Public Interest, Accounting Policies and Advanced Financial Accounting

Introduction

Public interest in accounting refers to the interests of the users of financial information. When companies provide financial information, they need to provide reports that are targeted on the interests of various users of financial information. Accounting policies are also important in financial accounting because they provide guidelines on how companies report on their financial information. Furthermore, the number of users of financial information plays an important role in the creation of decision-useful information for all users of financial information. This report critically discusses the concept of public interest in accounting. It also explains various accounting policies applied in Woolworths limited, and how they are disclosed in the company’s financial reporting to enhance effective financial reporting. Lastly, the report will explain how the reduction of the users of financial information will help in creation of decision-important information.

  1. Critically discuss the notion of public interest and its relevance to financial reporting for the creation of decision useful financial information with the help of research literature.

Financial Accounting Standards Board (FASB) establishes and improves public interest as a concept of great importance in Financial Reporting in the US. With an aim of promoting public interest in mind, FASB focuses on the development and improvement of standards of financial reporting in order to create decision-useful information to investors and other financial reports’ users. Public interest in financial reporting is fostered through comprehensive, independent and transparent process that allows for broad participation. Financial reporting should also consider stakeholders’ views when providing financial reports. The financial reports should also be over-sighted by an independent body in order to ensure that it is in line with the interests of the public. Promotion of public interest through financial reporting has become a major topic of discussion in financial management; involving shareholders, investors, governments, companies, financial reporting regulation bodies and other users of financial information. Researchers have investigated the relevance of the notion of public interest to financial reporting to create decision-useful information to users of financial reports.

Franzel (2013) argues that public interest should be a key consideration in financial reporting at this time when there is great financial volatility and economic uncertainties affecting the public, businesses and investors. In his report, Franzel discusses the importance of reliable corporate financial reporting. He argues that high quality standards of financial reports enhance efficient allocation of capital to its best use in building and sustaining lives and economies. He considers that integrity in financial reports is an important way of enhancing public interest. Franzel (2013) says, “The integrity of capitalism depends on the integrity of corporate accounting system”. Transparent and accountable financial reporting wins the trust of investors and other users of financial reports who prefer reliable financial reporting. Wyatt & Frick, (2010) suggests that financial reports which are prepared based on accounting standards that protect public interests are considered by investors to be reliable.

Financial reporting scandals that have been experienced in the past have occurred due to unreliable financial reporting systems which do not take into consideration the interests of the public. Failure to consider public interests in financial reporting often leads to deterioration of investor confidence; hence causing business failures. Accounting standards that seek to protect public interest advocate for corporate accountability and integrity in financial reporting systems. These aspects of accountability and integrity are relevant in financial reporting because they build the confidence of investors and other users of financial reports, and reduces the problems of business failures and financial reporting scandals. Business failures occur because the business managers have failed to utilize its resources efficiency using appropriate financial management approach. This problem can be solved by engaging stakeholders in decision making issues and considering public interests in financial reporting. Public interest is enhanced through the preparation of informative, accurate, and reliable financial reports. Reporting transparently and accountably also helps to boost public interests.

AASB 1053 aligns the definition of public interest with that of public accountability, which means accountability to people who provide resources and to other external parties who make economic decisions but are not obligated to demand financial reports that are aimed at meeting their specific information needs. In this case, any public company or private company whose shares are traded in a public market should provide financial reports that address the interests of members of the general public. In the context of Australia, companies that should provide financial reports in line with public interests include listed companies, insurance companies, and banks. These companies are referred to as “Public Interest Entities”. These entities serve public interest by providing a specific direction to financial reporting and enhancing unbiased financial information.

According to Financial Accounting Standards Board (2010), unbiased information provided by Public Interest Entities enhances efficient functioning of capital markets and appropriate allocation of resources in the economy. Professional bodies and Australian Securities and Investment Commission (ASIC) have stated that it is necessary to develop an Australian definition of public interest entities in order to enhance public interest and to avoid disagreements on firms that should demonstrate public interest. ASIC further advocates for a consistency in auditing and accounting approach in which all public interest entities are expected to provide high financial reporting requirements and strict auditing independence. Therefore, it is not just the listed companies that should address public interest, but also includes other companies for as long as they are public-interest companies.

In general, financial reporting should enhance protection of public interest in order to win the confidence of investors and other users of financial reports, and provides them with decision-useful information needed in allocation and utilization of resources in the economy. Public interest is also relevant in financial reporting of Australia, and an Australian definition of public interest has been given. Using the concept of public interest in financial reporting also prevents financial reporting scandals and business failures.

  1. Identify and select at least three accounting policies by reviewing the latest financial statements of an Australian firm listed in ASX and critically discuss the disclosure of these accounting policies for decision usefulness.

From the Financial Statements if Woolworths Ltd, it is possible to identify various accounting policies that the company uses and discloses in compliance with the AASB in order to be used by investors and other users of financial reports in obtaining decision-useful information. In its 2013 annual report, the company has disclosed various accounting policies that can be used to make economic decisions. This shows that the company complies with the Generally Accepted Accounting Principles and the provisions of AASB; hence gaining the confidence of investors.

One of the main policies disclosed in Woolworth’s financial statements is the Basis of Preparation. Through this policy, the company discloses the basis in which its Financial Report is prepared (Woolworths Ltd, 2013). For instance, the company suggests that its financial report is presented in Australian dollars. This disclosure is important for decision making because it enables investors to know the exact share prices, profits, revenue, dividends and other important elements of the financial reports in a specific currency so that they can make important decisions related to foreign currencies. The policy disclosure also shows that the company Financial Report has been prepared on the basis of historical cost. This also helps investors to obtain decision-useful information about their investments with the company. Investors will be able to determine the value of the company’s assets using the Historical Cost approach; hence they decide whether to invest in the company or not.

Woolworths Ltd has also disclosed that it applied the new and revised policies of the Australian Accounting Standards Board (AASB) which are relevant to the business operations of the organization. For instance, the company adopted AASB 1054 Australian Additional Disclosures, AASB 2011-1, and AASB 2010-6 which are mainly related to disclosures (Woolworths Ltd, 2013). Woolworths disclosed that these revised standards have not caused great impact on its financial results because they are purely concerned with disclosures. This leads t trust by the investors who need the financial results report to make decisions. it indicates that the company complies with new provisions of the AASB; hence its financial reports can be relied on for decision making.

Basis of consolidation also provides another set of policies that the company uses in preparing its financial reports. In this policy, assets and liabilities of all subsidiaries are incorporated in the consolidated financial statements of the company. The policy also requires non-controlling interests of subsidiaries to be shown separately in the consolidated financial statement. This disclosure of policy is important for decision making among investors and other users of financial statements because it shows the financial results attributed to each of the subsidiaries. Another policy on the basis of consolidation is the elimination of transactions on consolidation. In this case, intra-group transactions and balances, gains and losses, and income and expenses are eliminated from the consolidated financial report (Woolworths Ltd, 2013).  This aids in decision making of financial report users because they will know the exact amount of income of the company without considering income for various subsidiaries.

Another policy is the foreign currency policy which states that the company’s transactions in foreign currencies are translated on the day when the transaction is made. Assets and liabilities which are valued at foreign currencies are also translated to Austrian dollar at the balance sheet date. Foreign exchange differences are also recognised in the company’s profit or loss when they arise. This is important financial information for investors because they will use it to make appropriate decisions on risk management and hedging.

Another significant accounting policy is depreciation policy which applies to buildings, plant and equipment, leasehold improvements, plant and equipment and asset sale’s proceeds. The policy suggests that buildings and plant including lifts and air conditioning are depreciated using the straight line method over the asset’s estimated useful life (Woolworths Ltd, 2013). This is decision-useful information which can be used by investors and other users of financial information to determine the true value of the assets of the company before deciding to invest in the company or contributing in any way to the capital formation in the company. Disclosing the method used to arrive at the depreciation of assets in the company is a good step of ensuring that the company wins the confidence of investors who rely on such information to make decisions.

The depreciation policy disclosure also suggests that the leasehold improvements of the company is amortized over the remaining lease period or useful life of the lease improvement (Woolworths Ltd, 2013). Furthermore, plant and equipment are depreciated based on the straight line method of depreciation over the assets’ estimated useful life to the consolidated entity. Estimates of useful lives are made regularly for all the assets. Proceeds from sale of assets are also recognised on the date of unconditional sale contract and the net gain or loss is recorded in other income or other expenses. This disclosure is an important source of information which helps investors to understand how the company accounts to proceeds from sale of assets; whether the company is transparent on such proceeds or it hides the information. With this disclosure, the company protects the interests of shareholders who are actually the owners of those assets. Disclosing the methods of accounting for proceeds from assets demonstrates transparency and accountability on the part of the company; hence winning the confidence of stakeholders who require the information to make decisions on how their assets in the  company should be utilized.

These policies are disclosed on the section of “notes to consolidated financial statements.” They are essential in maintaining effective decision making for investors. Reliability, transparency, accountability and integrity of accounting policies and disclosure are necessary in building the confidence and trust of investors and other stakeholders of the company.

  1. Reduced Number of Users of Financial Information

AASB approved Amendments to the Australian Conceptual Framework on December 20, 2013. This amendment reduced the users of financial information to existing and potential investors and creditors. These users use the financial information to make decisions on the provision of economic resources to the organisation. The reduction of financial information users has an impact on the creation of decision-useful information for all users of financial information.

The information needed by users of financial statements to make economic decisions should always be relevant to the decision making needs of the decision maker. It should also be reliable by representing faithfully the financial position, cash flow, and financial performance of the organisation. The information should also reflect the economic substance of the business transactions involving the entity. The conceptual framework provides the objectives of financial decisions and the characteristics of useful accounting information. Of major concern, however, are the users of financial information.

First, financial reports are mainly intended for users who are reasonably knowledgeable of business and economic activities.  Therefore, it was necessary for the AASB to reduce the users of financial information to only a few users in order to enhance creation of more decision useful information for all users of financial information. In this case, reducing the users of financial information enhances understandability of the financial information in order to enable users to make the right economic and business decisions. Investors, lenders, and other creditors have reasonable knowledge about economic and business activities; so they can use financial information effectively to provide resources to the company. Previously, users of financial information included government and the public, who may not even have enough knowledge on economic and business information. They could therefore make ineffective decisions on resource allocation to the company.

Creation of more decision useful information for all users can also be enhanced through having information available to users at the right time in order to influence decision making. In order to enhance effective timeliness for good decision making, it is necessary to reduce the number of users of financial information. This approach is important because it takes a shorter time for a few users to respond to financial information in an effective decision making environment; hence making the financial information more useful for decision making.

The reduction of users of financial information also ensures that the variability of financial information is done effectively in order to get assurance that the financial information provided faithfully represents the true economic condition that it suggests to represent. A reduced number of users and independent observers can easily reach a consensus about a specific direction regarding the faithful representation of the financial information provided by the organisation.

The decisions made by users of financial information are based on comparison between alternatives, e.g. selling or not selling an investment with the company. The number of users should therefore be small in order to reduce the overall decision points or alternative decisions, because the decision of one user will be affected by the decisions of other users. A few users will therefore enhance effective and easy decision making regarding various economic activities that involve the company, based on the financial information provided by the company. Furthermore, the decisions made by users of the financial information are based on the comparisons of the performance entity with the performance of other entities. Following the reduction of the users of financial information, it becomes easier for the users to compare the performance of the current company with the performance of other companies. This is because there will be less economic agents to influence the decision of the current users. However, this may lead to low quality of decision because there will be a few people to discuss and come up with best decisions regarding economic engagement with the company.

Reduction of users of financial information also reduces the number of decision making in a given scenario; hence the organisation will provide less information in its financial reports that are only suited for the few decision makers. For example, the decision about buying, selling or holding an investment by existing and potential investment can be made based on financial information that suits that purpose. Therefore, reduction of the number of users of financial information has led to increased creation of more decision useful information for all users of financial information.

Conclusion

In conclusion, it is clear that the three concepts discussed in this paper have good impacts on financial accounting. The concept of public interest in accounting is a relevant tool in creation of decision-useful information. It involves meeting the interests of the public in financial reporting, which promotes the creation of decision-useful information for all users of financial information. The accounting policies of Woolworths have also been found to be relevant in financial reporting. Such accounting policies as basis of presentation, basis of consolidation and depreciation policies are provided by the company to be used by accounting information users to meet their financial needs. On the reduction of financial information users, this paper has determined that reduced financial information users reduces the decision making points of such users; hence making decision making process for investors and other users of financial information easy

 

References list

Australian Accounting Standards Board (2013). Amendments to the Australian Conceptual Framework. Melbourne: Australian Accounting Standards Board.

BOYMAL, D. (2007). The Work Program and Priorities of the AASB. Australian Accounting Review, 17, 42, 3-7.

Esther, C., Elaine, E., & Sue, W. (2010). An historical review of quality in financial reporting in Australia. Pacific Accounting Review, 22, 2, 147-169.

Financial Accounting Standards Board (2010). Conceptual Framework for Financial Reporting. Norwalk: FASB.

Franzel, J.M. Accountability: Protecting Investors, the Public Interest and Prosperity. Association of Government Accountants 62nd Annual PDC, Dallas, TX.

Woolworths Ltd (2013). Woolworths Limited – Annual Report 2013. Sydney: Woolworths Limited.

Wyatt, A., & Frick, H. (2010). Accounting for Investments in Human Capital: A   Review. Australian Accounting Review, 20, 3, 199-220.

Leave a Reply

Your email address will not be published. Required fields are marked *