Accounting concepts and principles can be inferred to as the general principles, assumptions as well as the layout that is used by the businesses in the global landscape. They can be inferred as globally accepted rules, regulations and groundwork that serves as a basis for maintaining the books of accounts in the firm. Furthermore, these concepts are developed as a guide that helps the accountants to identify and record accounting transactions of the firms.
These concepts and principles are developed as well as maintained by the global as well as national regulatory bodies that underlines financial reporting of businesses that operate in the global and national landscape, like the International Accounting Standards Board or IASB and the Australian Accounting Standards Board or AASB.
The AASB or the Australian Accounting Standards Board is the national regulatory body of Australia that is primarily responsible for the implementation as well as enforcing the accounting standards on the businesses operating in the landscape of Australian Economy. The AASB oversees the rights of the stakeholders of the firm, and are accountable for the formulation of accounting standards along with developing appropriate frameworks for the evaluation and assessment of the proposed standards.
Novita Healthcare Limited is an ASX listed company and operates in the realm of Medical Technology, its core functions and operations are aimed at developing medical technology that enables children to attain their latent potential through training software. Their subsidiary company, TALI Health Pty Ltd, is aimed at achieving this objective by enhancing the core cognitive functions of the children through training programs and software (novitahealthcare.com.au, 2019). Whereby, in the fiscal year that ended in 2018, the company reported that it incurred a loss of over $4,000,000 AUD and an amount of $1,161,458 as cash in hand with an influx of cash that amounted to $260,881.
1. From the annual report of your selected company and in addition, to providing examples identify and describe the accounting concepts used.
Through the analysis of the annual report of Novita Healthcare Limited, it was ascertained that the company utilizes the accounting concept of Going Concern. In accordance with the going concern concept, it is assumed that the business has a perpetual existence and is not going to wind up in the near future (novitahealthcare.com.au, 2019). In this concept, the expenses and losses of the business that it incurs in an operating year can be effectively written off in the subsequent years without any repercussions, as the company enjoys infinite existence.
For example: If the company incurs a loss of $10,000 AUD, in a fiscal year, it can be written off wholly or in parts from the profit or revenue that the company generates in the subsequent years, the company can write off $10,000 as a whole in the next year when it generates revenue, or can write off $1000 AUD every year from its revenues.
Furthermore, apart from the Going concern concept, there are over various principal concepts on which the businesses can ground their financial reports, they are:
1. Accrual concept: The financial reports that are grounded on the accrual concept, recognise income in the same accounting year in which they are accrued rather than when they are actually received, whereby any pre-received income or revenue that relates to the next or upcoming financial year must not be recognised as income in the current year, likewise for the expenses (Carey, Knowles, & Towers-Clark, 2017).
For example: In Accrual basis of accounting, if a firm receives income for goods that are to be delivered in the upcoming year, the revenue will only be recognised as revenue when the goods are actually delivered, rather than the year of commitment.
2. Conservatism concept: The financial reports that are grounded on the Conservatism concept, recognise income or revenue only when it is actually received by the firm, whereas, the expenses are recognised and recorded as soon as they are accrued. Thus this concept of accounting presents an inflated statement of the conditions of the company, thus increasing the cash the consequences of misappropriation of funds or resources of the company (Penman, 2016).
For example: If a company FGH, is being sued by its competitor for malpractices, the firm FGH will recognise the accrued expense, in the form of repercussions that it will have to pay, subsequently, the court of law, finds that the evidence against FGH was planted and orders its competitors to pay for damages, in that case, the company will only recognise the damages it will receive as revenue only when it is actually received.
3. Consistency concept: The consistency concept states that, once the firm has started following a certain concept for grounding its financial reports, the firm must continue to remain using that particular concept until the concept is proven to be flawed or is required by statute to make the change. This is due to the fact that frequent changes in the accounting concept can create undue reserves and funds that can be misappropriated by the management and thus the stakeholders might lose value (Mio, 2016).
For example: If a company utilises the concept of conservatism, it must continue to follow the concept of conservatism until it is flawed or required by the statute to do so, as changing accounting concepts from conservatism to accrual, might create undue or unfair revenues or reserves and might be confusing for the stakeholders.
4. Economic entity concept: The financial reports that are grounded on the Economic entity concept, must treat the transactions of the owners and of the company as transactions by two distinct legally recognised individuals. It recognises that the transaction of the company are different from the transactions of the owners and must be kept separate and should not be intermixed (Schroeder, Clark, & Cathey, 2019).
For Example: If Mr X, the owner of Y, buys a car for personal use, this transactions should not be recorded in the accounts of the company, whereas, is he buys a vehicle for the use of the company, it should be duly recognised as the transaction made by the company respectively.
2. What changes have been incorporated in the new accounting standard for lease AASB 16? Using your selected company and discuss the issue with examples.
The changes that have been incorporated through the AASB 16, are primarily incorporated to bring in better transparency in financial reporting of the companies operating in the public sector. Wherein in AASB 117, for lease reporting established lease into two broad category of financial Leases and Operating Leases. AASB 117, for lease reporting in the organisational context, failed to provide an honest or faithful representation or picture of the financial standing of the company in the financial statement of the company that were produced at the end of the financial year. AASB 117, was effectively flawed in its main concepts and principles, which resulted in a non-transparent financial report, which was instigated by Off-balance sheet activities, that is the activities that were not highlighted or mentioned in the balance sheet (treasury.nsw.gov.au, 2019).
Whereby, the financial reports of the companies because of the off-balance-sheet activities and non-indulgence of the essential accounting information were lacking data about assets which were worth US$3 trillion in the fiscal year of 2014 alone. Thus, the new and updated AASB 16 came into existence for transparent reporting and presenting an accurate picture of the financial picture of the company (Joubert, Garvie, & Parle, Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet., 2017). The AASB 16 is integrated into the financial reporting of the companies that are operating in the landscape of the Australian economy for presenting a transparent and better picture of the financial standing of the company.
In accordance with AASB 16, that is integrated into the Australian Economy in the fiscal year of 2019, states that the companies have to classify all its leases into the balance sheet under one category of Financial Lease with an exemption or exception of short term Lease that has a validity under 12 months and Low-Value Leases, as established or guided by the AASB (Brumm & Liu, 2019). Thereby, the primary objective or focus of AASB 16, is to present a better or transparent picture of the financial standing of the firm under the balance sheet that shows a clear and transparent picture of all its obligations and assets.
For Example, if a firm with respect to AASB 117, classified its leases into two broad categories, Financial and Operating Lease, the firm with the current accounting standard for leases, the AASB 16, has to group its leases into one category that is financial Leases. Thereafter if the firm has any Low value or short term lease it is exempted to group it into the financial leases, furthermore, it is directed to present all its lesser information in the balance sheet, so that a clear picture of the firm's financial position can be effectively highlighted.
Furthermore, the key objectives of the integration and formulation of AASB 16, is to primarily group and present all the leases of the firm as the “Right-to-use” assets wherein all the leases will be identified and integrated into the balance sheet (Xu, Davidson, & Cheong, 2017). Thereafter, it also highlights that in order to make any payments for future leases, the firm must identify and present its obligations as a financial liability as these payments are made over a certain duration of time.
In addition to those changes, the AASB 16, disregards the use of leverage leased model that was a standard of accounting in AASB 117 that enabled the firm to net the non-resources debt. The firm is mandatorily instructed by the AASB 16, to provide additional information on the risk management activities that the firm undertakes, like, the residual or remaining interest in leased assets, and other factors related to leases.
Furthermore, in the case of Novita Healthcare Limited, the firm in its financial reports highlighted that they have changed their accounting policies for recognition and classification of Leases, wherein from the fiscal year of 2019, the firm would not classify its leases into operating or financial leases in the recognition of assets in the financial statements and annual reports of the company (Dakis, 2016). Furthermore, all the payments that are made towards leases and leased assets were to be classified and presented in the Profit and Loss statement of the company and are to be calculated on the basis of straight Line method, during the course or duration of the lease.
For example, if a firm ABC ltd., during the operating year of 2018, leased a property for storing inventories for a period of 6 months as a temporary arrangement, the firm is not bound to classify this arrangement in the Balance sheet under financial leases, whereas, if the firm leases a property for over 6 years for research and development facility or any other use of the business. The firm has to classify the lease in the Balance sheet and show the lease expenses in the Profit and Loss statement that is to be prepared for the fiscal year.
3. Summarise the key disclosures the company has made on its accounting for leases including on the transitional provision and effect of the transition to AASB 16 from AASB 117. Provide examples for your selected company.
The key disclosures made by the company in regards to its accounting policies in the accounting for its leases and its relative transition from AASB 117 to AASB 16, the firms are allowed to maintain a transition provision for leases. The transition provision can be illustrated as the reserve that a company can keep for the effective transition from AASB 117 to AASB 16 since both the accounting standards and principles have huge differences in terms of reporting and accounting, thus this reserve will help the company in an effective and glitch-free translation.
Wherein the company is required to account for the change in accounting policy to AASB 16, which would be in accordance with the transitional provision (Joubert, Garvie, & Parle, Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. , 2017). Thereafter the companies are not mandatorily required to reassess and scrutinize its existing leases if its leases or obligations did not qualify or were identified as lease in accordance with AASB 117.
Whereby, Novita Healthcare Limited, in its annual report for the fiscal year of 2018, established that it did not possess any long term financial leases, and any other lease other than financial leases were termed as an operating lease. Thereafter, the firm also does not maintain any transitional provision for lease, as it does not possess any financial lease in its accounts. Therein, the firm Novita Healthcare Limited function on the assumption that all the perks and disadvantages that are associated with ownership are to be grouped into financial leases. Thereafter, all its obligations are classified as an operating lease, it does not require any appropriation fund for the hassle-free transition from AASB 117 to AASB 16 (novitahealthcare.com.au, 2019).
Additionally, all the payments that are made by the firm for its leases are accounted for in the Profit and Loss Statement in accordance with the Straight Line Basis over the duration of the Lease Obligation. Thenceforth, in the annual report, the firm stated that the future expenses for its non-cancellable lease commitments and obligations amounted to $60,779, which included the expenses of operating lease of the firm, along with the office equipment and company Premises lease (novitahealthcare.com.au, 2019). Furthermore, the future expenses or obligations in terms of operating lease that were payable under one year amounted to $36,217 and obligations that were payable within 5 years amounted to $24,562. These figures were not accounted for in the financial statement of the company, as they are future expenses and can effectively distort the actual financial position and standings of the company along with inflating the revenues that the firm has generated over the course of the year. Furthermore, cancellable lease commitments that were not accounted for in the financial statements of the firm amounted to $1,419,812, wherein amount up to $1,309,209, was payable within a year and amounts up to $110,603 were payable after one year but within five years.
Thus, in a nutshell, it can be established that the accounting principles and concepts have a significant impact on the operation of the company, which defines its accounting process and its relative financial standing. The accounting principles and concepts are generalised principles that are applicable throughout the global business landscape and are regulated by appropriate regional as well as international regulatory bodies. These bodies work towards clarity and transparency as well as uniformity in financial reporting by the companies that their respective stakeholders and potential investors can get a clear image about the current financial standings of the company.
Thereby these statutory and regulatory bodies are responsible for overseeing the smooth implementation of the standards and principles set by them, as well as the modification of any flawed principle that might potentially impact on the decision making of the customers in a negative way. Like, the recent ramification of the accounting concept for lease by the IAFB and AASB for the transition from the technically flawed AASB 117 to AASB 16. This new concept ort model directed the companies to provide an accurate as well as a clear picture of their Financial Standings.