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Question:

Discuss about the Conceptual Framework of accounting and application of accounting standards in real life annual reports of the Companies.
 
 

Answer:

Introduction

Wesfarmers limited is a public company and belongs to the conglomerate industry. It is having its headquarters in Perth, Western Australia. The company is serving various areas such as Australia, Bangladesh, Ireland, New Zealand and United Kingdom. The company is basically dealing in chemicals, mining of coal, fertilizers and other products related to safety. It was founded in the year 1914. The key people engaged in operations of the company are Michael Chaney and Richard Goyder.  The company is the largest employer in Australia and is employing around 220000 employees in its company. It is also having various subsidiaries such as Bunnings Warehouse, Coles supermarkets etc. This report is basically being prepared in order to analyze the impact of IFRS on the financial statements and also the impact of IFRS on the qualitative characteristics of financial statements.

Detailed research

The important qualitative characteristics of financial reporting are as follows:

  • Understandability: The financial report should be prepared in a manner that it is understandable thus they should possess basic understanding level hence the financial statements should have proper explanations in regard to each and every aspect.
  • Reliability: The financial report should be prepared in a manner that it does not possess any kind of error and is not having biasness. Thus the report should be complete in each and every aspect.
  • Relevance: The financial report should be prepared in a manner that it is providing relevant information so that the users are able to take proper decision making. The financial reports should give information in regard to financial position of the company and also help in predicting the financial position of the company. (Hasaan Fazal, 2011)
  • Comparability: The information contained in the financial report should be comparable and thus the financial information should be able to be compared over time and also with other companies of same nature. The financial statements will be said to be comparable if they are being prepared as per the international accounting standards.
  • Verifiability: This characteristic requires that the information presented in the financial statements is being faithfully represented from the sources and that the users of the financial statements can easily take upon the consensus on the basis of the information.
  • Timeliness: This characteristic assures that the information should be timely available to the users of the financial statements and thus the information should be able to effect and influence the decision making of the users of the financial statements.

As per the article, the international accounting standards are rendered unusable from the point of view of the investors. The international financial reporting standards lead to misinterpretation of accounts as the reporting standards require a lot of professional training and the lack of knowledge may lead to misleading results from the financial reports. Some of the international financial reporting standards are not consistent with the accounting aspects and still the professionals and accountants are still using them. The members of the board are constantly using them as they feel there is no substitute for the international financial reporting standards. (Gjerde, O., Knivsfla, K., & Saettem, F. 2008)

 


There are various negative issues that are connected with the implementation of the international financial reporting standards:

  • The results of the evaluation of the results of the company who have adopted the international financial reporting standards shows that the quality of the earnings that are using IFRS is not high as the IFRS concentrate on low levels of income and high levels of loss recognition which leads to lower levels of income and the low quality of earnings.
  • The CEO and directors believe that the adoption of the IFRS had led to the uncertainty in the tax positions in the company.
  • The directors have also provided that the results of the adoption of the international financial reporting standards are not in consistency with the basic accounting concepts and had also led to ineffective results.
  • The correct implementation of the international reporting financial standards requires high level of professional knowledge and thus the lack of knowledge may lead to misleading results and hence the misinterpretation of results.

Effect of the IFRS on the annual report of Wesfarmers

The areas which have been benefited by the application of IFRS and thus the qualitative and enhancing qualitative characteristics are present are as follows:

  • The revenues are depicting the clear picture of the financial position of the company as the revenue is being correctly measured on the basis of the fair value of the consideration which is to be received and it is only recognized in the books when the criteria specified for the purpose of recognition are being satisfied.
  • The employee benefit expense and the expenses related to occupancy are being correctly recorded in the books of accounts and are thus enhancing the qualitative characteristics of information and providing relevant and reliable information in regard to different type of expenses. (Paola Zanella, 2014)
  • The cash and cash equivalent had been correctly shown in the books in accordance with the international reporting financial standards and is correctly providing all the qualitative characteristics of the financial information and the users are able to easily and effectively take decisions accordingly.
  • The property, plant and equipment have been correctly shown in the books of accounts and they have been accordingly recognized and depreciation had been carried on them in accordance with the rules of IFRS. Hence the enhancing qualitative characteristics have been fulfilled in this attribute of financial statements. The users are thus able to take decisions in regard to financial position of the company on the basis of the balance of the property, plant and equipment.
  • The capital, equity and reserves correctly fulfill the qualitative characteristics of the financial information. The inclusions in the reserves and capital have been made in accordance with the guidelines issued in regard to IFRS disclosures and hence it is depicting clear picture of the financial position of the company and will help the investors in accordingly planning their investment. (Paola Zanella, 2014)

The areas which show that IFRS had not satisfied the qualitative characteristics of the financial information are as follows:

  • IFRS had not satisfied all the qualitative characteristics and it is not providing reliable and relevant information in regard to the recognition and measurement of the tax liabilities. It is creating various type of uncertainty in regard to recognition of the tax expense in the books of accounts. The current taxes and deferred taxes is not providing clear picture in regard to the overall tax issues of the company.
  • The receivables does not provide clear information and the recognition of the net realizable value requires various judgments to be made by the management which requires professional knowledge and thus the lack of knowledge may lead to misleading results and various misrepresentations. Hence it is not satisfying the qualitative characteristics of the financial information.
  • The qualitative characteristics does not exist in the field of recognition and measurement of goodwill and intangible assets as the key judgments are required for the purpose of deciding the useful life of the intangible assets and hence calculating the amount of amortization each and every year. Thus the inappropriate assumption by the management in the field of intangible asset may lead to inappropriate financial statements and thus the misinterpretation.
  • The provisions are also being recognized on the basis of the estimate hence they are not satisfying the qualitative characteristics of the financial information. As the estimates are being prepare on the basis of discounting the future cash flows. Thus the provisions requires deep knowledge and care in order to prepare the correct and appropriate estimates thus it may lead to improper financial results and information in the hands of the users of the financial statements.
  • The analysis of the annual report of Wesfarmers limited show that reconciliation statement which is being prepared in regard to adjustments of earnings does not provide any new information.
  • The analysis also provides that the adjustments which are done in regard to changes in the amount of provisions and intangibles had not been correctly provided and disclosed in the books of account.
  • The financial statements are prepared in a complex manner which is revealed as per the annual report of Wesfarmers limited. Hence the investors are not able to effectively evaluate the results shown by the annual reports. (John R. McGowan, 2009)
 


The other problems that have been found during the analysis of the annual report of the Wesfarmers limited are as under:

  • The organizational structure of the company is suffering from inefficiency and thus the productivity of the management towards the organizational objectives is decreasing and this may adversely affect the financial position and growth of the company.
  • The management of the company had not been changed from past many years which shows that the management is not using new and innovative ways of operations and thus the operations are being carried out in a manner which is comfortable for the existing management system hence the changes are not being done in the organization.
  • The organizational structure of the company had led to conflicts amongst the various departmental managers and one manager is trying to focus its own motive at the cost of other departments and thus the level of loyalty amongst the departments is very less.
  • There is lack of effective communication in the organizational structure which may lead to increase in errors and thus the level of errors may lead to manipulation and frauds in the data.
  • The different departments are focusing their own goals and are not concentrating on achieving the overall goals of the organization due to lack of effective organizational structure.
  • The divisions of the company are not working effectively as they are undertaking competition amongst the departments which leads to reduction in the overall productivity of the organization. (Becis, T., Ng, C. & Roca, E. 2006)

Literature review on impact of IFRS on financial statements of the company

  • Katerina Struharova, Karel steker, Milana Otrusinova (2011) : This literature review indicates the shifting of the preparation of the financial statements as per the IFRS.
  • Naseem Ahmad and Professor Nawab Ali Khan (2010): This literature review indicates that companies should concentrate on adopting financial statements in the coming years.
  • Amanda Paul and Eddy Burks (2009): This literature review provides that financial statements should be prepared as per international financial reporting standards.
  • Joanna Yeoh, Kimberley Crook (2008): This literature review indicates that international reporting financial standards will be used in order to achieve long term goals.
  • Michel Blanchette (2007): This literature review provides that IFRS is a evolution in the economy.
 

Impact of IFRS on financial statements

The IFRS is having different impacts which include both the positive and negative impacts on the financial statements of the company which are as follows:

  • The proper utilization of IFRS in the financial statements of the company will improve the level of relevance of the accounting reports prepared by the company.
  • It provides that the effective utilization will help in promoting comparability in the company by using the standard and practices which are also used by the peers.
  • The other positive outcome that will arise by way of effective implementation of the international reporting financial standards is that it will be very beneficial for the investors as it will provide high level of accuracy in the field of forecasts being prepared in regard to the company.
  • The managers are bound to work in accordance with the prescribed standards and ensure that they are being prepared in accordance with the appropriate international financial reporting standards.

The above analysis had shown that IFRS is having different negative impacts on the society and investors but it depends on the perception of the investors and it can be beneficial in the following ways in the following manner:

  • The investors thus need to properly read and observe the financial statements that are being prepared in accordance with the international reporting financial standards.
  • The problem of alternative measures in regard to profit had been developed in order to avoid the criticism of the IFRS.
  • There is complexity in the evaluation of the financial statements prepared in accordance with the international reporting financial standards but the complexity can be solved by gathering proper information in regard to the preparation of the statements as per the international financial reporting standards.
  • The statements prepared as per the IFRS will help in delivering the expected benefits by using proper steps in regard to audit and regulatory measures.
 

Conclusions

Wesfarmers had used international reporting financial standards in the preparation of the financial statements and the annual report that is being issued to different interested users of the company. The company is facing various kinds of negative issues after implementation of the international financial reporting standards in the preparation of the financial statements of the company. The company is getting various issues due to problem of provisions, earnings and amounts of impairment on the intangible assets.

Thus I agree that the issues raised by CEO are genuine and the implementation of IFRS in the financial statements of the company may lead to problem of misrepresentation of the position of the company. But the company can come out of the adverse issues connected with the implementation of IFRS by influencing the investors to properly read the financial statements. The investors should be given information that the financial statements prepared by the company are adequate. The financial statements will be having the competitive advantage if they are prepared after proper guidance in regard to the preparation of the financial statements. The complexity in the financial statements prepared as per IFRS can be easily solved by properly y examined understanding the concepts related to IASB conceptual framework. IFRS requires use of the judgment by various managers in regard to the accounting concepts. The judgments and accounting estimates should be clearly disclosed in the financial statements of the company so that the investors are having clear and complete information in regard to preparation of the financial statements of the company. Thus they will be able to understand the statements in an effective manner. The rules specified in regard to the requirements of IFRS should be proper examined so that there is no misunderstanding in relation to interpretation and it will not lead to misleading results.

Thus the contention of CEO was correct while evaluating the results of implementation of IFRS. Hence IFRS needs to be very carefully used in the preparation of the financial statements as they require a code of conduct and training needs to be given to the employees, managers and investors so as to achieve successful results. Wesfarmers limited will also be able toa chive desired results on overcoming the negative issues.

 

References:

  1. Hasaan Fazal, 2011, “What are the important Qualitative characteristics of Financial Statements?”; Available at: https://pakaccountants.com/qualitative-characteristics-financial-statements/
  2. Isabel Maria, Manuel Emílio, 2014, “Main Consequences of IFRS Adoption: Analysis of Existing Literature and Suggestions for Further Research”; Available at: https://www.scielo.br/pdf/rcf/2015nahead/1519-7077-rcf-201500090.pdf
  3. MAFK International, 2013, “How IFRS effects your business”; Available at: https://mafkinternational.com/2013/07/25/how-ifrs-effects-your-business/
  4. Paola Zanella, 2014, “The Negative Effects of International Financial Reporting Standards”; Available at: https://www.knowledge.unibocconi.eu/notizia.php?idArt=13916
  5. https://www.ox.ac.uk/research/research-impact/revealing-hidden-impact-international-financial-reporting-standards-ifrs-0
  6. University of Oxford, 20xx, “Revealing the hidden impact of International Financial Reporting Standards (IFRS)”; Available at: https://www.thetaxadviser.com/issues/2009/dec/theeffectofifrsimplementationontax.html
  7. John R. McGowan, 2009, “The Effect of IFRS Implementation on Tax”; Available at: https://www.iasplus.com/en/standards/other/framework
  8. 2005, “The IASB conceptual framework – An Introduction”; Available at: https://www.accountingweb.co.uk/business/financial-reporting/the-iasb-conceptual-framework-an-introduction
  9. Sofie Van Der Meulen, Ann Gaeremynck, Marleen Willekens (2006) The Influence of Specific Accounting Differences on the Choice Between IFRS or US GAAP,- (Journal of Business Finance & Accounting, Vol. 33, No. 3-4, pp. 329-373, April 2006)
  10. Philip D Palmer(2008) ? Disclosure of the impacts of adopting Australian equivalents of International Financial Reporting Standards?. Accounting and Finance. Clayton: Dec 2008. Vol. 48, Iss. 5; pg. 847
  11. NEVIUS, A. M. (June, 2008). How Will IFRS Affect Tax Practitioners? Journal of Accountancy
  12. Marie Lambert, Georges Hübner, Pierre-Armand Michel, Henri Olivier (2006) The Impact of International Financial Reporting Standards on Market Microstructure in Europe, - (The International Journal of Accounting 34 (1): 121-131).
  13. Cheney, B. G. (november 2007). If IFRS Offer the Answer,They Sure Raise a Lot of Questions. financial executive , 21-23
  14. Nicolas Pawsey, 2016, “The Impact of IFRS adoption in Australia: evidence from acedmic research”; Available at: https://apo.org.au/node/69547
  15. Gjerde, O., Knivsfla, K., & Saettem, F. (2008). The value-relevance of adopting IFRS: Evidence from 145 NGAAP restatements. Journal of International Accounting, Auditing and Taxation, 17(2), 92-112.
  16. Vishnani S., and Shah B. K.,2008, Value relevance of published financial statements- With special Emphasis on Impact of cash flow reporting”, International Research Journal of Finance and Economics, 17, 84-90
  17. John A. Goodwin, Kamran Ahmed, Richard A. Heaney, 2008, “The Effects of International Financial Reporting Standards on the Accounts and Accounting Quality of Australian Firms: A Retrospective Study”, Available at: https://www.researchgate.net/publication/222404616_The_Effects_of_International_Financial_Reporting_Standards_on_the_Accounts_and_Accounting_Quality_of_Australian_Firms_A_Retrospective_Study
  18. Kamran Ahmed, Manzurul Alam, 2012, “The effect of IFRS adoption on the Financial Reports of Local Government Entities”; Australasian Accounting, Business and Finance Journal, Volume 6, Issue 3; Available at: https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1370&context=aabfj
  19. Australian Accounting Standards Board (AASB), 2004,‘First-time adoption of Australian equivalents to international financial reporting standards. AASB 1.’ In: CA Financial Reporting Handbook 2005, Wiley, Queensland, pp.47-96
  20. Becis, T., Ng, C. & Roca, E. 2006, ‘The impact of the adoption of the Australian International Financial Reporting Standards on profits and equity of Australian companies’, unpublished paper, Griffith University
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