Effective Theory and Current Issues in Accounting

Question: Discuss about the Effective Theory and Current Issues in Accounting. Answer: Introduction: Financial health is one of the effective indicators of business potentiality of any corporate organization or a nation. It highlights the overall growth of economic infrastructure as well. To remain consistent in the measurement of growth, an organization needs to understand the financial scenario accordingly. For this basic reason, financial literacy is required for all the companies management along with their financial officers (Collings Loughran, 2013). The knowledgeable content within corporate environment tends to lead the companies towards greater revenues as well as profits i.e. more success and consistent growth. Fundamentally, the growth is replicated by capital investment, more revenues, profits and financial balances. These financial terms are known as basic financial elements. For a corporate organization, the measurement of the financial elements is one of the most important determinants according to its overall management criteria. There are several measurement facili ties that aid the companies in order to assist them in their financial measurements (Henderson, Peirson, Herbohn Howieson, 2015). In this similar context, the study highlights the different accounting theories and their implications for the companies policies in order to evaluate the financial measurements. The major aim of this assignment is to analyze five elements related to financial elements of International Financial Reporting Standards (IFRS) conceptual framework are measured by listed companies. The objectives of this study are segregated as follows: Recognize the financial elements according to measurement criteria Evaluation of different accounting theories and their implications on financial elements Generate conceptual framework for complex financial elements to apply accounting activities according to the measurement theories Gaining knowledge regarding the financial frameworks to evade the accounting issues and problems of the companys financial environment These objectives are addressed in the following sections. Concepts of Financial Elements Financial statements are a part of IFRS conceptual framework. The basic requirements of these statements are associated with the financial reporting purposes of private as well as public sectors. The financial statement encompasses financial elements such as assets, liabilities, equity, revenue, and expenses. The first three financial elements such as assets, liabilities and equity come under balance sheet of the company and the revenue along with expenses are included into the income statement. In addition, changes in any of these elements are significantly noted in the cash flow statement of the company (Accounting tools, 2016; Australian Accounting Standards Board, 1995). The brief descriptions of each of these elements are illustrated below: Assets. This financial element is associated with the future economic benefits. Fundamentally, it is controlled by the entity of a companys financial statements and shows the results of past transactions along with other prior financial events, which are expected to yield the benefits in the future periods. Such examples of assets accounts in a company are receivables, inventories and fixed assets. The asset can be recognized from the financial statement when it is anticipated that the future economic benefits of the company are personified. In addition, the value of assets can be measured in a reliable manner for which the company is able to focus towards its economic benefits (Accounting tools, 2016; Australian Accounting Standards Board, 1995). Liabilities. It replicates a companys future sacrifices through which it is capable to facilitate its beneficial journey towards growth. These are legally binding obligations of the company that are payable to another entity. Accounts payable, taxes payable and wages payable are example of liabilities (Accounting tools, 2016; Australian Accounting Standards Board, 1995). Equity. It is the amount that is invested in the business. It can also be depicted as the residual interest in the assets after the deduction of a companys liabilities (Accounting tools, 2016; Australian Accounting Standards Board, 1995). Revenue. It reflects a future beneficial financial aspect in the form of assets increase. Revenue is a quantified outcome of overall activities generated by the business. Product sales and service sales are the example of revenue of a company (Accounting tools, 2016; Australian Accounting Standards Board, 1995). Expenses. It is associated with the losses of a company reflected from the reduction of assets as it is used to generate revenue for a company. Both revenue as well as expenses are included into the income statement of a company. Interest expenses, compensation expenses along with utilities expenses are examples of expenses (Accounting tools, 2016; Australian Accounting Standards Board, 1995). Based on these financial elements, there are several financial theories and measurements that have evolved for standardization of corporate finance that also can strengthen the overall economic infrastructure accordingly. Contextually, it is determined that IFRS designed this common global financial language for effective corporate economic management so that the companies are capable of managing their accounts accordingly. The financial code of conducts by IFRS fundamentally assists companies to maintain an understandable as well as comparable scenario throughout the organizational environment across the geographical boundaries. IFRS is utilized in several countries throughout the world, except the United States (US). In the US, companies follow generally accepted accounting principles (GAAP), which is also adopted by Securities and Exchange Commission (SEC). IFRS has affected business activities in the US in several ways due to mergers and acquisitions, capital-raising, along with non-US stakeholders, and non-US subsidiaries of companies. Hence, a majority of companies throughout the world have adopted IFRS in their financial statements (PWC, 2015; ICAEW, 2011). IFRS Systems Measurement Methodologies and Empirical Examples Financial reports measure the outcomes of the applications of measurement practices within economic activities. In a company, economic activities and measurements are associated with the financial reporting system through which it gains an understanding regarding the perceived financial problems in the environment along with the future concerns of economic incentives. Financial problems and their mitigation scenarios are associated with the measurement practices that are included in the financial reporting measurement system (Zulch Hendler, 2014). This entire process of measurement methodologies can be illustrated as below: Figure: The Development of Measurement Practices Source: (ICAEW, 2011) Based on the previously discussed financial elements, it is determined that there are several ways through which assets and liabilities can be measured. Companies depend on historical costs or current values to gain knowledge about practical as well as conceptual challenges. With respect to the measurement of assets and liabilities through the process of historical cost, time value of money is required to be considered. Historical cost is mainly allied with the conventional rules. Therefore, the conventional rules have to make adjustments with the depreciations and the financial impairments of a company. Typical characteristics of these of historical costs can make it challenging for the investors to interpret the outcomes effectively. On the other hand, current value is associated with a variety of alternative valuation methodologies. Additionally, it can be customized in order to fulfill the measurement criteria. According to Cooper (2015), the selection of a measurement method for a company is one of the controversial issues. In respect of financial measurement methods, Cooper (2015) depicted certain measurement standards apart from single measurement approach. International Accounting Standards Board (IASB) considers fair value measurements, but in this method relevant information is unable to cover the entire areas of financial measurements accordingly. IASB follows a view of mixed measurement approach for maintaining the standards. For instance, it is evaluated that IASB recently issued IFRS 9 financial instrument and IFRS 15 revenue from contracts with customers as two new standards. Final deliberations of standards are in progress (Cooper, 2015). To understand the financial measurement in different companies, the study highlights empirical examples from companies annual reports. Contextually, ABM Resources NL utilizes the mixed methodology of accounting policies for effective measurements. From the financial statements of ABM Resources NL, it is evaluated that the company complies with IFRS as issued by IASB. Moreover, ABM Resources NL prepares its financial statements according to historical cost convention, critical accounting estimation along with adopting new as well as amended standards (ASX Limited, 2016; ABM Resources NL, 2015). On the other hand, Abacus Property Group thoroughly follows the fair value method through profit and loss measurement. Significant accounting estimations and assumptions are effectively determined through the fair value derivatives including financial instruments along with guaranteed funds. It also calculates the valuation of investment priorities that are determined through the fair value. Moreover, Abacus Property Group estimates its fair value of financial liabilities through profit and loss statement. From the annual report of Abacus Property Group, it can be inferred that the company measures its financial valuation through various techniques including Cash Flow Waterfall Model. This model is able to determine fair value of several financial arrangements associated with funds. In respect of financial statements according to the policy, the company is also capable of considering financial judgments, through which it can attain decision-useful information according to IFRS framew ork (ASX Limited, 2016; Abacus Funds Management Limited, 2015). Based on the above discussed scenario, it is quite clear that Abacus Property Group processes its financial reports according to the instructions of IFRS including standards of IASB. In terms of decision-useful information, it can be stated that unclear and undisclosed financial matters such as valuation of fair value might create problems among the stakeholders of the company. In respect of this scenario, it is reasonable to consider that transparency among the stakeholders through the appropriate disclosures of financial transactions and measurements, specifically the fair valuations is required accordingly. At times, companies suffer from lack of confidence as well as lack of comparability in order to structure their financial reports. Therefore, through efficient financial infrastructure, effective operative financial instruments and measurement techniques, the company is capable to lead towards fair decision-useful information (Giner, 2014). From the annual report of Abacus Prop erty Group, it can be stated that the company is able to disclose its financial activities and fair value amounts in a reliable manner that can be recognize as the vital decision-useful information within the financial statement. Critical Analysis of Financial Techniques Cash flow statement of a company can be summarized through the cash flow waterfall model, which apparently shows the cash inflow as well as outflow accordingly. This model can ensure the appropriate seniority of financial elements. Fundamentally, the cash flow waterfall model is the most useful one, due to its debt repayment procedures. In the process of cash flow waterfall model, there are certain key lines that assist to reach the desired outcome as described below: Cash flow available for debt services (CFADS) that is utilized for debt payments calculations CFADS includes Debt service coverage ratio (DSCR), project life coverage ratio (PLCR) and loan life coverage ratio (LLCR) Cash flow calculation before funding Debt service reserve account (DSRA) valuation Equity calculation Net cash flow Cash flow waterfall model in financial statement model is one of the most useful techniques, due to its grouping system in cash flow calculations along with seniority measurements, which provide the financial statements a concrete view of future outcome. Moreover, the financial instruments and tools that are utilized in the cash flow waterfall model can specify several categories including financial analysis through SUMIF formula, which also improves the models usability. The net movement of the cash balance and cash closing balance calculation both are effectively utilized in cash flow waterfall model, which is a significant sign of effective implications on a companys financial arena (Preinitz, 2009; Wrnelid, 2008). From the overall evaluation, financial elements considered within a companys financial reports in order to record the financial transactions of a fiscal year have been determined. In relation to describing the IFRS conceptual framework and incorporated financial standards, ABM Resources NL and Abacus Property Groups financial frameworks from their annual reports. In terms of financial techniques used by Abacus Property Group, it is evaluated that the company uses cash flow waterfall model. For highlighting the implications of this model on a companys financial reports, the traits of cash flow waterfall model are ascertained. From the evaluation of this model, it is evidently highlighted that the implications of this model are more effective than any other financial techniques. Moreover, the decision-useful information of the company has been determined to be a crucial factor within this technique, which is appropriately considered as well in the financial framework of Abacus Property Group. References Abacus Funds Management Limited. (2015). Annual financial report. Abacus diversified income fund II, 2-41. ABM Resources NL. (2015). Notes to the consolidated financial statements. 2015 annual report, 64-92. Accounting tools. (2016). What are the elements of financial statements? Retrieved September 16, 2016, from https://www.accountingtools.com/questions-and-answers/what-are-the-elements-of-financial-statements.html ASX Limited. (2016). The Official List (Listed Companies). Retrieved September 16, 2016, from https://www.asx.com.au/asx/research/listedCompanies.do Australian Accounting Standards Board. 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