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The Accounting Standards Board (ASB) is a body concerned with setting rules and regulations aimed at helping to improve financial reporting standards of entities and thereby ensure compliance with corporate governance principles. These standards describe the rules and regulations to be adhered to by reporting entities and/or corporations to ensure credibility of the financial information to the main users and/or firm major stakeholders. Besides setting regulations for corporate and government reporting, ASB also contains statements of principles which assist in reviewing and developing these standards. Constant review and development ensure dynamism in board provisions and thus help the body to capture the current needs of financial information users (Britton & Alexander 2004). Similarly, the accounting body also plays other roles such as defining liabilities and assets, reflecting the discussion of the statement on activities which are to be included in a company's financial statements as well as representation of the financial performance of an entity.
Chapter II: Discussion
3.0 Primary Characteristics
During financial presentation procedures all the intended information presented ought to be reliable. Reliability entails exclusion of those characteristics that indicate organizations fiscal reports free of any conflicting information or even of intentional biasness. The presentation of fiscal reports ought to be free of any error, upholds completeness in reporting as per the accounting standards. For example, modern organizations consider use of consolidated financials in an attempt to enhance reliability of the entire annual report.
Any information represented needs to be neutral meaning that it should not be deliberately biased. Neutrality will not be achieved when financial information has been presented in a manner that influences the decision making. Similarly, the judgment evolving outcomes which are predetermined should be considered (Britton & Alexander, 2004).
Verifiability relates to the consensus of measures, and their use without bias or error. Normally this quality is classified as a reliability sub-notion. Counterchecking of errors is done by analyzing the primary documents, for example invoices or various receipts prior to recording. Similarly, actions of the internal auditors are monitored for verifiability purposes. Verifiability is also an important aspect in the check of the faithfulness of information presented. External auditors have to verify a company's financial report independently, considering verifiability to be a constraint. Similarly, external auditors may execute the verification of all the financial reports of an entity by deliberately scrutinizing the entity's fiscal reports (Elliot, 2006)
A completely error free report presentation is normally within boundaries of materiality. According to Higson (2003), false and misleading financial reports may result from material error or omissions for other reasons which aren't material. This therefore will mean the report will be unreliable with deficiency in relevance. Completeness in this case is relative since a financial report portrays an entity's financial position and performance which has high level of aggregation hence cannot reveal everything.
3.14 Substance over Form
Substance over form ensures financial reports are complete, relevant showing the correct view of events and transactions as well. This means the financial statements represented for the entity will be real and not in legal form. The entity represents the substance, while the events and transactions represent the form. For substance over-form to be achieved, there is need for vigilant, inner understanding and knowledge of the operations of the company be undertaken (Higson, 2003) Need for extra investigations in seeking more evidence and proof is applied. The transactions or events of an entity normally happen within an accounting period, for instance in preparation of balance sheets. For example, a company may out-rightly buy equipment while in real sense the transaction substance reflects a lease.
There are high levels of uncertainty within financial reporting which can be conquered by statements which disclose the nature of uncertainty and perceived extent as well. In addition, practice of prudence can help to reduce uncertainty. Prudence refers to the amount of caution taken in exercising judgments while taking estimates needed in uncertainty (Britton & Alexander, 2004). Overstatement of profits and assets and understatement of losses and liabilities are controlled. Nevertheless, where there are no cases of uncertainty, it's useless to exercise prudence. Also, using prudence for the purpose of, for example creating reserves which are hidden or provisions which are in excess. Prudence should not also be intentionally used in understating gains and assets or overstating losses and liabilities. This would mean the financial report is not neutral, hence unreliable.
3.16 Faithful representation
Faithful representation is an attribute of reliability. An event or transaction portrayed in the financial reporting is highly dependant on its weight, obligations and rights. Any information is said to be faithful if the measures of accounting within the financial is correspondent with the economic phenomena. The basis of measurement and techniques of representation used to derive the obligations and rights are also evaluated. Faithfulness is evident where financial reports recognition measurement and presentation does correspond to the repercussion of a given transaction or an identified event. Faithful presentation will rotate on the reflection of hardship in application of measurement and devising them, plus techniques to be used for representation revealing messages reflecting those events and transactions. Completeness, substance over form and neutrality maybe said to qualify faithful representation meaning thereby rendering reliability redundant (Britton & Alexander 2004).
Relevance analyzes the capacity of the information represented to bring in a change in decision making. Any relevant information provides values which are predictive and confirmatory, predicting on future, present and past. Therefore, this implies that for financial information to be considered appropriate, it must give the users a forecast of the expected trend of the entity in the future. Relevance quality is also important in correcting and confirming prior expectations due from its confirmatory value. This is because, for relevance to be achieved, market trends clarity and transparency should be considered. Usually, any information is relevant if demonstration of economic decision making is achieved and also if the information provided is timely and influences the decisions taken by the end-users (Higson, 2003). For example, asset holdings structure and its current level representation will help the user to analyze the ability of the entity to maximize opportunities and reveal it's response to adverse situations. At the same time, similar information will assist in confirming assessments in the past on the structure and the results of its operations. In addition, infrequent or abnormal profits or losses disclosure through financial statements is a prediction that assists the users to foresee the repercussions of a similar situation in the future.
3.21 Predictive value
Predictive value influences decision making due to its prediction abilities. For example, earnings predictive value may refer to the possibility of using current earnings to foresee future cash flow and future earnings. Users therefore develop high expectations on future incomes in correlation with cash flows in the future. One of the major objectives of accounting for earnings is prediction of future uncertainties, timing and amount. Feedback value may also assist to predict future occurrence. The role of this value is influence on decisions by correcting or confirming the previously developed expectations to the decision makers (Britton & Alexander, 2004).
Timeliness is an aspect of relevance which explains the need for availability of information when required. When a report is timely, this does not however enhance relevance while its absence may result to irrelevant information or lead to the loss of relevance. Normally timeliness according to ASB is not defined as a relevance component rather as a constraint limiting the existence of relevance on information presented. Early financial report presentation improves relevance (Higson, 2003).
Materiality is normally an attribute of relevance, representing the last test that should be availed to any financial report. It questions the importance of any financial information inclusion into the financial report (Elliot, 2006). The quality acts as the threshold normally required by all financial statements. Immaterial representation will impair the understanding of any other information in provision. Other qualitative characteristics maybe affected by materiality, for example faithful representation. The quality is a filter in determination of significance of any financial information influencing decision reached by users.
3.24 Influence Economic Decision
Any decision taken by an entity will always have a financial or even material effect. For example, an official within an entity may invest 2000 dollars in the business resulting into adverse effects such as increase in returns during favorable business performance cycles or even losses due to poor internal management. Normally, it's advisable not to allow officials to make decisions for the entity to avoid adverse effects. Whenever a decision is being made, a consideration should be put in place to determine whether that decision affects the entity directly in indirectly.
Chapter III: Part 2 Case Application, Afren Plc.
Preparation of financial statements however can be faced with difficulties to achieve the above named quality characteristics. These difficulties include timeliness, complexity, cost against benefits as well as the skills required in preparing the financial reports (Elliot, 2006).
Despite a report having met the requirement of relevancy and reliability, or materiality, its usefulness maybe lost if it's not reported on time (Higson, 2003). For example, Afren plc reported a successful financial year in 2008, due to application of timeliness on various elements affecting consolidated financials. The available time for gathering and presenting a report acts as a constraint in provision of a relevant report. Normally, when reporting period convention is applied, a need will arise for an earlier reporting before transaction and event aspects are known. This thereby limits the possibility of relevant and reliable information representation. Auditors, setters of standards, preparers or regulators need to account for the time available for proper presentation of financial reports so as to enable user to make timely decisions (Higson, 2003).
Costs against benefits
Standard setters or even auditors are mainly faced with the difficulty of deciding whether certain financial information they are to represent is more costly than the gains to be derived. These expenses are such as retrieval, storage, collection, presentation, analysis, interpretation, losses and diminution that may occur, misdirected resources, among others (Higson, 2003). Afren plc has acquired highly qualified professionals in its board, allowing for proper control of finances. In 2008, it recruited highly skilled staff from Randal and Dewey technical team. Since there are no universally accepted methods in measurement of gains or costs, professional judgment is therefore applied.
For every report to be presented to the users, expertise in terms of collection, presentation storage analysis and interpretation among others will require professional knowledge. Therefore for any financial report professional such as auditors, will be required and their absence may result to unreliability (Elliot, 2006). For example, the board of directors of Afren plc has applied the been recruiting professionals such as accountants, auditors, (internal and external).
The complexity of report presentation differs from a report to another. Some may be difficult to analyze and present than others. Apart from recruiting highly talented team, Afren plc ensures substantial and frequent training, equipping its staff with highly standardized skills. The company also holds regular review of operations such as initiating new reporting regimes and deliberately restructuring it B.O.D's compensations.
Chapter IV: Conclusion
Afren plc has put into place internal control measures that assist in ensuring proper financial report representation is made and as well curbing the constraints encountered. The company's board is responsible for the above task in an attempt to ensure reliability or even credibility in financial reporting (Elliot, 2006). On the difficulty of costs against benefits, the board holds regular meetings and strategizes on approving major capital expenses, policy divestment and financial matter considerations. On complexity and skills constraint, the board applies the law of delegation to individuals thereby facilitating specialization. The group performance is reported on quarterly, as well as fiscal basis and comparisons with the prior and latest period is done.