Discuss the characteristics which should be present in a financial statement which are both fundamental qualitative characteristics and enhancing qualitative characteristics which forms a part of the conceptual framework.
Conceptual Framework and Its Role in Financial Reporting
Conceptual Framework may be defined as the general framework which is used by businesses for the purpose of reporting of financial information in the business. The conceptual frameworks are used by business for the purpose of developing and preparing annual reports of the company (Macve, 2015). With the help of an effective conceptual framework numerous business problems can be solved and the same can result better management of the business. Therefore, the role of conceptual framework is important in bring about consistency and accountability in the reporting process for financial information.
The report will be concentrating on the characteristics which should be present in a financial statement which are both fundamental qualitative characteristics and enhancing qualitative characteristics which forms a part of the conceptual framework. In this assessment, Retail Food Group Ltd is taken as the company which will be analyzed. Retail Food Group Ltd is an Australian Multinational Company which is engaged in running of numerous businesses which provides food products to the customers (Retail Food Group., 2018).
The role of conceptual framework in a business is evident from preparation of the financial statements which are prepared by the business. As per the requirement of the conceptual framework, the management of the Retail Food Group Ltd has effectively prepared the financial statements of the business following all relevant provisions of Australian Accounting Standard Board (AASB) and Corporate Act 2001.
In addition to this, the annual reports of the business is prepared after adhering to the provisions which are applicable in International Accounting Standard Board (IASB) and International Financial Reporting (IFRS) Framework (Baker and Burlaud, 2015). The objectives of conceptual framework are specific and the same needs to be satisfied by the Retail Food Group Ltd while preparing the annual reports of the business. The objectives are stated below in details:
- One of the main objectives of Conceptual framework which is followed by businesses is to be accountability of every business to provide useful and valuable information to the users of the financial statements (Zhang and Andrew, 2014). As per the financial reports which are prepared by the business for the year all crucial information regarding important treatments, complex transactions and appropriate notes to accounts are shown in the annual reports of the business (Weil, Schipper and Francis, 2013). The financial statements of any business mainly comprise of income statement, balance sheet and cash flow statement and all these statements are shown in the annual reports of Retail Food Group Ltd.
- Another objective which is associated with the conceptual framework for preparing a financial statement is to supply the users with all necessary information in a timely manner and also provide information which are related to uncertainties which might be present in the cash flow statement of the business (Lawson et al. 2013). In the case Retail Food Group ltd, the cash flow statement is showing a clear view of the cash inflows and outflows of the business depicting all the items and uncertainties if any present in the annual report of the business. An extract of the cash flow statement is shown below:
The cash flow statement which is prepared by the business for the year 2017 is shown above which represents all the cash flows of the business and also depicts the major sources of funds and major expenses which lead to cash outflow of the business.
- Th third important objective of the conceptual framework is to reveal to the users of the financial statements all the crucial information of the businesses such as what activities are undertaken by the business, how much funds are invested in the business, what are major expenses which the business needs to incur. The profit and loss statement which is prepared by the business for the year 2017 shows all relevant income and expenses which are undertaken by the management during the period. Therefore, it can be said that the annual report of the business reveals all relevant information and therefore the business of Retail Food Group Ltd is in compliance.
The recognition criteria of conceptual framework refer to the important items which are to be recognized and represented in the financial statement of the business and these are to be mandatorily recognized in the annual reports of the business. The items which are to be recognized in the financial statements are income, expenses, assets and liabilities of the business. The items should be fairly represented and should be showing true view of the financial situation of the business (Barth, 2013). The significant items which are recognized in the financial statements of the company are listed below:
- Assets: The assets of the business are used by businesses to earn revenues and profits for the business. The balance sheet of the company shows property, plant and equipment, intangible assets and other significant current assets of the business which are cash, debtors, inventories and the same are fairly represented. The depreciation and impairment amount which are incurred on the assets are also shown in the financial statements of the business. Therefore, the assets section of the annual reports are fairly represented as per the recognition criteria of the business.
- Liabilities: The liabilities of the business are also shown in the balance sheet which is prepared for the year 2017. The liabilities comprise of provisions, borrowings and other current liabilities of the business. In addition to this, proper notes are maintained in the annual reports of the business (Müller, 2014).
- Equity: The equity of the business represents the capital fund which is available for the managing the day to day finance requirements of the business. The equity sections of the business shows issued capital, reserves and retained earnings of the business.
- Revenues: The revenues of the business are shown in the profit and loss statements of the business. The main source of revenue for the business is sales of inventories from different business sources of Retail Food Group Ltd.
- Expenses: The expenses of the Retail Food Group Ltd are shown in the profit and loss of the company for the year 2017. The major expenses of the business are cost of sales and other operating expenses which are shown in the profit and loss statement of the business.
Analysis of Retail Food Group Ltd's Financial Statements
Thus, on the basis of the discussion of the various aspects which are shown in the financial statements of the business, it is evident that the business has effectively followed all the relevant provisions which are associated with the recognition criteria of a financial statement.
The qualitative characteristics which should be present in a financial statement to be effective are shown below in details:
- Relevance: This feature states that the financial statements should contain relevant information which are present in the annual reports of the business as to ensure that annual report of the business are presented in a fair manner (Khan, 2015). The management of Retail Food Group Ltd has effectively followed all the relevant accounting standards, policies and practices which are necessary for preparing the financial statements of the company.
- Faithful Representation: This principle states that the annual report should be showing financial information in a fair manner and the same should be transparently displayed by the management. As per the audit report of PwC, the financial statements of the business are showing correct view and therefore the same proves that the data which is displayed in the annual reports of the business are faithfully represented.
- Comparability: This principle recognizes that financial statements which are prepared by the company should be such that financial information are comparable from one year to another and also with financial information of other businesses (Kim, Kraft and Ryan, 2013). The financial statement of Retail Food Group Ltd contains notes to accounts and various graphs and presentations which help in comparability of the financial information.
- Verifiability: This principle states that the financial information which is shown in annual reports of Retail Food Group Ltd must be capable of being verified by the users of financial statements (Kim et al. 2016). The business has also provided proper notes to financial statements in the annual reports of the business.
- Timeliness: This shows that the financial statements of the business should be prepared and published in a timely manner. The financial reports which are prepared by the business are shown on yearly basis (Cascino et al. 2014). And interim reports are prepared by the business on quarterly basis.
- Understandability: The financial statements of the business should be such that the same are understandable and simple for the users to understand. The annual reports of Retail Food Group ltd is shown in a precise format and the same contains appropriate notes and the same is understandable for the users.
As per the discussion above, the financial statement which is prepared by the management of Retail Food Group Ltd follows all relevant accounting standards which are as per AASB and the corporation Act 2001. In addition to this, the business follows IFRS and IASB framework for the purpose of preparation and presentation of financial statements of the business. The business also follows recognition criteria for all expenses, incomes, assets and liabilities of the business which adds more creditability to the annual reports which is prepared by the business.
The business follows all relevant rules and regulations with relation to tax, depreciation and other regulations as well. The conceptual framework of the business should be followed effectively for ensuring all relevant information are shown in the annual reports of the business.
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