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Conceptual Framework for Financial Reporting

Introduction to Generally Accepted Accounting Principles Analysis

Generally Accepted Accounting Principles are the rules that are followed commonly in the accounting standards and rules for the reporting of financial statements. These accounting standards includes concepts and principles. Also they have certain industry specific rules. These standards ensure that there is transparency and consistency between various organizations. These standards have been issued by FASB i.e. Financial Accounting Standards Board (Prather-Kinsey, Boyar and Hood 2019). GAAP helps in governing the world of accounting as per the rules and guidelines that have been available or created through the standards of GAAP. The topics that have been covered by GAAP includes revenue recognition, classification, balance sheet etc. The main aim of GAAP is to make sure that the financial statements of the company are complete, consistent and comparable for making it easier to the investor for analyzing it. To follow GAAP appropriately there is a conceptual framework that has been make the rules consistent.

Conceptual Framework

Conceptual framework for a company can be defined as a system for the objectives and ideas that can lead to the creation for consistent set of rules (Conceptual framework 2019). In accounting conceptual framework, standards and rules set the function, nature and limits of accounting and statements.

Relevance

For the qualitative characteristics relevance and faithful representation is required. Relevant information is one that has the capability of changing a decision with a value that is predictive or confirmatory (Conceptual framework 2019).

In the annual report of the company it has been shown that the statutory profit has improved from $280 million in 2018 to $121 million in 2019. The revenue is up by $931 million while underlying profit for the company in the year 2018 was at $726 million while in the year 2019 it reached to $1028 million. There was a growth of $302 million. In the same manner the net debt for the company has reduced from $6529 million to $5417 million from the year 2018 to 2019. Return on capital employed for the company has improved from 7.7% to 9.1%.

Net profit shows the profitability for the company (Origin Annual report 2019). If the profit margins are declining people would not like to invest in the company. But the profit margins have improved for the company. In the same manner return on capital employed also serves as a positive point. It shows the return company is generating on its capital depicting the efficiency for the company. It has increased since last year. Investors can see the positive returns and would like to invest more. Thus, helping them in making a decision and following the concept of relevancy (Baker et. al. 2020)

For the financial instruments the company has adopted AASB 9 that recognizes the financial assets and liabilities. The company through this standard shows the treatment of equity and other financial instruments like trade receivables. The amount has been shown in the notes to depict the relevancy of figures. The opening balance as per AASB 9 is $2880 and reclassification is at $108. So the opening balance as per AASB 9 is at $2772. This shows that figures that has been used are calculated as per the accounting standard and are relevant for making a decision (Prtama 2020). .

Comparability

Comparability is another concept of conceptual framework. It involves the decision of user for choosing between the options that are available. It is a phenomena that is qualitative and helps the users in understanding the similarities and differences among various items (Ding, Hellman and De mello 2017). In the report of Origin energy limited figures are given for the net profit, returns that are being generated, debt that the company holds and also the assets and liabilities of the company. These figures make it easy for the users to compare the information with its competitors like AGL, Oil search etc. and then the user as per their preference can make a choice of investing where they feel like. Like the total assets of Origin Energy were at $25903 m while for AGL it stands at 4 14710 m in the year 2020. This shows that Origin energy is a larger company as compared to AGL as it has a higher base of assets that can be used for production. Thus, satisfying the concept of comparability.

Financial Statements and Reporting Entity

Financial statements and reporting entity chapter provides information that is to be there in the financial statements as per GAAP (Conceptual framework 2019). This concept relates to the positive accounting theory. Positive theory of accounting describes the accounting in the method or the way it is supposed to be actually done (Srivastava and Baag 2019). In the same manner this standard of framework describes the information or the objective of financial statements where liability, equity, income and expenses for the company are identified and also helps in assessing the management’s stewardship towards the economic resources is described.

In the annual report of Origin energy, the assets have been identified at $25743 million in the year 2019. They were at $24257 in the year 2018. While the liabilities have been identified at $12594 million in the year 2019. The equities for the year were at $13129 million (Origin Annual report, 2019). Every element that constitute the asset, liabilities or equities has been described as it is. The person can easily define the amount of assets that the company holds or the liabilities. This follows the above mentioned conceptual framework.

Reporting Period

According to conceptual framework financial statements are to be prepared for a specified period of time and provide the information that is related to assess and liabilities, equities, income and expenses (Xinshu 2019). For the users of financial statements to understand the trends and the changes in trends, the statement of finances should also provide the information for at least a year that has been preceded (Conceptual framework 2019). Information about the events for the future should be in the statement of finances that is useful to the users of the finances. Statements should also include the information about the transactions that have occurred.

Origin energy financial statement contain information related to assets and liabilities for the year. Income and expenses are depicted on yearly basis. With that previous year record are also included in the statements. For example in the balance sheet of 2019, finances related to 2018 are also included. This helps the user in comparing the trends for the company.

For example: The assets of the company were at $25743 million in the year 2019 while it was at $24,257 million in the year 2018 (Origin Annual report, 2019). This helps the users in understanding that the position of assets have improved for the company and help them in understanding the growth trend.

This concept is connected with the measurement approach of accounting. Measurement accounting refers to the representation of data in a specific manner (Mickhail 2019). This makes the data for the firm more comparable over the period of time. This is the basic for reporting period conceptual framework and the financial statements of Origin energy are prepared according to the conceptual framework and measurement concept.

Faithful Representation

In conceptual framework, faithful representation is mentioned. It has been stated that for financial information to be useful it should be represented faithfully. For representation to be faithful there should be three characteristics that includes completeness, neutral and free from the errors (Lennard 2018). It should be the objective of board to maximize these qualities in the financial statements. A depiction that is complete should include all the information that is necessary for the user to understand (Conceptual framework 2019). It includes all the required explanations and descriptions. Neutral depiction is without the biasedness where it should not be manipulated to portray a good image of the organization. The neutral description should be supported by prudence. Prudence refers to a condition where assets and liabilities are neither understated nor overstated.

This conceptual framework relates to the normative theory. Normative theory of accounting describes accounting in a manner it should be done. It makes the procedure as it should be rather than accepting it as it is (Cardao-Pito and Silva Ferreira 2018). It describes what should be done in the same manner conceptual framework of faithful representation does. It describes how assets and liabilities should be portrayed in the statements rather than how they are being portrayed.

Understanding that company is portraying its statement faithfully is complex because if the company has hyped its income or expenses then it is hard to determine whether the statements are presenting a faithful position of the financial or not. The process for understanding the faithful representation is audit which provides a surety that statements have been prepared appropriately (Roberts and Wang 2019). In the same manner Origin energy’s financial statements have been audited by KPMG. A report is provided by the auditor’s stating that a true and fair value has been presented of the financial position of the company (Origin Annual report 2019). Also, it states that all the required standards and concepts have been followed by the company. This provides the verification that the company’s records are represented faithfully. Thus, auditor’s report is required for verifying the faithful representation in the company as other than that there is no other way through which it can be checked.

Understandability

Understandability is another qualitative characteristic mentioned in the conceptual frame work. It mentions that information should be presented in such a manner that it is clearly understandable and also concise (Zuccon 2016). There are certain phenomena in the financial statements that are complex and are hard to be understood. If these information is excluded than it will make the statements much easier to be understood (Conceptual framework 2019). The reports of finances are presented to the users who are in the field of business and are able to review the information in a diligent manner. So, it is required that financial information provide information in a manner that is understandable easily.

The conceptual framework is connected with the harmonization theory. It refers to the purpose that helps in enhancing the understanding of the researcher for International harmonization of reporting in finance (Ghio and Verona 2018).

Origin energy represent the financial statements in an understandable manner. Every assets and liabilities are described in the notes section. The increase and decrease of the assets are mentioned clearly for every transaction. In the notes section the company mentioned about the opening and closing balance of the financial instruments. The standards of accounting like AASB9 is followed in the company (Origin Annual report, 2019). The company also showed the calculation for parent entity and the group. Appropriate classification are shown in the notes section for better understanding (Gabryelczyk and Jurczuk 2017). Also, for the better understanding of foreign exchange movement, Origin energy statements has shown the notes for the year. In the same manner gains and loss on assets are also shown in the notes section. This will help in better understanding of the financial statements and the standards provide universality for better comparison. Thus, Origin energy follows the conceptual framework for marinating the financial statement.

Conclusion on Generally Accepted Accounting Principles Analysis

Origin energy is an energy limited company in the Australia. Conceptual framework is followed by the company. Conceptual framework refers to set of ideas that provides universality and better understanding to the company. Origin energy follows various concepts of conceptual framework in its financial statements. Relevance, understanding, reporting period etc are there in the statements of accounts.

References for Generally Accepted Accounting Principles Analysis

Annual Report. 2019. Origin Energy Limited. Available at: https://www.originenergy.com.au/content/dam/origin/about/investors-media/documents/fy19-origin-annual-report-online-oct.pdf. (Accessed on: 24th August 2020)

Barker, R., Penman, S., Linsmeier, T.J. and Cooper, S., 2020. Moving the conceptual framework forward: Accounting for uncertainty. Contemporary Accounting Research37(1), pp.322-357.

Cardao-Pito, T. and Silva Ferreira, J. 2018. ‘Fair Value ‘accounting as the normative Fisherian phase of accounting. Accounting History Review28(3), 149-179.

Conceptual framework. 2019. Conceptual framework for financial reporting. Available at: https://www.aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19.pdf (Accessed on 24th August 20020)

Ding, Y., Hellmann, A. and De Mello, L., 2017. Factors driving memory fallibility: A conceptual framework for accounting and finance studies. Journal of Behavioral and Experimental Finance14, pp.14-22.

Gabryelczyk, R. and Jurczuk, A., 2017. Does experience matter? Factors affecting the understandability of the business process modelling notation. Procedia Engineering182, pp.198-205.

Ghio, A. and Verona, R., 2018. Accounting practitioners' attitudes toward accounting harmonization: Adoption of IFRS for SMEs in Italy. Journal of International Accounting Research17(2), pp.103-122.

Lennard, A., 2018. Fair value and the conceptual framework. The Routledge Companion to Fair Value in Accounting, p.2.

Mickhail, G. 2019. The Accounting Measurement of MetaCapitalism. Journal of New Business Ideas & Trends17(3).

Pratama, M. N. 2020. Fungsi Corporate Social Responsibility Disclosure dan Independent Commissioning: Relevancy Of Accounting Information. el-Qist: Journal of Islamic Economics and Business (JIEB)10(1), 69-88.

Prather-Kinsey, J., Boyar, S. and Hood, A.C., 2018. Implications for IFRS principles-based and US GAAP rules-based applications: Are accountants’ decisions affected by work location and core self-evaluations?. Journal of International Accounting, Auditing and Taxation32, pp.61-69.

Roberts, J. and Wang, T., 2019. Faithful representation as an ‘objective mirage’: A Saussurean analysis of accounting and its participation in the financial crisis. Critical Perspectives on Accounting65, p.102078.

Srivastava, J. and Baag, P.K., 2019. Positive Accounting Theory, Agency Costs And Accountng Regulation. pp 346.

Xinshu, M., 2019. Conceptual Framework for Financial Reporting: Change and Challenge. Accounting Research, (9), p.3.

Zuccon, G., 2016, March. Understandability biased evaluation for information retrieval. In European Conference on Information Retrieval (pp. 280-292).

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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