity of the business reveals the funds which is available to the management to be utilized in different projects.
- Expenses: The expenses comprise of both operation and non-operating expenses which are both shown in the profit and loss statement of the company. The expenses of the business need to be shown so that the users of the financial statements are aware of the costs which is incurred by the during the year.
- Income: The income of the business which is mainly received from the main product or main activity of the business is also shown in the profit and loss statement prepared by the business.
The above discussion makes it clear that the management of Liquefied Naturals ltd have effectively followed the conceptual framework as the profit and loss account, Balance sheet and cash flow statements are effectively prepared and shown in the annual report of the company and therefore has met with the recognition criteria of the business (Weil, Schipper and Francis 2013).
The qualitative characteristics refers to the principles which should be followed in order to make the annual report rich in presentation and classification of financial information. The classification is on the basis of fundamental characteristics and Enhancing characteristics. The characteristics are shown below:
- Relevance: The information which are to be presented in the annual report of a company should be relevant to the current business estimates and performance. The annual report of Liquefied Natural Ltd covers all relevant information in the financial statements itself along with notes to accounts.
- Faithful Representation: The information which are presented in the annual report should be represented faithfully without any ambiguity. The audit report is prepared by Ernest and Young for the year 2017 and the opinion of the auditor is that the financial statements show true and fair view and is also complying with relevant standards applicable to the business.
- Comparability: The principle states that the information presented should be comparable from past performance and also with current performance of its competitors (Francis, Pinnuck and Watanabe 2013). The presentation of financial data in the annual report of Liquefied Natural ltd is presented in such a way that it is easily comparable.
- Verifiability: The users of the annual reports should be able to verify the presented information in the annual report as per this principle. The notes to accounts which is provided at the end help the users in the verification process.
- Timeliness: The information regarding various activities and projects undertaken by the business and also its financial implications should be made available to the users of financial statements in a timely manner.
- Understandability: The information which are presented in the annual reports which are related to a business performance during the year needs to be such that the same are easily understandable by the users of the annual reports (Barth 2013). In order to achieve such understandability, the management must include notes to accounts which explains various treatments and complex transactions which are related to the business.
Conclusion
Thus, from the analysis of the annual report of Liquefied Natural ltd, it can be easily be said that the conceptual framework is followed by the business in preparation of annual reports of 2017. In addition to this, as the company is a public limited company and also listed in ASX, all relevant accounting standards and principles are followed while preparing the financial statements of the company. The assessment also points out the fundamental and enhancing qualitative characteristics which are related to the financial statements prepared by the business.
References
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), pp.331-352.
Baumgartner, R.J., 2014. Managing corporate sustainability and CSR: A conceptual framework combining values, strategies and instruments contributing to sustainable development. Corporate Social Responsibility and Environmental Management, 21(5), pp.258-271.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
Francis, J.R., Pinnuck, M.L. and Watanabe, O., 2013. Auditor style and financial statement comparability. The Accounting Review, 89(2), pp.605-633.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Liquefied Natural Gas Limited (2018) – About Us LNGL at a Glance.. Lnglimited.com.au. Retrieved 27 January 2018, from https://www.lnglimited.com.au/irm/content/lngl-at-a-glance.aspx?RID=172
Owen, G., 2013. Integrated reporting: A review of developments and their implications for the accounting curriculum. Accounting Education, 22(4), pp.340-356.
Smith, M., 2017. Research methods in accounting. Sage.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
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