Income statement
Discuss about the GAAP as Ineffective Legal Defense.
In the current competitive landscape, various issues confront the corporate firms when they conduct their business operations. More specifically, the accounting-related issues are inherent, since many organisations fail to adhere to the regulations and guidelines stated in the conceptual framework. In order to meet the needs of the conceptual framework, the preparation and disclosure of the financial statements need to be made appropriately. The main issuers of this framework include “Australian Accounting Standard Board (AASB)” and “International Accounting Standard Board (IASB)” through which it is possible for the firms to obtain an overview of the requirements and guidelines required to prepare and reveal their financial reports (Azam 2017).
The goal of this report is to present the different aspects laid out in the conceptual framework and therefore, Boral Limited is taken into consideration. Boral Limited is an Australian multinational corporation, which is involved in producing and supplying construction and building materials having operations in US and Asian nations and it is listed under ASX 100 (Boral.com 2018).
For Boral Limited, it is important to satisfy three objectives of the proposed conceptual framework of IASB and AASB that would help in preparing and revealing its financial reports. The brief description of these objectives in the context of Boral Limited are analysed as follows:
This objective mandates the need for the organisations in revealing their financial performance by presenting the income made and amount spent in the form of expenses. The income statement of the business entities helps in revealing such information to their users (Baker and Burlaud 2015). It could be observed that Boral Limited has made the necessary disclosures in its income statement supported additionally by the financial statement notes. As per the latest annual report of Boral Limited, its income statement is illustrated as follows:
This objective clearly highlights the fact that the economic resources of a business entity are to be disclosed to the users for portraying the actual financial position concerning the business operations. The balance sheet statement of an entity helps in providing such information to the users (Barker et al. 2014). The annual report of Boral Limited clearly provides a description of all the economic resources, which could be identified from its statement of financial position.
This objective necessitates the need for the organisation to pass information to the users about the changes in the financial condition so that the latter could undertake significant decisions. These changes could be identified from the cash flow statement and statement of changes in owners’ equity (Barth 2015). Boral Limited has presented both the statements in its annual report, which are illustrated as follows:
Statement of financial position
Boral Limited has to meet certain recognition criteria in relation to different financial components like liabilities, assets, equity, revenue and expense apart from the conceptual framework objectives. For adhering to AASB and IASB, it is necessary to take into account different aspects when the financial statements are recognised. At the time of recognition, it is mandatory for Boral Limited to consider financial information of the distinct components like assets, liabilities and others (Barth 2018). Moreover, it is necessary for the accountants of the business entities to ensure recognition of those aspects having association with rightful representation of the financial elements. Finally, it is required for the organisations to undertake cost-benefit analysis of the financial components.
The principles of AASB and IASB are to be followed for fulfilling these criteria. It could be identified by discussing the recognition criteria in the context of Boral Limited, which are explained as follows:
As Boral Limited is involved in operating in the Australian construction industry, the primary fixed assets of the organisation include property, plant and equipment. Property, plant and equipment is realised at cost minus accumulated depreciation and impairment, which could be linked with “Section 334 of the Corporations Act 2001” and “AASB 116 Property, Plant and Equipment”.
The initial recognition of trade and other receivables is made at the issued invoice value and at the amount considered recoverable from the customers (cost of amortisation using the method of effective rate of interest). In addition, Boral Limited has created an allowance for doubt debts for the anticipated irrecoverable trade amounts.
In case of Boral Limited, the recognition of inventory is made at lower of net realisable value or cost in accordance with the guidelines of “AASB 102 Inventories”.
Boral Limited realises provisions in its balance sheet statement, if the following three conditions are satisfied:
- There is a present obligation due to previous event
- The obligation amount could be gauged reliably
- There is likelihood that the economic benefit outflow would be needed for settling obligation (Craig, Smieliauskas and Amernic 2017)
The realisation of loans and borrowings is made initially at fair value minus attributed transaction costs, in which they are stated at amortised cost.
In case of Boral Limited, ordinary shares are considered in the form or equity and they are paid wholly with no par value, having one vote per share and the dividend rights. Thus, it complies with the requirements of “AASB 1004”.
Revenue is recognised in Boral Limited from the provision of products or services, allowances, discounts and net of returns. In addition, all the considerable risks and rewards related to the purchaser during revenue, which complies with the standard “AASB 118 Revenue”.
Expenses are recognised in the income statement at the time they occur irrespective of whether the payment is made or not.
The above dissection clearly validates the fact that Boral Limited has complied effectively with the guidelines and principles of the conceptual framework so that different financial statement aspects are recognised appropriately.
Two fundamental qualitative characteristics are inherent in the conceptual framework for financial reporting, which are elaborated in relation to Boral Limited as follows:
It is highly expected from the business entities regarding faithful representation of their financial position (Gordon et al. 2015). As a result, the worth of the financial information is increased. According to the audit report published in the annual report of Boral Limited, the preparation of the financial statements is made in such a way that they fulfil the needs of AASB and IASB.
If relevant financial information is disclosed in the annual report, the users could extract the necessary information that would aid in their process of decision-making (Perera and Chand 2015). In case of Boral Limited, pertinent financial information is delivered to the users about the economic resources that it possesses and this could be identified from the balance sheet statement of the organisation.
Cash flow statement and statement of changes in owners’ equity
Four enhancing qualitative characteristics are inherent in the conceptual framework for financial reporting, which are elaborated in relation to Boral Limited as follows:
There is a positive and strong correlation between verifiability and faithful representation. The reason is that faithful representation forms the base so that the financial information of the corporate entities could be verified (Smieliauskas, Craig and Amernic 2017). As evaluated, Boral Limited has conformed to all the relevant standards, which makes it easy for its users to verify the published financial statements in the annual report. With the help of the aspect of comparability, the users could differentiate as well as detect the similarities in the economic resources of the corporate organisations. It has been assessed that Boral Limited develops its financial statements in a way that follows the prevailing norms and guidelines of the conceptual framework. This provides a platform for the users in comparing its financial information with the other entities having separate timelines.
With the help of timely revelation of financial information, the users would be benefitted greatly (Walton 2018). Boral Limited is involved in publishing quarterly as well as annual reports so that the users could be supplied with valuable information.
If there is broadening of financial information, the users could use the same for specific purpose. The formation of the presentation of financial information of Boral Limited is simple, as it categorises all the aspects and footnotes for assuring better understanding of the users.
Conclusion:
The above analysis clearly inherits the fact that all the essential norms and rules pertaining to the AASB and IASB conceptual framework at the time of preparing and revealing financial information on the part of Boral Limited. Moreover, it has complied with all the objectives, which are mentioned under the reporting of conceptual framework. Along with this, it has been evaluated that the organisation has followed the criteria of recognition that includes assets, liabilities, equity, revenue and expenses. Finally, it has been dissected that Boral Limited contains all the necessary enhancing and fundamental qualitative characteristics laid down in the conceptual framework for developing the financial statements.
References:
Azam, M.R., 2017. Challenges to the Users of Financial Reports Constructed Using Multiple Measurement Bases: A Review of the IASB’s Conceptual Framework for Financial Reporting. International Journal of Accounting and Financial Reporting, 7(2), pp.172-177.
Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.
Barker, R., Lennard, A., Nobes, C., Trombetta, M. and Walton, P., 2014. Response of the EAA financial reporting standards committee to the IASB discussion paper A review of the conceptual framework for financial reporting. Accounting in Europe, 11(2), pp.149-184.
Barth, M.E., 2015. Commentary on Prospects for Global Financial Reporting. Accounting Perspectives, 14(3), pp.154-167.
Barth, M.E., 2018. The Future of Financial Reporting: Insights from Research. Abacus.
Barth, M.E., Nobes, C. and Tarca, A., 2015. Conceptual framework for financial reporting: an introduction to the special issue by the guest editors.
Boral.com., 2018. [online] Available at: https://www.boral.com/sites/corporate/files/media/field_document/Boral-Annual-Report-2017.pdf [Accessed 16 Apr. 2018].
Craig, R., Smieliauskas, W. and Amernic, J., 2017. Estimation Uncertainty and the IASB’s Proposed Conceptual Framework. Australian Accounting Review, 27(1), pp.112-114.
Gordon, E.A., Bischof, J., Daske, H., Munter, P., Saka, C., Smith, K.J. and Venter, E.R., 2015. The IASB’s discussion paper on the Conceptual framework for financial reporting: a commentary and research review. Journal of International Financial Management & Accounting, 26(1), pp.72-110.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial reporting standards (IFRS) for small and medium-sized enterprises (SMES). Advances in Accounting, 31(1), pp.165-178.
Smieliauskas, W., Craig, R. and Amernic, J., 2017. GAAP as Ineffective Legal Defense of Financial Reporting: Implications for Truthfulness, Auditability, and the IASB’s Proposed 2015 Conceptual Framework.
Walton, P., 2018. Discussion of Barker and Teixeira ([2018]. Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15) and Van Mourik and Katsuo ([2018]. Profit or loss in the IASB Conceptual Framework. Accounting in Europe, 15). Accounting in Europe, pp.1-7.
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