Conceptual Framework Provided by International Accounting Standards Board to Financial Reporting - Essay Example

Financial Reporting Name Course Institution Date Table of Contents Table of Contents 2 Executive Summary 2 Introduction 3 Discussion 4 Recommendations 8 Conclusion 10 References 11 Executive Summary This report mainly addresses the issue of reporting financial results of the company in monetary terms. From the information that has been gathered, it emerges that in some way business entities are limited to reporting their transactions in monetary terms. The International Accounting Standards Board and other regulatory bodies are charged with designing policy guidelines to address financial reporting standards. From the preliminary studies undertaken, entities are forced to report financial performance in monetary terms. The report analyzes some issues in conceptual framework provided by IASB in relation to financial reporting. The report addresses issues like measurement, capital and capital maintenance. Inference is drawn from the information availed on the need to provide financial statements that appreciate the emerging issues in the current business environment. Introduction It is the intention of every company to report its financial performance in accordance with the set guidelines by the regulatory bodies (Cochrane 2005, p. 67). In addition, companies are committed to ensuring that these financial statements are able to communicate the information to the various users. In the category of users, there mainly two blocks. One category of users is referred to as general purpose users. This category is not in a position to request specialized financial statement for their use (Barton& Simko 2002, p. 26). In other words, they use financial statements that are available for every person. On the other hand, there is a category of users who are allowed to make a formal request to the organization to submit various financial statements. For instance, revenue collection authorities are allowed to write to organizations for financial statements that abide by particular guidelines in the preparation. The information provided by financial statements is important to stakeholders like investors and creditors. This indicates how critical financial statements are. It is therefore the role of the management to communicate the accomplishments of the company to every stakeholder to the company. In order to meet the needs of various users, the management is meant to follow specific guidelines that have been set. Unfortunately, these guidelines have failed to accommodate the emerging trends in the business environment. The rigidity of these policies makes it a bit hard for the organization to adjust to the emerging financial reporting needs. This report seeks to evaluate a number of issues that have been assumed in the process of drafting financial reports. This is the non-monetary aspect of transactions that organizations may be involved in. this is so timely considering the various changes in the current market (Bricker 2012, p. 71). The report seeks to evaluate the conceptual framework as provided by the International Accounting Standards Board (IASB). The report addresses various elements that have been impressed in the conceptual framework that seems to force entities to report financial performance in monetary terms. At the same time, the report seeks to evaluate financial statements of a company in order to ascertain the reporting of non-financial elements. Discussion It is true that most if not all organizations report their performance in monetary formats. The companies are keen to maintain comparability aspect of financial statements by reporting the same way as other players in the industry (Kanodia, Singh, & Spero 2005, p. 501). According to what is already in place, it makes it a bit technical for entities to report performance in non-monetary forms. The conceptual framework provided by IASB clearly shows its favoritism towards reporting in monetary form. Even with this realization, it may be a bit shocking to realize that it is not only IASB that is keen to make entities report their performance in monetary forms. Many other accounting regulatory bodies restrict the reporting of performance in monetary form. Nevertheless, the regulatory bodies are keen to ensure that financial reports presented to owners of the business and the investors reflects what is has happened during the financial year involved. This need is reinforced with the events that have led to collapse of multinational firms in the recent decade including Enron and WorldCom. The conceptual framework limits the transactions that are considered in preparation of financial statements. In most cases, the financial statements are expected to acknowledge transactions that can be valued in monetary terms alone. The measurability of transactions for accounting purpose is actually limited to monetary terms. As a matter of fact, this is clearly put in one of the concepts of accounting. Those charged with the responsibility of preparing financial statement are expected to scrutinize transactions that meet the criterion that has been provided by the IASB (Blackwell 1953, p. 267). On the other hand, the framework has provided some grounds upon which transactions that are not monetary can be recognized and reported appropriately. The provisions that have been provided to allow non-monetary information to be reported are mainly in cost accounting. It is only in cost accounting statements that items like number of labor hours, number of jobs created, etc. are recorded. Even with this in mind, the ground is always provided to enable the translation of the various units into monetary. This demonstrates how the conceptual framework has limited reporting of financial performance to monetary units. In the preparation of financial statements, the needs of general users of financial statements are very important. General purpose users must access financial information that can assist them in making appropriate investment decisions. Therefore, by all means financial statements ought to communicate the relevant information for the general purpose users to make decisions thereof (Abarbanell & Bushee 1997, p. 19). In adhering to the objectives of general purpose accounting, the treatment of capital maintenance tends to be very important indeed. In accounting terms, capital is considered a legal economic item that is completely separate from the owner. In real sense, whatever is maintained in capital form is actually non-monetary in nature. This is because, according to double-entry accounting, for every asset bought in the organization, there is an equivalent credit or liability created. In this case, the credit or liability that is created is actually the capital. This capital in essence is non-monetary. Unfortunately, the reporting of financial results does not seem to depict capital as a non-monetary item. When capital in reflected on statement of the financial position, it is perceived as monetary item. The same is true also in the process of valuing net capital at the start and at the end of the period in order to ascertain if there is any profit accruing from the same (Soderstrom & Sun 2007, p. 690). From the discussion that has been advanced above, there is an obvious motive by the regulatory agencies to ensure that reporting of company’s performance is limited to monetary form. It will only be good if such entities could be considerate of the dynamic environment within which businesses are operating in. In my view, there are so many non-financial aspects that play a critical role in the success of organizations. For instance, the ability of the company to attract highly talented persons, overall good reputation, low turnover levels, etc. All these aspects are important in guaranteeing a going concern aspect of the organization. Therefore, regulatory bodies ought to reconsider the form of reporting in the 21st century. Part B As discussed in the prior section, quite often performance of a company is limited to financial aspects alone. Organizations report on transactions that can be quantified in monetary form alone. This to some extend limits scope of financial statements in relation to conveying all the aspects driving performance during the period. In the recent, the focus of organizations in various industries seems to be changing with time (Tricker 2011, p. 390). Organizations are no longer limited to focusing on financial performance of a single trading period. Most organizations are keen to ensure long term performance. The strategies being put in place by such organizations may not qualify being categorized as financial according to the set guidelines. Nevertheless, these strategies play a key role in ensuring that companies have a long term perspective in relation to their success path (Bricker 2012, p. 83). This clearly explains the move by companies to focus on aspects like customer relationship management, ethical trading, employee motivation, etc. All these are geared towards achieving long term success. When firms invest a lot of funds in customer relationship management programs, it clearly shows that their focus extends beyond performance in the current period. Macquarie Bank is my preferred organization that this report seeks to analyze the various non-financial activities that the company performed well during the financial period quoted. The financial statement being evaluated is for the period ending 31st March 2014. During the period, the company received top ranking award for Renewable Energy Research in Europe. This is one of the most coveted recognitions that companies endeavor to be associated with. For the company to qualify for this award, it had invested a lot in environment, social and governance strategy that it had set before. This is one way of strengthening the brand of the company in order to guarantee long term success. The good reputation created by such recognition is indeed great value to the organization. The company can bank on such recognitions to drive its agenda in the industry. This was attained after the company had invested a lot of money in research programs aimed at environmental conservation. The company regards this as part of its strategy to give back to the society. Besides, the company also achieved its diversity objective in relation to its global workforce. Indeed this is another aspect that cannot be easily quantified though it is critical in the success of any given entity. The company’s objective in relation to workforce is to ensure inclusivity in the selection process of employees. Therefore, every relevant stakeholder is expected to work towards ensuring inclusivity in the workforce. As at the balance sheet date, the company’s statistics in relation to its global workforce stood at 45% of employees coming from Australia and New Zealand, 20% from America, 26.2% in Asia and 8.8% from Europe, Middle East and Africa. According to the company’s vision in relation to workforce, this is a great achievement. The same is true with gender diversity initiatives that have been put in place. The statistics of the company in the Board of Directors shows that the company is moving towards the right direction. From the financial statement, funds have been set aside by the company to ensure that inclusivity initiatives are implemented appropriately. In addition, the company has one of the best corporate responsibility strategies. In its commitment to give back to the society, the company has invested a lot of resources especially during the last financial period. The value that streams from this nature of investment is actually expected to flow into the organization in the long run. Similarly, as part of the company’s strategy to ensure low turnover rates, the company reviewed remunerations packages for various employees during the year. This is a motivation strategy aimed at ensuring the company is able to retain its productive employees for a long period. Low turnover rate is an asset that brings a lot of value to the entity in the long run. Recommendations From the discussion that has been advanced in the various parts of the report above, it is clear that users of financial information want to know relatively more than what financial statements are providing in the current format. While adherence to IASB is of critical importance, it is important for the financial statements to be tailored in order to meet the needs of the various users (Tricker 2011, p. 388). In order to attain this, I will recommend inclusion of non-monetary information in the presentation of financial reports. This can be in form of notes to the financial statements. These notes provide additional information which is not financially quantifiable and therefore not reflected in the main financial statements. Such can be an opportunity through which users of these reports can easily comprehend the scope of resources that have been invested and the respective value that has been realized to the organization. In addition, there are special reports through which non-financial information can be appropriately disclosed. In most cases, companies use Sustainability and Social Responsibility Reports to provide details on non-financial information (Bricker 2012, p. 64). Such reports provide comprehensive details about transactions and activities that compliment financial statements. All these are meant to provide sufficient information to users at any given time in order to warrant decision making by the users. The bottom line to all this is to provide sufficient and in-depth information to the users of financial statement to enable them understand the unique dynamics that are modeling business in the current environment (Francis, LaFond, Olsson, G. &Schipper 2005, p. 302). This is because non-financial information incorporates the emerging trends that seem influence what is happening in businesses. For instance, it is now common knowledge that organizations that portray an image of being committed to environmental conservation receive recognition and good reputation at the end of it. The good reputation has a positive impact on the long term operation of the business. Therefore, it is only important for users of financial statements to have insights about all these occurrences. Conclusion The report has critically assessed the phases underlying the use of monetary terms in reporting performance of companies and organizations. From what has been discussed, I believe the highlight of it all is the realization that the business environment is changing so fast. In order for businesses to flow in the current environment, it is critical to adjust the reporting of organization performance to suit these dynamics. One way of doing this is by incorporating non-financial data in the process of preparing annual reports. 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