Small and Medium Sized Enterprises

Question: Discuss bout the Small and Medium Sized Enterprises. Answer: Introduction The essay provides a brief understanding of different concepts of measurement in the context of the present AASB (Australian Accounting Standards Board) /IASB (International Accounting Standards Board) framework.AASB is engaged in formulating Financial Reporting Councils policy for adopting the standards of International Accounting Standards Board (IASB). Discussion has been made in the essay by analyzing an Australian companys annual report for the year 2016 in context of AASB/IASB principles. The company selected for the purpose is AGL Energy Ltd. This study also discusses the problems of measurement, using AGLs annual report. Further, measurement issues are also evaluated. Finally, the essay concludes with the discussion of the role of useful information and recommendations regarding decision-making process of the organization. Background of AGL Energy Ltd AGL Energy Ltd. is an oldest Australian Gas Light Company. The company began its operations in 1837 in Sydney and became a second company to list on the Australian Stock Exchange. It is a leading company among Gas retailers and distributors of Australia. AGL deals with energy products and services of Australian economy (Nelson and Orton, 2016). The company has expanded its operations across New South Wales,Victoria,South AustraliaandQueensland. It provides gas and electricity to 1.4 million and 1.8 million customers respectively. It mainly has four business segments, named Retail Energy, Merchant Energy, Upstream Gas, and Energy Investments. It possesses a diversified power generation portfolio which includes hydro, and wind energy. At present, AGL Ltd. is a largest developer of renewable energy assets. Brief Introduction to AASB/IASB The Australian Accounting Standards Board (AASB)/IASB is a government agency of Australia that works under theAustralian Securities and Investments Commission Act 2001. It develops and maintains financial reporting standards that can be applied to both private and public sector companies of Australia (Horngren et al., 2012). The Board also contributes in facilitating a single set of accounting standards for worldwide use. It promotes main objects of IASB so that Australian companies can compete effectively across the world. The vision of AASB is to become recognizable among leading national standard setters. The mission of the Board is to meet Australian users requirements by establishing sound reporting standards. In July, 2004, the AASB has declared Australian Accounting Standards equivalent to IASB standards. This is done to bring uniformity and consistency in the work of AASB in order to meet the Financial Reporting Council strategic directions (AASB, 2014). AASB sets standards for all kinds of entities who prepare financial statements, while IASB mainly emphasize on profit-making entities. Concepts of measurement in context AASB standards Measurement in financial statements refers to a process which assesses the balance sheet and income statement items in monetary terms. The Australian Accounting Standards Board (AASB)/IASB are responsible for making and formulating accounting standards. It includes three measurement principles in a revised conceptual framework (Bazley et al., 2014). These principles indicate financial reporting objective and its qualitative characteristics. The three principles are described as follows: This principle states the important information given by a specific measurement method, which has a significant impact on the statement of financial position and statement of profit or loss (Barth, 2013). This principle affects AGLs statement of changes in Equity and the notes to financial statements. This principle states that cost of a specific measurement should be legitimize so that existing and potential stakeholders of AGL can be benefitted from the reporting system. This principle states in order to provide relevant information, minimum number of measurements must be used (Armstrong et al., 2010). Also, the required changes should be incorporated and clearly explained in measurement methods of AGL Energy ltd. Categories of measurement methods According to IAS 16, the term includes depreciated or amortized costs of financial assets and liabilities, accrual interests, and other historical costs. It also involves impairment of assets which are more troublesome. Because amortized cost of measurement involves discounted estimates of cash-flows, it is also known as cash-flow-based measurement (Biondi, Lapsley, 2014). Also, AGL Energy follows IAS 2 (inventories) which specifies costs of purchases, conversion costs and other costs related to bringing of inventory to the present location, to be included in costs. Fair value and other current market-prices: IFRS 13 states that fair value is a price received from selling of assets or price paid to transfer a liability in the principal market under existing market conditions. Using fair value technique, AGL makes it easier for users to understand the principles of measures adopted by it (Perera and Chand, 2015). The term also includes estimated cash flows of assets or liabilities, time-value of money, risk premium, and other factors of the comapny. Other measures based on estimated cash flows: Some measurement methods under IFRS are based on estimate cash flows, which are used for impairment of financial and non-financial assets, lease receivables, net realizable value (NRV) of inventories, provisions, and deferred tax assets and liabilities. By minimizing the number of measurement methods and further expansion, AGL makes its financial statements more reliable. Problems of measurement in context of AASB standards Measurement issues for elements: The AASB/IASB considers the issue of whether assets and liabilities are measured at cost or the value specified by AASB/IASB framework. Cost is considered more reliable by companies as it is identifiable. However, it is not useful for users as it represents the historical cost of assets or liabilities. To overcome this problem, AGL Energy uses valuation method because it is up to date (Bamber and McMeeking, 2016). But, it is not always reliable which creates an issue that which measurement method a company should use. IAS 40 (Investment Properties) and IAS 16(Property, Plant and Equipment)specify that companies should be allowed to use their own accounting policy for measurement purpose. The IASB/AASB considers following measurement bases, which usually creates issues for AGL Energy ltd.: Market Values: Market values do not recognize the difference between market buying prices and market selling prices. For AGL, entry and exit values of assets and liabilities are not the same as these market values are based on measurement basis adopted by the company. This is also because transaction cost is generally added or deducted from market price at which buyers and sellers meet. However, AASB/IASB do not convince with this measurement basis as this concept does not evaluate fair value. Historical Cost: AGL records its assets and liabilities at historical cost. On the other hand various companies recognize them on fair value or fair value plus directly attributable transaction cost or fair value less selling costs. According to AASB/IASB, this measurement basis lack clarity and consistency. Some companies adopt mixed measurement model which reflects different economic concepts of value of different items of financial statements. As a result, issues arise because a meaningful comparison of different companies cannot be made as different measurement scales are applied to different assets and liabilities. AASB/IASB states that historical cost and current cost are two different things. Historical cost may not have much relevance unlike other measurement bases, due to significant changes in prices. However, current cost and historical cost are considered as a same concept by various entities which may create further issues for them. Replacement Cost: AASB/IASB observed that the term replacement cost in context of impairment of assets and cost in fair value measurement is considered to be materially the same. AGL used to treat them interchangeably for some specialized assets. The Board also states that this accounting practice of companies is not valid and may create confusions in various circumstances. AASB/IASB also proposed to overcome issues regarding depreciated replacement cost. It specifies that not-for-profit companies are not required to use depreciated replacement cost as a measure of value, if such companies are not dependent on assets ability to revenues. Issues relating to Concept of capital and Concept of capital maintenance: AASB/IASB realized that many companies get confused regarding the concept of capital and capital maintenance. Capital signifies a name for a companys wealth. It determines the measurement basis that a company should apply to its assets and liabilities (Hail et al., 2010). On the other hand, the concept of capital maintenance determines the need to adjust opening balance of equity before assessing the entitys results for a particular period. The key issue here arises for AGL is regarding the requirement of recognizing price changes that affect assets and liabilities of a company. Issues in measurement in the context AASB standards There are various issues that AGL faces by adopting the framework of AASB/IASB. In order to make information more useful, it must be neutral, faithful and capable of helping in effective decision-making process. There are mainly five elements which create issues for AGL Energy, while preparing financial statements (Cordery and Simpkins 2016). They are described as follows: Assets: An asset is a valuable resource of a company which possesses some economic value. It may be current asset or non-current asset. It includes machinery, stock, goodwill, and cash. According to AASB/IASB, legal ownership is not necessary for determining whether an asset belongs to a particular company or not Kraal, D., (Yapa and Joshi, 2015). It is the control of an asset that is a major determinant. For instance, IAS 17 specifies that a lessee should recognize an asset as its own if all the risk and rewards relating to that belongs to him. It would not affect his ownership even if the lessee does not legally own that asset. It reflects that economic reality of an asset is the key issue which affects the faithful presentation of financial statement of an entity. Liabilities: A liability is an obligation of a company which arises from its past events. It may be current or non-current, for example, creditors, bank loan, and debentures. According to AASB/IASB, for recognizing a liability in financial statements, there must exist a present obligation. It must be recorded at its present value so as to reflect time factor (Birt et al., 2013). IAS 37 also considers Provisions, Contingent Liabilities and Contingent Assets of AGL to be consistent with AASB/IASB standards. They represent the liability related to future events. So, in many cases such a presentation creates issues in financial statements for recognizing liability. Equity: Equity in AGL represents the interests of its owners in companys assets. It is an aggregate of companys liabilities and capital introduced by its owners (Jamal et al., 2010). In many companies, benefits of equity in subsidiaries are not enjoyed by the parent company. These are recorded under other components of equity. It sometimes crates issues in identifying the net amount of equity of the whole company. Income: Income refers to the amount earned by a company from its business activities. It enhances the economic benefit of the company during a particular period. Most income of AGL is recorded in income statement of a company as it is derived from normal operations of business (Kraal et al., 2015). However, AASB/IASB requires certain types of income to be recorded in equity account i.e., reserves. Such incomes include revaluation profit or loss on assets or liabilities. Issues arise when AGL recognizes such gains in income statement although such transactions do not represent income for the company. Expenses: Expenses are defined as the outflow of amounts which lead to decline in the economic benefits of a company (Potter et al., 2013). These include payment of salary, rent and interest and depreciation. However, some companies record payments of dividend to equity as companys expense. AASB/IASB specifies that such outflows do not form a part of companys expense and therefore, not recognized in income statement. Such outflows are recognized as appropriation of profits and are deducted from retained earnings of AGL. Relationship and Impact between the measurement concepts employed in AGL Energy Ltd AGL Energy Ltd. adopts the measurement concept of fair market value in competitive market because in competitive market the objective behind implication of fair value is to endow with a cap in relation to market prices. These fair value prices are not the lowest price and are also not the effective price. These fair value prices are used by the AGL Energy for formation of financial statement (Kober et al., 2013). The fair value prices helps in identification of true worth of organization. Moreover, it is very important to find out the relationship regarding market contract prices and standard contract prices. In addition to this reliable measurement concept is also followed by AGL Energy Ltd. which includes that the liability are mentioned in balance sheet to show the monetary expression in terms of obligation to forgone economic benefits. The measurement of various liabilities stated in balance sheet may vary in terms of reliability (Dagwell et al., 2011). So, AGL Energy Ltd. provid es verifiable evidence of the nominal amounts paid by the company and the dates of payment for the majority of liabilities. AGL adopts the concept of providing Comparative information in which the organization provides information to the investors and other stakeholders so that they can be able to identify the exposure to risk faced by the organization in managing its diverse portfolios. The organization also provides Electricity Hedging Policy in public so that the investors and stakeholders can be updated about the financial position of AGL Energy Ltd (Escosa, 2016). The organization also provides financial statements at the end of the financial year so that the comparative analysis can be made by the investors and stakeholders about the profitability of the company over a period of time. AGL Energy Ltd. adopts the concept of going concern and formulates its financial statements on the basis of going concern principle (Ewert Wagenhofer, 2012). AGL Energy follows the concept of consistency in presentation which shows the items in the financial statements in consistent with one period over another so that an easy analysis can be made. AGL Energy Ltd. follows the written down value approach for calculation of depreciation and follows this approach over the years (Escosa, 2016). AGL Energy Ltd. follows the principle of materiality in which all the material information regarding similar class is presented all together and items of different class are to be presented separately. AGL Energy Ltd. follows the frequency of reporting principle. The organization publishes the complete set of financial statements yearly. AGL also publishes the interim financial statement report at the end of the quarter in the year. The objective behind publication of financial report is to make the investor aware of the financial condition of the company (AGL, 2016). The organization also follows the principle of accrual basis of accounting. AGL Energy Ltd. records the income and revenue when they are received in cash and record the expenses when they are going to incur. AGL Energy uses the concept of valuation technique so that the fair value can be measured of the transaction (Vinnicombe, 2010). AGL Energy represents the financial position, financial performance and cash flows with due faith and also makes a reflection on the economic substances of transactions occurred. Same accounting policies are adopted for the same transaction by the organization. Consistency in accounting policies will make the comparison easy (Dagwell et al., 2011). AGL Energy follows AASB 108. The organization correct any material prior period mistake in the first financial report after the error has been find out by restating the comparative amount in the financial statements of the organization. Conclusion From the above discussions, it is concluded that application of measurement principles in context of AASB/IASB standards have a significant impact on not-for-profit entities and public sector entities of Australia. AGL Energy ltd. also adopts these measurements in its current accounting practice. It is also identified that the company is affected by AASB 13 in various aspects of its business activities. Above discussions also found that AASB has been widely recognized internationally for its meaningful contribution in the development of uniform accounting standards. Role of accounting concepts and principles can be reflected in the operations of AGL Energy ltd. On the basis of facts described in this essay, it can also be said that the objective of AASB framework is not to rationalize treatments in existing standards but to incorporate IASB conceptual framework into AASBs conceptual framework. The conceptual framework of IASB is likely to have a major impact on the future guidelines of IFRS. However, it is recommended to AASB to focus on economic phenomena like scarce resources and claims along with changes in them as well. The Board should also take into account the latest thinking developed in standard projects. Also, in order to become more recognizable, AASB should not refuse to develop specific requirements in its existing standards that may be different from its conceptual framework. References AASB, C. A. S. (2014). Business Combinations.Disclosure,66, 77. AGL (2016). Sustainability Performance Report. 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