Financial reporting disclosures
Instructions:
Based on the Board’s decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following:
a. Explain in your own words the objective of general purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting (covering OB1-OB21 and QC1- QC39) (10 marks).
b. Critically analyse to what extent the latest annual report of your company meets the disclosure requirements for PPE as per AASB 116 (10 marks).
c. Based on your findings in part b, critically analyse to what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information (10 marks).
d. Based on your findings in part c, critically discuss to what extent the disclosures on PPE align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement (10 marks).
*You need to choose a suitable company by yourself from: http://www.asx200list.com/
Solution.
Financial reporting disclosures .
Executive summary
This report details the objective of general purpose financial reporting as the provision of relevant information to help users in decision making. It identifies the qualitative characteristics of general purpose financial statements as relevance and faithful presentation. The report utilizes the annual report of Telstra Limited, a telecommunications company listed on the Australian stock exchange and establishes the extent to which the company’s PPE disclosures are aligned to the requirements of AASB 116. It analyses the extent to which the Telstra Limited PPE disclosures meet the characteristics of general purpose financial reports and the extent to which the PPE disclosures meet the objectives of financial reporting.
Introduction
- Objective of general purpose financial reporting and the qualitative characteristics of useful financial information
The main objective of general purpose financial reporting is to provide the relevant information to the users of financial information to assist them in making decisions concerning their engagement with the entity. Business stakeholders require information for various reasons. Investors, for instance, would want to know the financial position of the company and its performance relative to other players in the industry so as to determine whether to buy, hold or dispose of their stocks in the entities. Lenders are interested in knowing about the company’s ability to meet their obligations when they fall due. They want to know whether the company is well leveraged and generating sufficient cash flows to be able to repay any debts that are owed to lenders. Regulators, on the other hand, are interested in knowing whether the company has met their tax obligations.
Since a business cannot provide all the relevant information to each class of users individually, general purpose financial reporting helps to meet these stakeholder information needs in the most efficient and cost effective means.
For financial information to meet the objective discussed above, they must possess the following qualitative characteristics. Relevance, financial information is relevant if it is capable of influencing the decisions that users of financial information make. This relevance is derived from the predictive value, confirmatory value or both. Predictive value is the ability of financial information to assist users to predict outcomes of business decisions, while it’s confirmatory if it provides feedback about evaluations made in the past. In both cases, the materiality of the information in question must be considered.
Faithful representation- Financial information is expected to fairly and faithfully represent the economic situation for the business. Faithful representation means that all efforts have been made in the preparation of the financial statements, to ensure that they are complete, neutral and free from error
- To what extent the latest annual report of Telstra Limited meets the disclosure requirements for PPE as per AASB 116
According to AASB 116 (AASB, 2010) property, plant and equipment are recognized at historical cost. The historical cost includes any costs that are incurred to ensure that the asset is in usable condition. Subsequent measurement should be done at cost less accumulation depreciation and amortization. The standard also spells out the treatment of all expenses related to assets such as maintenance, major/ scheduled repairs, etc. In this regard, the financial latest annual report of our selected company (Telstra limited) is deemed to meet the disclosure requirements as documented herein under.
According to their 2016 annual report (Pg 96-98), the company recognizes the fixed assets at their historical cost, together with the associated costs to bring the assets to use such as transportation and installation, which is in line with the requirements of AASB.
Subsequent measurement, according to the annual report is done on the cost of the assets, less the accumulated depreciation and impairment.
The annual report also documents the company’s depreciation policy, where assets are depreciated using the straight-line method. No depreciation is charged on work in progress.
The annual report discloses the company policy concerning impairment and notes that the amount of impairment is the higher of fair value less cost of disposal and the asset’s value in use.
The report discloses that the company reviews the useful lives of assets on an annual basis. This review is done in line with international best practice in the telecommunications industry. The management also decides on whether some assets are obsolete and disclosures made appropriately.
According to the attached PPE schedule (Appendix 1), the annual report outlines the breakdown, detailing the initial cost, additions, disposals and the accumulated depreciation to arrive at the cost, accumulated depreciation is deducted from cost to arrive at the net book value. The schedule also compares the net book value for 2014, 2015 and 2016, which is in line with the comparability characteristic of general purpose financial statements.
c) Critically analyze to what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information
The disclosures on PPE are relevant in the following cases. Investors can know what is the total property, plant, and equipment for the company, and how has it changed compared to the previous periods. Disclosures on additions and disposals help investors and lenders to understand how they affect their investments in the company. Seeing that some of the assets are charged as security for loans, a breakdown of the additions and disposals helps investors to know that their security is intact.
While it’s not possible to ascertain the fairness in the presentation of the PPE since a physical verification cannot be done, the comparability and additional disclosures on the financial statements seems to indicate that the PPE section is fairly represented. The fact that the financial statements have been audited by a reputable team of external auditors who have verified the existence, completeness, and accuracy of the PPE indicates fair and faithful presentation. Auditors work involves confirmation of existence, valuation, and recording of transactions related to PPE and therefore it means that there is a fair presentation as the financial statements have received an unqualified opinion.
One enhancing characteristic that is portrayed by these financial statements is comparability. The statements have been prepared in accordance with the requirements of the Australian Accounting Standards Board, which requires all listed companies to prepare financial statements in a specific format. This means that these statements and especially the PPE schedules are easily comparable with those of other institutions in the same industry. Users of these financial statements would find it easy to compare like line items in this annual report with those of other companies in the same industry.
Notably, the PPE schedule has presented information for 2016, 2015, 2014 in a manner that allows for them to be compared. This means that users can see how the value of assets has changed with time and therefore help in their decision making concerning the company assets level.
- Critically discuss to what extent the disclosures on PPE align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement
As discussed above, the objectives of general purpose financial reporting are to enable users to make decisions concerning the entity and its operations. In this regard, the disclosures on PPE seem to align with the objectives in the following ways.
Investors and potential investors can establish the asset strength of the company which is an indicator of the stability of the company. This informs them of the company’s stability and ability to generate high returns on their investments. A company with sufficient assets is deemed stable, and investors are likely to buy or hold their stocks in those companies in anticipation of stable dividend payments.
Lenders, on the other hand, rely on a company’s assets base, and especially the fixed assets to determine whether the company is stable enough, whether it has sufficient security to service their debts. Potential lenders also look at the company’s assets base with a bias on PPE to determine how much to lend and at what interest rate.
The government through the revenue authorities is interested in knowing whether the company has correctly treated its fixed assets in the books as their value affects the company’s tax obligations. For instance, the tax authorities are interested in knowing whether the company I have treated depreciation charges correctly in the statement of comprehensive income.
Conclusion
Telstra limited annual report disclosures on PPE have made all attempts to meet the requirements of AASB 116, and consequently, meet the characteristics of general purpose financial reporting.
References
Australian Accounting Standards Board (2010). AASB 116. The property, Plant, and Equipment. Retrieved from: http://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf
Telstra annual report (2016). Retrieved from: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Report.pdf
Appendix 1:
| Telstra Group | Land and site improvements | Buildings | Communication assets | Other plant, equipment and motor vehicles | Total Property, plant and equipment |
| $ Million | $ Million | $ Million | $ Million | $ Million | |
| Net book value as of July 1,2014 | 51 | 603 | 18,706 | 482 | 19,842 |
| Additions | – | 82 | 2,322 | 201 | 2,605 |
| Acquisitions of controlled entities | 5 | 9 | 776 | 27 | 817 |
| Disposals | (2) | (2) | (3) | (2) | (9) |
| Impairment losses | – | (3) | (7) | (10) | |
| Dep’n expenses for continuing operations | – | (64) | (2,721) | (130) | (2,915) |
| Dep’n expenses for discontinued operations | – | – | – | (7) | (7) |
| Net foreign currency exchange differences | – | 12 | 40 | 15 | 67 |
| Transfers | (2) | 10 | 69 | (17) | 60 |
| Net book value as of 30 June 2015 | 52 | 647 | 19,182 | 569 | 20,450 |
| At cost | 52 | 1,267 | 62,156 | 1,854 | 65,329 |
| Accumulated depreciation and impairment | – | (620) | (42,974) | (1,285) | (44,879) |
| Net book value as of 1 July 2015 | 52 | 647 | 19,182 | 569 | 20,450 |
| Additions | – | 57 | 2,913 | 118 | 3,088 |
| Acquisitions of controlled entities | – | – | 24 | 1 | 25 |
| Disposals | – | – | (18) | – | (18) |
| Disposals through sale of controlled entities | (3) | (1) | (17) | (21) | |
| Impairment losses | – | – | (11) | (2) | (13) |
| Dep’n expenses for continuing operations | – | (89) | (2,710) | (158) | (2,957) |
| Dep’n expenses for discontinued operations | – | – | – | (9) | (9) |
| Net foreign currency exchange differences | – | (7) | 37 | (4) | 26 |
| Transfers | – | 16 | 13 | (19) | 10 |
| Net book value as of 30 June 2016 | 52 | 621 | 19,429 | 479 | 20,581 |
| At cost | 52 | 1,277 | 61,755 | 1,876 | 64,960 |
| Accumulated depreciation and impairement | – | (656) | (42,326) | (1,397) | (44,379) |
Source: Testra group: Annual report,2016.