Conceptual Accounting Theories and Frameworks

Question: Discuss about the Conceptual Accounting Theories and Frameworks. Answer: Introduction Accounting theories are the collection of assumptions is methodologies that are used to study and application of various financial reporting principles. Accounting theories have a lot of importance in the process of analyze and evaluate various financial documents of an organization. Hence, the study of accounting theories is a crucial aspect. There are various aspects of the financial reports or annual reports of organizations like the application of accounting methods, remuneration report, auditors report, dividend report and many others. Without the knowledge of accounting, it is not possible to analyze the above-mentioned aspects. The purpose of the report is to analyze the various financial aspects of BHP Billiton. The BHP Billiton is one of the top producers of major commodities that includes copper, uranium, iron ore etc. The company also has substantial interest in coal, oil and gas energy. The main aim of the company is to make social and economic contribution through operat ion[1]. The various stages of the report shows the analysis of different financial aspect of the company like remuneration report, auditors report, executive remuneration and many others. Auditors report Analysis The individual auditors report is an important aspect to analyze the financial position of any company. There is no exception of this rule in case of BHP Billiton. The auditing partner of BHP Billiton for the year 2016 was KPMG. The KPMG has tested and examined various accounts of BHP Billiton. The accounts includes consolidated statement of financial position, consolidated statement of profit and loss, consolidated statement of other incomes, consolidated statement of cash flows, consolidated statement of change of equity and many others. The KPMG has also provided non-audit services the details are provided in the Note 35 of the annual report Auditors Remuneration of the company. The analysis of the annual report provides that all the non-audit services have prior approvals. The audited financial statement generally indicates that it has been prepared in accordance with the existing conceptual framework and the relevant accounting standards[2]. Meaning and scope of Conceptual framework The conceptual framework may be defined as established concepts that underline the financial reporting. The conceptual framework is consistent with the objective of the financial statement. The objective of financial reporting is to provide the user with financial information so that the user of the financial statement can make important financial decisions. The conceptual framework of IASB is incorporated in the Framework for preparation and presentation of financial statement issued by the AASB[3]. The purpose of the conceptual framework is: To assist in the development of accounting standards, To assist in harmonization of regulations, To prepare the financial statement, To provide assistance to the auditor, The Para 5 states the scope of the Framework. The Framework is developed to deals with: Objective of the financial statement; Qualitative characteristic of the statement; Measurement, definition and recognition of different elements of financial statement; Capital maintenance and the concept of capital; Therefore, in this report the framework is classified into three categories for discussing and critically analyzing the effectiveness with which the corporations have adopted this framework[4]. Basic Objective The foundation of the Framework is based on the objectives of the financial reporting. The objective of the General Purpose Financial Statement is to provide financial information so that the user can make informed decision[5]. The users of the financial statement include shareholders, lenders and creditors. The financial statement caters to the informational need of external users that cannot demand information from the company. Therefore, the financial report provided by the company becomes extremely. On analyzing the annual report of BHP Billiton, it can be seen that the report includes Income statement, balance sheet, cash flow and notes to account. Therefore, it can be said that the information provided in the annual report by the BHP Billiton satisfies the basic objective and purpose of conceptual framework[6]. Fundamental Concepts The next classification that is made of the conceptual framework is the fundamental concepts that are related to accounts. The fundamental concept is a bridge between the basic objective and the accounting treatment like recognition, measurement and preparation of financial statement. The fundamental concepts relate to the qualitative characteristic of the financial information[7]. In QC4, it is stated that in order to be useful the financial information should be faithful and relevant. The usefulness of the information provided by the financial statement increases if it is comparable, timely, understandable and verifiable. The relevance and faithfulness are the fundamental qualitative characteristic of the financial statement. The Audit report submitted by KPMG to SEC states that in their opinion it appears that the BHP Billiton has provided financial information in a faithful manner and the information provided are relevant to the users of the financial statement[8]. Therefore, it can be said that annual report provided by the company is in accordance with the fundamental qualitative characteristic of the conceptual framework. The characteristic like verifiability, comparability, timeliness and understandability increases the quality of the financial information. The verifiability of financial information is achieved if the independent methods obtain the same results. In this case, the auditors have independently verified the financial information and they have obtained the same result. Therefore, it can be said that the financial statement has satisfied the characteristics of verifiability. The comparability of financial statement is assured by the application of the accounting standards. In the notes to financial statement, section of the financial report it is stated that the accounting policies are applied consistently thereby ensuring comparability. The financial information is provided in a timely manner on 30 June every year. The understandability of the financial information is increased through detailed presentation of financial information in the notes to accounts[9]. Based on the analysis it can be said that the financial information are presented following the qualitative characteristics of conceptual framework. Basic elements of Financial report The conceptual framework issued by Australian Accounting Standard Board Framework for preparation and presentation of financial statement states in Para 49 that the elements that should be included financial positions are assets, liabilities and equities. On analyzing the Annual report of the BPH Billiton it can be seen that the elements that required by the framework has been followed. The conceptual framework states that assets are the resources that are controlled by the entity[10]. It is expected that the future economic benefit from this resources will flow to the entity. On analyzing, the balance sheet of the company it can be said that the items that are included in assets confirms with the definition of asset provided in conceptual framework. The conceptual framework defines liability as present obligation that arise from a past event and it result in outflow of economic resources. The items in the liability side of the balance sheet of the company fulfill the definition prov ided in the conceptual framework. The conceptual framework defines equity as residual interest in the assets after all the liabilities have been deducted. The equity recorded in balance sheet complies with the definition of conceptual framework. Income Statement Analysis The conceptual framework provides that profit is computed for analyzing the performance of the company. The profit is measured by deducting related expenses from income. Therefore, the company has prepared income statement for calculating the profits. The items that have been included in the revenue are in accordance with the conceptual framework. The conceptual framework states that an item that increases the economic benefit of the company should be included in the revenue[11]. The expenses are those items that decrease the economic resources of the company. The items that are included in the income statement as expenses satisfy the definition provided in the conceptual framework. The income statement of the company is given below: The third classification of the conceptual framework deals with the measurement, recognition and disclosure of the financial information[12]. This are discussed in details below. Recognition Recognition is a process of incorporating the financial items in the income statement and balance sheet as provided in Para 82 of the standard. The financial information are recognized in the financial statement based on five basic assumptions this are economic activity, going concern, monetary units, periodicity and accrual basis. This assumption requires that the entities that are engaged in economic activity are required to recognize those activity in the financial statement. The company is engaged in economic activity therefore the company has satisfied the basic assumption of economic activity. The gong concern assumptions states that the financial information should be recognized in a manner that it is assumed to continue. The financial informations should be measured in terms of monetary units in a periodic manner and by following the accrual basis of accounting. On analyzing, the financial statement of BHP Billiton it can be said that financial information has been recognized following the basic assumptions stated above. Measurement The measurement of financial items is discussed in Para 99 of the standard. The measurement is a process of determining the monetary amount at which the items of financial information are recorded in the financial statement. The measurements of items are done based on various bases that include historical cost, current cost, realizable value and present value. The basis of measurement of few items in the financial statement is discussed below. The inventories are measured at cost or net realizable valued whichever is lower. The debtors included are all current debtor. The company does not have any non-current debtors. The company in its financial report has followed the entire disclosure requirement. The company has followed the disclosure requirement mentioned in accounting standard. Managerial Remuneration and its relation The BHP Billiton has two types of remuneration policy one is for executive directors and other is for non-executive directors. The remuneration provided includes basic salary, pension and benefits. The salary is extending by 8% per annum and the pension is 25% of the salary. The general benefits that are given cannot be more than 10% of the base salary. In addition, other incentives are provided that includes target performance and threshold performance. The target performance can be 160% of the base salary and the threshold limit can be 80% of the base salary. Therefore it can be said that maximum award that manger can get is 240% of base salary. This high remuneration based on target will encourage short-term focus of the management and that is not beneficial to the company. The conceptual framework fails to deal in this matter in any substantial form. 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