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ACC303 Contemporary Issues in Accounting

Published : 08-Sep,2021  |  Views : 10

Question:

Prepare a comprehensive report directed to an Australian ASX Top 100 listed corporation detailing a critical analysis of the effectiveness of the corporation to meet the obligations of the conceptual framework of accounting. Consideration of the Conceptual Framework Objective, Recognition Criteria, Fundamental and Enhancing Guidelines is essential.

Answer:

The conceptual framework for financial reporting plays a key role in underlying the presentation and preparation of financial statements for users to assist them in making effective decisions. Decision making is vastly influenced with the help of conceptual framework as it provides a strong foundation.  Hence, it is very important to them because it allows them to understand the limitations of financial reporting. Furthermore, in order to adhere to the requirements of the conceptual framework, the IASB has laid down various qualitative characteristics like materiality, relevance, reliability, etc that must be fulfilled by every company. Furthermore, the framework also specifies a recognition criterion that must be effectively met in order to report asset, liabilities, expenses, income, and equity in the financial statements (Conceptual Framework, 2016). For the purpose of this report, the annual report of Rio Tinto has been selected and it will be evaluated whether the company has complied with the requirements of the conceptual framework.

Satisfaction of objectives of conceptual framework

Based on the auditors’ report of Rio Tinto, it can be seen that its annual report has been prepared in compliance with the norms and procedures of IFRS (International Financial Reporting Standards). Furthermore, it can also be observed that such financial statements are in accordance with Article 4 of the IAS Regulation and the Companies Act 2006 that assists the IASB in the development of consistent and coherent accounting standards. Moreover, it can also be observed that based on the AASB (Australian Accounting Standards Board), the financial statements of the Group reflect a true and fair view of its performance, which clearly proves the fact that the company has met the objectives of the conceptual framework. Moreover, the report of directors prevalent in the annual report of Rio Tinto is also consistent with the disclosed financial statements that play a key role in assisting users in understanding the purposes and limitations of financial reporting (Rio Tinto, 2016). Overall, the financial statements and annual report of Rio Tinto are clearly in accordance with the company’s obligations to satisfy the presentation and preparation of consolidated accounts under the Corporations Act 2001 of Australia. This projects that the company has complied with the obligations stressing on the strong management of the company.

Recognition criteria

It can be observed from the financial statements of Rio Tinto that compliance with the recognition criteria to report all the necessary five elements of the conceptual framework has been appropriately done. In relation to assets, the same are presented in the statement of financial position of the company as non-current and current assets. For example, based on IAS 12 (recognition of deferred tax assets for unrealized losses) has been amended in order to clarify users how to account for such assets associated with debt instruments that are measured at fair value (Rio Tinto, 2016). Furthermore, the Group has reported about its intangible assets that are recognized at their original cost.

 Similarly, PPE of the company is also recognized at cost minus accumulated impairment losses and depreciation (IAS 16). In relation to liabilities, the financial liabilities and other borrowings of the company including trade payables are also in compliance with the recognition criteria, as the company has reported on their initial recognition at fair value (Everingham et al. 2007). Such liabilities are recognized at a net of incurred transaction expenses and thereafter, stated at amortized cost. Rio has also reported about its recognition of deferred tax liabilities on the mining rights that might have been identified in its acquisitions (Seilber, 2015). Hence, a clear observation has been made and the same is reported in a proper manner leading to a better disclosure.

In relation to equity, since it is defined as residual, Rio Tinto has effectively sub-classified the same in its balance sheet. For instance, reserves, share premium, and retained earnings have been separately recognized by the company in its annual report. Such classifications can assist the users in their decision-making process because it indicates legal or other restrictions on the company’s capability to distribute or apply its equity (Rio Tinto, 2016). Furthermore, with respect to income and expense, the same has also been reported by the company in various ways to provide relevant information to users. In relation to income, the Group has made sure that no material measurement differences are recognized betwixt IFRS 15 and IAS 18 (present revenue recognition standard). It also ensures under IAS 18 that all its shipping and freight revenue are identified and associated expenses are accrued in full on loading. Moreover, the impact of treating freight as a different performance obligation cannot affect earnings, cost, or earnings (Conceptual Framework, 2016). Furthermore, Rio does not recognize additional losses unless legal obligations to make payments on behalf of equity accounted units are incurred.

Fundamental qualitative characteristics

With respect to relevance, it can be seen that the company has offered meaningful financial indicators to the users that can be utilized to evaluate its performance. For instance, it has offered information of its underlying earnings in the current year and compared it with the previous year in order to report changes in such segment (Rio Tinto, 2016). Therefore, with such comparison, users can easily judge whether the company is performing properly or not. Furthermore, the company has also taken into account both financial and non-financial aspects of the conceptual framework in order to satisfy the quality of relevance in its reporting. This can be proved by the fact that the auditors (PWC LLP) of the Group have assured that the financial statements accommodate both financial and non-financial details so that material ineffectiveness with the audited report or financial statements can be identified easily (Conceptual Framework, 2016).

With respect to faithful representation, it can be seen that the company has adhered to the same by offering a written declaration from its directors stating the fact that its annual report clearly presents a true and fair view of its financial performance (Conceptual Framework, 2016). Moreover, in order to offer more surety to the same, the Group has also complied with section 295A of the Corporations Act 2001 (Rio Tinto, 2016). The directors also consider that the annual report of the company has been truly prepared in accordance with the applicable accounting standards that is assisted by reasonable judgments and estimates. Therefore, the company has efficiently adhered to the faithful representation and relevance concept in its annual report.

Enhancing qualitative characteristics

It can be seen from the annual report of Rio Tinto that the company has offered material information of its performance data for a period of past five years. For instance, in the annual report, the performance data of social, environment, and direct economic contribution of the company from 2012-2016 has been reported. These aspects have further sub-headings that clearly depict the performance of the company in different segments. Hence, the information can be compared easily with that of past five years to determine whether the company has been performing effectively in the mentioned areas (Rio Tinto, 2016). Therefore, this proves that the company has adequately adhered to the comparability aspect of the conceptual framework in its annual report. Furthermore, the company has appropriate verification procedures in place so that it can detect material errors if the data reported in the previous years are not able to ensure comparability over time (Conceptual Framework, 2016). Besides, if information can be easily compared with that of the past years, it can be easily verified whether the performance of the company in such segment is effective or not (Horngren, 2013).

With respect to timely information, it can be seen that the directors of Rio Tinto attain timely information so that they can fulfill their duties in an effective manner. This shows that if the directors are able to attain timely information to complete their responsibilities, then they are also capable of reporting such information to the users of financial statements, thereby completing the process of effective decision-making (Gibson, 2010). Besides, the company recognizes the significance of timely communication with its stakeholders and therefore, it ensures that its disclosure committee communicates all public reports, documents, etc to the stakeholders in a timely manner (Melville, 2013). Lastly, with respect to understandability, it can be seen that the performance indicators of the company have been reported in a simple manner that can easily be interpreted by users and that allows them to make effective decisions (Rio Tinto, 2016). Hence, the information clearly fulfills the understandability concept of financial reporting. Overall, all the enhancing qualitative characteristics of the conceptual framework have been adequately and efficiently complied by Rio Tinto.

Conclusion

After analyzing the annual report of Rio Tinto, it can be seen that the company has taken into account all the five elements of a conceptual framework for reporting financial details in its annual report. For such purpose, the company has effectively complied with the recognition criteria to report such elements in its annual report. Furthermore, it has also ensured that all the objectives of the conceptual framework are adequately met. For such purpose, it has also complied with the fundamental and enhancing qualitative characteristics of corporate reporting, which makes it clear that the users can easily make proper decisions based on such financial information.

Bibliography

Conceptual Framework 2016, Conceptual Framework Pronouncements, viewed 5 December 2017, http://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx 

Everingham, G.K, Kleynhans, J.E & Posthumus, L.C 2007,  Principles of Generally Accepted Accounting Practice,  Juta and Company Ltd.

Gibson, C 2010, Financial Reporting and Analysis: Using Financial Accounting Information, Cengage Learning.

Horngren, C 2013, Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Rio Tinto 2016, Rio Tinto Annual Report and accounts 2016, viewed 11 September 2017 http://www.riotinto.com/documents/RT_2016_Annual_report.pdf

Seilber J 2015,  FASB removes concept of extraordinary, retains guidance on unusual item, viewed 5 December 2017, http://www.pwc.com/us/en/cfodirect/assets/pdf/in-brief/us2015-01-fasb-extraordinary-unusual-items.pdf

Tysiac K 2015, No more extraordinary items: FASB simplifies GAAP, viewed 5 December 2017, http://www.journalofaccountancy.com/news/2015/jan/gaap-extraordinary-items-201511630.html

Williams, J 2012,  Financial accounting, New York: McGraw-Hill/Irwin.

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