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Analysis of Accounting Policies and Estimates of Ansell Ltd

Discuss About The Financial Accounting Pearson Education Au?

The business corporations around the world are placing large emphasis on improving on the quality of their financial reporting as per the IASB accounting standards. The IASB (International Accounting Standards Board) have directed the business entities to prepare and publish their financial reports as per the conceptual accounting framework principles. The major principles of conceptual accounting framework are relevancy, reliability, understandability and comparability. The compliance of all these accounting principles during the development of financial reports will help in improving the quality of financial reports as per the IASB standards. The conceptual accounting framework is developed on the basis of normative theories of accounting that helps in predicting the type of accounting approach to be adopted for resolving a particular financial issue (Knight, 2004). In this context, the present report aims to present an evaluation of the accounting quality of a company listed on ASX through assessing the accounting policies and estimates adopted by it.

The assessment of accounting policies of the selected firm is carried out by evaluating its annual reports disclosures. The assessment is carried out for developing an adequate understanding of the various factors that impacts the development of financial statements of a business entity. The company selected for the purpose is Ansell Limited, a recognized Australian company that is involved in manufacturing of protective medical equipments. As such, the report presents an investigation on the accounting reporting strategies and choices selected by the managers of the company for evaluation of their quality and usefulness to promote its long-term growth.

Ansell limited is a company which is situated in Australia, and the company along with its subsidiaries is specialized in protection solutions. In other words it can be said that the company is global leader in the protection solutions. The business organization is a profit entity and deals in developing and manufacturing a wide range of clothing and hand arm protection solutions (Ansell, 2017). The accounting policies of the firm are quite effective as their accounting principles are based on historical cost basis except the assets and liabilities are accounted on the basis of derivative financial instruments. In addition to this, the financial assets which are categorized for sale are accounted on the basis of fair value. The accounting policies of the company have been consistently followed as per AASB (Ordelheide, 2016).

IFRS 15/AASB 15 deals with the revenues from contracts with the customer, this accounting principle establishes a framework for the company to determine the amount of revenue and when the same will be obtained (Ansell, 2017). This framework has replaced the existing IAS 18/AASB 118 Revenue, IAS 11/AASB 111.  After its implementation in the organization, the company has assessed the efficiency of the same realized that it is quite effective and has no bad impacts on the financial statements.

Identify Key Accounting Policies

IFRS 16/AASB 16 is another accounting policy used by the firm, this framework has introduced a single lease accounting model. This framework has aided the lease holder to identify the right to use the asset and liability that can represent the responsibility of making the payments of the leased asset (Ansell, 2017).  The financial statement of the company presents a consolidated data of all the subsidiaries. The control of the parent company will remain on subsidiaries till the date on lease ceases to exist (Marley and Pedersen, 2015). The business organization has assessed the impact of application of IFRS 16/AASB 16 in their accounting policy and have found no bad effect on the firm (Australia, 2011).

The firm is following its accounting policies based on the guidelines prescribed by the AASB, however sometimes the management takes a flexible route to make the process easier. For example, the carrying amount of non-current assets valued on the basis of cost, however there are other methods prescribed by AASB. The impairment loss of the company is identified when there is a certain increment in the income statement of the company for a particular period (Ansell, 2017).  However AASB has suggested that impairment loss occurs when the carrying amount of a non-current asset exceeds its recoverable amount (Hussey and Ong, 2005). The company at the time of analyzing the value of asset, discounts the estimated future cash flows in accordance to present value, it represents current market assessment of the time value of money and the probable risk associated with the asset.

AASB prescribed that while calculating the recoverable amount, the price of the asset must be higher than the fair value (Walton, 2011). To remain in conformity with the Australian generally accepted accounting principles requires the management to make estimates that affect the reported amount of assets and liabilities, in addition to this, the contingent assets are required to be disclosed for a particular financial period. The company follows a flexible mode in this respect, the estimates and assumptions about the assets and liabilities are based on historical experiences, in addition to this, various other factors are also considered that can be rational in that particular aspect (Ansell, 2017).    The results of such estimates are reviewed on ongoing basis, whereas, AASB has prescribed to carry o evaluation on the basis of a particular accounting period in which it affected the entity (Dagwell, Wines, and Lambert, 2015). All this shows that management of the business organsation have a high degree of flexibility in choosing policies. The frameworks adopted by the firm are completely ethical and they are not breaching the code of AASB.

Assess Accounting Flexibility

The accounting department of a business entity holds major responsibility of gathering, recording and analyzing the financial information. The department develops and implements the accounting strategies for planning the future growth and development of a business entity. The Ansell Ltd, as such is pursing growth strategy as it is actively involved in providing its innovative protective medical equipments across the world. Therefore, its accounting strategy is to meet the financing need of its diversified business units for streamlining its production process. The company as such adheres to the IFRS and AASB standard accounting principles and rules for the preparation of its consolidated financial statements but has also incorporated some flexibility in its accounting framework. The flexibility in the accounting framework refers to the preference given to a particular accounting approach by a business entity during its financial reporting as compared to the other. In this context, the positive theory of accounting states provides an explanation of the use of a particular accounting method as compared to others. This is because the selection of accounting methods has an impact on firm potential cash flows and therefore has implications for managers, creditors, investors and debtors (Mirza and Ankarath, 2012).

In this context, it can be said that Ansell Limited has also implemented flexibility in its accounting policies and estimates for maintaining its competitive position in its industrial sector. The major competitor of the company is MCR safety, a UK company that is involved in providing medical protective equipments and is recognized a global leader in development of medical protective equipments. As such, there is large difference between the accounting framework adopted by both the companies as both need to comply with their country-specific accounting standards. The Ansell Ltd needs to comply with Corporations Act 2001 as per the AASB standards while MCR Safety needs to develop its financial reports as per the UK GAAP. The company however introduces some flexibility in its accounting strategies such as that for measuring its financial instruments as per the accounting policies of its peers to remain competitive (Kenny, 2009).

Therefore, it can be said that Ansell Ltd incorporate changes in its accounting policies and estimates in order to meet the disclosure requirements of various countries where it conducts its business operations. For example, there exist large differences between the IFRS and the UK GAAP accounting standards. The annual report of Ansell Ltd implement IFRS standards as depicted from its annual report but also need to introduce changes in its accounting policies as per the UK GAAP principles while operating in the UK (Mirza and Ankarath, 2012). As such, it is essential for the company to structure its accounting transactions as per the country-specific standards for meeting its strategic objectives (Ansell, 2017).

Evaluate Accounting Strategy

The company has developed its strategic objective of diversifying its business operations around the world and hence it is essential for it to comply with accounting conventions of different countries. For example, as per the IFRS standards, Ansell Ltd, has adopted the far value measurement model for assessing the value of its assets and liabilities. However, as per the UK GAAP, the financial derivative should not be measured at their fair value and therefore the company has to introduce some changes in its accounting policies for meeting its strategic objectives. As such, the flexibility in the accounting policies and estimates adopted by the Ansell Ltd is as per its business operations and is thus generally acceptable. This is because they have effectively complied with the conceptual accounting framework principles at each stage of its financial disclosure (Ansell, 2017).

Besides this, the company has also adopted an effective accounting strategy for providing incentives to its managers. As per the company financial reports it is analyzed there is an increase in its accrual for short-term and long-term incentives in the year 2017 as compared to that in the year 2016. The company has implemented the use of accrual accounting rules for determining the incentives for its managers. This is done to ensure that incentives provided to the mangers provides them a motivating factor for maximizing the firm value but not provide them a discretion to distort its financial performance (Pietra, McLeay and Ronen, 2013). The accrual accounting is mainly subjective and based on assumptions and as such provides an easy way for an entity to manage its earnings and also providing the incentives to managers at the same time (Sheridan,  2016). The company as such has adopted the method of earnings management as per the GAAP principles that have helped in promoting consistency and comparability in business operations (Hussey and Ong, 2017). Thus, it can be said that the company has presented all information regarding its financial operations in its annual reports and therefore its accounting strategy can be regarded to be revealing (Ansell, 2017).

The annual report presented by Ansell is quite adequate as it has covered various aspects. The report has provided sufficient information about the purpose and vision of the company. It has also covered the views of chairman and other executives. The financial summary of the firm has provided a brief idea about the financial statements and the areas of operation of the business.

The footnotes provided a summary of the accounting policies that are used by the firm. Ansell limited has categorized its global business units into three different categories, the industrial unit, medical unit and the single use unit. Apart from this, the footnotes also provide the statement of compliance which represents that the financial report of the firm is in accordance with the Australian accounting standards (Horngren et al., 2012). In addition to this, the footnotes to financial statements also present the policies of accounting that has been followed in the firm. (Laopodis, 2012). The rate of foreign currency in which the company transacts is recorded at the exchange rate of each day.

The notes have provided a wide range of information about the accounting policies and other operation of the company. It has provided information about the financial statement of the company and also the countries in which the company operates. The notes have explained series of things which are consistent with the present performance of the company. The company is working in accordance with the GAAP framework (Ansell, 2017).  The implementation of GAAP has certainly proved beneficial for the firm, as it has helped the firm to remain in compliance with the international accounting principles. GAAP completely reflects in the accounting policies of the firm and is quite beneficial in managing the accounts (Thomas and Gup, 2010).

The segment disclosures have provided a detailed analysis of the firm operations. It has explained the three segments of the firm which is medical unit, industrial unit and single use unit individually. In addition to this it has also presented information about the operating and closed units of the firm. Apart from this, the regional information about the company is also explained in this section (Ansell, 2017). The region in which the company is operating is summarized in an effective way. The domicile country of the firm is Australia and its sales revenue in Asia Pacific region is also presented in the section as per the AASB (Dagwell, Wines and Lambert, 2015)

The financial reports of Ansell Ltd have although presented and disclosed all the relevant information but there are some issues that are identified as red flags that needs more disclosure. There is not adequate explanation regarding the decrease in its inventories and trade receivables from $ 14.3 million to $ 8.2 million in the year 2017 as compared to that of the financial year 2016. Also, the company needs to provide more detailed information regarding the manager’s incentive provided for managing the earnings. This is essential for ensuring the transparency in its business operations in the stakeholder minds as it will provide an analysis of the discretion provided to managers to influence the financial performance of the company. In addition to this, it is depicted form the auditor’s report of the company that its auditing partner is also involved in providing some non-audit services for which it receives good compensation (Ansell, 2017) . This is the area of potential concern for the company as it is against the AICPA Code of Conduct as per which an auditor should not maintain any financial interest in its client for maintaining independency in its profession (Langendijk, Swagerman and Verhoog, 2003).

Besides this issue of concerns, the company as such does not have any potential red flag that requires disclosure of more information. There is no reported gap between its recorded profit and the cash flow arising from its operating activities. There is no reported use of research and development partnership used by the company for funding its activities. There is no unexpected write-offs and also there is no reporting of related-party transactions in the annual accounts of the company (Ansell, 2017)

The analysis of the annual report of Ansell Ltd has depicted that it effectively complies with all the principle of conceptual accounting framework such as relevancy, reliability, comparability and understandability. The compliance of all these accounting principles by the company has helped it in improving its accounting quality and achieving the trust of all its stakeholders. The company has provided all the details regarding its accounting strategies in its annual reports as per the IFRS and AASB standards (Wolk, Dodd and Rozycki, 2012). The accounting disclosures are provided by the company in its annual reports as per the Corporations Act 2001 and AASB standards. The AASB have mandated all the business entities operating in Australia for developing their financial reporting as per the accounting rules and conventions of conceptual accounting framework principles (Hoffman, 2016).

The selection of accounting policies and estimated by the company have possible implications for all its stakeholders such as mangers, employees, customers and other such people that are directly or indirectly impacted by its operational activities. As such, it is highly essential for the company to select the appropriate accounting methods for maximizing the value of its stakeholders. The company must select the accounting methods that maximizes its equity base, dividends provided to the shareholders and returns generated for its investors. However, the selection of accounting choices and policies are also largely impacted by the political factors that came into existence when a business entity operates in different business environment. For example, the Ansell Ltd aiming to diversifying its operations globally have to adopt specific changes in its accounting framework as per the political context of different countries (Henderson et al., 2015).

The political factors can cause a firm to change its accounting principles such as incorporating the use of different deprecation method or transferring from LIFO to FIFO. However, it is required on the part of the company to provide a full description of nay changes adopted in its financial statements in the footnotes section (Mumba, 2013). This is essential so that end-users are able to analyze and evacuate the adopted accounting change properly. The managers adopt the use of accounting method that proves it to be cost-effective under a different political environment (Bazley, Hancock and Robinson, 2014). The different in the accounting standards adopted under different political situations exist because accounting standards are not based on economic realities. As such, the reporting entities need to select the accounting method that depicts its financial performance more efficiently (Albrecht, 2010).

Conclusion

It can be stated from the overall discussion held in the report that marinating an appropriate quality of financial reporting is essential for business entities. This is because it helps in achieving trust and integrity in the mind of stakeholders therefore promoting its sustainable growth and development. The analysis of financial reporting of Ansell Ltd has demonstrated that good financial performance of the company is related with its sound quality of financial reporting system. The company has effectively followed and implemented all the standard accounting principles and standards as directed by the Corporations Act 2001 and AASB. The company also complies with the IFRS standards as per the accounting rules developed for harmonization of accounting standards by IASB. The company has implemented a flexible approach in it accounting framework so that all necessary changes can be easily introduced in its accounting strategies as per the nature of its operational activities. The potential area of concern is also identified in the report for Ansell Ltd that need more disclosure in its annual report such as earnings management and auditor’s independency. The companies though have effectively followed conceptual accounting framework but still needs to improve its financial reporting quality in order to promote its goodwill at an international level through resolving the identified area of concerns.

References

Albrecht, D. 2010. Economic Consequences and the Political Nature of Accounting Standard Setting. [Online]. Available at: https://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/ [Accessed on: 13 September, 2017].

Ansell. 2017. Annual Report. [Online] Available at: https://www.ansell.com/-/media/Corporate/MainWebsite/About/Investor-Center/Annual-Report-2017/Ansell-Annual-Report-2017-FINAL.ashx?la=en [Accessed on: 17 September 2017].

Dagwell,R.,  Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson Higher Education AU.

Henderson, S. et al. 2015. Issues in Financial Accounting. Pearson Higher Education AU.

Hoffman, C.W. 2016. Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism. World Journal of Business and Management 2 (1), pp. 1-32.

Hussey, R. and Ong, A. 2005. International Financial Reporting Standards Desk Reference: Overview, Guide, and Dictionary. John Wiley & Sons.

Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.

Kenny, G. 2009. Diversification Strategy: How to Grow a Business by Diversifying Successfully. Kogan Page Publishers.

Knight, J. 2004. Internationalization Remodeled: Definition, Approaches, and Rationales. Journal of Studies in International Education 8 (5), pp. 5-29.

Langendijk, H., Swagerman, D. and Verhoog, W. 2003. Is Fair Value Fair?: Financial Reporting from an International Perspective. John Wiley & Sons.

Marley, S. and Pedersen, J. 2015. Accounting for Business: An Introduction. ed, 2. Pearson Higher Education AU.

Mirza, A. and Ankarath, N. 2012. Wiley International Trends in Financial Reporting under IFRS: Including Comparisons with US GAAP, China GAAP, and India Accounting Standards. John Wiley & Sons.

Pietra, R., McLeay, S and Ronen, J. 2013. Accounting and Regulation: New Insights on Governance, Markets and Institutions. Springer Science & Business Media.

Sheridan, T. 2016. Managerial Fraud: Executive Impression Management, Beyond Red Flags. Routledge.

Walton, P. 2011. A Global History of Accounting, Financial Reporting and Public Policy: Asia and Oceania. Emerald Group Publishing.

Wolk, H., Dodd, J. and Rozycki. J. 2012.  Accounting Theory: Conceptual Issues in a Political and Economic Environment. SAGE.

Mumba, C. 2013. Understanding Accounting and Finance: Theory and Practice. USA: Trafford Publishing.

Thomas, R. and Gup, B.E. 2010. The Valuation Handbook: Valuation Techniques from Today's Top Practitioners. John Wiley & Sons.

Laopodis, N. 2012. Understanding Investments: Theories and Strategies. Routledge.

Ordelheide, D. 2016. Transnational Accounting. Springer.

Dagwell, R., Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson Higher Education AU.

Horngren, C. et al. 2012. Financial Accounting. Pearson Higher Education AU.

Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage Learning Australia.

Australia. 2011. Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. CCH Australia Limited.

Identify Key Accounting Policies

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