NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
Abstract The changes to the trilogy standards which comprise of AASB 1018 Statement of Financial Performance, AASB 1034, Financial Report Presentations and Disclosures and AASB 1040 Statement of Financial Position created confusion within the accounting profession and business community. The changes were designed for the purposes of international harmonisation and for a paradigm of change away from the profit and loss approach. Many of the issues that arose are being addressed by Exposure Drafts and a emphasis on making the disclosures relevant and reliable is a key issue for the profession. This assignment covers the changes that took place, it looks at the response to the changes and is supported by evidence resulting from a study of the Australian Securities and Investment Commission (ASIC) and Ernst and Young (E&Y). The relevance and reliability issue as in the Statement of Accounting Concepts (SAC) 3: has created debate over whether the trilogy standards meet such requirements. The overall concern is eliminating the misinterpretation and confusion caused so the financial information is both relevant and reliable.
Introduction The current AASB 1018 Statement of Financial Performance was issued in October 1999, along with two other presentation and disclosure standards, AASB 1034, Financial Report Presentations and Disclosures and AASB 1040 Statement of Financial Position. These three standards became generally known as the trilogy and were first pertinent for 30 June 2001 year-ends. The introduction of the trilogy was the largest change to the presentation of financial reports in Australia in recent times with the balance sheet and profit and loss account being replaced with a Statement of Financial Position and Statement of Financial Performance. The two main reasons behind the change are the international harmonisation program and the move towards a balance-sheet emphasis.
After the first year of the trilogy implementation, a significant number of issues arose in relation to professed inconsistencies, differences in interpretation and lack of comparability owing to the flexibility of presentation allowed under the revised standards. In this essay, we will explain the changes that took place within the trilogy standards as well as drawing on some issues and evidence that have evolved because of the changes. Furthermore, we will argue that the trilogy satisfies SAC 3, (Qualitative Characteristics of Financial Information), fundamentally, however point out paradoxical issues that have taken place as a result of the trilogy standards. Question 1 - Give a Brief summary of the significant changes to the disclosure requirements of the trilogy standards.
AASB 1018 Statement of Financial Performance Parker (2002) explains that under the changes, the face of the Statement of Financial Position requires more disclosure than was required in the out of date Profit and Loss Account. Disclosure, which was previously in the notes to the financial statements, can now appear on the face of the statement. Adam-Smith (2001) adds, that a more detailed income and expense breakdown is required, therefore summarising expenses by either function or nature. In addition, Adam-Smith (2001) points out that if revenue from the sale of goods is exposed in the revenue disclosures then the associated cost of goods sold will also be required. This in effect will disclose the gross margin.
Thirdly, abnormal items no longer exist, nevertheless Curtis (2001) mentions, the standard requires disclosure of individually significant expenses where they materially influence the result of the company. Finally, Curtis (2001) adds that the concept of errors and fundamental errors were also introduced, together with specific rules applying where errors were acknowledged. AASB 1034 Financial Report Presentation and Disclosures Curtis (2001) explains this standard sets out disclosure that is required in financial reports that are not already covered by specific accounting standards. The standard outlines general formatting requirements of financial reports and introduces some new disclosures.
Curtis (2001) highlights each disclosure that includes: number of employees, the legal form of the entity, who the parent and ultimate parents entities are, dividends and attaching franking credits, economic dependencies and a narrative discussion on material changes to comparative information. AASB 1040 Statement of Financial Position Until recently, Curtis (2001) mentions that the presentation of assets and liabilities had been very unyielding. More recently, the format has been made more flexible and is dependant upon the operations of the entity and, according to Curtis (2001), the most useful source for presentation of information to the users of the financial reports. This standard requires assets to be classified in the Statement of Financial Position, (replacing the balance sheet) according to their nature or function. Curtis (2001) highlights that classification may now be based on liquidity, marketability, physical characteristics, expected timing of realisation and subsequent cash flows, or the purpose of holding the asset. Finally, Curtis (2001) adds that additional information is required to be disclosed in respect of the rights attaching to equity entitlements, for example shares, and options.
Question 2. Suggest possible reasons for the complaints received by the accounting profession with respect to trilogy standards Even though accounting rules have given companies a lot more flexibility, especially with respect to how they report their earnings, Kavanagh (2002) states that the trilogy standards have come under fire for creating confusion and leaving the way open for abuse. This statement is supported by evidence taken by one of the four biggest accounting firms Ernst and Young (E&Y). E&Y surveyed 100 companies and found, of the companies surveyed, several found varying interpretations of the standards and a considerable degree of confusion. More particularly, Kavanagh (2002) highlights that the survey found that application of the standards made it more difficult to compare the performance of companies within an industry sector. The Australian Securities and Investment Commission (ASIC) reviewed 80 companies accounts and found that aside the confusion, there where instances where it had to justify the interpretations made.
Above all, the interpretations were inconsistent mainly due to the lack of definitions of the terms used within the trilogy. For example, Kavanagh (2002) mentions that the wording of standards makes it clear that companies are to treat significant items as different from the old abnormal, however the word significant is not defined. Thus, Kavanagh (2002) supports this by mentioning that E&Y through their survey had discovered a substantial level of confusion was found in the number of different terms used to describe abnormal significant items. Other generic problems included, as quoted to Kavanagh (2002) is that Ruth Picker from E&Y states, The extent of flexibility the standard allows is controversial. Shareholders may become confused and be drawn to the profit lines.
Picker was referring to the headline profit figure, stating it was not comparable. Ravlic (2002) supports the abovementioned issue by adding that the new rules on how to draw up profit and loss accounts and balance sheets have made it more difficult to read and compare crucial corporate reports. In addition, Ravlic (2002) adds that users were finding the reports less useful. Another major reasons being for the eradication of abnormal items from the Statement of Financial Performance. In particular, Ravlic (2002) pinpoints problems such as the lack of precision in the definition of cost of sales, an absence of a definition of gross profit and the non-disclosure by companies of significant accounting policies.
After a study by Pierre Prentice (executive director from JFC Pure), on reviewing the annual reports of Woolworths, Coles Myer, David Jones, Foodland and Harvey Norman, found that 40 % lacked transparency because of the trilogy standards. Ravlic (2002) quotes Prentice on saying the new standards is a big step backwards that use...
Free research essays on topics related to: balance sheet, financial position, adam smith, financial performance, accounting profession
Research essay sample on Accounting Profession Balance Sheet
