The title of the report – Prudence and Conceptual Framework in Financial Report suggests the aim of the report. The purpose of this report to analyze the importance of Conceptual Framework in preparation of the General Purpose Financial Reports and to investigate the effects of Conceptual Framework in Accounting which has been used by different stakeholders in their decisions about the company. The report will help in understanding the impact of Prudence over a period of time so that it enhances the outcome of conceptual framework. The report will help in finding out the recommendation for improvement in conceptual framework together with prudence.
The main body of the report has been bifurcated in three different sections. First section details as to how conceptual framework of accounting is required for general purpose financial statements. Second section is dealt with the concept of prudence and it has been described with their importance in the conceptual framework of accounting. Lastly the close scrutiny of the general purpose financial statements has been made with reference to the different heads of the financial statements.
The purpose of report has been achieved by using and analyzing the Annual report of Qantas Airline which is ASX listed company for the year 2016.The report is prepared using primary and secondary data available on different sources and references has been made from different journal article available online.
Conceptual Framework In General Purpose Financial Reports
Whenever any work or task is required to be done, it shall be done within the defined structure and according to the needs and requirements of the task. The structure itself determines as to how the particular work or the task is to be done and it also defines the different criteria against which the task will be monitored and evaluated. This defined structure is known by the name of the framework. The framework provides the platform upon which the accounting of the company and thereby the financial statements of the company can be prepared in easy manner. The framework is not only made up of the defined structure but also contains the legal requirements which the company has to comply while finalizing the financial statements of the company. Thus, in this manner the framework is the factor which drives the motivation of the workers and the employees of the company towards the attainment of the organizational goals and that too within the legal limits and requirements. If the framework is not present then the employees and workers of the company will perform their work in the haphazard manner and will come out with the zero results (Anastasia, 2015 and Capital Marketing Advisory Committee Meeting, 2013).
In the terms of the financial matters, the framework up on which the accounting is based is known as the conceptual framework of accounting. The conceptual framework of accounting consists of the two major wings. First wing deals with the presentation and the measurement of the heads of the financial statements. In other words it deals with measurement and the presentation of the assets and liabilities on the particular date and the measurement and the valuation of the expense and the income so incurred and earned during the period end. The second wing of the conceptual framework of accounting deals with the preparation of the financial statements of the company with correct disclosures. The second wing has provided three different characteristics:
Faithfulness – In the common parlance faithful means the act of being an honest but in an accounting area, the term faithful is itself a subject and provide various kind of information to the users of the financial statements. The first characteristic that is provided by the conceptual framework of accounting is the faithfulness. It entails that the financial statements of the company so prepared by the company shall be faithful and presented accordingly. Faithful is not the single word rather it includes the gamut of terms which in itself explains how the financial statements are presented and details how much useful information is delivered by the company within the definition of this term. The faithfulness is the broad term and includes the different features - neutrality, error free and objective. It entails that the financial statements so prepared shall be neutral which envisage that the financial statements are not under the pressure of someone or something and secondly the financial statements shall not contain any statement which can misled the users of the financial statements to take the wrong decision. The third one objective which means that then it should be free from any bias. If these three features are present then it is clear that the financial statements so prepared are faithfully presented (Weiss, 2014).
Relevancy – The second characteristic of the conceptual framework of accounting is the relevancy. The term relevancy denotes that the financial statements of the company so prepared shall be useful for the users of the financial statements. Being useful and relevant means that the users of the financial statements shall be able to take maximum information about the company so as to take an effective and an efficient decision. In case the financial statements are not found relevant then decision of the users of the financial statements will get mutilated and thus the importance of the conceptual framework of accounting will decline.
Reliability - The third characteristic of the conceptual framework of accounting is the reliability. The term reliability denotes that the financial statements of the company shall be reliable enough upon which the users of the financial statements can take their decision and the other stakeholders can take maximum benefit out of the information made so available. In case the financial statements so provided by the company are not so reliable then it will be interpreted that the conceptual framework of accounting of the company is not sound and fair (IASB, 2010).
The above three features describes how far the conceptual framework of accounting has been From the above, it is very clear that if the conceptual framework of accounting plays the key role in the preparation and the presentation of the financial statements of the company. In case it is found weak then the decision of the users of the financial statements will be ineffective and inefficient.
Inclusion And Exclusion Of Prudence In Conceptual Framework
As already apprised, conceptual framework of accounting plays very important role in the preparation and the presentation of the financial statements of the company. New concept has been introduced within the framework which has increased the worth of the conceptual framework of accounting. The new concept is commonly known by the name of Prudence. The concept of prudence is known by the different titles and is there from the beginning of the year nineteen hundred and eighty nine. The work prudence means, in accordance with the oxford dictionary, the state of being active and cautious. In the beginning of the concept the same meaning has been assigned to the word and it has been said that the employees and the other workers of the company shall take care and shall be attentive, active and cautious while performing and recording of transaction or events in the accounting books. It is because if the employees and the workers of the company are not so attentive and cautious then there may be the situation where there will be undervaluation or overvaluation of the assets or liabilities.
The prudence concept has been criticized on the ground that it is very traditional and does not take into account the current changes and scenario of accounting as it talks about only revenue and assets and does not consider liabilities and expenditure which are more essential parts in GPFRs in current time period. Without considering the liabilities and the expenditure no financial statements can be prepared in the effective and efficient manner. The results so provided will be null and void as the users of the financial statements will be aware about the assets and the revenue but not the liabilities that the company has as on that date and also the expenses that the company has incurred during the year. The concept of prudence was removed in 2005 as part of conceptual framework. But after exclusion in 2005, the scholars started arguing that GPFRs without the prudence policy of conceptual framework are thoughtless for its users (Cooper, 2015). And after the arguments in favor of Prudence it has been again included in conceptual framework of accounting in 2015 as it will create the situation of impartiality in GPRs for its users. With the inclusion of the prudence, the conceptual framework of accounting has become more and more strong. The prudence allows the finance department of the company to be cautious while accounting for each and every managememt whether it relates to the revenue or relates to the expense or relates to the assets or relates to the liabilities. The financial statement of the company reflects the true and fair view of the state of affairs of the company and financial performance of the company.
Scrutiny Of General Purpose Financial Report
With the knowledge and recognition of conceptual framework and prudence inclusion, the General Purpose Financial Reports has been analyzed to know the concept better. Both the concepts have helped the users of the financial statements to understand the financial statements in the much better manner. For this Qantas Airline has been selected and its Annual Report for 2016 has been taken into account to assess the practicability by companies in their GPFRs (Annual Report of Qantas Airline, 2016). From the below mentioned factors it can be assessed the use of conceptual Framework along with Prudence has been followed by the company under consideration:-
Key Managerial Personnel Remuneration: - The Remuneration Report shown in Appendix as a part of company’s GPRs shows that the company is following framework for remuneration to reduce the labor turnover and to retain the maximum no key personnel for long period. Also the framework shows that the company has linked the remuneration to pay of the personnel by categorizing the same into three components – basis pay, short term incentive and long term incentive. This can be useful for different stakeholders to assess the productivity of Key Managerial Personnel to the company but on the other hand this framework can enhance the chances of manipulation.
Debtors/ Trade Receivables: - The Company has debtors amounting to $ 929 m in the year 2016 in comparison of $ 1079 m in previous year as depicted from Appendix. The company’s management is recording the debtors after making provision for doubtful debts or impairment. It shows that the company has following the framework for recording and estimating the debtors.
Tangible Fixed Assets – Property, Plant & Equipment: - The Tangible fixed assets for the company worth $ 11,670 m in 2016 which has been recorded in the books of account after taking into consideration the depreciation and impairments. The company is following the framework for recording the assets in the GPFRs. Also the company is recording the capital expenditure commitment in the base currency in which the GPFRs are prepared and presented to users after converting the commitment amount from foreign currency. This also concludes that the company is following the framework rules for recording and presenting the GPFRs.
Advance Revenue: - The Prudence concept says to record all the Assets and revenues according their occurrence and benefit given to company. The company is recording the Advance Revenue as their Liability under the head Current Liability showing that the company has to provide the service for the received amount as revenue and it does not relate to current period. This shows that The Company is following the Prudence Concept with Conceptual Framework.
Revenue and Other Income: - The conceptual framework of accounting says that the company shall account for all the revenue in accordance with the accounting standard and in case of any specific deviation, the same shall be reported in the notes to the accounts or in the financial statements of the company. Qantas Airlines has booked the revenue for $16200 million in the year of two thousand and sixteen. Note has been given regarding the disclosure as the company has not booked the Other Revenue in this head as it is difficult to account the other revenue at different geographical locations.
Net Finance Costs: - As per the conceptual framework of accounting under the accounting standards, the finance cost can be shown as net off which means the finance costs can be set off from the finance income and the balance can be shown as the Net Finance Costs or the Net Finance Income as the case may be. In the given case, the company has account for the net finance costs and disclosure has been given that the borrowing costs have been capitalized during the year and has not been counted here.
Assets Classified as Held for Sale: - The assets which have been held for sale has been classified under this head instead of Property Plant and Equipment. As per the accounting standard and the generally accepted accounting principles, the asset has been valued at the fair value and this value pertains to the amount that the asset would fetch if sold in the market. In this sense, the conceptual framework of accounting has been followed with great caution.
Intangible Assets: - Intangible assets have been valued at the cost less accumulated depreciation and has been done in accordance with the accounting standards issued by the accounting standards board. It includes goodwill, trademarks, patents and other contract intangible assets. The note has been given in the valuation that the interest of $3 million has been capitalized. Further the impairment of assets has been done. Through this valuation it is ensured that the due caution has been taken while valuing the assets so that the assets are neither been overvalued or undervalued by the company. This assurance has been served with the conceptual framework and the concept of prudence.
Deferred Tax Assets – As per the accounting standard issued by the accounting standard board, every company is required to account for the tax on the timing differences that the company has encountered over the year. The timing differences either results into the deferred tax assets or the deferred tax liabilities. Deferred tax asset is created when there is the certainty that the company will have the future tax liability against which the tax assets can be adjusted. Deferred tax liability is created when there is the certainty that the company will have future income against which the liability will be set off. In both the cases, the term certainty is related to the term prudence in the sense that it ensures not to result in either the undervaluation or the overvaluation of the assets of the liabilities.
Provisions - As per the concept of prudence, every company shall provide for all losses and expenses and not for gains and income. With this concept the company has been able to provide for all the expenses and losses and therefore, the company has been able to provide $1287 million as provision.
Framework is very important for any kind of work. In this report the framework of accounting has been discussed and it has been named as the conceptual framework of accounting. Throughout the report, two concepts have been detailed – one is conceptual framework of accounting and another one is Prudence. The second concept has been discussed in detailed as to why the same has first been included in the framework then excluded and then again included. The history has been given as to how the prudence has been developed and how the same concept has been criticized. With these understandings the financial statements of the Qantas Airlines Company has been analysed and discussed. Major Head of the annual report of the company has been analysed and has been related to the conceptual framework given by the accounting standards and different statutes. To conclude, the conceptual framework of accounting is very important for every company to survive.
From the analysis of the report and the financial statements of the Qantas Airlines, it is recommended that the every company shall follow the conceptual framework of accounting and that too with prudence.
It’s our recommendation to treat prudence as part of the conceptual framework.
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 04-05-2017
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 04-05-2017
Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 04-05-2017.
International Accounting Standards Board, (2010), “Conceptual Framework for Financial Reporting 2010” , pages 16-21
Qantas Airlines Official Website, “Annual Report 2016” available on https://www.qantas.com.au/ accessed on 04-05-2017
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 04-05-2017..