Financial Accounting Essay

Question:

Discuss the measurement and recognition requirements of the relevant accounting standard. Review the most recent financial statements of a listed Australian firm and provide discussions about the measurement and recognition disclosure provided by the company in compliance with the relevant accounting standard.

Answer:

Introduction

With increasing modernization and development in the world, the size and level of transactions have also increased that is ultimately a good indicator for progression but it is to be noted that this increase in the transactions have made the disclosure of information more tougher because users are confused about when to disclose, how to disclose and for whom to disclose. With the support of accounting boards like IASB and AASB, specific standards are being set that must be complied by all but due to this varied and over-stretched nature of transactions, one universal rule to be followed by all gets failed to be applied. Therefore disclosure of information is required but according to Materiality, only the important information must be taken into account and the unimportant ones must be avoided. As a universal rule fails to be applied for every single company, it can be understood that Materiality is a subjective factor that depends on the nature and size of transactions and hence information can be considered material for one company while other company may not feel the same (Choi & Meek, 2011).

Disclosures and Measurement of Intangible assets

There are various users of the financial statements and they also use it for different motives like taxation motives, business motives and educational motives etc. Simply saying, these general purpose financial statements have different uses for different users and thus in order to satisfy the users, the information must be materially complete and exempted from any flaws (Graham & Smart, 2012). The threshold of materiality for intangibles for one company may differ from other companies because it varies over time and hence the threshold point when the disclosure of information becomes essential, that point is defined as Materiality (Albrecht et. al, 2011). IASB states that information is material if its omission or misstatement can influence the judgement of someone who relies upon the financial statements. Materiality helps in the break-up of amounts of relevant items present in the financial statements.

In order to depict a true and fair position of the business, the information in the financial statements for every item including intangibles must be materially complete from all aspects. This materiality concept is closely associated with some other concepts of accounting that are reliability, relevance, comparability, understandability and completeness. According to the Reliability concept of accounting, only that information of transactions must be recorded in the financial statements which can be verified with objective evidence (Gibson, 2012). This means that the information must be completely accurate and true in all aspects so that the users can place their reliance on the same. Materiality is also linked with relevance concept due to the reason that both the concepts imply that information can be considered relevant if it can help the users in predicting future business trends and for this purpose, the irrelevant matters from the statements must be avoided. Both Completeness and Materiality concept in turn fulfill the requirements of Reliability concept because information in financial statements can be considered reliable if it is materially complete in every aspect. Both the Comparability and Understandability concept are also associated with Materiality because according to all these three concepts, information must be materially complete so that the users can understand it and make decisions for future but for this, the information must be comparable with that of the previous years so that better decisions can be ascertained (Deegan, 2011).

Evaluation of BHP Billiton Ltd

In order to understand more about the concept of materiality in the financial statements, BHP Billiton Ltd has been chosen for this purpose that can help in explaining more details about the topic. By observing the annual report of this company, it can be understood that the company has been followed many aspects of Materiality. The most relevant aspect followed by the company is associated with Corporate Governance of a company and in relation to this; BHP Billiton has appointed the ASX’s second edition of Corporate Governance Principles and Recommendations (BHP Billiton, 2015). With the help of this aspect, outsiders and investors have become confident towards the company and are interested to be informed about the functioning of the Board and its composition. It can be observed that these aspects are very beneficial for the company and hence are considered material for it. It can also be observed that various relevant matters regarding the composition of Board, appointment of Board, Independence of the Board and Board meetings are also accommodated in the annual report of BHP. If any of the directors of the company pursue a material interest in respect to any transaction in the company, then that director must be debarred from voting in the meetings of the company. He also loses the right to participate in the meetings of the company where such transactions are discussed. The only condition required is that the director’s material relationship in respect to a transaction must be other than his role as a director. If not, then this situation does not prevail.

The net cash position of operating, investing and financial activities can be obtained through a cash flow statement. As materiality helps in providing support to the users of financial statements that enables them in decision making, it is advised that the management and preparers of the financial statements must bound themselves with a duty to discuss matters with the auditors of the company in relation to the matters requiring disclosure (Guerard, 2013). The accounting standards of this company prescribes that only some specific companies or entities are needed to disclose their financial information but the ascertainment whether the information to be disclosed is relevant or not to the management and other users is a materiality related decision.

The annual report of BHP Billiton also provides the importance of risk disclosure in a company. In the present scenario, the business world is filled with several risks and uncertainties and in order to counter these risks, the financial statements of the company must disclose the material risks associated with the business (BHP Billiton, 2015). This can help the investors to make relevant investment decisions relating to the company. Disclosure of risks is thus considered to be a very important aspect (Brigs, 2013).

As discussed earlier that the annual report of BHP Billiton comprises of details on the Board meetings, Independence of Board etc, this disclosure can fetch several advantages to the company because outsiders are keen to know about the functioning of the company and its reliability level and disclosing such information helps in building integrity and trust upon the outsiders. They can exert confidence on the company in relation to several matters that can in turn develop the goodwill of the company (BHP Billiton, 2015). Setting a threshold point for the expenses of the company helps in avoiding the irrelevant items from the statements and also the useful life of an asset together with an estimate on asset amortization enables the stakeholders to make a judgement regarding the fulfillment of statutory requirements of the company (Libby et. al, 2011).

Conclusion

The concept of materiality can thus be understood and it can be known what emphasis it has on the efficiency of the company’s functioning. It clearly helps the users of financial statements in effective decision making but it is to be noted that nowadays, financial information is being determined on both qualitative as well as quantitative attributes that clearly indicates a serious lack or loophole in the functioning of the legal or compliance system (Davies & Crawford, 2012). This deficiency in the compliance system generates an urgent requirement for professional judgement on matters relating to materiality. Due to the improper function of compliance system, professional judgement is being stressed by everyone so that the materiality concept is not taken to another level and its efficiency is safeguarded on the minds of every user of financial statements. Thus, this makes it clear that not only the monetary effects are taken into consideration for determining and testing materiality but also there are other factors that must be given due importance.

References

Albrecht, W., Stice, E. and Stice, J 2011, Financial accounting, Mason, OH: Thomson/South-Western.

Brigs, A 2013, Financial reporting & analysis, Mason, Ohio: South-Western.

Choi, R.D. and Meek, G.K 2011, International accounting, Pearson.

Davies, T. and Crawford, I 2012, Financial accounting. Harlow, England: Pearson.

Deegan, C. M 2011, In Financial accounting theory, North Ryde, N.S.W: McGraw-Hill.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Graham, J. and Smart, S 2012, Introduction to corporate finance, Australia: South-Western Cengage Learning.

Gibson, C. 2012, financial statement analysis, Mason, Ohio: South-Western.

Libby, R., Libby, P. and Short, D 2011, Financial accounting, New York: McGraw-Hill/Irwin.

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