The Contemporary Issues in Accounting

Question : Discuss about the Issues in Accounting ? Answer : Introduction Business organisations worldwide need to prepare their financial reports as per the accounting methods and standards provided to them by International Accounting Standards Board (IASB). The conceptual framework in accounting is developed by the IASB that provides the standards accounting principles need to be followed by businesses for developing their financial statements. The Australian Accounting Standards Board (AASB) has also developed its own accounting practices and standards in compliance with IASB standards. The AASB standards need to be adopted by the business organisations operating in Australia for ensuring their long-term growth and development. In this context, the present report analyses and examines the effectiveness of current accounting framework in meeting the needs of the users of financial reports (Persons, 2013). For the purpose, the report analyses and examines the compliance of annual report of tow companies listed on the ASX in accordance with the conceptual framework and AASB standard requirements. The companies selected for the purpose are AGL Energy and Origin Energy traded on ASX (Australian Securities Exchange). In addition to this, the inclusion of prudence in the conceptual framework revision for addressing disparity in corporate reporting is also examined in the report. AGL Energy is Australian leading energy company involved in providing electricity, gas, solar and renewable energy services to the population of the country. It has been analysed from the annual report of the company that it effectively follows all the principles of conceptual framework of accounting (AGL Annual Report 2015, 2015). The main principle of conceptual framework is relevance, reliability and comparability. As per the relevance principle of conceptual framework, the financial reports develop by an organisation should be accurate and simple to be easily understood by the end-users (Mbira and Tapera, 2016). The financial report of AGL Energy is prepared in accordance with the relevance principle as it discloses all the required financial information in a relatively easy format. The company also effectively follows the reliability principle of conceptual framework according to which the financial information disclosed should be free from any type of material error. The financ ial information should disclose all the accurate figures relating to net profit, operating income, dividend per share as per the reliability principle of conceptual framework of accounting. The analysis of annual report of AGL Energy also depicts that is comply with the comparability principle of conceptual framework of accounting (Unegbu, 2014). The comparability principle states that the financial reports prepared should be compared with the results obtained or the previous year for evaluating the percentage growth of the organisation. AGL Energy compares and evaluates the financial figures of the present year with the results obtained for the previous year so that investors can easily predict the financial profitability (AGL Annual Report 2015, 2015). The company has also developed its remuneration report in accordance with the standard guidelines of the AASB. The remuneration framework provides all the relevant information regarding the compensation received by the key management personnel (KMP) of the company. The key management personnel include managing director, executives and non-executive directors. The remuneration framework provides the information related to the compensation of the KMP that includes three elements that are fixed remuneration, short-term and long-term incentives. The fixed remuneration comprises of base salary while short-term and long-term incentives are offered on the basis of individual performances. The remuneration framework of the company is developed for attracting, retaining and motivating right talent for achieving its strategic objectives. The remuneration committee takes all the decisions regarding the compensation received by the KMP for ensuring employee satisfaction and thus promoting the lo ng-term growth of the company. Thus, the remuneration report of the company provides all the necessary details about the strategies adopted for promoting employee welfare. The financial figures related to the remuneration of KMP are clearly disclosed in the remuneration report in accordance with the AASB standard requirements (AGL Annual Report 2015, 2015). The directors report of the company also reflects that the company effectively follows the principle of consolidation in accordance with the accounting policies of IASB. The principle of consolidation states that the businesses need to comply the financial information of all its subsidiaries and present it as a single economic entity in its annual report. The company published its consolidated financials statements at the end of the annual report in accordance with the principle of consolidation (Titilayo et al, 2014). The company has also disclosed clearly the accounting method used in preparation of its financial statements in its annual report. There is clear declaration that the concise financial statements are developed in accordance with the Corporations Act 2001 and AASB accounting standards and all financial figures are presented in Australian dollars. There is also proper disclosure of segment information in the annual report of the company in accordance with the AASB standa rd requirements (AGL Annual Report 2015, 2015). On the other hand, Origin Energy involves in providing divers range of energy solutions to the Australian pollution does not so effectively comply with the principle of conceptual framework and AASB standard requirements. The company effectively follows the comparability and reliability principle of conceptual framework. The financial information presented is free from any material error as declared in the directors report and is also compared with the results obtained for the previous year. However, the company annual report reveals that it does not comply with the relevance principle of conceptual framework. This is because the financial information presented in lengthy and complex. Thus, the financial results are not so easy to be understood by the end-users and as such the company does not effectively follow the relevance principle of conceptual framework of accounting. The remuneration report of the company has also not disclosed all the reveal details about the compensation off ered to the key management personnel. The company has also not adequately disclosed the consolidated financial statements as per the principle of consolidation of Corporations Act 2001 (Origin Annual Report 2015, 2015). As analysed from the annual report of both the corporations, there is wide difference in their financial report disclosure format. AGL Energy effectively complies with all the accounting standards and practices of conceptual framework and AASB. It prepares the financial report in accordance with the principle of conceptual framework of accounting by complying with the relevance, reliability and comparability principles. The company also publishes its consolidated financial statements as per the principle of consolidation (Mazhambe, 2014). The remuneration report of the company provides all the necessary details regarding compensation offered to KMP. The remuneration report has presented the structure of compensation according to which key management personnel receives the remuneration. The directors report has also presented clearly the accounting method used in preparation of financial statements (AGL Annual Report 2015, 2015). On the contrary, Origin Energy has not properly disclos ed the structure of compensation provided to KMP in its remuneration report. The company has also not presented its concise financial statements such as income statement, balance sheet and others as per the principle of consolidation. The basis of preparation of financial statements is also not clearly stated in the annual report of Origin Energy. Also, the financial information presented is complex and lengthy that makes it relatively difficult to be understood by the end-users (Origin Annual Report 2015, 2015). The reason for non-compliance with all the principle of conceptual framework and AASB standard requirements by Origin Energy seems to be its small-size business operations in comparison to AGL Energy. Origin Energy does not have an international presence and thus does not effectively comply with the international accounting practices advocated by IASB. AGL Energy has a global presence and thus it becomes mandatory for the company to comply with all the IASB standard accounting practices (Origin Annual Report 2015, 2015). AGL energy conducts its business operations on an international level while Origin Energy is mainly involved in providing energy solutions within Australia. This seems to be the reason for non-compliance of Origin Energy with all the principles of conceptual framework and IASB standard requirements (Ataman et al., 2014). Conceptual framework revision to include Prudence for addressing the disparity in Corporate Reporting The prudence concept is recognised as one of the fundamental principles of accounting that is essential for maintain the neutrality of the financial statements of business corporations. The prudence concept is in accordance with the conservatism principle of accounting as per which the businesses should not overestimate their revenue and underestimate the expenses during financial reporting. The concept of prudence is very beneficial for the inverts to analyse the real profitable position of a business organisation before taking decision about their investment. The implementation of prudence principle by businesses at the time of financial reporting helps in ensuring that financial data is useful for speculation purpose. The principle of prudence was removed from the conceptual framework of accounting in the year 1970S as it was said to be against the accruals basis of accounting (Araujo and Gomes, 2015). Accruals basis of accounting states that recording of financial transactions th at have not yet been completed. The financial analysts have determine prudence concept to be not very beneficial for businesses as it restricts them to create hidden reserves to be used at the time of emergency situation. However, with the recent increasing evidences of misrepresentation of financial statements by business corporations have caused IASB to include prudence principle again in the conceptual framework (Hoffman, 2016). The aim of the prudence concept is to reflect the least favourable position of a business organisation for protecting the interest of the investors. The principle is highly important for facilitating faithful and realistic presentation of financial information before the end-users. This helps in ensuring that financial statements of a business corporation are not misleading in any way and does not provide false optimism about its profitability position. The removal of prudence principle in the conceptual framework has caused the use of fraudulent information by business organisations for enhancing their financial position before the investors (Whittington, 2008). The implementation of prudence concept again by the IASB will help in ensuring the financial statements presented to the end-users are free from any misleading information. Thus, it can be said that prudence along with other fundamental principle of accounting is essential for addressing disparity in corporate reporting. The organisations cannot create hidden reserves or can withhold their revue through the including of prudence principle in accounting. The interest of investors remains safeguarded by protecting them from any type of false and fraudulent accounting practices used by business organisation in which they seek to invest. Thus fair presentation of financial facts and figures is the main objective of IASB by including prudence again in the conceptual framework revision (Malley, 2014). Recommendation On the basis of the overall discussion held in the report, Origin Energy is recommended to adopt all the accounting standards and practices advocated by IASB in financial reporting (Origin Annual Report 2015, 2015). This will enhance the brand image of the company in the eyes of investors globally. The business across the world should adopt all the international accounting standards and practices of IASB for the preparation of their financial statements. This is essential for enhancing the credibility and reliability of the financial information presented to the end-users and thus attracting capital from foreign investors. This will further promote the growth and sustainability position of the company worldwide. Also, the businesses should adopt the principle of prudence at the time of preparing their financial statements. This is essential for promoting transparency and authenticity in business operations and protecting the interest of investors (Knight, 2004). Conclusion It is inferred from the report that compliance with the principle of conceptual framework and AASB standards is essential for business operating in Australia. This will help the businesses to ensure their long-term growth and development and strengthen their brand image globally. Also, the businesses should place special emphasis on the application of prudence principle at the time of financial reporting for resolving issues related to corporate disparity. References AGL Annual Report 2015. 2015. [Online]. Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_AGK.AX_2015.pdf [Accessed on: 14 December 2014]. 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