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ACC706 Accounting Theory and Current Issues Assignment
In accounting theory the conceptual framework of accounting is considered as “normative theory”. The conceptual framework of accounting focuses on the objectives of accounting, the qualitative features that the general purpose financial reporting may comprise of, the way elements of accounting needs to be defined, by what time these should be realized and the way accounting elements must be measured. IASB and FASB jointly released an Exposure Draft in May 2008 for Improved Conceptual Framework of Financial Reporting. According to this the main purpose of financial reporting forms the basis of conceptual framework of accounting.
Under this context, Financial Statement Fraud comprises of purposeful omission or misleading disclosure of financial statements with an intention of deceiving the users of financial statements; mainly the creditors and investors. The term fraud itself has a wide meaning. It indicates an activity which has been committed intentionally and deliberately. Fraudulent activities comprise of false presentation of financial records or manipulation of the same; intentional omissions and providing of misleading information related to accounting transactions; incorrect application of accounting principles, procedures and policies deliberately for the purpose of measuring, reporting, recognizing, etc. According to Section 1309 of the Corporations Act it is serious crime if a company delivers incorrect or misleading information to ASX and this may result in punishment of the director or officer involved. This is considered as a regulatory tool against the officers involved in such fraudulent activities. In situations where ASIC have detected serious breach committed by any listed company they would charge the officers involved in the same under Section 1309 and may also impose a fine of $22,000 on every offence accompanied by an imprisonment upto 5 years or any.
Rio Tinto commits abiding by the global code of business conduct in order to maintain integrity and compliance. The company’s “the way we work” comprises of standards and principles which ensures their commitment towards corporate social responsibility. According to the company their core values are accountability, integrity, teamwork and respect. The company believes in communicating with the shareholders and investors effectively.
Overview of the Company
The company got itself listed on the Australian Securities Exchange in the year 1962. At present there are over 200,000 shareholders of the company. The company is a producer of iron ore, bauxite, coal, aluminium, uranium, salt, diamond, etc. The company is a leader in global mining. As per report published by the auditors Rio Tinto’s financial statements are prepared complying with the IFRS (International Financial Reporting Standards) norms and procedures. As per audit conducted by Pricewaterhouse LLP the financial statements of Rio Tinto are:
The financial statements of the Group reflect a true and fair picture and comply with the norms and policies of IFRS.
The financial statements of the Group are in accordance with the Article 4 of Regulation of IAS and Companies Act 1985.
The financial statements of the company reflect a true and fair view as per AASB (Australian Accounting Standards Board).
The Director’s Report contains information which is consistent with the financial statements disclosed.
The financial statements published by the company are in compliance with the Accounting Standards and is set in their “The Way We Work”. The four core values of the company are accountability, integrity, teamwork and respect. Thus, transparency in accounting practices forms a core value of the company. The company has an internal risk control system where there are two groups, the Executive Committee and Disclosure and Procedures Committee responsibly reviewing the reports of the control framework of the Group for the purpose of satisfying internal control requirements of the Code and the Principles of ASX (Statement of concepts, 2001). Every year the Group’s business leaders are expected to execute and complete Questionnaires of Internal Control for the purpose of ensuring that internal control are in line and are performing effectively so that there are no failure in effectiveness. In case any issue is detected a prompt action is taken for correcting the same. The Audit and Assurance Team of the Group performs in order to ensure integrity and effectiveness is maintained on the control activities. They are responsible for providing reports on regular basis to the Audit Committee, Management Committee and Sustainability Committee. Disclosure Control system is maintained by the Group. The management of Rio Tinto Limited and Rio Tinto Plc are responsible for continue required internal control over the financial reporting. The Chief Executive Officer and Chief Executive in common are responsible for supervising the internal control system over their financial reporting and provide assurance related to trustworthiness of the financial reporting and Group’s fair and true presentation of financial statements and their compliance with the International Financial Reporting Standards. However, due to certain limitations the internal control on financial reporting fails to ensure 100% assurance as a result of which misstatements can be detected either occurred mistakenly or purposefully (Alfredson, 2007).
Rio Tinto’s Annual Report and Financial Statements are in accordance with the obligations of the company to satisfy preparation of consolidated accounts under the Corporations Act of Australia, as suggested by the auditors in their report. The fact that arises is that most of the amounts involved in preparation of financial statements are done on the basis of estimates or judgement. These estimates are done as per the best knowledge of the management (Rio Tinto, 2016).
Group Statements : The two DLC organs of the Rio Tinto Group of companies, namely, Rio Tinto ltd. and Rio Tinto plc has been declared as a single unified entity by the “Outline of dual listed companies’ structure and basis of financial statements”. Therefore while compiling the financial statements of the Group of companies so as to comply with the IFRS, the guidelines regulated that the aligned interests of the shareholders pertaining to both these organs have to be aligned and presented as the consolidated equity interests of the unified entity’s shareholders. The commission of Australian Securities and investments had issued an order on the 14th of December, 2015 regarding the same and in consistency with the guidelines of this amendment; the 2015 Annual statement was drafted to satisfy the financial obligations of the entity (Easton, 2016). The 2015 report thereby documents the effect of unification of the subsidiary organisations’ figures on profit or loss, total comprehensive revenue income or loss as well as the shareholders’ returns. Page 113 defines the compliance of the documents prepared under the IFRS with the standards prescribed by International Financial Reporting which is applicable for business based in Australia. These guidelines are collectively known as Australian Accounting Standards, or the AAS. Nevertheless, the financial reporting still uses the US Dollar standard currency profile since it reflects the most cogent representation of the overall business performance of the organisation, worldwide.
Intangible Assets : When there is no predictable limit to the amount of time over which an intangible asset can be probabilistically expect to generate flow of liquid income into the Group treasury based on careful assessment of all the environmental factors, these assets are usually thought to have indefinite lives. Various relevant factors are considered and analysed in the process of making this inference (Gibson, 2009). There has to be existing contractual rights for an indefinite period, there has to be sufficient evidence supporting the fact that no significant incidental cost will be incurred to the futuristic investment plans for the renewal of an expired contract over these assets. Rio Tinto Group considers the JORC code guidelines when employing competent people to make an estimate of its existing and continually exploited mineral reserves and ore mines. These figures are generated and the approved numbers regarding the mines and reserves are presented in the ACC706 Accounting Theory and Current Issues Assignment under the aegis of IFRS and AAS. The estimation also involves the access and reference to relevant geological information as well as a model for the schedule of extraction in the future years (Media, 2012). Some sagacious business assumptions are made to develop the trend like the future exchange prices, world commodity prices, costs of production, demand and human resource prices etc. These assumptions are mostly instantaneous at all times and are very sensitive to change in any worldwide business scenario. Therefore the estimation is done with a number of uncertainties.
Deferred Tax: Some assets are typically not eligible for allowances on income tax. Sometimes to expedite the process of fair value adjustments related to these assets, such as rights of mining and extraction, Deferred Tax can be provided. Usually, the Deferred Tax is a concept which is based on the difference between an asset carrying value and its income tax eligibility. Sometimes as in the aforementioned example, there are zero income tax bases. In this case, the capital gains tax base is not considered while determining the value of deferred tax (Quagli, 2013). The only exception occurs when these assets are held for sale as in that case, they are expected to recover the carrying value by primarily using of the asset and not through disposal. According to the guidelines, any asset acquisition after the 1st of January, 2004 might lead to an increase in the amounts related to goodwill due to any deferred tax liability.
Remuneration Report : Remuneration policies in KPI segment of Online Annual Report presents itself with a dollar sign that expresses the intention of the indicators towards measuring and determining the executive remuneration to that of non-financial indicators. The remuneration reports informs about the enclosure of health and safety performance in remuneration policy which dictates “As a business organisation, we struggle for greater shareholder value creation in a more sophisticated approach. The key elements to the commitment are to improvise upon the operational excellence and license to operate two of the group’s strategic driver”. Due to this reason, every organisation consists of health and safety key performance indicators for a short term incentive plan that is measured in terms of all injury frequency rates, potential incident rates and semi-quantitative risk assessment to measure the information. The remuneration report provides explanation which states that 52.5% of executive director’s bonuses are counting on the earnings and cash flow (Quagli, 2013). 17.5% highly depends on safety of employees and 30% on individual objectives. Individual objectives are available in details for many senior administrators who are related to the sustainability performance. For example, objectives such as “strengthen Rio Tinto’s license to operate, driving further for sustainable cost reduction and demonstrating the progress of the climate and their strategy on conserving and utilising energy resources appropriately exists. Therefore the integration of sustainable performance in to remuneration policy has been stated properly and informed in detail. There is a presence of strong focus that concerns to safety in addition to other complexities that are being included in individual objectives.
Making sustainable development and providing a clear statement on Rio’s strategy includes,
- Establishing sustainable development considerations are considered to be an integral part of a business plan towards decision making process.
- Providing better returns for the shareholders, managing risks, minimise the environmental impacts through business productions and reduce the operating costs
- Retain high quality employees
The annual report of 2010 has successfully integrated the issues relating to sustainability and developed appropriate strategies to improve the overall performance. For example, the primary agenda for the company at the present scenario is to implement one of the five strategic drivers of the organisation and providing them necessary information on shareholder returns and presenting the operating cash flows which also acts as an indicator in terms of sustainability that reflects on the frequency rate and GHG emissions intensity (Schrand, 2016).
The presence of Rio’s code of business conduct is available on every system and processes. It displays the working flowchart that is considered to be the building block of framework towards sustainability. The strategy dictates “Reinforces our commitment to integrate sustainable development thinking decision making stages which includes, acquiring, developing and operating assets around the world”.The 17 page code explains that though it covers the key aspects of corporate responsibility, still it fails in providing proper guidance or implementing the broad policy statements that are available. For example, sustainable water management dictates “Access to affordable water is critical to Rio Tinto’s operation, it must be understood that that, the future generation is highly dependent on our present efforts and responsibilities to water management”. The portal provides access to a more comprehensive policies and standards. For example, biodiversity strategy and community relation policies exists in the book, but are stated to general. Sustainable development is presently essential to determine and implement the same for a better future. This strategy will help any organisation to make an improvement and contribution towards developing a sustainable business environment. The financial statements of the organization have been prepared in compliance with the requirements of the General Purpose Financial Reporting Framework. The organization’s financial statements are in compliance with the various sections of Corporations Act 2001 and have files various reports such as director’s report, auditor’s report and remunerations report.
Alfredson, K. (2007). Applying international financial reporting standards (1st ed.). Milton, Australia: John Wiley & Sons Australia.
Easton, P. (2016). Financial Reporting: An Enterprise Operations Perspective. Journal Of Financial Reporting, 1(1), 143-151. http://dx.doi.org/10.2308/jfir-51333
Gibson, C. (2009). Financial reporting & analysis (1st ed.). Mason (OH): South-Western Cengage Learning.
McIntosh, M. & Thomas, R. (2001). Rio Tinto (1st ed.). London [u.a.]: Routledge.
Media, B. (2012). IFRS Explained (1st ed.). London: BPP Learning Media.
Quagli, A. (2013). Just some order in financial reporting studies - the need for a taxonomy. FINANCIAL REPORTING, (1), 5-6. http://dx.doi.org/10.3280/fr2013-001001