Essay On Qualitative Characteristics Of Financial Information And Disclosures Of Property, Plant And Equipment: Qantas Airways Case Study.

As a new accounting graduate, you have just joined the financial reporting unit of a listed company* when your manager, the Chief Financial Officer (CFO), approaches you with your first task.

In their last meeting, the Board of Directors of your company discussed the importance of ensuring that their financial reports meet the objective of general purpose financial reporting and qualitative characteristics of useful financial information as outlined in the IASB September 2010 ‘Conceptual Framework for Financial Reporting’ (CF). Board members are concerned about the company's reputational standing in the market relating to deviations from these objective and qualitative characteristics, specifically in Property, Plant and Equipment (PPE).

Therefore, the Board decided to have a review of the relevant disclosures in the company's latest annual report pertaining to PPE and whether these disclosures are aligned with the CF's objective and qualitative characteristics.    

Based on the Board's decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following:

1. Explain in your own words the objective of general purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting (covering OB1-OB21 and QC1-QC39)
   
   
2. Critically analyse to what extent the latest annual report of your company meets the disclosure requirements for PPE as per AASB 116.
   
   
3. Based on your findings in part b, critically analyse to what extent the disclosures on PPE satisfy the fundamentaland at least one of the enhancing qualitative characteristics of useful financial information.
   
   
4. Based on your findings in part c, critically discuss to what extent the disclosures on PPE align with the objectiveof general purpose financial reporting and, as a conclusion, recommend actions for improvement.

You need to choose a suitable company by yourself from
: http://www.marketindex.com.au/asx200

1. is constituent of the S&P/ASX 200 index;
2. published audited annual reports for the year ended 30 June 2016in English, fully complying with IAS/IFRS or AASB; and

Objectives of general purpose financial reporting

The present report is prepared in order to provide an understanding of the qualitative characteristics of the financial information for making it useful for the end-users. The financial reports developed by business corporations should meet the objectives of general purpose financial reports as stated by the IASB (International Accounting Standards Board). This report aims to present an understanding of the financial reporting disclosures and the qualitative characteristics that financial information should possess. It is carried out through evaluating the financial disclosures of an ASX listed firm, that is, Qantas Airways, a major national carrier airline of Australia. The report has been developed on the basis of views of an accounting graduate who has been assigned the responsibility of reviewing the qualitative characteristics of financial reports of the company particularly in regard to Property, Plant and Equipment.

The objectives of general purpose financial reporting as stated as IASB can be stated as follows:

• To disclose necessary financial information of a business entity to its present and future users such as investors, lenders and creditors
• To support the decision-making process of present and future investors regarding their purchasing, selling or holding the securities of the reporting entity through providing them information regarding the present and future cash flows
• To provide an assessment regarding the use of an entity resources efficiently and effectively by the management
• The general purpose financial reports must be directed to the primary users such as investors, creditors and lenders
• The general purpose financial reports doesn’t provide all the necessary information to the end-users and thus they need to gain the information obtained from other sources such as economic environment, political sources and industry performance
• The financial reports developed by a reporting entity do not intend to provide the real value of a firm but only provide estimate of its value
• The reporting entities through their financial disclosure intends to satisfy the needs of maximum of its primary users
• The management of business entities can also rely on the information obtained from the internal financial reports besides external financial reports
• The financial information disclosed must be able to provide an analysis of its strength and weakness through stating its economic resources and claims
• The business entities should use the accrual accounting for depicting the effects of transactions on the economic resources in the period of their occurrence. This is to be done even if the payments are made in future financial years.

The general objectives of the financial reporting have laid the foundation of development of qualitative characteristics of conceptual accounting framework. The main fundamental qualitative characteristics of financial information are relevance and faithful presentation as stated by IASB in its conceptual accounting framework. The relevance principle states that financial information in order to be useful for the end-users should be able to make a change in their investment related decisions (Alexander, Britton and Jorissen, 2007). The faithful depiction of financial information holds it to be complete in all aspects and should be free from any biasness and error. In addition to this, there are enhancing qualitative characteristics that a financial information should possess as per the principle of conceptual accounting framework. These include comparability, understandability, verifiability and timeliness. As per the comparability characteristics, the financial information disclosed must be able to provide a comparative analysis of increase or decrease in the financial performance as compared over the past years. The financial information must be presented in simple and easy format as per the understandability principle. The verifiability characteristics state that financial information should accurately present the economic phenomena it intends to present. Timeliness means that financial information disclosed should not be old to influence the decision-making process of users (Conceptual Framework, 2010).

The Australian Accounting Standards Board (AASB) has developed the AASB 116 standard in order to comply with the IASB standards for disclosures of property, plant and equipment (PPE). The AASB 116 has incorporated the amendments done by IASB in its IAS 16 standard for measuring the value of PPE. The standard is developed with the objective of providing guidance to the business entities operating in Australia regarding the treatment of property, plant and equipments. The standard provides the necessary information to the end-users regarding the investment done by an entity in relation to PPE. The standard has provided the guidelines relating to principal issues in accounting for PPE such as recognition of assets, estimating their carrying amounts and the significant deprecation and loss arising from impairment of assets. The annual report of Qantas Airways has disclosed that the airline measure its items of property, plant and equipment on cost basis through deduction of significant losses arising from deprecation and impairment (Compiled AASB Standard: AASB 116, 2015).

Conceptual Framework for Financial Reporting

The value of PPE is initially measured through historical cost basis and subsequently recorded through the use of fair value accounting during preparation of consolidated financial statements.  The depreciation on the long-term assets of the company is calculated through the use of straight-line basis with the exception of land that is not subject for depreciation. The cost of acquired assets also includes cost of dismantling or restoring the site of location of the assets. The company capitalizes the expenses related to the items of PPE in the income statements only if it is estimated that the economic gains will be realized from the assets. The depreciation is calculated on the assets from the date of their acquiring till the time it is available for use (Qantas Annual Report 2016, 2016). The company have also disclosed the asset depreciation periods of its principal assets and the predicted percentage of the residual value illustrated as:

Source: https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf

Thus, it can be said that Qantas has effectively comply with the AASB 116 standard requirements through providing all the required information in relation to its property, plant and equipment.

The disclosures made by Qantas Airways in relation to PPE effectively comply with the AASB 116 standard requirements. Thus, it can be said that the company financial information in relation to PPE satisfy the qualitative characteristics of financial reporting. The company in relation to relevance qualitative characteristics of conceptual accounting framework incorporates the use of both historical and fair value accounting in estimating the carrying value of items of PPE.  The useful and residual values of the assets are reviewed annually by the company in order to identify the impact of market fluctuations on the useful and residual values of assets. This is done by the company so that existing and potential users gain information regarding the value of property, plant and equipment as per the current market situations (Qantas Annual Report 2016, 2016). In addition to this, the company in accordance with the relevance principle has disclosed all the information regarding the recognition and measurement, subsequent expenditure, depreciation and the cost incurred on maintenance of assets. The financial information provided by the company in relation to items of property, plant and equipment is also disclosed in a simple and easy format as per the enhancing qualitative characteristic of understandability of conceptual accounting framework (Albrecht, Stice, Stice and Swain, 2007). The notes to financial statements section of the annual report of Qantas has sufficiently disclosed the financial procedures adopted for measuring the long-term assets of property, plant and equipment . The use of fair value method for measuring the items of PPE by the company are classified as held for sale under the fair value hierarchy technique in the notes to accounts. The fair value less cost to sell for individual assets of PPE is determined in reference to recent sale transaction as per the AASB 13 standard (AASB 13: Fair Value Measurement, 2013). The Qantas Airways notes to accounts adequately satisfy the relevance and understandability qualitative characteristics of conceptual accounting framework:

Source: https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf

The general purpose financial reports aims to meet the needs and expectations of its maximum end-users related to investment decisions. The Qantas Airways through disclosing the financial information related to measurement of its long-term assets of property, plant and equipment as per the AASB 116 standard has met the objective of general purpose financial reporting (Qantas Annual Report 2016, 2016). The company has disclosed complete and relevant information through providing the accounting treatment for property, plant and equipment. This is essential so financial statements users can develop an in-depth understanding about the investment made in PPE. The information disclosed is required by the end-users to make decisions regarding the holding, selling or buying the equity of the company. However, the company is recommended to incorporate the use of double declining deprecation method in comparison to straight-line basis for effective matching of its cost items to expenses in the income statement (Warren, Reeve and Duchac, 2015).

Conclusion

Thus, it can be stated from the overall analysis of annual disclosure made by Qantas in relation to PPE that business corporations need meet the requirements of qualitative characteristics of conceptual accounting framework. This helps them in turn to achieve the general objective of developing financial reports.

References

AASB 13. 2015. Fair Value Measurement. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed on: 4 September 2017].

Albrecht, W., Stice, J., Stice, E and Swain, M. 2007. Accounting: Concepts and Applications. Cengage Learning.

Alexander, D., Britton, A. and Jorissen, A. 2007. International Financial Reporting and Analysis. Cengage Learning EMEA.

Compiled AASB Standard: AASB 116. 2015. Property, Plant and Equipment.

Conceptual Framework. 2010. The Conceptual Framework for Financial Reporting.

Qantas Annual Report 2016. 2016. [Online]. Available at: https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf [Accessed on: 4 September 2017].

Warren, C., Reeve, J. and Duchac, J. 2015. Accounting. Cengage Learning.