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Write a report which focus on the conceptual framework requirement and whether it is properly followed by fashion jewellery retailer Lovisa Holdings Limited.

Recognition Criteria of Assets, Liabilities, Incomes, Expenses, and Equity

Lovisa Holdings Limited operates its business as the retailer of fashion jewellery. It develops, designs, merchandises and sources fashion jewelleries and accessories under the name of Lovisa brand for the females those are conscious regarding fashions and aged between 25 and 45. The company operates its business all over New Zealand, Australia, Malaysia, United Kingdom, South Africa and Singapore. Further, it has franchised stores in UAE, Kuwait, Bahrain, Oman and Saudi Arabia (Lovisa, 2018). The report will depict whether the company is following the framework of corporate reporting. The report will further focus on the recognition criteria of assets, liabilities, incomes, expenses and equity. Finally the report will verify financial report’s qualitative characteristics to evaluate whether the information presented in understandable, verifiable and timely manner.

Consolidated financial statements of Lovisa Holding Limited and the associated notes are prepared in compliance with International Financial Reporting Standards (IFRS), Australian Accounting Standards (AASBs) including the Australian Accounting Interpretations and adopted by Australian Accounting Standards Board (AASB) and Interpretations issued by International Accounting Standards Board (IASB). The company adopted all amended and new Accounting standards and the interpretations released by AASB relevant to the company’s operations (Bebbington and Larrinaga, 2014). Further, while preparing the consolidated statements the management of the company has made various judgements, assumptions and estimates that have an impact on the application of the accounting policies and reported amounts for income, expenses, liabilities and assets.

Various accounting policies and the disclosures shall be measured at fair values for financial as well as non-financial liabilities and assets. While measuring fair value of liability or asset the company uses data from market as far as possible (Chen, et al., 2013).

Revenue – company recognizes the revenue while the significant rewards and risks with regard to ownership are transferred to customer. Other conditions for recognition of revenue are the recovery for consideration shall be probable, possible return and associated costs shall be estimated reliably, revenue amount shall be reliably measured and management’s continuous involvement shall not be there with goods (Byrne, 2018). Further, the revenue is determined by deducting the trade discounts and returns. Specific criteria for recognition must be followed before recognising the following –

  • Selling of goods – revenue generated from selling of fashion jewellery is accounted while the significant rewards and risks with regard to ownership are transferred to buyer.
  • Income from franchise – income generated from franchise that is earned generally on the basis of sales percentage is recognized on the accrual basis.

Expenses – various expenses are recognized as follows –

  • Income taxes – taxes on profits or on losses includes deferred tax as well as current tax. It is expected amount of tax payable on taxable income using the substantially enacted tax rate or the rate of income tax (Lovisa, 2018). On the other hand, the deferred tax is charged using liability method of balance sheet and taking into consideration the temporary differences.

Assets – assets are recognized as follows –

  • Trade and various other receivables are recognized initially at fair values and eventually it is recorded at amortised cost using the effective method of interest reduced by the amount of impairment loss, if any.
  • Inventories are recorded at cost or realisable value, whichever is lower. Realisable value is projected selling price under ordinary business course reduced by the completion costs and expenses to sale. Cost here includes is the purchase cost, freight on import and duties and carious other cost incurred for bringing the inventories at present condition and location (Henderson, et al., 2015).
  • Plant, property and equipments are recorded at cost reduced by the accumulated depreciation. Cost here includes the purchase cost and any other cost for removing or dismantling the items and restoring site where the asset is located (Crookes and Conway, 2018).
  • Goodwill and intangible asset – goodwill generated from subsidiary acquisition is recorded at cost reduced by the amount of impairment losses.

Liabilities – the company recognizes its liabilities as follows –

  • Trade and various other payables – obligation with regard to trade payables are carried out at amortised cost (Lovisa, 2018). Further the payable towards related parties are recorded at principal amount. When the interest is charged by lender it is recorded as expenses on accrual basis.
  • Provisions – provision is recognised only when owing to past event company has present constructive or legal obligation. Further, to recognize the provision obligation must be reliably estimated and it is projected that economic benefit will be out-flown for obligation settlement (Lovisa, 2018). Further, the amount of provision is determined through discounting expected future cash flows at the pre-tax rate.
  • Employee benefits – obligation of the company with regard to long-term benefits for service is future benefit amount that have earned by the employees in return of their services in present as well as prior periods. Obligation amount is computed through increase in projected future salary and wage rates and is discounted by using the corporate bond rates of Australia (Lovisa, 2018). However, the shorter benefits are not discounted.

Equity – equities of the company are recognised and measured as follows –

  • Reserves and capital – ordinary shares are initially recognised at the fair value of consideration received by the entity. Transaction cost expensed while issuing the ordinary shares is directly recognized in equity as deduction from the amount received as share proceeds.
  • Borrowings and loans – initially the borrowings and loans are recorded at the fair values and the amount is reduced by transaction cost attributable directly. Eventually after initial recognition these are recorded at amortised cost by using the effective method for interest (Lovisa, 2018).

Evaluation of Financial Report's Qualitative Characteristics

The financial information to be useful shall be represented faithfully and relevantly. Further, the information is considered as useful if it is verifiable, comparable and understandable and presented in timely manner. Further, fundamental characteristics for the financial report are faithful representation and relevance (Miller and Power, 2013).

Relevance – if the financial information is relevant it can have an impact on the decision of the users. Further, the information is capable of creating the difference in decision irrespective of the fact that some of the users may not take the advantages of it (Li, 2013). It can be identified from the annual report of Lovisa Holding Limited that the financial information is represented in relevant way that will help the users to make any decision. Further, various items are differentiated properly under different heads.

Materiality – information is regarded as material if misstatement of it can influence the decisions of financial statement’s primary users. However, materiality is company specific relevance aspect made on the basis of magnitude or nature or both (Griffith, Hammersley and Kadous, 2015). It can be identified from the annual report of Lovisa Holding Limited that it disclosed all the material information under notes to financial statements. Further, the auditor issued unqualified report as no material misstatement was found by them.

Comparability – it is the qualitative characteristic that allows the users to understand and identify the differences and similarities. Further, it is not related to the single item rather it is related to at least 2 items. Further, the comparability also allows comparing the data with previous year as well as with the competitors (Frias?Aceituno, Rodriguez?Ariza and Garcia?Sanchez, 2013). From the annual report of the company it is found that the company along with current year data the company presents the previous year’s data for comparison and for major items the changes is presented in percentage term and bar graphs. It will enable the users to compare the changes as compared to the previous year.

Verifiability – as per the conceptual framework the financial statement shall be associated with notes for making it verifiable with regard to various items (Francis, Hasan and Wu, 2013). It is found that the annual report of Lovisa Holding Limited is associated with the supporting notes that clearly explain the accounting treatment of various items and segregation of various items under accounting heads.

Timeliness – to make the information useful for the users it shall be presented in timely manner. Further, the information must be related to the period in which it takes place or for which it is relevant (Cheng, et al., 2013). It is identified that the company publish its annual financial result at the end of the month of June and half yearly financial result at the end of the month of December.

Conclusion

It is concluded from above discussion and analysis that Lovisa Holding Limited has complied with the conceptual framework requirement. All the major items like revenues, expenses, equity, liabilities and assets are recognized in compliance with the conceptual framework. Further, the financial statement of the company has been prepared in such way that qualitative characteristics of the conceptual framework can be followed.

It is found that the company does not provide 5 years data in table format which is one of the major requirements of conceptual framework. 5 years data enable the users to compare and analyse the company’s performance on ling term basis. It further enables the potential investors to make decision regarding investment. Therefore, it is recommended that last 5 years data shall be presented in table format and concise manner.

Reference

Bebbington, J. and Larrinaga, C., 2014. Accounting and sustainable development: An exploration. Accounting, Organizations and Society, 39(6), pp.395-413.

Byrne, D., 2018. Introduction. In Contemporary Issues in Accounting (pp. 1-14). Palgrave Macmillan, Cham.

Chen, L.H., Folsom, D.M., Paek, W. and Sami, H., 2013. Accounting conservatism, earnings persistence, and pricing multiples on earnings. Accounting Horizons, 28(2), pp.233-260.

Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.

Crookes, L. and Conway, E., 2018. Technology Challenges in Accounting and finance. In Contemporary Issues in Accounting (pp. 61-83). Palgrave Macmillan, Cham.

Francis, B., Hasan, I. and Wu, Q., 2013. The benefits of conservative accounting to shareholders: Evidence from the financial crisis. Accounting Horizons, 27(2), pp.319-346.

Frias?Aceituno, J.V., Rodriguez?Ariza, L. and Garcia?Sanchez, I.M., 2013. The role of the board in the dissemination of integrated corporate social reporting. Corporate Social Responsibility and Environmental Management, 20(4), pp.219-233.

Griffith, E.E., Hammersley, J.S. and Kadous, K., 2015. Audits of complex estimates as verification of management numbers: How institutional pressures shape practice. Contemporary Accounting Research, 32(3), pp.833-863.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Li, J., 2013. Accounting conservatism and debt contracts: Efficient liquidation and covenant renegotiation. Contemporary Accounting Research, 30(3), pp.1082-1098.

Lovisa., 2018. Reports. [online] Available at: https://www.lovisa.com/pages/reports [Accessed 14 Aug. 2018].

Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting accounting research and organization theory. Academy of Management Annals, 7(1), pp.557-605.

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My Assignment Help. 'Compliance With The Conceptual Framework Of Lovisa Holdings Limited Is Essential For Essay.' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/busn7005-contemporary-issues-in-accounting/the-conceptual-framework-for-lovisa-holdings-limited.html> accessed 18 May 2024.

My Assignment Help. Compliance With The Conceptual Framework Of Lovisa Holdings Limited Is Essential For Essay. [Internet]. My Assignment Help. 2021 [cited 18 May 2024]. Available from: https://myassignmenthelp.com/free-samples/busn7005-contemporary-issues-in-accounting/the-conceptual-framework-for-lovisa-holdings-limited.html.

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