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Financial Accounting: Accounting In A Competitive Economy

  0 Downloads   |   5 Pages 1,195 Words   |   Published Date: 03/05/2017

Question:

Describe about the Financial Accounting of Accounting in a Competitive Economy.

 

Answer:

Introduction

Accounting standards are the rules, regulations and policies that help an organization to run effectively and smoothly. The Australian Accounting Standards Board (AASB) is the agency of the government of the country that issues the AASB standards and includes the Australian equivalent to the IFRS (International Financing Reporting Standards). In the year 2007, the AASB modified the Standards of accounting such that the requirements are identical to the IFRS that were issued by the IASB for the entities (Shim, Siegel, & Shim, 2012). However, it has been found that the AASB/ IASB are against the present concept of materiality. Therefore, in this report, the general concept of materiality has been discussed along with its application in the firm Wesfarmers and also the problems of materiality in the context of the present AASB / IASB standards and framework using the annual report of the particular company has also been discussed in details.

Concept of Materiality

The concept of materiality is also known as the materiality constraint. It is defined as the information related to finance that is considered as the material of the financial statements that would alter the view or the opinion of rational personnel. It can also be said that all the vital financial information might affect the user’s opinion regarding the financial statements. This conception of materiality is of greater importance and is relative in size. As per Williams (2012), it has been found that some of the financial information of a company might be useful to some of the people like stakeholders or some of the financial information might be considered as material to some of the companies. On the other hand, it might happen that the same financial information might not be considered as the material rather it might be considered as the immaterial to the other companies and persons. The concept of materiality addresses that the financial information might make a differentiation between the users of the financial statements (Needles & Powers, 2012). Therefore, as per the need and concept of materiality the company adds the financial information for disclosing the financial condition of the firm to its stakeholders and if the financial information is considered as immaterial to the accountant of the firm then the information will not be added to the annual report of the particular firm. Therefore, it can be said that concept of materiality varies from one organization to another. For example, within the firm Wesfarmers, the materiality is based on the accounting standard AASB 1031. As per this particular accounting standard AASB 1031, this is considered as an interim standard that generally cross-references to the Framework and Standards that consists of the guidance regarding the materiality. On the other hand, the accounting standard AASB 2013-9 reflects the Amendments to the Accounting Standards of Australia – Materiality, Conceptual Framework and Financial Instruments. As per this standard, several amendments are considered as a result of issuance of AASB CF 2013-1 and will make amendments to the specified standards of accounting in order to delete the references to the AASB 1031 (Wesfarmers.com.au, 2016). The particular company Wesfarmers for measuring fair value and disclosures implement the following methods – the fair value is calculated based on the quoted prices in active market and the fair value is determined by using the inputs for liability and assets, which are depended on the market data that are observable.

 

Issues of materiality in regard to the existing AASB / IASB standards

There have been pertinent issues relating to the concept of materiality as per the IASB/AASB framework. Investors’ are required to be informed of the financial condition of the business enterprise before making essential financial decisions (Bevis, 2013). The concept of materiality emphasizes on certain financial items that can only be considered relevant for executing investment and financial decisions. In the case of Wesfarmers Limited, there are relevant financial items that should be directly related to the financial condition of the entity. These are the amount of assets and liabilities in the organization and the amount of profits made by the business enterprise in the previous financial year (Narayanaswamy, 2014).  However the value of intangible assets is subjected to certain constraints. As such, the determination of intangible assets is subjected to the perception of the investors. In addition, the determination of prepaid expenses in the organization and its treatment is another issue in the concept of Materiality. BHP Billiton assesses the prepaid d expenses of the organization as a current asset. However, this depends on the opinion of the investors. The IASB/AASB recognizes this essential issue in the concept of materiality, thereby, having an adverse influence on the preparation of financial statements of a business enterprise (Warren et al. 2013). As per the financial statements prepared by BHP Billiton, the recognition of Bad debt recovered is another important essential issue recognized by IASB /AASB. In instances, the Bad Debt recovered can lead to issues relating to recording and assessing of accounting information as per the financial statements of a business enterprise. As such, bad debt recovered has been a pertinent issue in the concept of materiality as per the IASB/AASB. Besides this the IASB /AASB  has imposed strict guidelines relating to the allocation of variable  expenses to the cost of production .As per the financial statements prepared by Wesfarmers Limited , the brand has numerous variable expenses  that adds to the cost of production . Hence, such variable expenses have to be reconsidered when presenting the financial report to the investors of the company.  The concept of materiality determines the variable expenses of an organization as per their relevancy and usefulness to the production process (Porter & Norton, 2012). As such, the standards set by the concept of materiality cannot be judged against the measures implemented by the IASB/AASB. As such, recognition of variable expenses is an important issue as per the IASB/ AASB framework .m

Conclusion 

The AASB 1031 standard is an interim standard which adheres to the international standard of accounting and financial reporting. The materiality disclosures followed by Wesfarmers Limited follows this standard, thereby, presenting the financial information to the investors. However, as per IASB/AASB the information presented to the external parties constitutes certain issues when information is disclosed as per the materiality concept. These include- determination of the value of intangible assets, depreciation as well as bad debt recovered. Thus, the IASB and the AASB framework have rightly identified materiality issues when preparing the annual financial statements of a business enterprise.

 

References

Bevis, H. W. (2013). Corporate Financial Accounting in a Competitive Economy (RLE Accounting). Routledge.

Home - Wesfarmers. (2016). Wesfarmers.com.au. Retrieved 26 May 2016, from http://www.wesfarmers.com.au

Narayanaswamy, R. (2014). Financial Accounting: A Managerial Perspective. PHI Learning Pvt. Ltd..

Needles, B. & Powers, M. (2012). Financial accounting. Mason, OH: South-Western Cengage Learning.

Porter, G., & Norton, C. (2012). Financial accounting: the impact on decision makers. Cengage Learning.

Shim, J., Siegel, J., & Shim, J. (2012). Financial accounting. New York: McGraw-Hill.

Warren, C., Reeve, J., & Duchac, J. (2013). Corporate financial accounting. Cengage Learning.

Williams, J. (2012). Financial accounting. New York: McGraw-Hill/Irwin.

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