Accounting Standards and Methods
Discuss About The Accounting Changes Measurement And Mandated.
Accounting standards have been state with a view to show the true view of the financials of the company and male sure that there is no under or over valuation in it. Accounting methods refres to the different ways in which the company can calculate the given value of any item as per accounting terms. It is said that accounting standards aims to restrict the usage of too much accounting methods in order to protect the quality of conservatism. AASB has stated the importance of financial reporting and maintaining the best quality in that, they have provided definitions with relation to prudence and conservatism both which people can follow to get a clear idea on this statements as per the accounting standards board. As per them if there is too much application of the accounting standards it might end up reducing the quality of the work provided and areas that are prone to risk will not be highlighted effectively. As per the given statement and based on the overall knowledge it can be said that this statement is correct in a way that too much usage of accounting methods and policies can destroy the way the basic qualitative characteristics of the financial report (Abbott & Kantor, 2017). Accountants will always be eager to apply some or the other methods to reduce the overall risk areas and provide a statement of best results for the company. But this will lead to less understanding on part of the user who will not be able to see the real picture of the financials of the company and end up believing on the tailored statements that are provided to them. This is as per the accounting policies and therefore it cannot be challenged to be reducing the effect of accounting and causing any kind of fraud. Thus, as per my opinion it can be said that this comment about accounting standards regulating the usage of accounting policies to show the true view of the company and to conserve its overall quality is correct and palpable and there is no harm in following this as this will ultimately help in improving the quality of audit and providing the people the true scenario of the company affairs.Analysis
The concept of conservatism refers to the policy of recognizing expenses and losses as soon as there is a uncertainty or their occurring but in case of assets and income it should be recognized only when the company is sure of them occurring. This refers to the concept of prudence which refers to the concept of not over evaluating anything that might users an idea that the company is performing goo when everything is in contingent. It aims to understate the revenue but in case of losses if there is any chance of them occurring it should be stated in the financial statements. This is known as the concept of conservatism that is followed by the companies and which aims to improve the quality of the financial statements by this method (Maynard, 2017).
The Concept of Conservatism and Prudence
The major advantages of applying conservatism in the financial statements is that it gives the users a clear picture of what the company is performing. The company in no ways can overstate its financial since they expect that this might occur in future and thus that will lead to correct valuation on part of the investors of the company (YUAN, 2018). It also helps in maintaining the overall quality of financial reporting and helps in protecting the investors from feeling bait to such statements in the financials of the company. It helps the accountants in preparing the financials of the company to the best of their ability and make sure that there is no errors in their accounting methods applied. It restricts the use of too much of accounting scenarios which may hamper the overall quality of the audit being conducted in the long run (Alexander, 2016).
But there are certain disadvantages also that is associated with such kind of concept. It aims to recognize the expenses and losses even if it is not sure that it will happen in future, thus in a way it is hampering the quality of the audit conducted as users will believe looking at these losses that the company is not performing well, even though the loss has still not occurred. The other important point to be noted is that it will restrict the freedom of the accountants as they will not be applying their own judgements and would need to provide the statements as per the policies. There may be certain risk areas which might be camouflaged due to this policy of the company in many ways. There is a biasness involved with recognition of assets and income in comparison to losses and expenses which cannot be ignored when doing an extensive analyses of the said standards and how these can be applied in terms of companies that are aiming to provide returns to the investors in the long run (Gray, 2018).
Two examples of conservatism in the annual reports of the company that have been selected. In the given assignment the selected Company is Caltex Limited which is one of the largest public company I Australia. It is one of the leading fuel supplier in the country and has expanded to many other countries as well. Two examples are stated below from the annual report of the given company-
Credit Risk are being recognized even though there is no hundred percent surety that this will occur in the future. It is a loss that would occur if the counterparty fails to function as per the set contract. The credit risk has been recognized on the balance sheet of the company covers the carrying amount of the debtor’s net of the impairment allowance. The company aims to reduce the chances of credit risk by undertaking transaction with millions of people, so we see that the policy of conservatism is applied in this case as the management is following a policy of recognizing the losses even though there is no certain that such loss will ultimately occur(Boghossian, 2017).
Advantages of Applying Conservatism in Financial Statements
Several contingent liabilities have been recognized with a view that the company s not sure how much payment will be made in all such cases and hence the company has put all of this under contingent liabilities, where there is a chance of cash outflow in the future. This covers items like legal claims, bank guarantees, cross deed and class order relief etc. So, we see that the concept of conservatism is followed as all the elements of contingent loss has been recognized but contingent assets have not be stated. Thus, the company is only recording the liability and not the assets(Chariri, 2017).
Based on the above discussion it can be said that the concept of prudence can be of great importance to the company and the investors. From view point of investors, it is better as they will be aware of the potential losses that can occur, possible areas that are more risk friendly and based on that they can take decisions regarding the overall operation related to the company. They can decide whether they want to invest in the company or not seeing that there are so many areas in which the company can suffer loss in the future. Like we see over here in case of Caltex Limited the investors are aware that the company can suffer loss with respect to credit loss, and there are so much cash outflow that can occur based on the legal proceedings against the company. Hence based on all these details they can decide whether they want to put their money in the company or not and if in any case there are assets recognized which are contingent and there are no chances that cash inflow will happen ultimately and investors put their resilience on that and invest in the company. In that case also the investors will face loss. Thus we see as a concept prudence is good as it helps the investors in planning their overall approach related to the concept they can decide based on the contingencies whether they want to invest in the company or not.
Abbott, M. & Kantor, A., 2017. Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.
Chariri, A., 2017. FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).
Gray, D., 2018. 'Extraordinary turnaround': Big miners pushing ASX towards 10-year high. The Sydney Morning Herald.
Maynard, J., 2017. Financial accounting reporting and analysis. second ed. United Kingdom: Oxford University Press.
YUAN, T., 2018. The Prospect for RMB Becoming One of the Two Center Currencies of the Dual-Center Global Financial System. The Dual-Center Global Financial System, Issue 1, pp. 83-91.
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