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Research Essay on Financial Reporting Assignment
This research essay on financial reporting assignment in which we explore on Australian accounting standards board and problems of measurement in context of AASB/IASB standards.
The Australian accounting standards board or AASB is basically an Australian Government Agency which maintains and creates the financial reporting standards being applicable to the public and the private organisation of Australia. It mainly contributes in the enhancement of the global financial reporting standards and assists in the participation of the Australian community at the global standard levels. However, the present assessment would be focusing on the concepts of measurement in the accounting based on the AASB standards (Kanodia and Sapra, 2016). It would help in identifying the issues in the measurement in the annual report along with the relationship between the accounting measurement and the provisions of the standards. In order to gain an in-depth understanding the annual report of Rio Tinto Ltd would be focused and utilise for the concepts. Rio Tinto is a British Australian multinational metals and mining industry. The organisation was been established in the year 1873, where a multinational association of investors made a purchase of a mine complex in Rio Tinto. The organisation is basically headquartered in Melbourne, Australia. The organisation majorly deals with the extraction of copper, aluminium, Iron ore, Gold, Diamonds, etc. and had recorded the revenue income of approximately US$ 34.829 billion in the recent year. Thus, the assessment would elaborate the concepts of the measurement and would relate the same with the annual reports of Rio Tinto Ltd specifically.
Concepts of measurement
Measurement is been mainly defined as the process of systematic assignment of the numbers to the objects and their properties. It mainly facilitates the use of different mathematical aspects in explaining the values and objects along with their relationship. The organization makes use of different approaches to measure their accounting records so that to calculate the fair value and depicts the actual status of the business. The concept of measurement mainly indicates the value of the business being extracted with the help of different accounting approaches and meets the AASB standards as well. The term measurement is been mainly used to represent the process of identifying the amounts which would be presented on the face of the financial statement. As per Deegan (2013) the measurement concepts differs to the great extent as the accounting records are been measured in different ways which develops complexities in the results and making use of the same. The measurement is been done on different bases like cash flow, fair value, etc. However, it has been found that the most common basis being used for the measurement is the fair value measurement which facilitates with the organization to calculate the values of their assets and liabilities effectively. It has been identified that the concepts of measurement differs with the different components or values in the same. The fair value is basically defined as the prices which would be received to sell out an asset or is been paid to transfer the liability in a systematic manner within different the market contributors on the date of measurement (Loyeung.et.al, 2016).
As per the set standards, the fair value measurement is been concerned with the specific assets and liabilities. Thus, the organizations measuring the fair value mainly observes the market prices, the adjustments made with the market participants, accepted valuation of the model, etc. while making the financial statements (Lu.et.al, 2013). For instance, Rio Tinto Ltd completes its measurement on the initial recognition which includes the fair value, net realizable value, etc. The fair value of Rio Tinto’ financial records of 2015-16 of assets and loans equity accounts approximate carrying values in terms of their short term maturity.
In context to the AASB/IASB standards, a fair value measurement of the non-financial asset brings the market participants into consideration in order to generate the economic beneficiality with the help of the assets at the highest levels. It is been also valued by selling the assets to the other market participants which would make use of the same in its best usability. The basic aim of AASB is to maintain and enhance the high quality financial reporting standards in all the sectors of Australia and helps in developing the global financial reporting standards. The international accounting standard board or IASB fair value concept acquires higher priority during the worldwide economic downturn and served to highlight the variations which exist in the utilization of the fair value measurement all over the world (Ryan, 2012). The standards define the fair value as the prices which would be acquired to trade into the assets or pay for the transfer the liability towards the marker participants. The prospective disclosures enhance the transparency regarding the fair value measurement involving the assessment of the techniques and inputs being used to measure the fair value specifically. In addition to this, the standards also stated that while measuring the fair value of the accountability, the organization should focus on the effect of its credit risk along with other factors which could influences its likelihood as if the obligation would or would not be accomplished. It is been assumed by the fair value measurement of the non financial assets that it is being sold constantly with the account value being specifies in the other Australian accounting standards. Moreover, the AASB/IASB standards have adopted various mixed measurement approaches so that to incur the flexible procedure and the results of the financial report specifically (Shalev.et.al, 2013).
Problems of measurement in context of AASB/IASB standards
AASB standards or the Australian accounting standard board mainly ensures the effectiveness of the financial accounting measurement activities for the organisation functional in both private and public sectors and facilitate and to deliver the fair and effective financial statements out of it. The major objectives of the AASB are to issue the Australian version of the IASB information, influence the enhancement of the international financial reporting standards significantly, to develop the standards which handle the transactions constantly, to endorse the consistent application and version of the accounting standards at the global levels, to develop the accounting standards effectively and contribute in the enhancement of the single set accounting standards (Gao, 2013). The AASB standards of the financial instruments includes the instructions of the measurement of the financial assets together with the new credit loss model to determine the impairment and the supplements the new hedge accounting needs. In context to the organisation, it has been found that the organisation complying with the accounting standards must be more analogous than they would otherwise be. It facilitates the investors and the financial statement users for gaining better comparison of the organizations.
The financial statement basically provides with the details by which the organization or the governing bodies are been liable to the one who provides with the required resources. There are wide ranges of the problems being faced by AASB standards in the measurement as it includes variation in the procedures and the usability of the financial report as well. The terms of information for liability purpose are considered to be an important aspect of the financial reports by the organization in the public sector and the private sector as well. The standards board is been mainly committed in the development of public interest, set high quality, acquire transparency in the standards and compares the information of the financial statements. In addition to this, using different measurement bases related to the diverse asset classes and proposes their nature or function which differs and therefore, the entity present a separate line (DRURY, 2013). For instance, Rio Tinto Ltd is been facilitated to combine the financial records and information and compare the same to acquire the end results. The AASB standards help Rio Tinto in their financial reports and deliver effective accounting reports. In addition to this, it has been seen that the prices of the commodity being driven by the products and supply of Rio Tinto might vary with the expectations in the external environment. The variation in the exchange rate and the geopolitical issues might compensate the risk over the finances.
The major problem faced by AASB for the measurement is to meet the standards and the varying rates in the market which might influence the end results of the financial reports. The global and the local issues which involves the regional enhancement are been also faced by the organization. Moreover, the Rio Tinto Ltd and its related association carry out the operation as a single economic business. The measurement issues being faced by the standards is the determination of the actual process to be followed by the organization. It has been seen that the enterprises makes use of different forms of measurement such as fair value, intrinsic value, cash flow, historical cost, realizable value, etc (Henderson.et.al, 2015). These bases of accounting measurement provide with the different aspect of the financial records and helps in identifying the actual current values of the same. The basic influence of this is that the financial statements are been developed based on the respective principles and the information about the business. it has been also seen that the principles of the accounting standards compels the financial department of Rio Tinto Ltd to follow the same in order to deliver the accurate records and details of the finances.
Evaluation of the issues of measurement
The most influential issue of measurement is the increasing fluctuation and inconsistency in the procedures which affects the standards to the great extent. The controversies have been increased covering the measurement of the financial reporting due to the gradual shift of the tradition basis of measurement towards the new bases. The bases which have been traditionally used to measure the accounting reports were historical cost which has now been replaced by the latest basis i.e. fair value. In the recent times the setter of financial reporting standards are also considering the measurement as one of the major general principle of accounting (Needles.et.al, 2013). Each and every measurement basis of in the accounting reports had its own group along with their separate views on the same. Currently, it has been identified that the measurement practices have become complex, different and actually inconsistent. There are wide ranges of cases of having consistency and simpler aspects. The basic objectives behind this practice is to acquire single set of accounting standards so that to make the financial report more feasible and accurate. The issue of shift into the measurement basis had also reinforced the AASB standards which influences them extensively.
In context to the financial reporting, the historical cost would remain the predominant base and would reflect the foundation of the financial statements of the enterprise. This trend replicates the base of financial reporting in the book keeping and makes use of the historical cost for the purpose of better financial management. It has been also seen that there is a significant exception in the financial services that rely on the information of fair value for the managerial purposes. The transactions are basically recorded as they take place at the degree which forms the historical cost measurements basis. It has been found that the Historical cost is typically considered as the simplest and cheapest basis of financial reporting measurement in order to develop foundations which are been laid by the book keeping record of business (Ball.et.al, 2013). The financial reporting is been consistently varying to manage the latest ways of carrying out the business effectively. For example, the financial statement of Rio Tinto is much complex and includes the detailed information of its values to be measured. It has been identified that in case of leased assets, the financial instruments such as interest-rate swaps are been used by the organization along with the good and services and using the share based instruments.
With the evolution of current financial reporting practices, the organization requires recording such aspects at the fair value as the substitute of the historical cost. The fair value of cash, the short term borrowing and the loans usually lead to the joint ventures and relates to the carrying values of the same. This results due to the short maturity periods as they incur the floating rate interests. It has been observed that the measurement bases are not fixed and thus fluctuates accordingly. Different accounting experts have different views on making use of the financial information. It is very much important to manage the assumptions, judgments and the estimations while preparing the financial reports of the business (AASB, 2013). The judgment while implicating the accounting principles and the crucial accounting estimation must also be managed effectively so that to ensure the accuracy of the facts provided. The estimations, judgments and the assumptions are generally based on the knowledge and the understanding of the management having proficiency and experience in the financial terms.
Moreover, the annual financial report of Rio Tinto Ltd includes the principle accounting policies in which the preparation bases as well as the judgments of the accounting policies. The financial guarantees of Rio Tinto are been identified at the fair value initially. Consequently, the accountability is majorly measured based on the higher levels of expenditure being required for settlement of the current obligation. It has been found that the Australian securities and investment commission had issued an order which grants a relief to the Rio Tinto Ltd from specific needs of the company with respect to the financial statement of the company and its reports (McDonough and Shakespeare, 2015). As per Australian law, it is necessary for the authorities to prepare the financial statements of Rio Tinto Ltd as per the Australian accounting standards. The directors of the company ensure the compliance of the IASB norms and develop the report effectively.
Relationship between the measurement employed
With the emergence of new concepts of measurement the organisation had faced wide ranges of complexities in preparing its financial reports. As per the fair value measurement, the organisations are been allowed or obliged to measure the assets and liabilities specifically at the fair values at the completion dates. The fair value is been considered as the present marked based Hypothetical value. However, this market value is been not always observed directly. It has been seen that the measurement of the accounting elements is one of the most important act while preparing the financial statements (Kueting and Cassel, 2012). There is a positive relationship between the fair value measurements basis being used in the annual report of Rio Tinto Ltd and the provisional decision being made by the organisation. The financial statement elements could be measured by focusing various attributes along with the purpose for which the reports are been framed. The consistency and significance of the attribute measures are the basic aspect of measuring the liabilities, assets and equities of the company. It has been identified that there is no economical difference amid the unrealised profitability and the cost which has been appeared due to the fluctuation in the fair value and the realised profits by selling the assets at the sales price more that the purchasing prices.
However, it has been argued in favour of the fair value measurement accounting instead of the allocation of unrealised profits. It has been also identified that the traditional way of measurements i.e. the historical cost has been laid off and is not preferred by the organisation in the present times. The financial statement constantly varies to manage the latest ways of carrying out the business effectively. For instance, Rio Tinto’s financial statement is based on the fair value measurement approach and includes the detailed information of its values to be measured (Leggett.et.al, 2015). It has been identified that in case of leased assets, the financial instruments such as interest-rate swaps are been used by the organization along with the good and services and using the share based instruments. Moreover, the decision made on the information includes the actual value of the business in the market and assist in the development of the financial report effectively. It has been even found that the low consistency of the fair value measurement approach is been considered as the main issue especially when the prices in the market are increasingly declining and when the markets faces a lack of liquidity. The application of fair value measurement approach is completely understandable and provides with the specific response to the requirements of the investors. Additionally, the fair value also facilitates with the transparency in the information to investors (Kola?evi? and Hreljac, 2014). Thus, the fair value measurement approach had made the AASB face critical controversies and had highlighted the accounting standards at the global levels.
With the above assessment it could be concluded that the measurement is the process of systematic assignment of the numbers to the objects and their properties. It mainly facilitates the use of different mathematical aspects in explaining the values and objects along with their relationship. It has been revealed that the concept of measurement mainly indicates the value of the business being extracted with the help of different accounting approaches and meets the AASB standards as well. It has been recognized that fair value measurement is the most common basis being used for the measurement facilitates the organization to calculate the values of their assets and liabilities effectively. The study had also found that the organizations measuring the fair value mainly observes the market prices, the adjustments made with the market participants, accepted valuation of the model, etc. while making the financial statements. Even it has been observed that the organization should focus on the effect of its credit risk along with other factors which could influences its likelihood as if the obligation would or would not be accomplished. It is been assumed by the fair value measurement of the non financial assets that it is being sold constantly with the account value being specifies in the other Australian accounting standards. Moreover, the financial statement basically provides with the details by which the organization or the governing bodies are been liable to the one who provides with the required resources.
Books and journals
AASB, C.A.S., 2013. Fair Value Measurement.
Ball, R., Kothari, S.P. and Nikolaev, V.V., 2013. Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism. Journal of Accounting Research, 51(5), pp.1071-1097.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Gao, P., 2013. A measurement approach to conservatism and earnings management. Journal of Accounting and Economics, 55(2), pp.251-268.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.