Meaning of conceptual framework or financial reporting

This report contains the analysis and interpretation of the financial reporting framework of two organizations Woolworths Limited and Wesfarmers Limited. The financial statements of these two organizations are compared by analysing them. The disclosure requirements and the financial reporting are different in both the companies which can be analysed through their financial statements. The balance sheet, income statements and notes of the companies are compared. The report will also discuss about the involvement of new concept prudence into the accounting framework of these two companies. To cover this, the benefits of prudence will be analysed which will be used in the preparation of financial accounts of Woolworths Limited and Wesfarmers Limited. In the end of the report, the conclusion about the involvement of prudence concept will be made that how it helps in overcome the disparity in the corporate accounting.

Does the current accounting framework meet the needs of the users of financial reports as prescribed in the objective of the Conceptual Framework of Accounting?

Meaning of conceptual framework or financial reporting

Conceptual framework can be understood as the systems which define the objectives and basic concepts of the financial statements prepared as per the accounting standards. It helps in determining the purpose of the financial reporting to the users. It can also be understood as the system of ideas and the rules and regulations which helps in the functions of financial accounting. These developed rules and regulations of financial accounting further helps the companies as they follow these accounting systems for better functioning.  These can also be called as a base for preparing and presenting the financial statements of the business during a particular period (Rankin et al., 2012).

The main objectives of conceptual framework or financial reporting are as follows:

Decision making activities: The main objective of conceptual framework or financial reporting is to help in the decision making activities which will be made on the basis of information supplied. This financial information collected will helps in taking the financial decisions regarding credit, borrowing, investments, etc.

Providing the details about the organisations: The conceptual framework and financial reporting helps in providing the details information about the organisations to the future investors and the stakeholders. It forms the basis to take decisions for making investments and for providing credits to the business (Kaplan, 2011).

To set up standardization in the accounting processes: one of the main objectives of conceptual framework and financial reporting is to set up standard process for preparing and presenting the financial statements (Altamuro and Beatty, 2010). The standardization of financial statements of every company will help in making the genuine comparisons between them. These comparisons will help in making decisions by the investors.

Objectives of conceptual framework or financial reporting

To set up transparency in the processes: another objective of conceptual framework and financial reporting is to set up transparency in the business operations. It helps in setting up the responsibilities and each and every information becomes clear to the investors and other stakeholders.

Analysis of financial reporting 

Financial reporting has been done to provide information to shareholders and to all other stakeholders of the business organization. Preparation and presentation of financial reports requires application of conceptual framework of accounting i.e. basis on which financial reports are prepared. Conceptual framework of accounting is standards that each and every business organization is required to be followed. In this case, since both Wesfarmers and Woolworth limited has been operating in different industries but they are required to follow same accounting frameworks while preparing and presenting financial statements and reports. Financial reports of both the companies include statement of financial statements, income statement, cash flow statement, director’s report, etc which should be in compliance with conceptual framework of accounting.

From the analysis of financial statements of both the companies, it can be observed that both the companies has prepared and presented financial reports according to conceptual framework of accounting (Gebhardt, Mora, and Wagenhofer, 2014). There is various information that has been said to be useful for stakeholders in the decision making process. Most of the stakeholders seek following information in terms of decision making in the general purpose financial statements:

Full disclosure of financial position i.e. assets, liabilities and equity funds of Woolworth and Wesfarmers limited. This will ensure strength and weakness of Woolworth and Wesfarmers limited to the stakeholders in decision making process. Disclosures related to sales revenue, direct cost, operating cost and level of profits earned during the reporting period (Donald, 2014). This information in financial statements of Woolworth and Wesfarmers limited will provide information related to operational capacity to stakeholders in decision-making process (Macve, 2015).   

There are many other sections in annual reports of Woolworth and Wesfarmers limited that can be said useful for stakeholders. On the other hand there are some differences in presentation and disclosure of financial information also that can confuse stakeholders in decision making process.

Disclosure of segment information of Wesfarmers Limited in annual report

Above is the segment information of the Wesfarmers Limited and has been extracted from annual report of 2016. It can be observed that this disclosure will support decisions of decision maker as there is disclosure related to different segments of Wesfarmers Limited that they are into. Disclosing segment revenue and other operation is one of the most important disclosure requirements on the accountants and those charges with governance (Horngren et al., 2012). It can be observed that decision making information in terms of business performance of Wesfarmers Limited sunder different segments has been disclosed above.

Analysis of financial reporting

Disclosure of segment information of Woolworth Limited in annual report

Same is the case with Woolworth limited; they also disclosed segment information in its annual report so that investors, creditors and other stakeholders can use this information in decision making.

It can be conclude that in terms of disclosing relevant and useful information in annual report or financial statements can be helpful for stakeholders in decision making process. Current conceptual framework of accounting or financial reporting framework makes it necessary for business organizations to disclose the same (Ramanna, 2013). On the basis of above facts and disclosure it can be observed that financial statements support relevant disclosure and provide decision making information to stakeholders. Under conceptual framework of accounting or financial reporting framework disclosure of segment information is mandatory and hence it is beneficial for decision makers (Weil, Schipper and Francis, 2013).

Disclosures related to risks

Following is the disclosure related to risk those business operations of both the business organization has while performing business operations at the market place. For all business organization, it is very much important to manage and control various risks that are associated with business operations at various levels. According to financial reporting framework or conceptual framework of accounting every business organization is required to disclose risks that are associated with business operations (Weygandt, Kimmel, Kieso and Elias, 2010).

It is more responsibility of accountants and those charges with governance of business organizations to disclose various risks that are related to business operations. Apart from disclosing risks, there is need to disclose mitigating factors also that are required to be disclosed with these risks. In order to analyse and assess risk involve in business operations of Wesfarmers Limited and Woolworth Limited and risks which are associated with their business operations has been disclosed in the financial statements of both the companies (Smith, Haniffa and Fairbrass, 2011). Following are some screenshots that are taken from notes to financial statements or annual report of both the companies in terms of disclosure of various risks with business operations:

Extracts from Woolworth Limited in terms of disclosure of risk associated with business operations:

From the above disclosures it can be analysed that financial reporting framework and conceptual framework of accounting has done great work in terms of disclosing risk related information in the financial statements or annual report. In order to take decision by any stakeholders, risk and reward is the major consideration. Most of the stakeholders are not aggressive and they more likely invest in less risky business organization. Among various risk involve in the business operations financial risk and market risk are important and are considered in the decision making process (Carol, Brad, Singh and Jodi, 2016). Therefore it is responsibility of accountants and those charges with governance to disclose the same. Therefore in order to provide complete overview of business operations and risk involve in operations disclosure of risk has been incorporated. Most of the investors or other stakeholders consider this disclosure before making investment in the business organization (Carpenter, Baue and Erdogan, 2010).

Disclosure of segment information of Wesfarmers Limited in annual report

How the conceptual framework revision to include Prudence is likely to address the disparity in Corporate Reporting is a requirement in your analysis.

The business organisations were at freedom to produce and present their financial statements as per their convenience which was not so accurate and responsibilities were difficult to assign.  There was an urgent need to have a framework which helps in bringing the unanimity in the financial statements of every organisation. It helps in better governance and the accountability can be assigned easily. Earlier, when the financial statements were presented with no frameworks, it affected the transparency of the financial statements.

There was no basis on which the financial statements of two organisations could be compared easily. But with time, many developments were realised in the field of corporate accounting. Prudence concept is included in the presentation of financial statements. Prudence is the main accounting principle which shuld be considered while preparing the financial statements of the companies. Prudence framework should be incorporated in order to systemize the conceptual framework of accounting.

The principle of prudence states the framework in which the business is organised for the better management of the accounting concepts and financial statements. It brings discipline in the preparation of the financial statements. It also improves the governance of the preparation of financial statements of the organisation. Prudence should be implemented so that no disparities are seen in the financial statements of two companies (Government, 2011). Prudence brings uniformity and curbs the differences which help in better comparison of the financial statements. It also helps in making effective decisions and is helpful for the investors to make investments in businesses after making comparison of the financial statements of different companies. This shows that the concept prudence has not only improved the presentation of financial statements of the organisations but also set up a base for decision making activities.

Conclusion

It can be concluded that the report is based on the contemporary issues of accounting. The report considers the analysis and comparison of the financial statements of two organisations Wesfarmers Limited and Woolworths Limited. The conceptual framework of accounting and its importance in the organisations has been discussed. The analysis has been done which clearly states that there is a difference between the ways of presentation and preparation of the financial statements of both the companies. It makes tough for the users to make comparison between both and also finds it difficult to take the decisions. Prudence is the concept which should be incorporated to bring uniformity in the preparation and presentation of the financial accounts of the company.

References

Altamuro, J. and Beatty, A., 2010. How does internal control regulation affect financial reporting?. Journal of Accounting and Economics, 49(1), pp.58-74.

Carol, A. A., Brad, P., Singh, P. J., & Jodi, Y. (2016, June 05). Exploring the implications of integrated reporting for social investment (disclosures). Retrieved April 21, 2017, from drcaroladams: https://drcaroladams.net/exploring-the-implications-of-integrated-reporting-for-social-investment-disclosures/

Carpenter, M., Baue, T., & Erdogan, B. 2010, April 2. Different Types of Communication. Retrieved April 21, 2017, from Catalog.flatworldknowledge.com: https://catalog.flatworldknowledge.com/bookhub/5?e=carpenter-ch12_s03

Donald, H. R., 2014, Understanding Multigenerational Work-Value Conflict Resolution. Journal of Workplace Behavioural Health, pp 245-250.

Gebhardt, G., Mora, A. and Wagenhofer, A., 2014. Revisiting the fundamental concepts of IFRS. Abacus, 50(1), pp.107-116.

Government, A. (2011). Economic Structure and Performance of the Australian Retail Industry. Productivity Commission Inquiry Report .

Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012. Financial accounting. Pearson Higher Education AU.

Kaplan, R.S., 2011. Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), pp.367-383.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Ramanna, K., 2013. A Framework for Research on Corporate Accountability Reporting. Accounting Horizons, vol. 27, no. 2, p 409.

Rankin, M., Rankin, M., Stanton, P.A., McGowan, S.C., Ferlauto, K. and Tilling, M., 2012. Contemporary issues in accounting. Milton, Australia: Wiley.

Smith, J., Haniffa, R., & Fairbrass, J., 2011. A Conceptual Framework for Investigating ‘Capture’ in Corporate Sustainability Reporting Assurance. Journal of Business Ethics, vol. 99, no. 3, pp 425-439.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Wesfarmers Limited,. 2016. Wesfarmers Limited Annual Report, 2016. Annual report, Wesfarmers Limited, Sydney.

Weygandt, J.J., Kimmel, P.D., KIESO, D. and Elias, R.Z., 2010. Accounting principles. Issues in Accounting Education, 25(1), pp.179-180.

Woolworth Limited, . 2016. Woolworth Limited Annual Report, 2016. Annual report, Wesfarmers Limited, Sydney.