Discuss about the Present Value-Based Measurements In Accounting.
The financial accounting plays a very important role in the smooth and the effective functioning of the company. It is because of the fact that it is the financial accounting which gives the detail about the results of the company in terms of the position and performance. The financial accounting is done on the basis of the accounting standard that is prepared by the accounting standards setting board. The accounting standards are required to be complied with each and every company to which they are applicable. In this report at first the sources of regulating bodies of financial reporting in Australia has been discussed. Then the process have been explained as how the particular accounting standards are developed and made applicable in Australia and thereafter it has also been laid down as to how they have been enforced in Australia. Then the needs of the users of the financial statements have been analysed and discussed as to how the same have been treated as identical needs with regard to the information. Fifthly, the light has been focused on the basis of the measurement of the assets and liabilities and that too with the present value method and how the same method of valuation has the limitations in providing the useful information to the users of the financial statements. Lastly the accounting standard on the intangible assets have been discussed and how the same have some limitations in providing the information as useful to the stakeholders of the company. The report has then ended up with the appropriate conclusion and recommendation.
Financial reporting is defined as publishing the results of the company to the public. These are furnished in the form of the balance sheet, statement of profit and loss, statement showing changes in equity and the statement of cash flows and also include the notes to the accounts and the schedules as applicable. These all constitutes the financial reporting and is embedded in the annual report of the company. The financial reporting in the Australia are regulated by the following sources which have been discussed in detail:
The first sources of regulation of the financial reporting in Australia are the Australia accounting standards board. It is the agency of the Government which is in total dependent. It’s decision will be binding on all the companies. The board has the power to The board is involved in the preparation of the accounting standards and then developed the framework of accounting in conceptual terms as to how the provision of the accounting standard is required to be applied and the board also take active participation in the development of the accounting standards on international basis. The boards has not only provided the standards but also have provided the guidance notes and the interpretation which are required to be followed in the exceptional circumstances. The applicability on the company of the provisions becomes applicable when the standards developed by the board become the accounting standard. These are the legal requirements which every company is required to follow. .
Australian Accounting Standards Board
The Australian Securities and Investment Commission are defined as the governing body which regulates and monitors the compliance with the company law in Australia. The body does not comes under the government of the state rather it is the body which reports the directly to the Parliament of Australia and the treasurer if requires.
The corporations Act, 2001 has provided the provisions which the director of the company is required to comply and read with the rules the law provides some provisions as to what is required from the directors in the director report of the company. The director’s report forms part of the annual report of the company. Thus, in this manner it is regarded as the regulator of the financial reporting.
The next regulator comes is the Australian Taxation Office. The Australian taxation office is the department of the government which collects the tax from the public and provides to the government for the welfare of the country. Australian Taxation office has been regarded as one of the regulator because of the fact that the every business which is operating and running in Australia is required to submit the statement known as the Business Activity Statement or BAS. This statement is required to be submitted by the companies so as to make the payment of tax and also for the purpose of reporting the obligations of the company towards the tax. The BAS is required to be submitted on regularly basis. It may be monthly or half yearly depending upon the situation and the facts of each case.
It is the body under which the required companies have to get the companies listed. After getting listed in the stock exchange, the company is required to follow the listing rules in the reporting of the financial position and performance of the company. As per the listing rules, the company is required to follow the full and timely disclosure framework and shall disclose the financial results on timely basis and that too in true and fair manner.
Reserve bank of Australia is responsible for ensuring the financial stability of the country and for that the monetary policy is developed and presented at the end of the every year and follows the same. The companies are required to give some reporting in the defined format to the banks from where they have taken the loan. As the report is to be given in the proper format, it is regarded as one of the regulator of the financial reporting.
Australian Securities and Investment Commission
The last regulating authority is the Australian Prudential Regulation Authority. It is regarded as the regulator for the institutions which takes the deposit and the life insurance companies. It provides the policies which help in ensuring the financial stability, efficiency and the neutrality in terms of the competition.
In this manner, all of the above are the main regulator for the purpose of financial reporting in Australia.
Under this part, it will be discussed in detail as to how the accounting standards are being prepared in Australia and made available for the application by the companies in their accounting books and the prepared financial statements thereon.
An accounting standard is defined as the technical declaration which is made by the accounting standards board which provides the details of the accounting procedure which every company shall follow and adopt and that too in case of the particular transaction or any particular event. The accounting treatment reflects the preparation and the presentation of the financial statements of the company.
Following is the procedure adopted for the enactment of the accounting standards in Australia (AASB, 2017):
- Technical issue by international organization – Before the starting of any work the issue is identified first and hence the issue regarding the treatment of any transaction in the books of accounts is identified and detail. At first the issue is identified by the International organization which is the International Accounting Standards Board and International Financial Reporting Standards Committee. In Australia, the board is named as Australian Accounting Standards Board and has been adopting the International Financial Reporting Standards since the year of two thousand and five and that too with the direction of the Financial Reporting Council. With this direction and similar other directions, the work of these international organization are included in the framework of this program.
- Technical issue by AASB – The technical issue if any is identified by the members of the AASB and their staff. If the technical issue so identified is related to the profit making entities then the same is referred to the International Accounting Standards board and International Financial Reporting Standards Committee. Other issue which is related to the nonprofit making entities will be addressed domestically.
- Technical issue identified by the Australian Organization / individual – The technical issue can be identified by the Australian stakeholders and advise to the AASB. These issues surrounds about the relevance and reliability of the financial information reported in the financial statements of the company.
- Issue Addition – When the issue is identified, the AASB adds the issue in the agenda for the board meeting to be held next. Before adding as agenda, the board will conduct the study and develop the proposal for this issue which is considered as the project. The proposal is assessed on the basis of the benefits that the project will give in future, the loss if any the board will incur in case the project is not undertaken and lastly whether the project so planned will be done from the available resources or not or extra cost will be required to be incurred. It this assessment of the project so proposed comes as positive then the same shall be added to the agenda of the meeting and the same shall be discussed otherwise the same shall be taken out of the agenda and shall be dealt with accordingly.
- Research – Once the issue is taken into the agenda, the AASB will then discuss in detail about the agenda papers which has been developed and presented by the members of AASB including the staff. The agenda paper consists of issues reasons and its scope and how the same will be dealt and timing that it will normally take.
- Consult – Once the research work has been completed and all the issues have been considered, the AASB will provide the documents to the public for their suggestions and comments if any so as to solve the issue in the best manner. The document is made available in any of the following documents :
- Exposure Draft – It is defined as the refined draft of the accounting standard which has been proposed for to become the accounting standard.
- Invitation to Comments – It helps in obtaining the feedback on the broader terms as to whether the draft of standard is accurate and correct.
- Draft Interpretation – It is defined as the draft which documents the interpretation of the standard so proposed.
- Discussion Papers – It includes the longer range of the accounting policies that may be adopted or the accounting treatment that may be followed for the purpose of solving the issues.
- Other forms – Apart from the above ways, the AASB can consult through the discussion on the round table, having the panel of the persons who can help in interpreting the accounting results and so on.
- Issue – The result of the above may be the issue of the declaration; it may be the accounting standard or the interpretation, etc.
- Submission – The pronouncement will be submitted to the international organization and also to IPSASB.
- Comments – Then the standard is kept open for comments from the stakeholders in Australia.
- Implementation and Compliance – In the last the accounting standards are publicized for the implementation by the companies and AASB then monitors the compliance of the same.
In this manner the accounting standards are prepared in Australia.
Accounting standards so developed in the Australia has been developed by the AASB and other professional bodies but these are enforceable under their code of ethics. Before beginning with the enforcement of the accounting standards, it is necessary to know and understand the meaning of the term enforceable. It is because without knowing the meaning one cannot infer as why accounting standard has been made enforceable.
Enforceable in the common layman language is any document which can be put or kept in force and in meaningful terms it is referred to as the law or the regulation which can be imposed and which shall be complied with. Under the given head, the major emphasis has been on as to how the accounting standards so developed by the AASB have been enforced in Australia.
The enforceability of the accounting standard has been granted by the Australian Securities and Investment Commission. The authority has been made responsible for the same. ASIC has the requisite authority and the power to provide the companies and the other persons with the orders or the clarifications with regard to the applicability of the same and can also grant exemption to the certain companies or the class of the companies an exemption from the applicability of the accounting standards (AASB, 2017). Secondly, for further enforcement of the same, the ASIC can refer the significant issues as come into the notice for any amendment in the current applicable accounting standard.
Australian Taxation Office
The accounting standards are also made enforceable through the applicability of the Corporations Act, 2001 which lays down that the financial statements of the company shall be prepared in accordance with the accounting standards as notified by the AASB. The non compliance may lead to the heavy penalty. With the inclusion of such clauses in the statutes it is very clear that the accounting standards have been made enforceable in Australia.
The general purpose financial reporting is the way of reporting the financial position and the financial performance of the company throughout the year. It consists of the balance sheet, profit and loss account, statement of the changes in equity and the statement of cash flows. The statement that objective of the general purpose financial reporting is to provide the useful information to the stakeholders and users of the company so as to make the effective decision is true and correct.
Under this head, it will be discussed as to how the users of the financial information have the identical needs.
The statement that the users of the financial statements have the identical information needs is not correct. All the users of the financial statements have different needs. Some wants to know the creditworthiness of the company, others wants to know whether the company will be able to generate higher return on investment or not. As per the general principles of the financial statements, there are six users and all of them with their uses have been detailed below:
- Trade Creditors – These are the person who supplies goods and services to the company. They are interesting in knowing the short term liquidity of the company as to whether the company would be liable to pay of its dues in times. For this, they can have the calculation of the current ratio and quick ratio from the figures stated in the financial statements of the company.
- Lenders – These are the person who provides the funds to the company. These can be banks, financial institutions and other non banking financial companies. They want to have the information about the repaying capacity of the company as to whether the company would be able to set off the liability in future and before that whether the company is eligible to have the amount of funds which it has applied for. All these findings are supported by the annual report of the company.
- Shareholders – Shareholders are the investors of the company who invest their money in the company in order to have the higher returns on their investment in the future in the form of dividend or any other benefits. Thus, shareholders are more interested in knowing the financial performance of the company as to whether the company has been able to generate the higher earnings per share which denotes the maximization of the wealth of the shareholder of the company.
- Customers – These are the persons on the preference of which the company survives. They are the end users of the products of the company. The products of the company depend upon the tastes and preferences of the customers. More the customer demands the products, more will be the company’s reputation and chances of survival. The main focus of the customers is on the quality of the goods and services provided by the company along with the continuity of the business.
- Employees – These are the person who works in the company. The employees are majorly concerned with the stability and the reputation of the company in the market. The employees always want to work in the organization which provides them with the good area of growth. Also they are interested in knowing the salary details. Therefore, for this the employees will look over the annual report of the company and check in detail the employee benefit expense along with the director’s remuneration report.
- Government authorities – These comprises of all the authorities which regulates the company. It includes Australian Securities and Investment Commission, Australia Stock Exchange, Australian Accounting Standards Board and Australian Taxation Office and etc. At first, all these are interesting in knowing whether the company is complying with the applicable laws and regulations and whether the necessary disclosure is being made or not. Secondly whether the company is paying the statutory dues in time or not.
In this manner, the information needs of all the user of the financial information is not similar rather it depends on the wants and the purpose of the users and thus the information needs are not similar in case of the all the users of the financial statements.
The International accounting standards board has prescribed the four methods of the measurement. These are historical cost base, current cost base, realizable value and the present value. Under this head, it will be discussed as to how the present value base of measurement has not been meant meaningful and useful for the users of the financial statements of the company in making the decision.
As per the statement of financial concept number seven, it is one of the methods for measurement and basis used is Value in use which is nothing but the present value of estimated cash flows which will occur in future and that too from the regular and continuous use of the asset includes the present value of the amount which will be received at the end of its useful life.
Australian Stock Exchange
It is not regarded as the best measurement of the assets and liabilities. It is because of the following reasons:
- Reliable – the valuation as determined suing the present value method is not reliable. It is because the cash flows as estimated by the management of the company may not be accurate because the management estimates are usually based on the historical experience and it cannot always be said that the future cash flows so estimate will be reliable all the time.
- Non - justification of the discount rate – The discount rate as adopted by the management of the company may not be justified because of the fact that the some companies uses the post tax discount rate and some companies uses the pre tax discount rate and some time it is taken as equivalent to the cost of capital of the company and sometimes it is taken from different database. Therefore, if the discount rate is not justified then the users of the financial statements will face situation of not having the correct figures of cash flows of the company (Financial Accounting Standards Board, 2014).
- Dependent Estimation with Cash Generating Units – It has been mentioned in the statement of Financial concept number seven that the estimation and the calculation of the future cash flows is dependent on the other assets. For this the big example is of the contractual assets where the cash flows can be estimated in an easy manner as each asset is linked with other asset and inputs. In case of the non contractual assets, it will be difficult to have the present value because of the availability of the non liked assets. Therefore, for the users of the financial statements, the information so supplied will be not reliable.
- Liabilities – As the present value of cash outflows so determined is not reliable then the liabilities so measured will in itself becomes non reliable (Financial Accounting Standards Board, 2014)..
In this manner, though the present value measurement is the part of the measurement process but it does not provide the meaningful information to the users of the financial statements.
The intangible assets forms part of the noncurrent assets and its accounting and treatment in the financial statements is considered as very important in providing the useful information to its users. But in actual there have been many cases where the accounting standard number 138 governing the intangible assets fails to provide the useful information to the users of the financial statements of the company through which they can have the better decision making (Mark, 2015)
First major limitation is regarding the assessment of the useful life of an asset. The company is required to make the estimation of the useful life of the intangible asset and sometimes the life of the asset is estimated as infinite which denotes that the intangible assets will work till the end of the company without being depreciated and amortized. Due to this the actual value of the intangible assets never comes into the picture. The whole value is treated manual.
Second major limitation is that in the accounting standard number 138, paragraph number 100, it has been mentioned that the residual value of the intangibles shall be assumed to be zero in case of the intangibles having the definite lives. However, it cannot be zero if someone has agreed to purchase the asset at the end of its useful life at the end of the life or when there is the active market for the intangibles. By having the residual value assumption, it is regarded as the value of the intangibles as computed by the company will not serve the purpose of the users to take the meaningful decision.
Third limitation is that the standard does not permit the valuation of the self constructed goodwill in the books of accounts which in itself restricted the use of the users of the financial statements. It is in the sense that the users can never have the information of the goodwill which has been created by the company over the last so many years from their production and the sales.
Thus, in this manner, the accounting standard does not provide the useful information to the users of the financial statements to make the effective decision.
Conclusion And Recommendation
Financial accounting is the branch of accounting which is basically done to inform the results and the performance of the company to its users both internal as well external. The financial accounting is mandatory for all the companies and the companies have to follow the methods and standards as envisaged by the regulating authorities. These standards are known by the name of accounting standards and in this report the accounting standards have been discussed in detail with regard to its development and the information it provides and the limitations in particular field such as in measurement of the assets and liabilities and in providing information regarding the intangible assets of the company. In order to conclude the report, the readers will have the deep knowledge about the accounting standards and necessary objectives and provisions.
It is recommended for all the companies on which these standards apply that the same shall be applied in the true and fair manner so as to enable the users and the stakeholders to have the useful and meaningful decision.
AASB, (2017), “The Standard Setting Process” available on https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx accessed on 14-05-2018.
AASB, (2017), “Enforcement of Accounting Standards” available on https://www.aasb.gov.au/About-the-AASB/For-students.aspx accessed on 14-05-2018.
Financial Accounting Standards Board, (2014), “Present Value-Based Measurements in Accounting (Discussion Memorandum)”, FASB Publications, 205(2), pp 92-108
Financial Accounting Standards Board, (2014), “Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements” FASB Publications, 207(1), pp 43-49
IASB, (2015), “Measurement basis for Financial Accounting” available on https://www.aasb.gov.au/admin/file/content105/c9/IASB_Canadian_MM_paper.pdf accessed on 14-05-2018.
Mark R, (2015), “Management incentives to recognize intangible assets”, Accounting & Finance, 57, pp 122-2444
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