Sustainable Financial Management Investments: Principles And Strategies Essay.

Accounting Concepts

Discuss about the Sustainable Financial Management Investments.

Financial statements are reports that represent the financial health, results, and cash flows of an organization. The statements are crucial for the business because they determine the company’s ability to generate cash besides the sources and uses of the cash generated (Braun, 2012). Financial statements are also useful to the organization because they show the performance and commitment of the company with respect to paying back its debts. Financial statements are also useful in the investigation of various practices and transactions conducted by the business.

From the financial statements, it is possible to derive ratios that help to determine the company’s health. Such ratios include but are not limited to profitability ratios such as gross profit margin, return on assets, and return on equity (Braun, 2012); liquidity ratios such as the quick ratio, current ratio, working capital, and the acid test ratio (Brooks & Mukherjee, 2013); management efficiency ratios such as accounts receivable turnover, asset turnover, inventory turnover, and the days’ sales in inventory (Brigham & Houston, 2012). These ratios measure the different operations and results of a company that can help to determine the financial health of the company. This paper describes various aspects of a financial statement and the rationale and criticism behind the processes used to prepare the statements.

Financial statements report the financial activities of the company (Gibson, 2012). The statements represent the strength of the company, its performance, and liquidity. The basic contents of a financial statement include a balance sheet or a statement of financial position, a profit and loss statement also known as an income statement, and a statement of cash flow (Brooks & Mukherjee, 2013). The statement of financial position represents the company’s financial position for a given time, usually a fiscal year or quarterly. This statement is comprised of the assets owned and controlled by the business, the liabilities, which the business owes to others, and the equity, which the business owes its owners (Gibson, 2012). The statement of income has the income of the business over a period and the expenses incurred over the given period. The statement of cash flow, on the other hand, reports how the business has moved cash and its bank balances over a period.

The statement of income shows the profitability if the company during a period (Shim & Siegel, 2012). It can be prepared quarterly or annually. This statement may be presented in its entirety or be combined with other comprehensive income information the company may have. If combined with other comprehensive income, it forms a statement of comprehensive income (Gibson, 2012). The income statement is presented in a manner that provides full details about the earnings of the company to the investors and shareholders alike. This also involves presenting the information in a way that details the nature of the expenses (Noreen, Brewer, & Garrison, 2013).

The Qantas statement of income found on page 52 of the company’s annual report follows a similar pattern. The format follows that of presenting the revenue first followed by the tax expense and the post-tax profit or loss realized by the company. The company’s post tax loss or profit from discontinued operations is preceded by the net profit or loss results. To maintain relevance, the expenses incurred by the company are recorded by function. The representation of the expenses by their nature as it is case for Qantas implies that these expenses cannot be allocated among the various segments of the business. The company also included a statement of comprehensive income on page 53 of its report. The comprehensive income takes into account how factors such as currency translations adjustments, unrealized gains or losses on investments, and pension liability adjustments, affect the income or loss of the company (Hitchner, 2011). These figures are indicative of a volatile market or economic events but over time, they tend to even out.

Problems of Measurement in Relation to present AASB/IASB Standards and Conceptual Framework

Asset valuation is another term mentioned in the passage. Asset valuation refers to the process of gauging the value of the company, its property, and any other value items the company controls (Bolton, 2015). The assets can include buildings, stocks, equipment, bonds, goodwill, brands, and labour. The assets reported in the Qantas annual report include cash and cash equivalents, inventories, receivables, intangible assets, property and equipment, and deferred tax assets. Asset valuation is done by assessing the book value of assets and their market value (Fabozzi & Peterson, 2013). The former valuation is lower because the assets are reported by their historical cost. An asset is valued by comparing it to other similar assets and its cash potential. Cost of acquisition, replacement cost, and the accumulated depreciation values are used in valuation of assets.

Accrual accounting measures the financial performance of the company and its position by taking into account economic events regardless of whether cash transactions are conducted or not (Essayyad, 2015). The current inflows or outflows of cash in the company are combined with the cash flows expected in future. The method presents an accurate understanding of the company’s current financial health and is in no way related to cash accounting that only records transactions after cash has been exchanged. Terms such as accounts receivables as seen in the Qantas annual report indicate that the company uses accrual accounting.

The Conceptual Framework describes why financial statements are prepared and reported. These statements provide important information for interested investors, creditors, lenders and shareholders of the company to guide them when investing into the company. Thus, the Framework defines what is useful enough to merit being recorded in the financial statement to make a difference in the decisions investors, creditors, and other interested parties may consider (Benston, 2007). The usefulness of the information should also be improved by making understandable and timely comparisons and verifications.

The Conceptual Framework sets out the various concepts that determine the preparation and presentation of financial statements (Benston, 2007). Thus, the Framework assists IASB in identifying the concepts to be used when developing and revising the standards of financial reporting. However, the current framework has a few problems that make financial reporting difficult. Some sections of the Framework are unclear, while others are not covered and outdated.

The existing Framework does not have clear guidance on a number of areas. For example, the framework does not give clear definitions to assets and liabilities. The definitions provided in the framework do not focus on the economic resources and obligations but instead focus on the inflows and outflows of economic benefits generated by the economic resources controlled by the company (Mard, Hitchner, & Hyden, 2007). For example, on the balance sheet some current and non-current liabilities that bear interest are only reported in connection to specific financing of the engines and aircrafts for the respective aircrafts. Consequently, the company reported other non-cash financing activities in addition to plant, property and equipment under finance leases of $32 million.

The Conceptual Framework does not provide guidance on the measurement, presentation, and disclosure or how a reporting entity can be identified. The single basis of measurement for an asset and liability does not provide useful details to the reader of the statement (Hitchner, 2011). Consequently, the measurements do not include the amounts that can be added meaningfully, or subtracted or compared. The economic significance of the measurements, both individually and collectively are not covered. With regard to presentation and disclosure, presenting relevant information is a challenge because the Framework champions documentation of accounting constructs used by the company without defining the disclosures that can directly and efficiently relate to the primary objective of financial reporting (Bolton, 2015).

The current reporting standards (IFRSs) measure different assets at various historical costs such as is the case for some property, plant and equipment items; fair value such as investment properties, and the fair value directly attributable to the transaction costs (Neuhausen, Schlank, & Pippin, 2007). Such measurements do not clarify if the historical or current prices are used or if the cash flows estimated belong to the company or other market participants. There is thus a need to have a single conceptual measurement framework that provides guidance on the development of consistent requirements of measurement.

Accounting is largely responsible for providing a user of a financial report in making an informed choice about a certain financial decision. Financial reporting and accounting is however, limited in some respects and these have brought about the debate on faithfulness of the various methods used to estimate the costs and liabilities recorded in the financial statements. The use of different accounting principles to prepare financial statements helps to present accurate circumstances of the entity. These different frameworks and policies afford an entity with the flexibility to present reliable information about the company’s financial health (Zhang & Andrew, 2014).

However, the use of different frameworks in reporting financial performance can present a challenge when it comes to comparing the results with other players in the industry (Whittington, 2008). This is particularly true if the entities under comparison are found in different geographical localities but ply the same industry. Estimates, in this case cannot provide a closer comparison because the policies used to prepare the statements differ.

The AASB and IASB underline the importance of producing high-quality reports. However, it is difficult to do so because entities are yet to fully grasp how to operationalize and measure the quality demanded from them. Using estimates to prepare financial statements is a common practice. However, the estimates are inherently subjective and thus do not have the accuracy needed because they depend on the management’s foresight in approving the values included in the statements (Hitchner, 2011).

The use of fair value to estimate the value of assets and liabilities is a common practice and is also evidenced in the annual report from Qantas. According to the IFRS, fair value standard defines fair value as the price attained when an asset is sold or paid to transfer a liability between participants at the date of measurement (Benston, 2007). The orderly transaction in this case is the asset or liability that has been exposed to the market before a fair value measurement to allow other activities (Wells, 2011). An entity can thus measure fair value with the assumption that market participants will act in their best interest economically (Bolton, 2015). The fair value can be derived from internally generated input determinants such as the expected net cash flows of an asset (Bolton, 2015). It can also be measured from the fair value found on the date of the balance sheet date as a product of the quoted price and the held quantity (Gibson, 2012).

Low levels of faithful representation can affect the relevance of the value of the asset or liability. The low level may be caused by a low return in the stock, usually about less than 3% in a year. The fair value of the assets at Qantas such as cash and cash equivalents, non-interest bearing financial assets and liabilities were approximated by their carrying value because they have short maturity (Hitchner, 2011). The estimation process utilized their present value of future contracted cash flows. Future estimates were thus used for these financial assets and the report also cites AASB 9 Note 29(E) in the representation of the fair value of other financial assets and liabilities (Benston, 2007).

The use of internal variables in the measurement of the value of the assets and liabilities adds to the debate on value estimation and valuation. Some have discouraged the measurement of fair value at successive balance sheet dates because the fair value changes should not be added to the net income (Fabozzi & Peterson, 2013). However, such measurements of the assets and liabilities at the balance sheet dates do not necessarily necessitate reporting the values in the net income. This is so because some items such as effects of the error corrections and changes in methods of accounting are not measured at fair value but can be included in the income statement. 

Conclusion

Financial statements are crucial reports used by investors, creditors, and shareholders of a business to assess the financial health of the company. Through these statements the profitability, managerial competence, and liquidity of the company can be assessed. Aspect such ass asset valuation and faithful reporting of the value of the assets and liabilities of the company have been subject to much debate that hassled some to discredit the importance of preparing financial statements. One reason for this is how the firms estimate the cost of their assets and liabilities and when the valuation takes place. However, what is clear is that the firms such as the one discussed in this report, adhere to the standards and framework set out in the AASB/IASB and the Conceptual Framework in reporting their financial results. An entity reports and audits its financial performance and presents the results to the users of the report in a manner that will help them make informed decisions on whether to invest in the business or not. The different ways in the companies report their results in accordance with the set guidelines and rules should not be a basis of discrediting the statements.

References

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Bolton, B. (2015). Sustainable financial management investments: Maximizing corporate profits and long-term economic value creation. New York: Palgrave, Macmillan.

Braun, K. W. (2012). Managerial accounting. Toronto: Pearson Prentice Hall.

Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Ohio: Cengage Learning.

Brooks, R., & Mukherjee, A. K. (2013). Financial Management: Core concepts. Pearson.

Essayyad, M. (2015). Essentials of financial management. Research & Education Association.

Fabozzi, F. J., & Peterson, P. (2013). France: Capital markets, financial management, and investment management. Hoboken, NJ: Wiley.

Gibson, C. (2012). Financial reporting and analysis. Cengage Learning.

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Mard, M. J., Hitchner, J. R., & Hyden, S. D. (2007). Valuation for Financial Reporting?: Fair Value Measurements and Reporting, Intangible Assets, Goodwill and Impairment. New Jersey: John Wiley & Sons.

Neuhausen, B. S., Schlank, R., & Pippin, R. G. (2007). CCH Accounting for Business Combinations, Goodwill, and Other Intangible Assets. Chicago: CCH.

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Zhang, Y., & Andrew, J. (2014). Financialisation and the Conceptual Framework. Critical Perspectives on Accounting, 25(1), 17-26.