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"As a map, financial statements form the basis for understanding the financial position of a business firm and for assessing its historical and prospective financial performance. Financial statements have the capability of making clear representations of a firm's financial health, leading to informed business decisions."(Fraser 1995) They are usually an important part of functional accounting as they paint a picture to everyone that may be interested into looking into the affairs of an organisation in a neat summary. The financial statement usually consists of different components that when looked at together could provide a foundation for an in-depth analysis and evaluation of the performance of the organisation. These components are the profit and loss account, the balance sheet and the cash flow statement.
PURPOSE OF A FINANCIAL STATEMENT
From a casual glance, most financial statements may seem irrelevant and senseless, especially to those who have no understanding about what it is supposed to show since the amount of information contained therein can usually seem overwhelming and daunting.. However, for those that know what to look for and where, it is usually like opening a door to see what is on the inside. Financial statements are used by a reporting entity or organisation to show the exact state of the firms health financially and if the management are running it efficiently or not. The information is usually useful for a wide range of users who may have an interest in the organisation and its activities. Such users include investors, lenders, suppliers and other trade creditors, customers, employees, government and their agencies and the general public.
ACCOUNTING STANDARDS BOARD
The accounting standards board makes up part of the regulatory framework of accounting and it is directly responsible for making, amending and withdrawal of standards that financial reporting entities are supposedly guided by. These standards as developed by the ASB also fall within the legal definition of accounting standards and a part of these standards is known as the statement of principles.
STATEMENT OF PRINCIPLES
The ASB believes that there should be a fundamental approach taken as regards preparation of financial statements by reporting entities which should be the guiding principle and this systematic approach has been detailed with the intention of being consistent and up-to-date in line with the approaches adopted elsewhere in the world. (ASB 1999)
It describes the basic principles but does not contain specific requirements on how the statements should be prepared as companies are expected to do so as required by company law act. Financial statements may not contain all of the information required by the users but they provide a baseline upon which these users are able to make informed decisions based on the evaluation of such statements.
A reporting entity is expected to present information in a way and manner that gives a true and fair view of its activities and performance if is to be seen as useful and this is a primary focus of what the statement of principle seeks to achieve. The financial statement is usually accorded the status of giving a true and fair view when it is seen to have been developed to generally acceptable standards and fulfilment of legal requirements. The statement of principles as given by the ASB requires financial statements to possess certain characteristics which are referred to as qualitative characteristics. These are; relevance, reliability, understandability and comparability. These characteristics are very key in the information provided being seen as useful and the diagram below depicts the relationship between these characteristics.
Fig.1. The qualitative characteristics of financial information. (ASB 1999)
The characteristics of relevance and reliability relate to the content while understandability and comparability relate to the presentation.(Elliot, Elliot 2006)
RELEVANCE - Where information is seen to be relevant, it should have confirmatory and predictive substance to it. It is through these that a user can confirm prior expectations and forecast happenings into the future. It is information which is capable of making a difference in a decision context. (Kieso, Weygandt, Warfield 2003) This information can help to establish future and past trends and it is the establishment of past trends that help users predict future trends more accurately.
In the financial report of Waste Connections Inc. relevance is seen to be achieved as the different elements of the financial statement which can help estimate performance and financial adaptability such as assets, liabilities and ownership interest which are components of the balance sheet and gains and losses in the case of profit and loss account are contained there in such a way that allows for predictions to be made based on the information at hand. On page 47, the assets and liabilities are presented for years 2007 and 2008 and these information is relevant for users to base decisions. For example the information about the current level and structure of asset holdings helps users assess the opportunistic ability of the entity and its reactions to adverse situations. This same information serves as a confirmatory resource on past assessments of the entities structure and operations. (ASB 1999)
RELIABILITY - A financial report should be able to give an actual and true representation of what it is supposed to represent to its users.(McLaney, Atrill 2005) It can be said to be reliable when it is free from misleading information and neutral of any bias and verifiable to the extent that the same conclusions can be arrived at by different independent users.
The issue of presenting relevant information that may not be reliable or vice-versa is one that comes up quite often but as rule of thumb, relevant information is usually more acceptable to provide when there is a choice to be made between more relevance or more reliability.
From item 1, page 1 of the report of Waste Connections, they have given a background of their business activities and the environment under which their operations are being run. This is clearly with the intention of giving a background to the users that indicates the report is free from deliberate misrepresentation or systemic bias. The figures given on later can also be extensively analyzed further when looked at along with this information. It fulfils the bounds of materiality which can make a difference to the significance of the statement being useful or not. (Kieso, Weygandt, Warfield 2003)
COMPARABILITY - In order to accurately identify the trends associated with the performance or financial standing of the reporting entity, the user must have a basis upon which comparisons are made. These comparisons should also be capable of being made relative to other entities as regards their standing and performance with one another. Complying with the standards as set by the ASB helps to achieve comparability by ensuring that different entities account for similar events and transactions in a similar way. (Glautier, Underdown 2001) It must have full disclosure of policies through which they were prepared for the users to be able to make the right deductions from them. Also there must be consistency of reporting of events within periods of time which should also be consistent for whatsoever judgements a user may want to make.
In the 2008 financial reports of Waste Connections Inc, which this paper is examining in terms of the content and presentation, the qualitative characteristics are seen to be consistent with the standards as set by the ASB's statement of principle. In page 25, item 6 which shows selected financial data from 2004 to 2008 can be seen to be presented in a way that comparison can be made for the targeted audience to make accurate judgements and predictions. The statement of operations data shows comparative results for the aforementioned years and there is a clear directive at the top of the page for it to be read with reference to the management's discussion and analysis of financial condition and results of operations included in item 7. The consistency of the data for the years in focus is not in any doubt and the policies and methods used in arriving at the figures are fully disclosed in the section. Consistency and disclosure are very key in fulfilling the quality of comparability which enhances the usefulness of the financial statement.
UNDERSTANDABILITY - If users of financial reports are unable to understand the information it seeks to pass across then ultimately it is of no essence. Though there is an expectation that users would have a basic understanding of the content and its message, the information should be presented in such a way that it is easily understood by those it is being prepared for.
Good presentation ensures that the essential messages of the financial statements are communicated clearly and effectively and in as simple and straightforward a manner as possible. (ASB 1999)
Waste Connections Inc have presented the data in a highly structured and aggregated manner that makes the data give a representation on key aspects of its operations. This information has been presented clearly, effectively and simply so that understanding the message it seeks to deliver is well received. In presenting cash flows, (page 50) the company has broken these down into cash flows from operating, investing and financing activities. All these have been presented in a manner that shows the key significant items and in a way that facilitates understanding. The cash generation and cash use are highly distinguishable which makes it useful to the users.
The ways all of these have been presented in the annual report have fulfilled the qualitative characteristics of understandability and comparability.
(B) Difficulty in preparing a set of useful financial statementsâ€¦â€¦â€¦..
USERS OF FINANCIAL STATEMENTS
It has been established that the purpose of preparing financial statements are to enable a range of users make decisions as concerns the reporting entity. These users are people who have an interest in the organisations activities and they include Owners, customers, competitors, employees, government, community representatives, investment analysts, suppliers, lenders, managers. The majority of users are usually outside the business itself but nevertheless they have a stake in it. (Atrill, McLaney 2008)
The usefulness of the financial statements to this wide range of users is dependent on it possessing the qualitative characteristics that have been listed above, however, the fulfilment of all the qualitative characteristics is not without diffifculties. The reporting entity is usually faced with certain issues that threaten the usefulness of the reports and some of these issues have been identified as listed below.
Materiality - The omission of information in a financial statement that could influence the economic decision that a user makes contravenes the concept of materiality. (Cairns 2002) It is a matter of relative significance and should be disclosed if its presence will make a difference. The theme of understandability is compromised when immaterial information is supplied hence it is a threshold quality of useful financial reporting.
The cost benefit rule- The cost and benefits of particular information supplied are not always measurable and hence sound judgement must be used when providing such information as the cost of providing such should not outweigh the benefits. (Kieso, Weygandt, Warfield 2003) In providing relevant information sometimes the cost of the information to the user may be such that it would be wise to leave out that particular information. It may be as a result that the information could compromise the understanding of that particular user hence its omission would be better. This is a crucial factor which highly compromises the ability if a report to achieve compliance with all the qualitative characteristics.
Conservatism - Where there is doubt as to some certain information the principle of conservatism suggests that the reporting entity choose the most conservative option to report that information. In this way it is unlikely that the assets and income statements are not overstated. However caution must be applied so that it doesn't look like a deliberate understatement of the facts as they are.
Timeliness - Timeliness usually can cause a conflict between reliable and relevant information as the delay in relating information at the appropriate time will eliminate the chance of the information being reliable or relevant.
Industry practices - Some industries may depart from basic accounting practices due to the way they conduct business and this can put at jeopardy the consistency of the reports. This essentially will also compromise comparability.
Trade off between characteristics/users - Balancing the characteristics of the report is not always easily achieved and this is a difficulty that comes up too often. For e.g Giving relevant information is given precedence to giving reliable information, and sometimes it may also seem as if a particular user group will benefit more from the information given.
Financial statements at first glance look complex, but they give a picture of what has happened within a particular period of time in an organisation. This is not in anyway an easy thing to do with a few numbers and words which statements are usually represented in. The adherence to the statement of principles and the qualitative characteristics which are meant to be a guide for any reporting entity is what can make this seemingly complex information easy to understand and evaluate.
The reporting entity faces a challenge in satisfying all the users of the information while at the same time overcoming the constraints in presenting a comprehensive detailed report with all the qualitative characteristics represented.
Waste Connections Inc. has given a true and fair view of their operations as seen in the way data was presented with all the background information about the organisation itself and the environment within which it carries out its activities.