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ACC 201 Financial Accounting Assignment Help
In this report, a detailed discussion is made on the materiality concept issued by the Australian Accounting Standards Board. The meaning of materiality and the reasons of its introduction by the board are mentioned in this report. The decision making process of the users of financial statements of the organisation is affected by the level of materiality defined by the management. Telstra is taken as a base for explaining the materiality concept and its importance. AASB 1031 has laid down the requirements for the adoption of material aspect in their accounts. The materiality problems in the present accounting standard are assessed and appropriate recommendations are done for overcoming it. The standard is revised for including some specifications regarding assessment of level of materiality, so as to provide right information to the shareholders of the Telstra Company (AASB, 2015). On the other hand, there are some issues which should be undertaken for the presentation of better financial results and attract more investors for strengthening the capital structure of the company. In this report, the relationship status between the requirements of AASB 1031 Materiality and the decision making process of the users of the financial statements of the Telstra company is also presented along with a variety of examples. Telstra has specifically mentioned in its annual report for the year ended 2015 that all the policies and concepts are followed including materiality concept (Alin-Eliodor, 2014). Any major non – compliance is required to be reported by the auditor of the company for satisfying the needs of the financial users.
Telstra Corporation limited is one of the top leaders in the field of technology sector and it is focusing on uniting a number of people through a common network. The main strategies of the organisation are to improve the customer’s relationship, creating value and finding new opportunities for achieving the mission of the organisation. Telstra has employees around 36000 persons from all over the world to contribute in the overall growth of the organisation. It has set around 2000 network connections for the adequate provision of its services (Telstra, 2015). Adequate dividend pay-out ratio is maintained by the company for motivating the shareholders and employee benefits are also very good. The concept of materiality is defined as a measure to identify the importance of some crucial transactions which are to be disclosed appropriately. If any material transaction is not disclosed properly, then it may affect the reliability of accounts prepared by the management of the Telstra Company. The shareholders also take decisions regarding investment in the share capital of the company after analysing the financial performance of the company during the year. The growth rate percentage can also be assessed which will help the investors to take right decisions. Thus, it is important that all the material transactions should be recorded appropriately by the management for providing contribution in the decision making system of the users of financial statements.
Question 1 With reference to the above statement, describe what you understand by the concept of materiality and provide examples from your selected annual report.
Telstra’s annual report for the year ended 2015 has shown clear results about following the materiality concept in the preparation of the financial statements of the organisation. As per the requirements of AASB 1031 issued by the Australian Accounting Standards Board, the concept of materiality is defined as the important information of the organisation which influences its operating system. If this material information is not disclosed properly or it is omitted unintentionally, then it would affect the organisation’s management system to a great extent in the terms of adopting effective success strategies for managing the scarce resources of the organisation for achieving its objectives. The shareholders of the Telstra Company would be able to take right decisions for the growth of the enterprise, if adequate and material information is disclosed in the annual report of the company.
Materiality is the most important principle of accounting, in which it is mentioned that all the crucial aspects should be reported and negligible aspects can be ignored for the purpose. However, for different types of organisations, the level of materiality is determined in a different manner and materiality report is prepared accordingly. It is introduced for the purpose of enabling the readers or users of the annual report and financial statements to analyse the financial position of the company in a correct manner (AASB, 2015). The financial statements should not give inadequate and unreliable information which can mislead the decision making procedure of the potential shareholders. For instance, if a wastebasket is purchased by a company for a very small amount of $ 20, then according to the requirements of the matching concept, it should be depreciated by a Straight line method for next ten years. It establishes the fact the depreciation of $ 2 will be charged every year for the next ten years (Radu, 2013). However, as per the concept of materiality, it should be initially charged in the Income Statement as the revenue expenditure, as it would affect the decisions of the stakeholders to a great extent.
In the annual report of Telstra for the year ended 2015, the material items are disclosed appropriately as per the auditor’s report. In this report, the fact that Telstra has invested in fifteen new businesses is disclosed in bold letters and the total amount paid for acquisition is more than $ 1.20 billion. The major changes in the accounting policies are disclosed separately in the report and its effect is also presented. AASB is followed instead of AASB 139 for the recognition of the financial transactions and its effects. The hedge accounting is also changed during the year etc. addition or deletion of the fixed assets is presented in an appropriate format for evaluating the going concern of the organisation. The nature of business and total revenue derived out of it, nature of transactions etc. all these effects have shown that the company has complied with the materiality concept.
Question 2 Discuss the problems of materiality in the context of the present AASB / IASB standards and framework using your selected annual report to provide examples.
AASB 1031 requires the preparation of the financial statement by the management after considering the material factor. It means that all the material transactions should be recorded timely and the major effects should be disclosed separately. The main problem for implementation of this concept is the determination of the level of materiality and impact of materiality on the financial statements of Telstra Company. When a transaction is material and it is not disclosed in the annual report, then it may impose adverse impacts on the decisions of the users of the financial statements. The trivial transactions may be ignored whose effect is almost negligible and will not affect the user’s decisions. The management is responsible for preparing the final accounts of Telstra as per the requirements of the Australian Accounting Standards Board (Pan, Y, & Chi, 2010). Then, the auditor is required to give appropriate opinion on the truthfulness of the final statements and the compliance of the accounting standards. The application of the accounting standards is done on the basis of its materiality for the final accounts preparation.
The AASB 1031 is to be amended by the Australian Accounting standards Board for overcoming some limitations in the present guidelines. The guidance on the materiality concept is improved by providing adequate reasons for the identified shortcomings. The conceptual framework is prepared for satisfying the demands of the users of the financial statements (Horch, 2010). The amendments will also reflect in other accounting standards for assessing the effect of the materiality concept on the financial profitability of the organisation. Revised AASB 1031 is also read with the requirements of the AASB 2013 – 9 which indicates the amendments in the Accounting standards of Australia for explaining the conceptual framework of the standards and importance of materiality for the preparation of financial instruments of Telstra Company.
For the correct presentation of the Cash flow statement, the organisation is required to present the entire aggregate sum from all the activities like operating, investing and financing. Telstra is complying with the above requirements in the preparation of final cash flow. As per the revisions made during the year, average amount of cash flow or used in the business activities is also to be shown, but it cannot be treated as a sole base for the purpose of taking decisions by the shareholders of the Telstra company. In the unrevised AASB, it is clearly mentioned that the level of materiality and its disclosure depends on the judgement of the management. The management is required to decide, which transaction is important for the decision making process of the shareholders and which is not. It depends on the efficiency of the management. The preparation of the final statements is regulated by the management only. No clear guidelines were mentioned for material; assessment of transactions of Telstra company (Telstra, 2015). Therefore, there is no uniformity in the preparation of final accounts and the users found it very difficult to judge the fairness of the financial statements. This can be evaluated from the amendments in the AASB 1031 that uniformity should be maintained so as to provide reliable and unambiguous information to the stakeholders of the Telstra Corporation.
Question 3 Evaluate the issues of materiality in your selected annual report in the context of AASB / IASB standards and framework.
The issues in the materiality level of the organisation may affect the management of the crucial aspects of the organisation. The Telstra Company should consider all these aspects in the preparation of financial statements. The importance of the materiality concept is to be undertaken for the management of financial resources so as to achieve the objectives of the business. For the recording of all the transactions, Telstra needs to consider the level of materiality for complying with the requirements of the AASB 1031 (revised).
Telstra has faced difficulty in the assessment of the materiality level because different executives have different personal opinion for this criterion. The main purpose behind the preparation of the financial statements should be fulfilled and the director of Telstra is required to take right decisions regarding judgement of the materiality impact. Mostly the items like acquisition of another business, sale of a large number of fixed assets of the company, lump sum amount of bad debts during the year etc. are considered to be the material transactions for the business of an organisation. The Telstra Company has recently acquired fifty business organisations for the purpose of raise its market share and achieve its targets more easily. This has led to growth in the business share in the telecommunication market. Another set target for the company is to maintain sustainability for the success of the enterprise. Telstra’s annual report has also presented in its annual report that it is engaged with some of the local indigenous groups in a partnership agreement (Swallow, 2010). It is one of the important information for affecting the user’s decision making process.
In the annual report of Telstra, the changes in the accounting policies regarding materiality is disclosed, which establishes a fact that the company has complied with its norms. Then, the question is that whether the management is efficient enough to analyse and evaluate the amendments; and incorporate it properly for the preparation of final accounts for the year ended 2015. The comparison with the previous year is also shown for the presentation of financial statements like Statements of final position, Statement of Profit and loss, Statement of Equity and Statement of Cash Flows (Hill, 2011). This enables the users to critically analyse the growth of the organisation.
In Telstra, various additions are made in the land and site improvements, buildings, communication assets and other related items, which are to be assessed that it is capital or revenue expenditure. The concept of materiality is applicable here for treating the expense in the preparation of financial statements. Goodwill or capital reserve raised out of the transactions regarding acquisition of other businesses should be treated as per the Accounting standard showing treatment of goodwill. The concept of materiality is also applicable on it for checking the compliance with the above mentioned standards. The bifurcation between the long term and short term assets or liabilities of Telstra should be done after considering the materiality concept. For determining the materiality level of adjustments to be done during the year, Telstra is required to study the requirements of the revised standard. After balance sheet items of the Telstra Company are difficult to record, as there are number of aspects which are required to be assessed in terms of maintenance of provisions and contingent assets or liabilities (Coe & Weygandt, 2010). Telstra has also faced difficulty in analysis of going concern information for not misleading the shareholders and attracting them to invest in the capital of Telstra.
Question 4 Comment on the relationship between the materiality employed in your selected annual report and the provision of decision useful information; provide examples from your selected annual report.
The materiality concept is introduced for strengthening the decision useful information of the shareholders. The financial statements are prepared for providing adequate and reliable information about the financial position of the organisation in the market. Telstra Company is engaged in the provision of telecommunication services. The users of the financial statements should assess the profitability and liquidity measures for taking an appropriate decision about the success of the organisation. Like in the case of Telstra company, acquisition of different businesses has affected the decision making process of a number of shareholders. The potential investors are attracted to invest in the shares of the company, as increase in the market share will lead to increase in the profitability of the organisation. Consequently, more dividends will be paid to the investors and adequate dividend pay-out ratio can be maintained.
In the statement of comprehensive income of Telstra, the continuing and discontinuing operations are bifurcated for assessing the long term profitability of the organisation. The remuneration report has disclosed adequate information about the remuneration criteria of the key personnel of the organisation. This way, the trusts of the potential investors can be gained as they would be able to analyse the managerial performance of the organisation (Armstrong, 2010). The segmental information section is providing clear and detailed information about different sections of the organisation. All the material transactions made during the year are presented in bold and highlighted letters for enabling the users to find all the important information easily. Details regarding tax and other matters in terms of regulatory requirements are presented in a separate note for providing information about tax rate applicable on it. This information is also important for the government and other regulatory authorities for assessing the net tax liability and its payment by the Telstra Corporation.
Maintenance of uniformity in the application of accounting policies and concepts is very important for the management, which can be ascertained by gaining a thorough understanding of the related concepts and provisions. Telstra has adequate amount of reserves, which can be used for different purposes in the near future. This information also affects the decisions of the shareholders as they would be able to assess the compliance with the going concern concept of the organisation. When an organisation is proved to be going concern, then more investors will invest in the shares of the company for gaining long term profitability. Telstra is having significant control over the internal working of the organisation, which shows that all the employees are performing well and cooperating in the achievement of the target objectives easily. The additions in the fixed assets shows that the company is intending to follow the going concern concept, which motivates the potential investors to invest in the shares of the company. Thus, the market share of Telstra will increase and number of outstanding shares will be increased. It also helps in strengthening the capital base of the company (AASB, 2015). The assumptions for different transactions by the management of Telstra Company are taken after considering a number of factors and the management is required to take care of the interests of the shareholders before taking any decision regarding it. The decision making process of the shareholders is also affected by the performance materiality concept of the management. The annual report of the Telstra Company has shown the compliances with the AASB 1031 and AASB 2013 – 3, AASB 2103 – 9 which establishes a positive relationship with the decisions of the users of the financial statements.
From the above report, it can be concluded that the Telstra Corporation limited is performing very well. The shareholders of the company are increasing in a frequent manner. In this report, the requirements of the Australian Accounting Standard 1031 are explained in detail. As per the standard, the materiality concept has some limitations which are required to be overcome as soon as possible for gaining the trust of the individuals on the financial report. There should be a consistency in the adoption of financial statements of the organisation. Appropriate uniformity should be maintained by the organisation for enabling the users to take right decisions about the investment options in the capital of Telstra Company. The level of materiality is very difficult to assess as every person has varying perception for viewing the things. The level of materiality is decided by the judgement of the directors of the company. Therefore, it can be a major drawback which is tried to be revised by the Australian accounting standards board. With the help of analysis of material level, the decision making system of the shareholders would also be more effective. There is a direct relationship between the assessment of materiality and decision process. The trivial matters can be neglected in the preparation of financial statements of the organisation, which don’t impact the decisions of the users. The management is required to manage its scarce resources for the efficient working of the organisation with the assessment of performance materiality. All other accounting standards should also be followed for the purpose of providing correct and adequate information to the stakeholders of the company.
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