Analysis of Conceptual Framework Standards

Question: Discuss about the Analysis of Conceptual Framework Standards. Answer: Introduction The primary purpose of developing general purpose financial statements is to disclose the information related to financial growth and development of a business corporation. The primary users of financial reports of a corporation includes investors, creditors and other stakeholders who need the information to make decisions about selling, buying or holding their equity or debt instruments. In addition to this, the primary users of financial statements also need to assess the financial information for gaining an analysis of the efficiency of management in carrying out their roles and responsibilities (Titilayo et al., 2014). The IASB (International Accounting Standards Board) has developed and established conceptual accounting framework that describes the principles and standards to be adopted by the accountants at the time of preparing financial statements (Persons, 2013). In this context, the present report evaluates the need and effectiveness of accounting framework for supporting t he decision-making process of end-users. This is done in the report by analyzing the compliance of annual reports of Medibank health insurance ltd and Virtus health ltd with the conceptual framework and AASB standard requirements. This will help in examining the effectiveness of conceptual framework in meeting the financial reporting requirements of business corporations. Also, the report examines the need of including Prudence in conceptual framework to overcome any type of disparity in corporate reporting. Examining Compliance of Medibank health insurance ltd and Virus health ltd with the conceptual framework and AASB standard requirements The major principles of conceptual framework of accounting are reliability, relevance, consistency and comparability that need to be followed by business entities during financial reporting. The reliability principle states that financial statements must provide true and realistic information to the external parties with no concealing of financial facts and figures. As per the relevance principle, the information disclosed must be complete and relevant to be used by external parties in decision-making (Burton and Jermakowicz, 2015). The consistency principle states that financial information disclosed on an annual basis by a business corporation must be consistent with that of previous year. At last, the comparability principle states that financial information disclosed must be comparable with the previous year results in order to demonstrate the net financial growth. The Australian Accounting Standards Board (AASB) holds the responsibility within Australia to ensure that all busine sses should comply with the IASB standards (Hoffman, 2016). The annual reports of Medibank health insurance ltd and Virtus health ltd are analyzed to examine their compliance with the above mentioned principles of conceptual accounting framework. Medibank health insurance is a leading private health insurer of Australia actively involved in providing varying range of health insurance options for individual, couple and family. The annual report analyses demonstrates that the company have prepared and published its remuneration report, directors report, corporate governance statement, auditors report as per the AASB standards. The remuneration report of Medibank health insurance is developed in accordance with the AASB standards as analyzed from its annual report. The remuneration report is as per the relevance principle of conceptual framework as it provides complete information related to compensation of board members. Also, the remuneration policies adopted by the company for controlling and reviewing the remuneration of board members are also discussed in the report. The role of remuneration committee in deciding the compensation including incentives of executives and non-executive directors is clearly mentioned in the repo rt (Medibank: Annual Report, 2016). The remuneration report also illustrates that the reward and incentive system of employees is directly linked with their performance. Thus, the company has shared all the information related to compensation and reward in an honest and transparent manner in order to comply with AASB standard of honesty and integrity (Knight, 2004). The corporate governance statement of the company has also disclosed all the necessary information related to corporate rules and policies adopted for managing the workplace diversity. The auditors report discloses the standards adopted by the company to maintain integrity and quality of the financial reporting (Kieso et al., 2010). The company has established an independent audit and risk management committee for irks management, compliance and internal control. Thus, it can be said that Medibank effectively complies with reliability and relevance principle of conceptual framework by disclosing all the relevant and reliable information to the stakeholders (Medibank: Annual Report, 2016). The company also complies with the consistency and comparability principle of conceptual framework as it discloses all the financial information that is in consistent and comparable with that of previous years. The financial information is disclosed through preparation of cash flows, statement of changes in equity, income statement and balance sheet. The accounting policies and procedures adopted for the preparation of the financial statements are also disclosed properly in the annual report of the company. The directors report also declares that financial statements comply with the Corporations Act 2001 as per the AASB standards. The annual report of the company meets the different needs of stakeholders through demonstrating a link between governance and shareholder value creation. The directors report states that companys leaders satisfy their statutory duties well by promoting its long-term development. The company also develops and publishes its consolidated financial statements as per the Corporations Act 2001. The development of consolidated financial statements is required to integrate the financial reports of all subsidiaries in a single economic entity (Medibank: Annual Report, 2016). On the other hand, Virtus Health ltd is an Australian company involved in providing hospital and pathology services. The company is recognized to be largest in vitro fertilization provider in Australia. The annual report of the company publishes and discloses effectively all the information related to the compensation of executive directors and non-executive directors. The remuneration committee holds the responsibility of deciding over the matters related to compensation of board members. However, the company has not disclosed its corporate governance statement in the annual report. The disclosure of corporate governance policies followed within the workplace is required by a business entity in order to comply with the AASB standards of ethics and integrity (Persons, 2013). The auditors report of the company also has not published complete information about the procedures adopted for risk management. The company has not disclosed concise information about the control systems impleme nted for monitoring and controlling its internal business procedures (Virtus Health: Annual Report, 2016). The company though has published all its financial information as per the AASB standards through developing its statement of cash flows, statement of financial position, income statement and balance sheet. It has also published its consolidated financial statements as per the Corporations Act 2001 mandated by the AASB standards. Thus, it can be said that there is some difference in the financial disclosure of both the corporations. The companies are operating within Australia and thus need to comply with AASB standards effectively. However, as analyzed from the annual report of both companies, only Medibank health insurance ltd effectively complies with all the AASB standards and principle of conceptual framework (Medibank: Annual Report, 2016). Vitrus health ltd does not comply with all principle of conceptual framework such as relevance and reliability. The company has not disclosed all information related to the accounting policies and procedures adopted for the preparation of fin ancial statements. Also, the pattern of disclosing financial information is different in both the companies due to their varying nature of business operations (Virtus Health: Annual Report, 2016). Thus, it can be stated from analysis of annual report of both the companies that they develop their financial reports in accordance with the conceptual framework and AASB standards. The adoption of conceptual framework of accounting has enabled them to meet the needs of end-users of financial reports through providing complete and concise financial information. However, Virtus health ltd has not effectively complied with all the accounting standards and principles of conceptual framework and AASB (Virtus Health: Annual Report, 2016). The complete disclosure regarding the remuneration, risk management, internal control, operating income and expenses is provided in the annual reports through the adoption of conceptual accounting framework. Thus, it can be stated that conceptual framework principles effectively meets the needs of end-users of financial reports (Whittington, 2008). Inclusion of Prudence to address Disparity in Corporate Reporting The accounting transactions are related with uncertainties and require to be reported in time. The uncertainties in financial transactions need to be reported by making proper estimates during financial reporting. The accountants need to be very cautious and prudent at the time of taking financial decisions (Mbira and Tapera, 2016). In this context, prudence is a major accounting principle according to which assets and income should not be overstated and liabilities should not be understated during financial reporting. The concept states that expenses and liabilities should be recognized immediately after their occurrence but revenues should be reported only when they are actually realized. This concept was included in the conceptual accounting framework in order to meet the varying needs of different stakeholders of a business corporation. The main objective behind the development of conceptual accounting framework is to protect the stakeholders interest by promoting transparency an d integrity in financial reporting. The implementation of prudence principle ensures that businesses do not report overstated revenues or understated expenses during financial reporting (Malley, 2014). The concept is in accordance with the conservatism principle of accounting according to which expenses and liabilities should be reported immediately when there is uncertainty about the outcome. However, revenues and assets should be recognized only when they are assured of being received. The concept was removed from the conceptual accounting framework on the basis as it opposes accrual basis of accounting. Accrual basis of accounting states that businesses should prepare themselves in advance for the occurrence of any uncertain condition through creation of hidden reserves. Thus, the concept of prudence was removed from the conceptual accounting framework as it received criticism from some financial experts as it was found to be against accrual basis of accounting. However, the increasing evidence of corporate scandal worldwide due to manipulation of accounting information has caused its inclusion again in the conceptual framework (Araujo and Gomes, 2015). The inclusion of prudence concept will ensure that there is no biasness in the financial statements and the information presented is fair and transparent. This will help in overcoming the increasing evidences of corporate scandal that are occurring due to misrepresentation of financial statements. The IASB has again adopted the principle of prudence in the accounting framework so that potential investors and creditors get fair representation of a business financial position. This is necessary so that there is no manipulation of accounts and stakeholders get a clear demonstration of the financial position of a business entity (Ataman et al., 2014). The occurrence of corporate scandals such as Enron, World.com etc has lead to the downfall of investors and creditors as they suffered huge losses by financial misrepresentation. This caused IASB to adopt strict accounting standards that need to be followed by businesses during financial reporting. This has caused the need of including prud ence in conceptual framework again for overcoming disparity in corporate reporting (Prudence and IFRS, 2014). Recommendations On the basis of analysis of annual reports of Medibank health insurance and Virtus health ltd, it can be said that conceptual framework principles adequately meeting the needs of stakeholders. The companies are complying with conceptual framework principles and AASB standards and thus have achieved a good brand image in the country. The main advantages of adopting conceptual framework of accounting principles by businesses are increasing the users confidence and gaining a realistic image of the financial performance of the business organization (Macve, 2015). However, IASB still need to develop more strict guidelines for business corporations for meeting the needs of end-users of financial reports. This is because adoption of conceptual framework principle is very difficult for all organization as it is very expensive and time consuming (Unegbu, 2014). This can be demonstrated from the fact that Virtus health ltd has also not effectively complied with all the principles of conceptual framework (Virtus Health: Annual Report, 2016). Also, it will restrict the business to develop new idea of financial reporting as they will be mandated to report their financial performance using same standard accounting practices. Thus, IASB still need to consider all the above mentioned points for improving the financial reporting system of businesses worldwide (Conceptual Framework for Financial Reporting 2010, 2017). Conclusion It can be summarized from the overall discussion that the adoption of conceptual accounting framework principles by businesses promotes transparency and honesty in financial reporting. However, there is still need of improvement in accounting standards so that all businesses are able to implement sound financial reporting system that is able to meet the varying needs of stakeholders. References Araujo, V. and Gomes, A. 2015. 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