Issues in Accounting

Question : What is the Caontemporary Issues in Accounting ? Answer : Introduction The International Accounting Standards Board (IASB) has developed the conceptual framework in accounting that guides the preparation of financial reports by business corporations around the world. The main objective of conceptual framework in accounting is to ensure that business corporations prepare the financial statements as per the basic concepts of International Financial Reporting Standards (IFRS). The current accounting framework ensures that financial reports prepared by business corporations are in accordance with the standard accounting practices and procedures developed by IASB (Hoffman, 2016). In this context, the present report analyses and examines the compliance of annual reports of Commonwealth Bank and St. George Limited Bank as per the conceptual framework and AASB standard requirements. The banks areregistered under the ASX (Australian Securities Exchange) and the report aims to identify the differences in the financial disclosures of both the corporations. In addition to this, the report also addresses the inclusion of prudence for addressing the disparity in corporate reporting. The Commonwealth Bank is an Australian multinational bank operating its business across New Zealand, Asia, USA and the United Kingdom. The banking corporation prepares its annual report in accordance with the conceptual framework principle of reliability, relevance and comparability (Commonwealth Bank, 2016).. The relevance principle of conceptual framework ensures that financial reports prepared by a corporation should not be lengthy and complex to be understood by the end-users. The financial statement prepared by the Commonwealth bank is in accordance with this principle of conceptual framework as the financial information disclosed is simple and relevant for the end-users. The directors report of the banking corporation also declares that the financial figures presented in the financial statements are free from any material error in accordance with the materialistic principle of accounting. The banking corporation has disclosed all the materialistic financial information relating to Net Profit after Tax (NPAT), operating income, total revenue, Earnings before interest and tax (EBIT). This is done to comply with the reliability principle of conceptual framework according to which the financial information presented in annual report should be true and reliable. The financial reports are also prepared in accordance with comparability principle of conceptual framework of accounting (Whittington, 2008). The financial results of the current year presented in the annual report of the banking corporation are compared with the results of the previous year. This is done so that investors can easily predict the percentage growth of the bank in the current financial year for investment purpose . The directors report of the banking corporation has also presented detailed information regarding the compensation offered to key management personnel. The remuneration report of the Commonwealth bank is prepared in accordance with the standard accounting practices of AASB. The banking corporation has appointed its distinct remuneration committee to decide on the fixed and variable remuneration offered to key executive and non-executive directors. The remuneration report of the bank is developed in strict adherence with the AASB accounting rules and practice with no concealing of financial facts and figures related to compensation. The directors report presents clearly the accounting policies adopted for preparing the financial statements in order to comply with the AASB standards and the Corporations Act 2001. There is proper disclosure of consolidated financial statements that complies the financial information of all the subsidiaries of the bank in a single economic entity as per the Corporations Act 2001 (Mbira and Tapera, 2016). The financial statements are prepared as per the historic cost convention and the amounts in the financial report are rounded to the nearest million dollars in accordance with the AASB standard requirements (Commonwealth Bank, 2016). On the other hand, St. George is a banking corporation in Australia that has undergone merger with the Westpac banking corporation in the year 2008. St. George Bank is a small banking corporation in comparison to that of Commonwealth bank. The bank follows the principle of relevance, reliability and comparability of conceptual framework accounting as reflected from its annual report of the financial year 2008. The remuneration report of the bank also discloses all the relevant information regarding the fixed andvariable compensation offered to the key management personnel. The compensation offered to the key executive and non-executive directors are presented in the financial report clearly. However, the banking corporation has not clearly disclosed the information relating to the accounting policies and practices used in preparation of financial statements. The accounting method used in preparation of financial statements is not stated in the annual report and as such bank does not effective comply with the AASB standard requirements (St.George Bank Limited, 2009). Reason of Non-Compliance with the Conceptual Framework and AASB Standard Requirements As analyzed from the discussion above, the St. George bank does not effectively comply with the conceptual framework and AASB standard requirements. The reason for non-compliance of the banking corporation effectively with the AASB standard requirements may be due to its small-size business nature (St.George Bank Limited, 2009). AASB has developed its different set of accounting rules and policies for small-sized business entities and therefore it is not required by them to comply with all the conceptual framework and AASB standard requirements. The small-sized companies only need to follow the necessary accounting reporting rules known as IFRS SMEs that are developed exclusively for them (Ataman et al., 2014). Differences in disclosures of the Commonwealth and St. George Banking corporations The analyses and examination of the annual reports of Commonwealth bank and St. George bank has shown that there exists a wide difference between the annual report disclosure formats of both the corporations. The commonwealth bank complies with all the principles of conceptual framework accounting and AASB standard accounting practices. The accounting policies adopted in preparation of financial statements are in accordance with the AASB accounting practices to make them easily understood by the end-users. The financial information in the annual report is disclosed in a comprehensive format so that investors can easily analyze the financial position of the bank (Titilayo et al., 2014). The financial statements of the parent bank and all its subsidiaries are presented in a consolidated manner as per the accounting principle of consolidation (Unegbu, 2014). This is also done to ensure that all the financial facts and figures are disclosed to the investors with no hiding of financial in formation (Commonwealth Bank, 2016).. On the contrary, the annual report of St .George banking corporation before is merger with the Westpac Banking Corporation reveled that it does not effectively comply with all the AASB standard requirements. The bank has not properly disclosed the accounting policies adopted for preparation of financial statements. The annual report of the Commonwealth bank has adequately disclosed the accounting method used in preparation of its financial statements. However, the accounting method used by St. George bank is not properly revealed in its annual report. The bank has also not clearly revealed the accounting policies adopted for segment reporting and the different convention used for preparation of financial reports. Thus, as such there exist a wide difference between the annual report disclosures of the commonwealth bank and St. George bank limited (St.George Bank Limited, 2009). Addressing Corporate Disparity through including prudence in Conceptual Framework Revision The concept of prudence is in accordance with the conservatism principle of accounting that prevents overestimation of revenue and underestimation of expenses at the time of preparation of financial statements of business corporations. The concept of prudence has long been a part of conceptual framework for maintaining consistency in the financial reporting. However, it has been removed from conceptual framework on the basis of biasness it causes in financial reporting through introduction of conservatism (Malley, 2014). The concept of prudence was removed from the conceptual framework by the IASB in the year 2010 dues to its incapability in preparing of high quality financial reports. The concept is recently included in the conceptual framework revision to maintain neutrality of financial statements prepared by business corporations. The conceptual framework revision by IASB has included prudence to prevent the misrepresentation of financial statement by business corporations (Perso ns, 2013). The decision is taken by the IASB due to occurrence of large number of corporate scandals due to overstating of revenues and understating the expenses for enhancing their profitability position in the financial market. This caused the inclusion of prudence in the conceptual framework accounting so that reliable and valid financial information is presented to the investors. The inclusion of prudence in the conceptual framework will restrict the business corporations to enhance their profitability position without its actual occurrence. The concept of prudence would help in presenting realistic and faithful information to the stakeholders thus promoting transparency and authenticity in business operations. It will help in overcoming the corporate scandals that are occurring on large basis presently due to presentation of fraudulent information in the financial reporting (Mazhambe, 2014). The IASB has removed the concept of prudence initially in the conceptual framework of accounting as it restricts businesses in creation of hidden reserves. However, with the widespread occurrence of corporate scandals the inclusion of prudence has become of utmost significance for the International Accounting Standards Board (IASB). The concept of prudence has been on the debate since its origination as it tends to bring conservatism in business operations. The recent business scenario demands the presentation of accurate and realistic financial figures before the investors to create a good brand image in the financial market. Thus, IASB has incorporated the concept of prudence in the conceptual framework of accounting for conserving the interest of investors (Araujo and Gomes, 2015). Recommendations On the basis of overall discussion held in the report, it can be recommended to the business corporations that they should effectively comply with all the principles of conceptual framework and AASB standard requirements for strengthening their brand image. The effective compliance of conceptual framework and AASB standard requirements has caused the goodwill of the commonwealth bank in Australia (Commonwealth Bank, 2016).. On the other hand, St. George bank does not effectively comply with the AASB accounting standard requirements and thus has not achieved a global image in the financial market. The bank due to its poor financial performance has undergone merger with the Westpac banking corporation in the year 2008 (St.George Bank Limited, 2009). Thus, it is recommended to the business corporations worldwide to proper their financial statement in accordance with the accounting principles and conventions advocated by the IASB. In addition to this, the business corporations should eff ectively follow the principle of prudence in the preparation of their financial statements. This is essential for overcoming the occurrence of fraudulent activities by business corporations and presenting true and realistic financial figures before the end-users. The concept of prudence will help in overcoming the mis-representation of financial information and thus help in presenting reliable information to the end-users (Knight, 2004). Conclusion Thus, it can be said from the overall discussion held in the report that it is essential for the business organizations to comply with the principles of conceptual framework and AASB standard requirements. The accounting methods used for the preparation of financial statements must be in accordance with Corporations Act 2001 in Australia to effectively comply with the AASB standard requirements. 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