Conceptual Framework of International Standards

Question: Discuss about the Conceptual Framework of International Standards. Answer: Introduction Target Australia Pty Ltd is Australias largest department store by numbers that is owned and operated by Wesfarmers. The company operates about 183 retail stores across Australia and is mainly recognized as subsidiary of Wesfarmers Group. The main products offered by the company includes cloths, cosmetics, toys, home wares, electrical, fitness and consumer electronics. The retail company mainly operates on the basis of providing high quality products at lower prices (Company Overview of Target Australia Pty. Ltd, 2014). The profitability of Target Company was largely negatively impacted through the occurrence of accounting scandal. The company was reported to use misleading accounting practices to demonstrate their inflated earnings. The occurrence of accounting scandal has negatively impacted the reputation of the company globally (Mitchell, 2016). The report, in this context, aims to analyze the compliance of annual report of the company with conceptual framework of accounting and AASB (Australian Accounting Standards Board) principles. Also, the report discusses the benefits and drawbacks of including prudence in the conceptual accounting framework. Analysis of financial reports of Target as per AASB Standards The International Accounting Standards Board (IASB) has developed conceptual framework of accounting for establishing standard principle and guidelines for preparation and presentation of financial statements of business entities. The AASB (Australian Accounting Standards Board) holds the responsibility that all business entities operating within Australia develop and maintains their financial statements as per the accounting standards of conceptual framework. The main objective of adapting to standard accounting rules and procedures during financial reporting is to meet the needs and interest of stakeholders of a business organization (Whittington, 2008). The main principles of conceptual framework of accounting are relevance, reliability, consistency and comparability. The relevance principle of conceptual framework states that information published in the annual report should be relevant so that end-users are able to develop complete understanding of a companys financial performan ce (Macve, 2015). The reliability principle states that information presented should be reliable and free from nay materialistic error. The consistency principle states that information presented in financial reports should be consistent and complete. Also, the comparability principle states that financial information should be comparable with the financial results of the previous year (Mazhambe, 2014). Issues in Remuneration The companys remuneration and directors report is analyzed to examine its compliance with the principle of conceptual framework. The occurrence of accounting scandal in Target Company has impacted its financial performance in the recent years. The main cause of the accounting scandal is misrepresentation of financial reports in order to report inflated earnings. The share price of the company has fallen drastically as its stakeholders could not rely on the financial information presented in the annual reports. The overstating of profits in the financial reports clearly reports that the company has not effectively followed the conceptual framework accounting principles and standards (Wesfarmers: Annual Report, 2016). The occurrence of accounting scandal has largely impacted the remuneration received by the executives and non-executives directors of its parent company, Wesfarmers. The remuneration report of Wesfarmers discloses information regarding the financial performances of its su bsidiary Target. The remuneration of the top executives and non-executives directors is linked to the profitability of the company. The decline in share price after Target accounting scandal has negatively impacted the profitability of Wesfarmers (Greenbalt, 2016). The basic pay, payments and share incentives of the companys executives have been dropped down drastically. It has been reported by the companys executives that their bonus payments and incentives have dropped by almost 50%. However, the annual report of Wesfarmers still reports the cash bonus of its executives to be more than $1m at the end of financial year 2016. Thus, it can be said that short-term incentive payments of the companys executives have not been impacted largely by the drop in its profitability. Thus, the link of incentives and bonuses of executives and non-executives to the profitability can induce a desire in them to obtain profit for receiving bonus payments. The fact can be illustrated by the occurrence of accounting scandal in Target where financial earnings were inflated by booking extra rebates from suppliers for earning higher prices. Thus, it can be said that this was done mainly by the accountants of Target for earning higher bonus and payments by inflating c ompanys financial earnings to be high (Greenbalt, 2016). The main issues of concern as evident from the remuneration report of the company are unhealthy pursuit of personal goals and manipulation of accounts. The companys executives are realizing good short-term incentives even after the reduction in the profitability after occurrence of accounting scandal. Also, the companys executives are involved in manipulation of financial accounts for earning higher compensation as evident from its accounting scandal. Thus, Target has not adhered to the principle of conceptual framework and AASB standards. The reliability principle states that financial information disclosed must be reliable and free-from any material error to be used by its stakeholders for decision-making. However, the companys executives reports their financial earnings to be reduced while corporate governance experts have reported after analysis of its annual report that top executives are still receiving god cash bonuses (Parker, 2016). The directors report of the company has stated that it effectively complies with all the AASB sands at the time of developing their financial statements (Compiled Accounting Standard AASB 108, 2014). However, Target executives have admitted that they have inflated the financial earnings of the company by 40% through booking extra rebates from suppliers. The extra rebates were not books against the cost of inventory as per the accounting standards but in return for realizing higher prices and this increasing the companys profitability. Thus, inventories are overstated in the financial statements of the company and are not valued as per AASB standards (Mitchell, 2016). Provision for bad and doubtful debts Businesses also need to comply with conceptual framework standards of maintaining a provision for reporting bad and doubtful debts arising from accounts receivables. However, the company has not maintained the provision for doubtful debts as evident from its accounting scandal. The company inflated its earnings through booking extra rebates in return for higher prices but has not maintained provision for reporting bad and doubtful debts. The financial leases of a business entity must be capitalized at fair value of leased asset and all contingent legal liabilities must be reported in the annual report (Compiled Accounting Standard AASB 108, 2014). However, the company has not effectively complied with this accounting principle as it has not disclosed information relating to its long-term and current liabilities as per the AASB standards. The analysis of annual report of Wesfarmers group has revealed that it has not effectively complied with code of ethics that is responsible for accounting scandal in its subsidiary Target. The board of directors has manipulated the profit in return of earning higher bonuses and thus stated materially false and misleading financial information. The company is strictly involved in taking action against the employees who inflated the earnings through rebate deals with about 30 international suppliers. The main cause of accounting scandal is overstating of companys revenue by about $21 million in order to boost its financial performance. It has been analyzed from the accounting scandal that earnings for overall group would have been 1.1 per cent lower as it was reported in its annual report (Greenbalt, 2016). The companys corporate governance policies are not adequate and effective that is responsible for the occurrence of this accounting scandal (Parker, 2016). The group through have admitted the occurrence of fraudulent activities in its subsidiary and also taken the responsibility of taking appropriate action against the employees involved in the scandal. The group has also announced strict adherence to international accounting standards and principles for promoting long-term sustainable growth over achieving short-term growth (Wesfarmers: Annual Report, 2016). Prudence and its Impact on Financial Reporting There exists some level of uncertainty in financial transactions that is to be reported during preparation of financial statements by making adequate estimates. In this context, prudence is the key accounting principle that states estimates should be taken in a cautious manner during the time of financial reporting. The concept of prudence states that assets and income should not be overstated in the financial statements and expenses should not be understated. The concept of prudence requires that accountants should exercise a degree of caution in the adoption of accounting policies and procedures during preparation of financial statements. This is essential to maintain financial statements neutrality as per the conservatism principle of accounting. The conservatism principle of accounting states that liabilities and expenses should be stated as soon as they are incurred while revenues should be reported only when they are realized (Prudence and IFRS, 2014). Thus, an asset should not be recognized at a higher value that can be realized from its usage or sale. On the other hand, a liability needs to be recognized at a lesser value from its expected amount to be realized in future. The prudence accounting principle was included in the conceptual framework of accounting for eliminating any type of biasness in the financial reports and therefore conserving the interest of the stakeholders. The financial information disclosed to the stakeholders should be realistic for supporting their decision-making process regarding investment in particular business entity. The inclusion of prudence in the conceptual framework ensures that financial information disclosed before the end-users is reliable and free from any type of materialistic error (Malley, 2014). However, the concept was removed from conceptual framework of accounting on the basis that it restricts businesses to develop hidden reserves to be used at the time of occurrence of any type of contingency situation. This was major argument for removing the concept of prudence in conceptual framework of accounting. The concept was against the accrual basis of accounting which states that businesses should maintain a provision for recording of financial transactions (Araujo and Gomes, 2015). This is necessary to generate some hidden funds for a business entity that can be used during any emergency situation. The principle of prudence is again included in the conceptual framework of accounting for overcoming the increasing evidences of corporate scandals due to misrepresentation of financial statements. The large number of corporate scandals due to mis-representation of financial statements such as accounting scandal of Target has caused the need for inclusion of prudence in conceptual framework of accounting (Whittington, 2008). The major benefit of including prudence in conceptual framework is protecting the stakeholder interest by providing them trustworthy and reliable financial information. The occurrence of corporate scandals due to manipulation of accounting information can be controlled through including prudence concept. This is because businesses are required to disclose all the relevant financial information in their annual reports without concealing any facts and figures related to their income and growth. It will eliminate biasness from financial statements by providing true and reliable information before the stakeholders of a business entity. However, there is also some criticism related to including prudence in the current accounting framework as it restricts businesses to face contingency situations as they cannot maintain any type of hidden reserves. The business entities are unable to make proper estimates against the uncertainties and thus the concept of prudence is criticized by several f inancial experts. Thus, management is not able to act correctly in the vent of occurrence of any uncertainty by the inclusion of prudence principle during financial reporting (Malley, 2014). Recommendations On the basis of above overall discussion, it is recommended to business entities that they develop their financial reports as per the principle of conceptual framework and AASB standards. The analysis of annual reports of Wesfarmers Group revealed that non-compliance with the accounting standards and principle by its subsidiary Target Australia Pty Ltd have caused a negative impact on its brand image internationally. This, it is essential for parent company to implement strict corporate governance rules and regulations that should be followed by all the subsidiaries. The main cause of the accounting scandal that occurred in Target is lack of ethics, integrity and trust that is responsible for employees to adopt unethical accounting practices for their self-interest. The group is recommended to adopt strong corporate governance rules and regulations for enhancing its brand image on an international market (Hoffman, 2016). The group should disclose its corporate governance policies amo ng its key stakeholder for gaining their trust and attention. The strict compliance of corporate governance rules and regulations is necessary for all the subsidiaries of Wesfarmers to effectively comply with all the principle of conceptual framework and AASB standards (Persons, 2013). In addition to this, the Group is also recommended to actively engage in the Corporate Social Responsibility (CSR) activities for promoting its brand name on a global platform and recover from the damage caused by the accounting scandal. The CSR activities will promote the development of social, economic and environment aspects related to the group thus achieving greater customer attention and trust. The strengthening of the brand image of the group on a global basis will improve its profitability thus sustaining its growth and development (Mazhambe, 2014). Conclusion It is summarized from the overall report that principle of AASB has mandated all the business entities operating within Australia to comply with the principle of conceptual framework of accounting. The main cause of corporate scandal that occurred in Target Australia Pty Ltd is non-compliance with current accounting framework principles and AASB standards. The company has misrepresented its financial statements for reporting inflated earnings and as such has breached the principle of reliability of conceptual framework. The Wesfarmers groups on the basis of overall analysis is recommend to adopt string corporate governance policies within all its subsidiaries to comply with AASB standards and conceptual accounting framework. Also, the inclusion of prudence concept in current conceptual framework of accounting will ensure that financial reports developed are reliable and trustworthy. The prudence accounting principle will help in maintaining financial statements neutrality through res tricting the business to report any overstated revenues. References Araujo, V. and Gomes, A. 2015. Analysis of Opinions Issued in Comment Letters on the Term Prudence. 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