ACC706 Accounting Theory And Issues

The conceptual framework of accounting has been developed by IASB (International Accounting Standard Board) for improving the quality of financial reporting by businesses across the world. AASB (Australian Accounting Standards Board) has also directed all the ASX listed entities to comply with conceptual framework of accounting for improving their global competitiveness. The conceptual framework is developed with the main objective of providing assistance to the developers of financial statements to prepare the quality financial reports.

In this context, this report is prepared to present a critical evaluation of the effectiveness of a ASX listed entity to meet the obligations of conceptual framework of accounting. The ASX listed entity selected for the purpose is CYBG plc, a holding company established by National Australia Bank (NAB) in the year 2016. It owns Clydesdale, Yorkshire and the app-based bank within the UK and is involved in providing online and mobile banking services to about 3 million of customers around the world.

The bank has about 160 branches and 40 business banking centers located mostly within the UK. It is listed both on London Securities Exchange and Australian Securities Exchange. The report analyses the effectiveness of the corporations to meet the conceptual framework of accounting by analysis of its latest year financial report. The assessment of qualitative characteristics of conceptual framework and recognition criteria for different financial items such as assets and liabilities are analyzed with the help of extracting data from the financial report.

Critical Analysis of CYBG Company to meet the Objectives of Conceptual Framework

Assessment of Satisfaction of the Qualitative Characteristics of Conceptual Framework of Accounting

            The conceptual framework of accounting forms the basis of all the theories of accounting such as stakeholder, agency and other corporate governance theories. These theories require businesses to maximizes the welfare of stakeholders rather than emphasizing on satisfying their personal interest. The conceptual framework of accounting has laid to the development of accounting standards that organizations need to adopt and thereby complying effectively with all the accounting theories.

The general purpose financial report of CYBG Financial are prepared as per the IFRS adopted by the EU and in accordance with the Companies Act 2006. The financial information has been presented by the use of historic cost convention and the consolidated financial report complies with the IASB standards. The critical analysis of the financial report of the company reflects that it has prepared the financial report as per the qualitative characteristics of the conceptual framework (Macve, 2015).

            The company as per the relevance characteristics of the conceptual framework has presented financial information in a way so that it is capable of decision-making. It has developed and disclosed all the materialistic financial information by publishing the financial statements of profit and loss, balance sheet, income statement and cash flow statement. The relevant financial information is disclosed through the financial figures by the financial statements:

            It can be seen that financial information and data is also faithfully presented from the analysis of financial report of CYBG Plc. The necessary descriptions and explanations for providing an understanding of the financial transactions carried out is provided in the notes to financial statements section. The process used in the numerical depiction of the financial items is also provided in the notes section.

The information is adequately disclosed in the notes section for providing assistance to the end-users to take decisions (Conceptual Framework for Financial Reporting, 2018). The end-users can rely on the financial data presented in the financial reports for taking investment decisions as it is faithfully presented by making detailed disclosures in the financial reports. The constraints in achieving faithful presentation of information is overcome by acknowledging the amended standard. The notes section presents both quantitative and qualitative information for providing assistance to the end-users for taking investment decisions (CYBG: Annual report and Accounts, 2018).

            It has also been analyzed from the financial report of CYBG Financial that it also complies effectively with the enhancing qualitative characteristics of the conceptual framework. As per the comparability characteristics, the financial report of a company must enable users for identifying and understanding the similarities and differences among the financial items of two previous years (Brealey, Myers and Marcus, 2007). The financial report of CYBG has presented financial data as per the comparability characteristics by providing financial reports of two last years for facilitating timely comparison and assisting in taking effective decisions (CYBG: Annual report and Accounts, 2018). The financial position of two consecutive years is provided in the financial statements for assessing the percentage growth or decline in the financial results for the end-users as depicted below:

The company as per the verifiability qualitative characteristics of the conceptual framework has disclosed the underlying assumptions used at the time of developing the financial statements (Dick and Missonier-Pie, 2011). For example, the Group for determination of the required level of collective impairment provisions has adopted the use of different statistical models. The management make use of required adjustments at the time of assessment of the modelled outputs. As such, the actual amount of cash inflow can differ significantly based on the assumptions made at the time of determination of allowances made by the management as depicted below:

It also follows the timeliness characteristics of the financial information. This means that financial information must be made available to the end-users at regular interval of time for facilitating in their decision-making process. CYBG Financial disclose the financial results by publishing the annual report annually for ensuring that financial outcomes are disclosed to the end-uses in a timely manner. Also, the understandability characteristics of presenting financial information in clear and consistent manner is also followed by the company.

The financial information is presented in the financial reports in an understandable manner by providing explanation of the nature of accounting processes used for recording the financial figures of the key financial items. Therefore, it can be said that CYBG Financial has prepared and presented its financial report as per the qualitative characteristics of the conceptual framework. This is necessary to protect the interests of the end-users, that are, stakeholders, as per the agency theory (CYBG: Annual report and Accounts, 2018).  

The agency theory in accounting is developed for providing an explanation between the principals and agents in business. As per the theory, stakeholders are the principals and the company are agent and it has stated the rights and responsibilities of the principals and agent that are mutually agreed as per the employment contract. The company as an agent is responsible for maximizing the welfare of the stakeholders, the principals, as per the theory and therefore need to be presented with all the relevant information. CYBG Financial has presented with all the relevant information as per the conceptual accounting framework principals to maximize the interests of all the stakeholders (Jones, 2015).

Assessment of satisfaction of recognition criteria for reporting of financial items

            Conceptual framework has defined the objective of financial statements to provide relevant information about the assets, liabilities, equity, income and expenses to the end-users of the financial reports. Therefore, it is necessary for a company to provide information in relation to the recognition criteria used for reporting the value of key financial items. The methods, assumptions and judgements used for estimating the value of financial items must be disclosed by a corporation for complying with the conceptual accounting framework effectively (Burton, and Jermakowicz, 2015).

Fair Value Measurements

The company has adopted the use of fair value accounting method to record the value of short-term assets and liabilities. Fair value is regarded as carrying value that would be received by selling an asset or paid for transferring a liability on the date of settlement between the market participants (Stickney, 2009). In the case, when the value of financial assets or liabilities recorded on the balance sheet cannot be realized with the use of active markets then it is determined through the adoption of accounting estimates and judgements. It involves the use of a mathematical model and involves the inputs from the observable market data and judgment is required for establishing the fair values (Arnold, 2013). Sensitivity analysis is used for indicating the impact of changes on the fair value of assets and liabilities. (CYBG: Annual report and Accounts, 2018).

Interest income and expenses on hedged assets and liabilities and also on the financial assets and liabilities are measured at fair value through the profit or loss. The carrying value of a derivative instrument is also measured at fair value over the contract life. The derivatives are categorized as assets when the fair value is positive and liabilities when the value is negative.                     

Contingent Liabilities

All the provision of liabilities and other charges have been recognised there have some legal obligations due to occurrence of part events and it is expected that there will be some outflow of economic benefits in order to settle the obligations. On the above recognition it can be said that CYBG Plc has followed the accounting policies defined for the purpose of contingent liabilities (Brealey, Myers and Marcus, 2007).

Deferred tax assets and liabilities

According to the annual report, the deferred tax assets and liabilities have recognized on the basis of temporary differences that arises due to difference in tax base of assets and liabilities and carrying value of assets and liabilities in the consolidated financial statements. The main purpose to recognize the deferred tax assets to give impact to the unused tax losses and unused tax credits and it is shown in balance sheet only when it is probable that there will be future tax amount that be used to utilize these deferred tax assets.

On the basis of annual report, the deferred tax assets have been recognized for 154 million pounds because the value of defined benefit pension scheme has given some surplus that can be utilized for future period. According to accounting standard related to accounting of taxation (CYBG: Annual report and Accounts, 2018).  CYBG PLC have recognized the value of deferred tax assets which prove the compliance of relevant accounting standard. The one thing that is not properly done in the report is the disclosure part as there is lack disclosure which can little better and elaborated (Arnold, 2013).

Assessment of Directors’ Report

It has also been declared from the Director’s statement of declaration that financial statements have been applied in accordance with the relevant laws and regulations. It has been declared from the director’s report that financial statements are prepared as per the company law that requires the company to prepare the financial reports as per the International Financial Reporting Standards (IFRS) (Collings, 2012). The Directors have approved that the financial statements are provide true and fair view of the company financial position as per the IAS. The accounting policies and the changes in the accounting estimates are applied in a consistent manner. Also, the financial reports have provided adequate additional disclosures when complying with the specific requirements of IFRS.

This has been done to enable the users for gaining an in-depth understanding of the impact of financial transactions and other situations on the financial performance of the company. The Director’s have also maintained adequate accounting records for maintaining the transparency and explaining the accounting transactions carried out in the financial reports.

The remuneration report, corporate governance and risk management report are developed as per the standard laws and regulations. As per the view of company’s directors, the annual report has depicted a fair, balanced and understandable information that is required for assessing the financial position of a company. The company as per the companies Act have also developed audit report for ensuring that financial statements are materially correct and represent a faithful view of the financial position of a company (CYBG: Annual report and Accounts, 2018).

Conclusion

It can be stated from the overall discussion held in the report that CYBG Financial has complied with the conceptual framework of accounting objective and qualitative characteristics.  The company has effectively followed and adopted the conceptual accounting framework principles of relevance, faithful personation, comparability, understandability and timeliness in development of the financial statements. In addition to this, as per the objective of the accounting framework it has also mentioned the nature of accounting policies and estimates used in recognition of the financial items of assets, liabilities, income and expenses. The financial report has provided both qualitative and quantitative information for providing assistance to the end-users for making right investment decision.

References

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Burton, G. and Jermakowicz, E. 2015. International Financial Reporting Standards: A Framework-Based Perspective. Routledge.

Collings, S. 2012. IFRS For Dummies. John Wiley & Sons.

Conceptual Framework for Financial Reporting. 2018. 

CYBG: Annual report and Accounts. 2018. 

Dick, A. and Missonier-Pie, F. 2011. Financial Reporting under IFRS: A Topic Based Approach. John Wiley & Sons.

Jones, S. 2015. The Routledge Companion to Financial Accounting Theory. Routledge.

Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, or Threat? Routledge.

Stickney, C. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.