Conceptual Issues in Political and Environment †MyAssignmenthelp

Question: Discuss about the Conceptual Issues in Political and Environment. Answer: Introduction The present report examines the accounting quality of a selected ASX listed company through evaluating its accounting policies and estimates. In this context, the report evaluates the accounting strategy of the selected business entity in the light of the various accounting theories such as positive and normative theories of accounting. The accounting policies of a business entity play a critical role in achieving its corporate goals and objectives through promoting its long-term growth and development. The financial reports are developed in accordance with the accounting policies that provide disclosure about the financial condition of a firm to its stakeholders. Therefore, it is essential for a business entity to adopt the use of standard accounting policies that provides all the necessary information to the end-users and through adopting revealing accounting strategy. The accounting strategy is analyzed through examining the flexibility in the accounting policies and comparing the m with the competitor policies (Mirza and Ankarath, 2012). Also, the report identifies the major issues of concern in the financial report of the selected company as red flags that require more disclosures. In addition to this, the compliance of the company with the conceptual accounting framework principles is analyzed through examining the relevancy, reliability and understandability of financial information provided in the annual report. The influence of the political pressure on the accounting standard-setting environment is also discussed in this report. The company selected for the purpose is AGL Energy Limited, an Australian publicly-listed company involved in the developing and retailing of electricity and gas both for residential and commercial purposes. Identify Key Accounting Policies The AGL Energy Limited is an ASX listed company and as such complies with the Corporations Act 2001 and accounting standards AASB for developing its financial reports (ASX and Media Releases, 2016). The company has valued its fixed assets of property, plant and equipment (PPE) at their cost through deducting the amount of net depreciation and impairment losses. The cost of the assets includes the entire significant amount related to its purchase and development. The income or loss realized from selling the fixed assets of PPE is attributed to the profit and loss account through calculating the difference between the sale proceeds and the carrying value of the asset. Thus, the accounting policy for measuring the value of the fixed assets is developed by the company as per the AASB 116 standard. The deprecation is calculated through the use of straight-line method. The intangible assets such as goodwill are carried at their cost through deduction of any loss arising from their amortiza tion and impairment. The financial report is based on the principle of historical cost with the major exception of derivative financial instruments that are identified and measured at their fair value (AGL Annual Report, 2016). Also, the company has adopted a corporate governance framework for effectively managing the operational risks associated with the company operations. The governance framework incorporates the use of energy hedging activities. The main objective of the risk governance framework is to hedge effectively the market price exposure of the company through operation of an integrated energy business. The hedging activity for minimizing the risk includes decrease in the hedging costs through incorporating the use of different financial instruments such as weather derivatives for optimizing the risk and return (AGL Annual Report, 2015). Assessing the Accounting Flexibility The company operates its business activities in a highly competitive sector and therefore the managers have incorporated some flexible accounting policies for value maximization. As such, the accounting of assets involving the expenses on exploration and development of oil and gas is not covered under the AASB 116 standard. The overall expenses relating to exploration is recognized as asset and the accumulated expenditure is transferred to oil and gas assets. Also, the company has adopted a minimum shareholding policy as per which the key management personnel of the company should hold specific number of shares in order to align the shareholder interests with the executives. There is no legislative requirement on the company for adopting such policies but it has maintained the policy for improving the organizational commitment of its key management people (Jensen, 2001). The accounting managers have also adopted the use of historical cost accounting method rather than using fair value accounting approach for measuring the financial instruments value. The IASB has directed all the business entities complying with IFRS standards to integrate the use of fair value accounting for measuring the value of assets and liabilities. However, the company is still adopting the use of historic cost accounting method rather than using fair value accounting due to numerous problems associated with it such as changing its tax structure value (AGL Annual Report, 2016). Thus, management as such possesses authority to change the accounting policies for improving the profitability position of the company. However, the board of directors of the company has ensured that the accounting information is not distorted in any form for hiding the materialistic facts and figures (Mumba, 2013). Evaluate Accounting Strategy The company has adopted flexibility in its accounting policies for strategically communicating the economic information to its stakeholders. The flexible accounting policies are essential for staying competitive in the market through developing better accounting strategies as compared to the competitors. The major competitor of the company is Origin Energy that is also providing large returns and profitability to its investors. The company for outperforming its competitors has implemented the accounting strategy for improving the productivity of the company in order to realize greater returns (Annual Report : Origin Energy, 2016). The accounting strategy of the company is aimed at improving the capital allocation through divesting its non-core business segments for enhancing its operational efficiency value (AGL Annual Report, 2016). In this context, the company is carrying a review of its asset portfolio and is targeting to divest around $1 billion under-performing assets at the end of the financial year 2017. This will help the company to increase the performance of its core business area and thus realizing larger returns in comparison to its competitors (Kenny, 2009). The flexibility in the accounting framework adopted by the company can be explained through the use of positive theory of accounting. The positive theory of accounting helps in identifying the reasons that provides motivation to the managers for selecting particular accounting policies. The theory argues that managers tend to adopt particular accounting methods for improving the business efficiency such as improving the cash flows or the selection of particular incentive plans for managers (Mintz, 2013). The company has adopted incentive policy that is based on the strategic aligning the executive incentives with the maximization of the shareholder value. The incentives provided to the key management personnel are linked with the underlying profit of the company. The underlying profit is the adjusted profit that is calculated through non-inclusion of significant items of revenue and expenses that are no related with the performance of the company value (AGL Annual Report, 2016). Thus , the linking of the incentives of manager with the underlying profit ensures that they do not enjoy an undue advantage or disadvantage by the items that are not under their control (Marley and Pedersen, 2015). Also, the company through incorporating flexibility in its accounting framework has introduced a minimum shareholding policy for its executive and non-executive managers. The policy motivates the KMP for holding some shares of the company in order to align the interest of the managers with those of the shareholders. This helps in ensuring that managers do not adopt the use of any fraudulent practice that distorts the financial performance of the company for realization of higher incentives. The company has also implemented the use of some amended standards that helps it to improve its operational efficiency for the present reporting period. However, the company have maintained that the adoption of the amended standards have not materially impacted the financial facts and figures disclosed in its consolidated financial statements (Ordelheide, 2016). Therefore, it can be said that the accounting strategy adopted by the company is revealing as it tends to disclose all the information re lated to the financial condition of the company. The company has adopted a flexible accounting strategy that is subjected to change as per the performance of the company value (AGL Annual Report, 2015). However, the flexibility in the accounting practices is as per the standard accounting rules and regulations and does not provide the authority to the managers for distorting the company financial performance (Bamberg and Spremann, 2012). Disclosure requirements of the financial reporting are prescribed in the IAS 1: The presentation of the financial statements. As per this accounting standard every public listed company have to comply with the specific requirement to disclose sufficient information regarding the performance of the company during the year. Disclosure requirement of other accounting standards are provided in the specific IAS standards and it have to be strictly followed. In this section of the assignment there is requirement to evaluate the disclosures made by the AGL Energy Company in their annual report value (AGL Annual Report, 2016). On analyzing the disclosures made by the AGL Energy regarding each accounting standard seems to be adequate but there are some concerns that need to be addressed. As per IAS 13 Fair value measurement, values of property, plant and equipment should be properly calculated and disclosed in the separate notes to accounts. In this regards AGL Energy have disclosed the information about the property plant and equipment in the separate notes to accounts but the information disclosed in that note to accounts seems not be adequate. Footnotes to financial statements are same as the notes to accounts and these helps to evaluate the detailed information of the items presented in the financial statements. For example, to show the information regarding how the values of intangible assets have been generated there is needed to check the notes to account. The note to accounts related to intangible assets provides the value of impairment loss on each intangible asset and also disclose remaining life of the intangible assets. In relation to the AGL Energy proper notes to account have been prepared and required information about each item to the financial statements can be seen from them (AGL Annual Report, 2015). As evaluated from the financial statements prepared by the AGL Energy, the financial performance in current year seems to be good and it can be also be evaluated from analyzing the notes to accounts. Notes to accounts are seems to address all the requirement defined in the accounting standards and they are consistent with the current performance of the company. The Australian GAAP is derived from the joint combination of IFRS and some guidelines by the Australian Board. Australian GAAP is made to address the requirement of financial reporting and to make common channel where the entity performance can be seen intact through analyzing the financial report. So it can be said that GAAP reflects the appropriate measurement of key measures of success (Hussey and Ong, 2017). Segment disclosure is given page number 68 of the Annual report of year 2016. Segment information is reported on the same basis that is used for internal reporting structure. Segment are determined in the manner in which products are sold either it is retail or wholesale. The four main segments of the company are Energy Markets, Group Operations, New Energy, and investments. So it can be said that proper disclosures are given for the segment information (AGL Annual Report, 2016). Identify Potential Red Flags It has been analyzed from the financial report of the company that there are various red flags that requires more disclosure. There are various unexplained accounting practices such as adoption of some changed accounting policies in order to improve the operational efficiency. For example, the company has applied amendments to the accounting standards in order to improve its financial profitability but has not effectively disclosed the changes that it has applied to the accounting standards. The changes are adopted by the company to improve its financial performance that is declining in the recent years due to transformations in the energy market of Australia. The inventory base of the company has also currently declined in the recent years to about $6 million value (AGL Annual Report, 2016). The company is also required to provide information relating to the significant decrease in the inventory value in the recent reporting period (Pietra, McLeay and Ronen, 2013). The company annua l report has revealed it is also incorporating the use of strategic partnerships for expanding its business. The company has strategically acquired Mosaic Oil and also entered into sale and purchase agreement with Transfield services Limited fir acquiring its asset base. There is also asset-write offs realizing from the sale of businesses and subsidiaries corresponding to$ 673m in the financial year 2016. The company has also not provided relevant information regarding its asset write-offs. Thus, these all are the potential red-flags present in the business entity (AGL Annual Report, 2016). Complaint with Conceptual Framework It has been analyzed from the annual report of the company that it has effectively followed with all the principles of conceptual framework such as relevance, reliability, comparability and understandability. The conceptual framework is developed on the basis of normative theory of accounting that provides guidance to the managers regarding the adoption of the accounting procedures that are most appropriate. The theory has identified and proposed the qualitative characteristics that financial information should possess, that are, relevance, reliable, understandable and comparable. The conceptual framework is developed on the basis of these qualitative characteristics that seek to define the objective of general purpose financial reporting. The company through has provided all the financial information in its annual report as per the qualitative characteristics of the conceptual accounting framework. However, the nature of the financial information is significantly influenced by the v arious political factors as per the accounting standard-setting environment (Wolk., Dodd and Rozycki, 2012). The reliable principle of conceptual framework requires disclosure of the financial facts and figures that are appropriate and can be used by the investors in decision-making processes (Bamberg and Spremann, 2012). However, due to presence of country-specific issues, the company incorporates the use of historic cost rather than fair value in valuing its financial assets and liabilities. The historic cost does not provide realistic information about the assets and liabilities value as it does not incorporate the market information (Horngren, et al., 2012). Therefore, IASB has directed the accounting standard-setting bodies around the world such as AASB to adopt the use of fair value accounting for meeting the needs of users of financial statements. The company has also made some voluntary disclosure sin its annual report such as disclosing the information related to the operating results realized from eco-markets. The company has adopted the different accounting policies during the preparation of its general purpose financial statements for improving its financial profitability (Langendijk, Swagerman and Verhoog, 2003). This include use of historic cost accounting, straight-line method for calculating deprecation, segment reporting and incorporating the use of principle of consolidation for developed its concise financial statements. This is all done by the company to meet the needs and expectations of its different stakeholders and thus achieve the trust and confidence (AGL Annual Report, 2016). This will enable the company to survive in long-term through realizing improved financial profitability (Hussey, and Ong, 2005). Conclusion It can be inferred from the overall discussion held in the report that accounting policies adopted by a business entity plays a significant role in improving its financial profitability. The business corporations should develop and prepare their financial reports as per the qualitative characteristics stated in the conceptual accounting framework. However, there is need for providing some flexibility in the accounting framework to the managers so that they can adopt the best accounting practices as per the nature of business operations. The discretion provided to the managers should not distort the financial performance in nay way. The AGL Energy Ltd is complying effectively with all the conceptual accounting framework principles through selection of adequate accounting policies and choices. It has also implemented flexibility in its accounting policies for maximizing its operational efficiency and linking the incentive plan of the KMP with the shareholders value. There area also som e issues of concern present in the annual report of the company that requires more disclosure. References AGL Annual Report 2016. [Online] Available at: https://www.agl.com.au/-/media/DLS/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en Annual Report 2015. AGL Energy. [Online]. 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