Financial Reporting and Accounting Standards

Flashcards based on lecture notes about financial reporting and accounting standards.

1. Define ‘reporting entity’ as per the Conceptual Framework, and AASB 1053. Describe the characteristics that help dependent users to identify a reporting entity.  Discuss evidence of each characteristic found within the company’s annual report that prove that the company has public accountability.                                                                                      

‘A reporting entity is an entity that is required or chooses to prepare financial statements’ and also ‘a reporting entity is not necessarily a legal entity’. AASB 1053 details that a reporting entity is required to prepare financial statements if it has public accountability, meaning accountability to those existing/potential resource providers and others external to the entity who make economic decisions but aren’t in a position to demand reports tailored to their particular needs.

There are 3 main characteristics of a reporting entity:

1.            Separation of management from Economic Interest: The greater the separation of ownership and management, the more likely that there’ll be users depending on financial reports to be informed. Shareholders are owners of a company, but company management and a board of directors make decisions regarding company affairs. To make investing decisions, shareholders need company reports for information as they aren’t involved in the daily management of the company. Evidence 1 (pg. 240) showcases the existence of major shareholders that aren’t directors of the BHP Group and evidence 2 (pg. 113) shows shares owned by directors and therefore indicates a separation in the management of the business.

2.            Economic and Political Importance: organisations that have an impact on communities, provide services and assistance to society, or play regulatory roles, will have users that want to be informed about their operations and hence depend on operational reports to make financial decisions. Evidence 3 (pg. 49) shows a table addressing various risks and influences that climate change could have on the business, including those of economic and political importance. Evidence 4 (pg. 66) showcases their impact on the community, with specific initiatives and research targeting them, such as the baseline studies, along with awareness of community concerns mainly regarding the environment.

3.            Financial Characteristics: If an organisation is significant financially, it’s more likely that there’s users that want to monitor and review operations and results. Evidence 5 (pg. 8), shows significant figures from Australia such as US$34.7 billion towards total economic contribution and 49892 employees and contractors, overall indicating the company’s financial significance.

2. General Purpose Financial Reports (GPFRs) must follow accounting standards and also include certain qualitative characteristics described in the Conceptual Framework.  Discuss the purpose of accounting standards.  Provide the name, number and brief explanation of any two accounting standards found on the company’s annual report.  Also explain what qualitative characteristics are.  Describe these characteristics:  faithful representation, comparability and timeliness, discussing evidence of such characteristics found within the annual report.         

The Australian Accounting Standards Board (AASB) issues accounting standards to guide accounting practice and ensure consistency and comparability in General Purpose Financial Reporting (GPRF’s) across Australia. Accounting standards apply to all reporting entities (mandatory) and are enforced by the Australian Securities and Investments Commission (ASIC). The purposes of accounting standards are:

1.            Protects External Users of Reports by assisting creditors, investors and other parties to analyse and make informed judgements about entities; facilitating the provision of financial information; providing for comparable reports so users can compare information over time and between similar entities.

2.            Assist Directors in discharging their obligations by assisting: preparers of financial reports through a framework and benchmarks to follow; facilitation of accountability; promotion of accurate reporting.

3.            Facilitate Australian Capital markets: Accounting Standards maintain investor confidence in the Australian economy through consistent reporting across reporting entities and sectors of the economy, enabling Australian companies to operate effectively internationally. This is done by promoting market efficiency (therefore reducing the cost of capital) and encouraging confidence of creditors and investors in financial reports.

Evidence 6 (pg. 193) shows a few amended and implemented accounting standards. IAS 1/ AASB 112 ‘Presentation of Financial Information’ establishes the general framework for how entities should prepare and present their financial statements ensuring consistency, comparability, and transparency across all financial information. IAS 12/AASB 112 ‘Income Taxes’ deals with the accounting treatment of income taxes, ensuring entities recognise and measure current and deferred tax obligations correctly.

The Conceptual Framework describes qualitative characteristics as fundamental principles financial reports should have to be considered true, fair and as useful as possible, making information quality high and reports being easier to use. Some include:

1.            Faithful Representation: To be useful, financial information must be relevant and faithfully represent that information. To be perfectly faithfully represented, information must be complete, neutral and free from error. Evidence 7 (pg.149) shows part of the notes related to expenses, listing all expenses incurred. Without it, only the total expense figure seen in the consolidated income statement has been informed, thus the information would be incomplete and not faithfully represented.

2.            Comparability: users decisions involve choosing between alternatives. Information about a reporting entity is more useful if it’s comparable with similar information about other entities/the same entity for another period/date. Evidence 8 (pg. 134) shows a consolidated balance sheet, prepared and presented as to meet the external obligations of the ASIC. The previous year’s financial position is also shown, therefore showcasing comparability.

3.            Timeliness means having information available to decision makers on time as to influence their decisions. Generally, older information is less useful. Evidence 9 (pg. 137), the basis of preparation of all the financial statements in Annual Report are “as at and for the year ending 30 June 2024” showcasing timeliness.

3. Locate one ‘asset’ (provide the name and $ value) in the Statement of Financial Position, and one ‘income’ (provide the name and $ value) in the Statement of Comprehensive Income.  Using the Conceptual Framework, define ‘asset’ and ‘income’, linking each  definition to the examples you have chosen.  Explain how the ‘recognition criteria’ has been applied.                                                                                                         

An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a ‘right that has the potential to produce economic benefits.’ Trade and other receivables (Debtors) are worth US$ 5169 million and is a current asset in the Statement of Financial Position (Evidence 10, pg.134).

Debtors are a right as the BHP group has rights to receive cash/economic benefits from these accounts on favourable terms. There exists a potential to produce economic benefits because of a past transaction involving the exchange of goods and services on credit so the company is now owed cash. The firm has control over the debtors as they owe them and failure to pay can result in the debtor/s having bad credit histories and a lawsuit against them. No other party/company may use these debtors to their advantage.

Income is ‘increases in assets, or decreases in liabilities, that result in an increase in equity other than those relating to contributions from holders of equity claims. Information about income is as important as information about assets/liabilities. Revenue is an income item (worth US$ 55658 million) shown in the Income Statement (Evidence 11 pg. 133). Revenue occurs when control of sold goods, such as copper, or services are given to a customer. So an increase in Debtors, a current asset, has occurred which result in an increase in equity through revenue.

The recognition criteria outlines that an asset/liability is recognised along with resulting income, expenses or changes in equity to provide external users with information that’s useful, meaning information must be relevant and faithfully represented. Debtors and revenue are relevant as they’ve a clear existence, a high probability of inflow/outflow of economic benefits and information about them can be important for decision making by users. They are also faithfully represented as information about them is complete, neutral, free from error and easily measured due to a clear $ value. Evidence 11 (pg.153) for Debtors and Evidence 12 (pg.141) for revenue reflect this.

4. Describe difficulties currently faced by accountants when trying to produce social and environmental information. Investigate and briefly discuss the latest Australian Sustainability Reporting Standards (ASRSs) created by the AASB which will become mandatory for sustainability reporting.  Identify and discuss one piece of evidence of the impact the company’s activities have had on each of the following:   environment, employees, and the wider community (from the Sustainability Report).  Finally, critically evaluate the company’s Sustainability Report by showing if the activities reported show positive and negative outcomes, as well as some form of valid measurement or evaluation.

Corporate social disclosures are largely voluntary and aren’t subject to accounting standards and the conceptual framework. Reporting Entities want to disclose information most useful and comparable with another entity’s information to users but definitions and benefits regarding social and environmental initiatives aren’t clear and are difficult to measure and predict as a $ value and asset/expense recognition is hard to assign.

There are currently 2 ASRSs. AASB S1 ‘General Requirements for Disclosure of Sustainability-related Financial Information’ requires an entity to disclose useful information about its sustainability-related risks and opportunities, potentially impacting its financial performance and cashflows, to its primary users. Similarly, AASB S2 ‘Climate-related Disclosures’ requires an entity to disclose useful information about climate related risks and opportunities to its users including both physical and transitional risks. Both standards are effective next year but S1 is voluntary and S2 applies to certain entities.

Evidence 14 (pg.61) shows the BHP group recognises nature and environmental risks their business poses and have devised rules for their operations to minimise certain risk. Evidence 15 (pg. 29) shows that 2 employee deaths have occurred, 1 in 2023 and another in 2024, and that the business recognises this and is reevaluating their workplace safety provisions to prevent future fatalities. Evidence 16 (pg. 144) recognises the significant 2015 Samarco dam failure which flooded multiple communities and impacted them adversely. The BHP Group has taken full responsibility for the damage and incurred relevant impacts in the financial year ending 2024.

As evidenced above, the BHP Group reported on various negative outcomes but there’s also positives. Evidence 17 (pg. 29) indicates a 36% decrease in high potential injury frequency (favourable) but a 5% increase in total recordable injury frequency (unfavourable). It also shows the Fatality Elimination Program, currently implemented at 90%, designed to make asset use safer and prevent fatalities. Evidence 18 (pg.68) shows values and policies of which to uphold regarding Indigenous populations, to strengthen and respect their communities due to operations taking place on/close to traditional land. Evidence 19 (pg.62) shows various statistics and details about the firm’s water management such 58% of water usage being seawater rather than fresh. Evidence 20 (pg.20) shows a “social value scorecard’ detailing various goals of the business across all Sustainability endeavours and the progress towards fulfilling them. Goals related to Indigenous populations and workplace safety are shown to need work while goals related to decarbonisation and responsible supply chains are mostly complete. Overall, the BHP Group has not used their Sustainability report as a marketing tool to encourage a better reputation. Their report details positive and negative outcomes along with statistics and programs to better their business and provide users with honest information.