Home Task 3 Flashcards
- Purpose of conceptual framework
The purpose of the conceptual framework is to describe the objectives of, and concepts for, GPFR. This assists:
- The AASB in developing Australian Accounting Standards (AAS) that promote international accountability and are based on consistent concepts.
- Preparers in developing accounting policies that are consistent when no Accounting Standard exists.
- Individuals in understanding and interpreting the Standards.
- Objectives of GPFR
Provide financial information about the reporting entity that is useful for investors, lenders and other creditors in estimating returns to decide if they should provide resources.
- Fundamental and enhancing characteristics of financial data
The conceptual framework states fundamental and enhancing qualities that financial reports and information should possess in order to be useful to primary users.
FUNDAMENTAL
- Relevance: Capable of making a difference in business decisions, meaning it is material and its omission or misstatement will influence decision making. Means it must have predictive or confirmatory value (future/past events).
- Faithful representation: Information must be complete (all info necessary), neutral (no bias) and free from error.
ENHANCING
- Verifiability: Different people independently agree the economic events info is correct. Direct means verifying through direct observation like counting money and indirect means verifying through a recalculation eg depreciation.
- Comparability: Information should allow users to see similarities and differences over time. Done through consistency in policies and methods over time.
- Understandability: Users with reasonable knowledge can comprehend and interpret the information.
- Timeliness: Info is available in time for it to influence decision making. Older means less useful.
Recognition criteria assets and liabilities
Relevant meaning info must affect users decisions (material)
Faithful representation meaning item is truthfully and accurately recorded or value is estimated honestly. Must have all info needed, not biased and have no errors.
Recognition criteria income expense
Income recognition criteria: When an asset value is increased/recognised or a liability value is decreased/derecognised.
Expense recognition criteria: When an asset value is decreased/derecognised or a liability value is increased/recognised
- Financial Reporting Council (FRC)
Created by federal government to help direct financial reporting and accounting standards in Australia and its success of implementation. Its functions are
- Advisory body to AASB
- Approve and monitor AASB plans
- Appoint all AASB members except the Chair who is appointed by the treasurer
- Give treasurer reports on standards
- Watch development of world accounting standards
- Oversee accounting and auditing standards
- Australian Accounting Standards Board (AASB)
Government body that watches the work of IASB in issuing Australian standards for reporting companies. Functions are
- Develop a Conceptual Framework
- Develop the world accounting standards for Australia under Corporations Act
- Try and maintain the consistent worldwide standards
- Analyse suggested standards
- Australian Securities Exchange (ASX)
Public company that gives a place for ownership transfers and listings of public companies. Roles are:
- Give a place for share trading to be done
- Give confidence in share trading
- Oversee compliance with Listing Rules
- Concerned with preparation and presentation of financial statements
Difficulties faced in producing social and environmental information
- No clear guidelines for reporting
- Minimal knowledge for how to report and measure
- Comparisons are difficult as no consistency
- Smaller businesses may not have the resources
- Not audited externally so info could be false
- Large amount of info needed
- Variety of different reports needed
- False info may be used to make a business look better for primary users
- Some owners don’t care about environmental and social concerns enough to report it
Who uses CSD?
CSD can be used by internal users (directors, managers) and external users (investors, lenders, suppliers) to judge business actions and make decisions.
- Limitations in assessing performance from analysis and traditional financial accounting (ratios)
Historical cost: May not accurately show value of company assets as it ignores depreciation or estimated book value. Ratios and users are basing their decisions on information that isn’t necessarily up to date.
Lack of comparability: Different accounting policies (depreciation, stock valuation) may be used by other companies. Comparisons can only be made if reporting is consistent.
Lack of disclosure: Some disclosures aren’t mandatory under law. Limited disclosure of data can limit ratio calculations and conclusions. For example other expenses in income statement is vague and some figures are estimates that aren’t disclosed in the notes.
Doesn’t account for external economic factors: A poor performance may have actually been good during that period. For example company performance during covid.
Ignores qualitative aspects.
Doesn’t consider business size
Why use CSD?
CSD can assist in:
- Judging if government regulations can be met
- Evaluating risk associated with the business good or service
- Measuring non-financial success by comparing CSD to other businesses
- Employee morale and motivation
- Reducing costs by reducing resource use
- Setting future CSD goals
- Enhancing image with external users
- Communicating CSD performance to stakeholders
- Building public reputation and trust
- Managing environmental supply chain risks
EPS ratio
Earnings per Share
($ per share)
Measures how profitable company is and a high ratio would mean shares are generating good returns. A company with same EPS as another but less equity is the better one as it’s more efficient at using its capital to generate income. A weighted number of shares is used because it often changes.
Profit after tax divided by weighted number of ordinary shares
High profit
Low shares owned
Tax laws become more favourable
Expenses decrease
Low profit
High share capital reliance
Tax responsibility increases
High expenses
P/E ratio
Price/Earnings
(x times)
Shows how much investors are willing to pay for each share to earn $1 company profit. Reasonable figure is 20 times meaning $20 for $1 of company profit. Should be used with EPS ratio. A high PE ratio suggests a financially strong company where future growth is expected, although if low stock could be undervalued
Market price per share divided by earnings per share
Investor perceptions improve
Share price rise
Less earnings per share
High future growth rates expected
Future company downturn expected
Share price decreases
More earnings per share
Dividend Yield ratio
Dividend Yield
(%)
Percentage return from dividends based on market price.
Annual dividend per share divided by market price per share
Stock price falls
Investor confidence falls
High dividend paid
Investor confidence is high leading to high share price
Dividend falls
