Conceptual Framework for Obligations Financial Reporting

Question: Discuss about the Conceptual Framework for Obligations Financial Reporting. Answer: Introduction In todays world companies are expanding their operations globally; as a result financial reports are becoming more complex due to the high involvement of financial transactions. Due to the existing complexities, shareholders and stakeholders are not able to understand and analyze the financial report for their own use. Financial statements are included in the annual report of an organization which is a comprehensive report which addresses the need of knowing the financial performance of the company ti its shareholders, creditors and investors. Hence it is the responsibility of the accountants to simplify the terminology used in those statements to make every individual who is not technically qualified can read and understand. Internationally acclaimed accounting bodies such as IASB and AASB have provided a legal framework which gives a true and fair view of the organizations financial position. It is the duty and obligation of an accountant to make sure that these accounting standard s are followed properly and provide the right judgment about the organizations performance. They should disclose all material information which can affect the decisions of the investors in the long run. Importance of simplifying the annual reports An annual report of the firm gives an insight about the companys performance and its future strategic decisions taken in the previous financial year to its shareholders and stakeholders. It is very important that it should be provided in such a manner that it is understandable to everyone, to be very specific the companys investors. The investors analyze the important information and take crucial investment decision based on that. So, it is very important simplification of material information should be done (Deloitte, 2014). Elements of simplification: Materiality and disclosure: Organization should provide information which is relevant to the shareholders and stakeholders. Irrelevant information provided may distract and confuse the investors but not disclosing any financial information should not be misunderstood as concealment of important information which will considered as a fraud (Hughes Fisher, 2015). In the report of AGL energy information about their business growth, profitability of each business segment, future strategic plans and cost and expenses occurred are presented in very precise and clear manner (CPA, 2012) Illustrative tables and figures: It is not important for the user of annual report to understand important information between the lines. The information should be presented in an interactive manner so that the investor does not miss any relevant information. On the very first few pages all the information regarding companys EBIDTA, EBIT, underlying profits etc. are provided in a graphical format showing clearly the increasing and decreasing trends. Also AGLs major achievements and developments are highlighted using pictorial view (Grand thornton, 2015). Comparative analysis: Investors can only analyze the growth of the company by comparing current year performance with the previous ones. Comparison plays a crucial role in the investors decisions. AGL energy has stated the information of past 4 years in preparing the financial statements to provide an overview of companys performance (Deloitte, 2015) Footnotes and explanation: It is not possible to understand each and every item mentioned on the financial statements, so the companys explain the relevant details in the footnotes, so that it can provide additional detail view to the investors. In AGLs report all the necessary clarification regarding the financial statements are disclosed in footnotes in a very clear manner (HMT, 2014). Financial illiteracy in the context of IASB/AASB The purpose of preparing an annual report is to help the investors, lenders and creditors to take appropriate investing decisions based on the performance of the company. Not every individual is an expert in reading and interpreting the financial reports provided by the company. Companys financial report as it is prepared by professionals is complex and difficult to understand. Financial illiteracy in this context refers to situation where the investors or any concerned party are not in a position to understand the financial statements and as a result they are not being able to take any sound investment decisions. To cope with this problem internationally recognized accounting bodies such as IASB/AASB have provided a universally accepted framework in terms of accounting standards and concepts to simplify the annual report for its end users. The aim of these organizations is to set high quality understandable standards which are accepted uniformly all over the world. They provide vari ous guidelines regarding disclosure and presentation which is to be followed strictly. IASB/AASB standards are following principle based system which follows judgment based application of policies and procedures (ACCA, 2014). The advantages of following principle based system are: They give a true and fair view of the financial statements. It encourages the use of professional judgments rather than following rigid rules. More flexible can be changed with the change in business environment (AASB, 2015). There are certain concepts which provide a framework for the better understanding of the annual report. The annual report of AGL energy has been prepared in accordance with the AASB standards which are taken from the IASB standards. These are: Report Entity concept: Under the reporting entity concept more emphasis is laid on preparing the consolidated or combine financial statements of all the businesses of the organization. The report of AGL energy has prepped their statements in a consolidated manner and the loss mentioned is also consolidated loss (ICAS, 2012). Recognition and derecognition: According to the recognition concept all the material transaction should be brought into the light of the investor. Derecognition concept refers to ignoring all the irrelevant information which does not affect the investment decision should be ignored. AGL energy has mentioned in detail about their energy plant transactions, sale and purchase of their fixed assets in a detailed manner (IFRS, 2015). Measurement: It is the right of the investor to know the method used to evaluate the assets of the firm. AGL energy in their notes have disclosed that they have prepared the consolidated financial statement on the basis of historical cost method and financial assets are measured using fair value (ACCA, 2013). These concept provide an overview about the policies and procedures followed by the company in a simple and clear manner. The annual report of AGL has been a clear example of a good and precise report as it states all the necessary in an easy and organized manner, this report educate investors about all the material information which will form a strong basis for their investment decision (PWC, 2015). Role of professional judgment A financial report cannot be presented without the help of professional and qualified individuals. These professionals are Auditors, accountants and chartered accountants. Companies hire these people to give their professional judgments to make their financial report more reliable and credible. There is no governing framework for providing a professional judgment rather it is based on the abilities, experiences and intuition of the professionals (Ernst Young, 2015). As told before there is no governing law or standard for giving a sound judgment but they should be made in the context of existing applicable accounting standards, concepts and policies. Requirement for providing professional judgments: Professional judgments should be exercised by a professional who have knowledge and expertise in that area because it is assumed that they have the required skills and knowledge. Professional judgments should be taken within the framework of accounting standards, policies and concepts. Professional judgments should be taken while analyzing all situations and circumstances and professional should take the responsibility of their decisions (Ernst Young, 2015). The authority of taking professional judgments lie in the hands of the auditor and the prepare of the financial statement. An auditor is an individual who checks and verify all the information presented in the financial report before it is presented in front of the shareholders and stakeholders. Without the auditor the financial statements are mere a piece of information which is not verified and authorized. It is the responsibility of the auditor to verify and check each and every items and cross check that they have supportive evidence or not (ASIC, 2015). Elements of judgment on the basis of concepts: Neutrality: An auditor should be a third party who should not be influenced by the management a sit will not ensure the accuracy and will subject to biasness. So in order to provide a true and fair judgment the auditor should be neutral and provide a fair judgment to the shareholders. Prudence: While auditing the financial statements the auditor should provide a their expert judgment on the basis of analyzing all the facts and figures, because their judgment will become a criteria for investors decisions in future. Reliability: The auditor should check all the items present in the financial statement along with their supporting documents to ensure that they are reliable and not fraud. Materiality: The auditor should also check that all the material information are disclosed and there is no concealment of facts on the part of the company. Shareholders and investors only trust on reports which are authenticated by an auditor. No annual report holds any importance if it is not authenticated by an Auditor. The AGL energys annual report is also audited by the external auditor Deloitte. By appointing an external auditor the company ensure its lenders and investors that the financial information provided is unbiased and true to the best knowledge of the company and the auditor. Conclusion It is very important for every organization to comply with accounting standards so as to give a true and fair view of their financial statements. Legal compliance with accounting standards gives investors a confidence in the financial data presented. It is the responsibility of an accountant to simplify the financial terms and disclose all material information so that investors can acknowledge relevant information useful in taking investment decisions. Too much disclosure should be avoided as the investors may miss the useful information and the core purpose remains unsolved. The accountant should use their expert judgment in order to give unbiased opinion and guide the organization to follow the rules and procedures. 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