Principles And Ethics Advanced Financial Accounting Essay

Question:

Discuss about the Principles and Ethics Advanced Financial Accounting.

Answer:

Introduction:

Financial accounting of the company should be prepared and presented by following the principles and standards on accounting for each of the components of financial information and transactions. The following assignment highlights the accounting issue in revenue recognition for a law firm Slater and Gordon that is based in Melbourne, Australia. It has been observed that the firm had experienced serious issue on maintaining the accounting policy for recognizing the revenue of “work-in-progress”. As per AASB 15, revenue from contract is to be recognized if the contract is approved between the parties to perform the contracted activities as per the terms and conditions of the contract (Eichengreen and Gupta 2015). In order to recognize the revenue from contract the firm is required to identify the terms of payment for products and services as well as there must be commercial substance. The firm is required to record the revenue transaction in the statement of income at the transaction price for the performance provided by the party. In the present case, Slater and Gordon firm did not follow the accounting policy to record the revenue of work in progress. As a result, the firm experienced several issues on incurring loss, fall in share price, consumers’ loyalty and other specified issues. The assignment covers reason on capital market issues, fall in share price, maintaining code of ethics with respect to the requisite of “International Financial Reporting Standard and Accounting Professional and Ethical Standard” (Badertscher et al. 2016).

Meeting the expectation of capital market

In order to maintain the business growth, firms or organizations are required to meet the expectations of capital market. Observing the article of “The Undoing of Slater and Gordon” it has been found that the firm faced serious issues for not maintain the accounting policies for recognizing the financial information. However, the firm worked to meet the expectations of capital market by maintaining the profitability, return on shares for investors, price- earnings ratios and other financial measures (Akbas et al. 2015). Growth of firm depends on the profitability percentage along with the other important measures. Profit of an organization is measured by considering the revenues and expenses that incurred directly or indirectly as well as after applying the expenses for tax. On the other hand, return on shares also known as earning per share is an important element to determine an organization’s capacity to pay off the investors (Spotts, Weinberger and Weinberger 2015). It is measured based on the weighted average outstanding ordinary shares of the company and net earnings adjusted by the interest and tax expenses. In the present situation, Slater and Gordon disclosed around $467 million as a revenue in work in progress in the year 2015 resulting in loss during the six months. However, the firm maintained the cost of capital structure as well as return on capital employed to meet the expectations of capital market. As reported in the article, firm Slater and Gordon managed to record the expected return on shares and capital for the stakeholders including investors (Virtanen, Parvinen and Rollins 2015).

Reasons of fall in share price

Market price of the shares of the organization or companies depends on the several factors through internal and external sources. The share market or stock market follows the trend of bullish and bearish trend for the fluctuations of the stock price of the firms and organizations. Bullish trend represents rise in the price of shares while bearish trend represents fall in the price of stocks. In the case of Slater and Gordon, the firm experienced fall in share price by almost 50% and accordingly faced a bearish trend in the recent year 2015 (Keyhanian and Rabbani 2015). Such fall in share price of the firm was due to several internal and external reasons during the years 2013, 2014 and 2015. One of the major reasons for a fall in the price of share was issues in following the accounting policies for recognition of financial information. During the year 2015, the firm recorded huge amount of revenue in work-in- policies that were not confirmed by the contracts to perform the activities. Further, the firm also experienced the poor trading results as well as issues in accounting records amounted to $80 million in the year 2013 and $90 million in the year 2014. Additionally, firm experience the bearish trend due to decline in the earnings of around $958 million during the half year in 2015. As there was constant decline in the revenue of the firm due to inappropriate recognizing of accounting information and lack in management accounting. The firm also failed to comply the requirements of the investors for decline in the dividend payment as well as paying the investors as per the expected rate of return (Mardini and Power 2015).

Recognition of service revenue

According to the IAS 18 on “Revenue Recognition”, revenue for any firm is termed as gross inflow from the business operating activities and other economic advantages. As per the principles of IAS 18 revenue from the operating activities are to be recognized at fair value. If there is an exchange of goods or service that are of similar nature, then the consideration received from such sale cannot be regarded as revenue. Additionally, the revenue by firms or organizations is to be recorded if the firm is sure about the inflow of “future economic benefit” from the sale of the products or services. Another condition that has to be satisfied is that the amount of consideration would be determined with reliability. Further, revenue from the sale of products or services would be eligible for recognition if the risk and reward from the sale has been transferred to the buyer along with the reliable measure of costs (Bohusova and Nerudova 2015).

Considering the IFRS 15 on “Revenue from Contracts with Customers” the firm is required to recognize the consideration against the contracts entered with clients except the contracts on lease, consolidation accounting. According to the requirement of the standard consideration from the contract is to be recorded if the agreement creates rights and liabilities as enforceable between the parties. In order to record the revenue from the contract, it is significant to identify the obligation of performance as per the agreement, transaction price and the performance liability should be satisfied (Lim, Devi and Mahzan 2015).

In the present case, Slater and Gordon recognized the revenue for the contract services that was not completed during the accounting year. It was observed that the firm did not receive the payment for the services as well as the performance obligation for the work was not satisfied. Yet the firm recognized the revenue for work-in-progress in the financial year 2014 with an amount $467 million while $826 million in the year 2015. In view of the standards of IAS 18 as well as IFRS 15, this amount should have been recognized either if the firm had received the consideration payment or if the contractor satisfied the performance obligation of contract service (Martin and Van Linden 2015).

Compliance of accounting standard by the firm as per IFRS 15

According to the principles and regulations of “IFRS 15 on revenue recognition from contracts with the consumers”, consideration from all the contracts is to be recognized. However, certain contracts are excluded from the requirements of IFRS 15 that are contracts on leases, contracts on financial instruments, contracts from insurance business, consolidation contracts and joint agreement business. As per IFRS 15, revenue from the contract should be accounted by identifying the contract or agreement as well as the obligations of performance with the consumers (Salotti and Carvalho 2015). It is significant to determine the transaction price of the contract as well as the performance obligation during the recording of revenue from contracts. In case of Slater and Gordon, the revenue had been accounted for work in progress for the financial years 2013, 2014 and 2015. The firm accounted the amount of revenue not collected from the consumers nor did the company receive the satisfaction for the performance obligation for the part of contract services. As per the accounting framework, recognition of financial information should be done by following the prudence level and accrual basis. Accounting standards require the recognition of revenue or consideration only when the amount is received against the trading of product or services. Since the firm recognized its revenue without realizing the same, it cannot be said that the Slater and Gordon followed the principles of IFRS 15 (Wagenhofer 2016).

Analysis of recognized revenue

Slater and Gordon is a law firm that recognize its revenue on the progressive work basis since it is engaged in the business of rendering law cases related to “personal injury cases”. However, as per the IFRS 15 and IAS 18 revenue on contracts is to be recorded if it has been received and the performance obligation has been satisfied. In case remuneration for contracted service received partly then the remuneration should be recognized in proportion to the percentage of work completed (Liu, Liang and Wang 2015). Besides, in the given case of law firm, it has been noted that the firm recognize its revenue from the cases on progressive basis. For certain cases the firm ensures the success of the cases and for some of the case it may not win the case yet it record the consideration for the all the cases that are work-in- process. During the financial year 2013, the firm recorded its revenue on basis of completed cases as well as for the cases that were under process. Out of the cases that were under process included the revenue for cases that the firm was not sure to win and as a result the firm would not receive the service charges. Considering the principles on accounting of revenue from contracts as per IAS 18 and IFRS 15, revenue recognition for incomplete services should not be recorded (Choi and Young 2015).

During the accounting year 2014 also the firm recognized its revenue on the basis of work in progress. Its total revenue recorded in the year 2014 amounted to $37,538,814 included the consideration of cases whose success was not confirmed. Accordingly, the management of the firm was not supposed to recognize the revenue for those pending cases. On the other hand, revenue for the financial year 2015 had been recorded for all the contracts undertaken by the firm. The amount of revenue recorded included the revenue that was not collected by the firm as the cases were pending (Singleton-Green 2016). Apart from that, the revenues collected from the pending cases were related to the cases of financial year 2013 as well as of 2014. It has been observed that the firm did not follow the required accounting policies and standards on recognition of revenue related to the contracts with the consumers. One of the major reasons for decrease in Slater and Gordon’s revenue is the recognizing policy as per the accounting standard IAS 18 and IFRS 15. In the year 2015, firm recognized the revenue for the cases related to the current year while amount collected for previous years were already recognized in those related years (Ingason 2015).

Factors influence the choice of accounting policy

Accounting of financial information is required to be done based on the relevant accounting policies and frameworks. Accounting frameworks states the accounting should be done on prudence basis, accrual basis and should present the reliable information to the users of accounting books. However, the principles on standards of accounting states the recognition criteria to record several elements of financial information that also gives choice to the companies and firms to adopt such criteria (Harriss and Atkinson 2015). In the given situation, Slater and Gordon selected the positive accounting theory to recognize its financial information. Positive accounting theory is a theory that explains the actual practice of accounting for the financial information for the efficient recognition of company’s financial performance. Factors that influence that selection of accounting policy are the financial results should reveal the true and fair view of company’s financial performance on earnings and costs. Another factor that influences the choice of accounting policy is the tax benefits. Since the firm is required to pay taxes on income, it is important to correctly recognize the business related costs and incomes (Svensson, Wood and Callaghan 2015). In case of Slater and Gordon, the firm was recognizing its revenue from contracts on the progressive work for the cases on which the actual consideration had not been collected. Such recognition revealed the higher and unfair income of the firm because the amount was not received by them. Accordingly, Slater and Gordon adopted the accounting policy to record the revenue and other financial components by following the “positive accounting theory”. The firm adopted the policy on revenue recognition by following IFRS 15 because it reflects the revenue on the basis of satisfaction of the performance obligation as well as on receipt of the related amount (Aryee et al.2015).

Reason for decrease in revenue for the financial year 2015

During the financial year 2015, the revenue of Slater and Gordon dropped in comparison to the accounting year 2013 and 2014. One of the major reasons for such fall is the criteria of revenue recognition as per the principles of IFRS 15, “revenue recognition from contracts with consumers”. During the previous years, the firm was recognizing the revenue for cases that were pending and there was no confirmation on receipts of revenue from such cases (Jaggi et al. 2016). Accordingly, the income of the firm reflected the inflated income in the years 2013 and 2014 for the amount that was actually not collected by the firm in the accounting year. However, in the accounting year 2015, the firm changed its accounting policy and adopted positive accounting theory to recognize its revenue by following the requirements of IFRS 15. According to this policy, the firm recognized its revenue from contracts based on the amounted actually collected and for the cases, that ensures the satisfaction of performance obligation (Hopper and Bui 2016). Therefore, in the year 2015, the firm could not recognize the revenue for the pending cases and as a result, the recorded revenue in the accounting records dropped in comparison to the previous year. Moreover, the firm could not recognize the consideration received for pending cases that were received against the cases of 2013 because it had already been recorded in the same year. Hence, the revenue of Slater and Gordon in the financial 2015 declined with a high percentage from that of the year 2014 and 2015 (Ve?Ќerskien?—, Valan?Ќien?— and Boguslauskas 2015).

Principles and ethics in accounting practices

Preparation and presentation of financial information should be done as per the fundamental principles and code of ethics of accounting. It is essential to follow the requisite principles of accounting by maintaining the ethical codes, which is regulated by APES 110. In order to recognize the financial information it is essential to follow the fundamental principles of integrity, objectivity, confidentiality, professional competence and appropriate use of accounting policies and standards. Further, APES 110 states the code of ethics for professional accountants for recognizing the business transactions to reflect the true and fair view of organizations’ financial performance. As per the APES 110, professional accountants are required to follow the integrity on recording the expenses and incomes. It is important for the accountants to be honest and required to avoid the biasness or undue influence for determining the performance of the business organizations (Flammer 2015).

In the present case, Slater and Gordon prepared and presented its accounts for the year 2013 and 2014 by recognizing the revenue for pending cases the amount of which was not received by the firm. Such recognition of revenue reflects the breach of code of ethics and fundamental principles of accounting practices. On the contrary, it was found that the accounting balance of the firm for the year 2013, 2014 and 2015 reflected disputed balance amounted $80 million, $90 million during the financial year 2013 and 2014 respectively. It was due to the breach of accounting principles with respect to the integrity, objectivity and professional competence for disclosure of revenues not received by the firm (Dobrzykowski, McFadden and Vonderembse 2016).

Conclusion

It can be concluded from the case of Slater and Gordon that recording of financial transactions should reflect the true and fair view of the performance of the business activities. Expenses and revenues of the organizations are the most significant financial element that discloses the financial result for the accounting year. In the case of Slater and Gordon firm faced the issue on recognizing the revenue from contracts with customers during the financial year 2013 and 2014. However, the firm maintained the expectations of capital market through earnings from shares, expected return to the investors on capital employed and by maintain the cost on capital structure. Besides, the firm experienced the fall in its share price by almost 50% during the year 2015 because its revenue dropped at a high percentage in comparison to the year 2013 and 2014. For the purpose of recognizing its revenue from contracts the firm did not follow the principles of IAS 18 as well as IFRS 15 as a result it reflected the inflated income. Moreover, in the accounting year 2015 the firm adopted the positive accounting theory and followed the regulations of IFRS 15 to recognize the revenue. As a result, the income of Slater and Gordon dropped in the year 2015 and revealed the breach in following the fundamental principles of accounting and code of ethics for the years 2013 and 2014. As the firm experienced several issues with respect to the revenue recognition in the accounting years 2013 and 2014 for the amount that was not collected by them, it opted the positive accounting theory during the year 2015. The company adopted the accounting practice by following IFRS 15 for recognizing the revenue from contracts that were completed and actually received that eventually reflected a decline in the firm’s income.

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