Saturday, December 7, 2019
IASB and FASB Conceptual Framework Ã¢â¬ Free Samples to Students
Question: Discuss about the IASB and FASB Conceptual Framework. Answer: Introduction The conceptual framework in accounting is developed by International Accounting Standards Board (IASB) for providing standard rules and principles that should be adopted by businesses around the world for preparing their financial statements. The business organizations develop and published general purpose financial reports that include balance sheet, income stamen, statement of changes in equity and cash-flows. These general purpose financial statements are meant to provide all the necessary financial information to the end-users such as investors and creditors for supporting their decision-making processes (Hoffman, 2016). In this context, this report has been undertaken for analyzing and examining the general purpose financial reports of Westpac Banking Corporation. The analysis is done for evaluating the compliance of annual report of the banking corporation with the standards principles and guidelines of conceptual framework and AASB. AASB (Australian Accounting Standards Board) is recognized as regulatory authority that holds the responsibility of developing and maintaining the compliance of businesses within Australia as per the IASB standard conventions (Mazhambe, 2014). Westpac Banking Corporation is a renowned Australian bank involved in providing a range of financial services for personal or business use (Westpac Group Annual Report, 2016). The evaluation of compliance of bank with the AASB standards is undertaken in the report through examining its balance sheet, income statement, auditors, directors and remuneration report. Remuneration Report The Westpac Banking Corporation has published and disclosed all its necessary information relating to the remuneration of its key management personnel in the remuneration report. The banking corporation has developed a sound remuneration framework in order to ensure that remuneration offered is aligned with the shareholders value maximization. The remuneration policies and practices are directly linked with providing superior long-term results for creating value for shareholders. The board in support of the remuneration committee holds the responsibility that the interest of shareholders is not impacted in any way with the remuneration policies of the banking corporation. The banking corporation has also effectively disclosed its remuneration strategy though disclosing information relating to the fixed remuneration, long-term and short-term incentives of the key management personnel. The reward policy of the banking corporation is strictly linked with the key performance disciplines that key executives and directors should achieve for gaining high reward and bonus payments. The performance disciplines include promoting the sustainable development of the bank, effective capital management, maximizing economic profit and improving its digital capabilities. Thus, the reward policy implemented by the Westpac is directly linked with promoting the long-term creation of value for shareholders (Westpac Group Annual Report, 2016). However, the banking corporation is recently facing problems in regard of remuneration offered to its key executives and directors. The banking corporation has recently announced that the short-term incentive payments of the directors and executives will be reduced on an average below 11% as compared to that of previous year. This is because on realizing lower earnings per share, economic profit and return on equity by the banking corporation as compared to that of previous year. Also, the company has not paid any long-term incentives for the financial year 2016. This is causing issues related to the remuneration emerging in the banking corporation as about 16% per cent of investors have turned in giants of this decision. This is due to providing lower dividend to shareholders as compared to the previous year. The reduction on return to equity has mounted pressure on the Westpac banking corporation to continue providing increasing dividends to shareholders (Pash, 2016). These are som e the issues that are observed in the remuneration report of Westpac banking corporation. Thus, Westpac though abide by all the principle of conceptual framework of relevance, reliability, comparability and consistency by disclosing complete, error-free and materialistic information about the remuneration of key management personnel is facing some challenges in its remuneration policy. The remuneration report is also in accordance with the section 300A of the AASB standards that requires that a business entity is required to disclose all the important facts and figures related to the remuneration of directors and executives. The challenges existed in the remuneration policy such as investors protest should be addressed adequately by the banking corporation for maximizing shareholders value (Westpac Group Annual Report, 2016). The inventories are valued as per the AASB standard at their net realizable value (Compiled Accounting Standard AASB 108, 2014). However, Westpac being a banking corporation does not disclose information relating to its inventory valuation (Westpac Group Annual Report, 2016). Accounts Receivables The Westpac banking corporation has disclosed all the relevant information relating to the accounts receivables from other financial institutions. The receivables are recognized at their fair value and at amortized cost as per the effective interest rate method (Whittington, 2008). The receivables are recognized on the date of their settlement after cash is advanced to the borrowers (Westpac Group Annual Report, 2016). The financial assets and liabilities are recognized at their fair value in the income statement of the banking corporation. The baking corporation has also disclosed the accounting policy adopted for the valuation of each category of financial asset and liability adequately. The intangible assets of the banking corporation consists of core deposits, customer relationships, management contracts and distribution relationships that are recognized after the emergence of Westpac with the J O Hambro Capital Management and Lloyds Banking Group. The intangible assets are valued at their useful life and their amortized value is reflected as a cash earning adjustment as intangible assets are non-cash flow items. The contingent liabilities of the banking corporation include contingent tax risk and settlement risk. The banking corporation has also disclosed information relating to its operating leases that are presented in gross of the depreciation of the assets that are subjected to leases. As analyzed from the annual report, the Westpac banking corporation, there is no overstated revenues or understated expenses in the financial statements of the banking corporation. The bank effectively complies with all the principles of conceptual framework and AASB standards. The banking corporation has developed its Code of Conduct that is effectively followed by al the directors, executives, management and employees. Thus, the development of a strong corporate culture is responsible for the effective compliance of the bank with all the AASN accounting conventions (Westpac Group Annual Report, 2016). Inclusion of Prudence in the Conceptual Framework The concept of prudence in accounting refers to recording the income realized when it has actually occurred and only reporting an expense transaction when it is probable. Thus, as per the prudence concept a business entity should no overestimate its revenues or underestimate the exposes at the time of financial reporting. Thus, a business entity is required to prepare and disclose conservatively-stated financial statements. The principle of prudence was removed from the conceptual framework as it was found to be against the accrual basis of accounting. The principle of accrual in accounting refers that revenues and expenses should be reported as soon as they are incurred regardless of the actual cash transaction. Also, financial experts believe that the concept of prudence in accounting restricts business entities to create hidden reserves. This was the basis for removal of prudence concept from the conceptual framework (Whittington, 2008). However, the increasing incidents related to the occurrence of accounting scandals due to manipulation of accounts has caused the necessity of including prudence in the conceptual framework. The main benefit of including the concept of prudence again in the conceptual framework is restricts businesses to create hidden reserves and thus misrepresenting the financial statements for personal benefits. This will also help in overcoming the increasing cases of business scandal due to manipulation of accounts. However, the major criticisms as stated by financial experts through including the principle of prudence in the conceptual framework is that business entities are not able to develop hidden reserves that can be used at the time of any emergency situation (Malley, 2014). Conclusion The overall discussion in the report has inferred that business entities worldwide need to comply with the AASB standards and conceptual framework principles for ensuring their long-term growth and profitability. The Westpac banking corporation annual report analysis has stated that the reason for its sustainable growth and development is due to its adequate abiding by all the AASB standards and rules. The notes to the financial statements in the annual report of Westpac banking corporation has provided all the necessary information relating to the accounting policies adopted for developing its general purpose financial reports. The remuneration report of the banking corporation has, however, mentioned some challenges that need to be overcome by Westpac in order to promote stakeholder welfare and interests. The report has also inferred that the implementation of prudence principle is required in the conceptual framework for ensuring that businesses provide real and trustworthy inform ation to the end-users. This will ensure promotion of welfare of stakeholders and thus protecting them from any type of fraudulent activities. Recommendations On the basis of analysis of annual report of Westpac, it is recommended to the banking corporation that it should resolve the issues related to its remuneration policy. The lower dividend offered to the shareholders is causing the investors to lose their confidence to investors in the bank. The banking corporation has reduced the incentives and rewards offered to the executives and directors that are also negatively impacting their performance in promoting the sustainable development of the bank (Westpac Group Annual Report, 2016). Therefore, it s recommended to the banking corporation to adopt a sound remuneration policy that is linked with the share prices and not with the profitability of the bank thus maximizing shareholder returns. The incentives and base salary of the executive and directors should be in accordance with the share prices that will resolve the issues relating to investor protest on lowering the remuneration of executives and directors (CCH Australia Limited, 2009 ). References CCH Australia Limited. 2009. Australian Master Accountants Guide. CCH Australia Limited. Compiled Accounting Standard AASB 108. 2014. [Online]. Available at:https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPdec09_01-11.pdf[Accessed on: 30 April 2017]. Hoffman, C.W. 2016.Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism.World Journal of Business and Management 2 (1), pp. 1-32. Malley, A. 2014.Opinion: Is prudence still a virtue?[Online]. Available at: https://www.theaccountant-online.com/news/is-prudence-still-a-virtue-4276220 [Accessed on: 30 April 2017]. Mazhambe, Z. 2014. Review of International Accounting Standards Board (IASB) Proposed New Conceptual Framework. Journal of Modern Accounting and Auditing 10 (8), pp. 835-845. Pash, C. 2016. Here's how Westpac is saving on the salaries of its senior executives. [Online]. Available at: https://www.businessinsider.com.au/heres-how-westpac-is-saving-on-the-salaries-of-its-senior-executives-2016-12 [Accessed on: 30 April 2017]. Prudence and IFRS. 2014. [Online]. Available at: https://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/tech-tp-prudence.pdf [Accessed on: 30 April 2017]. Westpac Group Annual Report. 2016. [Online]. Available at: https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report [Accessed on: 30 April 2017]. Whittington, G. 2008. Fair Value and the IASB/FASB Conceptual Framework Project:An Alternative View. ABACUS 44 (2), pp. 139-168.