Importance of Conceptual Framework

Question: Discuss about the Importance of Conceptual Framework. Answer: Introduction Businesses worldwide comply with the accounting rules and principles developed by the International Accounting Standards Board (IASB) for developing their financial reports. Australian government agency has developed its own Australian Accounting Standards Board (AASB) for developing its financial reporting standards that need to be adopted by the businesses operating within the country. The accounting reporting standards of AASB are in accordance with the accounting conceptual framework of IASB (About the AASB, 2016). This report analyses the annual reports of two companies in Australia for examining their compliance with the conceptual framework and AASB. The two companies selected for this context are TPG Telstra operating in the telecommunication sector of Australia. In addition to this, the report also examines the importance of prudence in the conceptual framework for addressing the disparity in corporate reporting. Identifying the Compliance of Telstra TPG with the Conceptual Framework and AASB Standard Requirements by Analysing the Annual Reports and identifying the differences in disclosures of these corporations Telstra is a leading Australian based telecommunication company actively involved in providing mobile phones, broadband internet services and many other communication services to the customers. The financial reports published by the company such as balance sheet, cash flow statements are in accordance with comparability principle of conceptual framework. The financial results such as total revenue, operating expenses, earnings before interest and tax (EBIT) are compared with the previous years financial figures for identifying the percentage change. Thus, comparison with previous financial year results helps in identification of the present growth and development of the company. The directors report of the company clearly defines the code of conduct and employee policy framework adopted by the company (Unegbu, 2014). The code of conduct of the company includes the inclusion of rules and regulations for preventing anti-corruption, resolving conflict of interest, proper market disclosu re and securing trading of securities. The employees policy includes promoting their health and safety at workplace, respecting of employee diversity and ensuring their protection from discrimination and bullying. The remuneration report outlines the executives compensation of the company. The remuneration policy of the company is based on linking financial rewards with the employee contribution and its financial performance (Telstra Annual Report, 2016). The company has developed its remuneration committee for providing recommendations to the board of directors about the remuneration polices and strategies to be adopted. The remuneration structure of the companys executives is divided into three sections namely fixed remuneration, short-term and long-term incentive. The fixed remuneration is based on the base salary and short-term incentive is based on individual performance and financial profitability of the company. On the other hand, long-term incentives are based on measuring the performance of companys executives over 3 years. The remuneration offered to the key management personnel such as Chief Executive Officer, Chief Financial Officer and Chief Operational Officer is detailed in the remuneration table elaborating each and every type of compensation benefits of the employees. This includes short-term employee benefits, post-employment benefit, termination benefits, long-term benefits and equity-settled share based payments. T he directors; report of the company also declares auditors independence in accordance with the Corporations Act 2001 through adopting and following all the professional codes of conduct in relation to the audit (Telstra Annual Report, 2016). The company has also disclosed the financial figures by rounding the, to the nearest million dollars as per the Australian Securities Investments Commission Corporations Instrument of the Corporations Act 2001 (Persons, 2013). The company also has effectively disclosed all the relevant details in its financial reports as per the AASB standards. The financial report is presented in dollars as per the accounting policies of the AASB. The financial reports are developed as per the historic cost and have effectively disclosed all the segment information for supporting the decision-making process of the management about the operating matters. The financial reports are also prepared as per the principle of consolidation that states that all the financial reports of the companys subsidiaries must be consolidated in a single economic entity (Australian Reporting Essentials, 2016). The company has also properly disclosed its employee share plans that describe both the pre and post-employment benefits provided to them. The director of Telstra has also clearly stated that the financial statements of the company comply with all the accounting standards applicable in Australia and provides a fair value of its financial performance (Vlady and Huang, 2012). The financial and remuneration report prepared by the director is in accordance with the Corporations Act 2001 providing all materialistic information to the end-users. The financial and remuneration report have clearly reflected the true financial performance of Telstra. Thus, it can be said that annual report of the company is in compliance with conceptual framework and AASB standard requirements (Telstra Annual Report, 2016). On the other hand, the annual report of TPG does not so effectively follows the conceptual framework and AASB standard requirements as compared to the Telstra. TPG is a recognised company operating in the telecommunication industry of Australia. The company provides various types of communication services to its customers such as Fibre Optic, telephony and Internet Protocol Television services to its customers (About TPG, 2016). The remuneration report of the company has not properly disclosed all the revenant details about fixed compensation and variable benefits offered to the executives. Although, the directors report of the company declares the financial reports compliance with the Corporations Act 2001 and AASB accounting standard but its financial results are not so adequately disclosed as compared to that of Telstra. Telstra has disclosed all the financial information through the help of graph and figures so that it can be easily understood by the end-users. However, the finan cial reports of TPG are not so properly disclosed that makes them relatively difficult to be understood by the end-users. Also, TPG has not disclosed consolidated financial statements in its annual report as per the accounting standards of AASB that integrates the financial information of its subsidiaries in a single economic entity (TPG Annual Report, 2015). Explanation of Reason for Non-Compliance with conceptual framework and AASB standard requirements As discussed above, Telstra has properly implemented all the accounting standards of conceptual framework and AASB in preparing of its financial reports. The remuneration report has cleanly outlined all types of employee benefits and fixed pay offered to the executive and non-executive directors. The employee share plans has also defined various types of benefits provided to the employees linked to their individual performances (Telstra Annual Report, 2016). On the other hand, TPG has not clearly defined the benefits offered to the employees and has also not clearly defined the employee policies adopted for ensuring their protection at workplace. The remuneration report is also not so effectively prepared that makes it rather difficult to be understood by the end-users. The reason for not adequate compliance of TPG with the accounting policies of AASB and conceptual framework is may be due to small size of the company in comparison to Telstra. Telstra has more controlled entities as compared to that of TPG and this uplifts the standards of accounting standards adopted by it (Hoffman, 2016). Thus, Telstra publishes its consolidated financial statements that are not relatively disclosed by the TPG (TPG Annual Report, 2015). Including Prudence in Conceptual Framework Revision for addressing the disparity in Corporate Reporting The prudence concept in the accounting is also known as conservatism principle according to which an accountant should record the assets and liabilities immediately on their occurrence but revenues should be reported on their actual realisation. The concept of prudence was removed by the International Accounting Standards Board (IASB) in the year 2010 from the conceptual framework. The concept was removed due to its ineffectiveness in developing high quality of corporate reporting. Prudence concept prevents the management of business corporations to take unrealistic estimates as it is based on conservatism principle (Welzel, 2006). Thus, IASB has presently revised the conceptual framework for including prudence so that accurate decisions can be taken by the management at the time of occurrence of uncertainty (Whittington, 2008). The introduction of prudence can help in overcoming the disparity in corporate reporting through maintaining the neutrality of financial information. It will help the management to take estimates that are realistic and non-biased. The inclusion of prudence principle would help in presenting the true and faithful information about the financial performance of a firm to the stakeholders (Knight, 2004). It will help in overcoming the occurrence of corporate scandals where corporations presented fraudulent information regarding their financial position to the investors. The concept of prudence was initially removed from the conceptual framework on the basis of its restrictions imposed on the businesses to create hidden reserves. However, with the occurrence of corporate scandals due to overstating of companys revenue to the investors has caused the inclusion of prudence in the conceptual framework again by the IASB. The revenue realised by a business corporation should be fair as it form the basis for investors to take decisions about investing their capital in a particular corporation. Thus, the principle of prudence is in accordance with the conservative accounting that helps in protecting the interest of investors (Araujo and Gomes, 2015). Recommendations Thus, it is recommended on the basis of overall discussion that TPG should improve the format of its annual reporting so that it can be easily understood by the end-users. This is essential for effective compliance of the company as per the conceptual framework and AASB standard requirements. Also, the corporations such as Telstra and TPG are recommended to implement the principle of prudence for addressing the issues related to corporate disparity. The inclusion of prudence principle will help them to present trustworthy financial information to the stakeholders thus promoting transparency in the business operations. This is required by the business for ensuring their long-term growth and development (Mazhambe, 2014). Conclusion It can be summarised from the overall report that businesses around the world should effectively comply with all the accounting standard requirements of conceptual framework developed by the IASB. AASB has developed its accounting standards by taking into the consideration the accounting policies developed by the IASB. Thus, all businesses operating in Australia should comply with the AASB accounting standards requirements. Also, there is high necessity of prudence in the conceptual framework for maintaining the neutrality of the financial information. It would help in preventing the occurrence of situation related to corporate disparity and protecting the interests of companys investors. References About the AASB. 2016. [Online]. Available at: https://www.aasb.gov.au/About-the-AASB.aspx [Accessed on: 8 December 2016]. About TPG. 2016. [Online]. 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