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A critical analysis of CSR's financial reporting disclosures
Table of Contents
Executive Summary
1.Introduction
2.The Conceptual Framework for Financial Reporting
2.1.The objective of general purpose of financial reporting
2.2.The qualitative characteristics of useful financial information
3.A critical review of the disclosures of Property, Plant and Equipment
3.1.The concept of the disclosure of financial information
3.2.The disclosure for PPE in CSR
3.3.The disclosures of PPE and the qualitative characteristics of useful financial information
4.Conclusion and recommendations
5.List of references
6.Appendix
Executive Summary
The primary aim of this report was to determine whether the disclosure requirements for Property, Plant and Equipment (PPE) in the latest annual report in CSR were satisfied and whether it was qualified as useful and relevant financial information. At first, the object of general purpose financial reporting (GPFR) and the qualitative characteristics of useful financial information were thoroughly reviewed. Then, the disclosures of PPE in the financial statements were critically analysed based on AASB116. Under the thorough investigation, it was found that the requirements of the disclosures of PPE in CSR were sufficiently satisfied and it was qualified as useful financial information, though a certain characteristic may not have been included. Meanwhile, the significance that the useful financial statement must be qualified based on both the disclosures requirements by AASB116 and The Conceptual Framework for Financial Reporting by IASB were highlighted in the task. Besides, a possible recommended action for an increase in the reliability of the disclosure of PPE in CSR was provided.
1. Introduction
Financial reports are generally prepared by entities to provide information that is significant to extra users to make business decisions. The Conceptual Framework for Financial Reporting (CFFR) is critically important for the users who are relying on the entity’s financial reports. Unlike Australian Accounting Standard Board (AASB), CFFR may not mandatory rules for all entities; however, it is probably the significant tool for AASB to issue accounting standards and rules. As an increase in the users demand for the financial reports that must be useful and reliable, CFFR is the principle that an entity cannot ignore. In order to satisfy the demand, the objective of General Purpose of Financial Report (GPFR) and the qualitative characteristics of useful financial information should be reviewed and applied. Meanwhile, to demonstrate the reliable and faithful representation of the financial reports, it is important to examine whether the disclosure requirements for Property, Plant and Equipment (PPE) are adequately met. This report will define the objective of GPFR and the qualitative characteristics of useful financial information. Besides, this will examine whether the company fulfil the disclosure requirements for PPE based on AASB116, whether it is qualified as useful financial information and discuss methods to meet the criteria.
2. The Conceptual Framework for Financial Reporting
2.1. The objective of general purpose of financial reporting
The objective of general purpose of financial reporting (GPFR) is to provide useful and relevant financial information for existing users: investors, lenders and other creditors who are relying on the information (IFRS Foundation 2010). The users will be able to decide whether to invest, which company to corporate with, and where to sell and buy a certain resources. While its significance, it is stated that the users cannot directly require an organisation to provide the financial reports for their particular needs and thus they need to rely on GPFR (IFRS Foundation 2010). This could lead an entity to be fair to all existing users in markets. Besides, GPFR requires an entity to provides the information about a change in economic resources resulted from the past transactions and events, which helps users to evaluate an entity’s liquidity and solvency (IFRS Foundation 2010). The disclosure of entity’s financial performance throughout periods would significantly impact on user’s financial decisions.
2.2. The qualitative characteristics of useful financial information
In order to be qualified as useful and relevant financial information, there are generally certain characteristics that should be included in the financial reports. As shown the figure1 below, the characteristics are divided into two parts; namely, fundamental qualitative characteristics: relevance and faithful representation and enhancing qualitative characteristics: comparability, verifiability, timeliness and understandability.
Figure 1: The qualitative characteristics of useful financial information
Characteristics |
Description |
|
Fundamental qualitative characteristics |
Relevance |
Relevant financial information is relevant to make decisions. |
Faithful representation |
All available information is faithfully represented without errors. |
|
Enhancing qualitative characteristics |
Comparability |
Users should be able to compare the information to its in different periods or companies. |
Verifiability |
The information can be represented faithfully by considering economic phenomena and other circumstances. |
|
Timeliness |
The latest information could be more useful than the older. |
|
Understandability |
Clear and concise representation of information is understandable. |
Source: IFRS Foundation 2010
In next section, the concept of the disclosure of financial information will be mentioned before the representation of the main issue, which is whether the company satisfy the disclosure requirements for PPE based on AASB116. Above the qualitative characteristics of useful financial information will also be utilised to evaluate the disclosure of PPE as the useful financial information may be needed to fulfil both the disclosure requirements and the above characteristics.
3. A critical review of the disclosures of Property, Plant and Equipment
3.1. The concept of the disclosure of financial information
Before demonstrating the evaluation of the disclosure of PPE in CSR, it is fundamental to acquire the adequate level of understanding in the concept of the disclosure of the financial information.
As mentioned earlier, financial information is provided by an entity to assist users in making financial decisions and the disclosure requirements could improve its usefulness and quality. While the disclosure of financial information is not addressed in the current CFFR discussed in previous section, it is provided in IASB and AASB (IFRS Foundation 2013). Disclosure is defined as ‘the process of providing useful financial information about the reporting entity to users’ and an entity is required to provide the primary financial statements and the notes to the financial statements (IFRS Foundation 2013, p137). Financial statements shown in the table below are required to disclose by an entity.
Figure 2: Required financial statements to disclose by an entity
The primary financial statements |
|
The notes to the financial statements |
|
Source: IFRS Foundation 2013
3.2. The disclosure for PPE in CSR
The previous section demonstrated how important the disclosure of financial information to make the financial statements useful to users and particular information that should be included in the financial statements. This section will evaluate the disclosure of a certain area: PPE of the financial statements in CSR based on AASB116.
An entity is required to provide the disclosure of PPE that shows a wide range of information about an entity’s investment on tangible assets. This includes, regards as depreciation: the methods, the rates, residual values, useful lives, the accumulated depreciation amount and carrying amount: beginning and ending amount, additions, acquisitions, revaluation, impairment losses and other changes occurred during the period (AASB 2013).
This shall begin with to evaluate whether CSR disclose adequately the depreciation method, rates, useful lives, accumulated depreciation. The method used was highlighted as ‘Depreciable assets are depreciated at rates based upon their expected economic life using the straight-line method’ (CSR Limited 2013, p. 49). Besides, the useful lives: 10 to 40 years for buildings and 2 to 40 years for plant and equipment and accumulated depreciation: 58.1 and 47.4 ($Million) in 2013 and 2012 respectively were provided in figure 3.
Figure 3: The disclosure of PPE in CSR in March 31, 2013
($MILLION) |
2013 |
2012 |
|
Land and buildings |
|||
At cost or written down value |
359.7 |
417.6 |
|
Accumulated depreciation |
(58.1) |
(47.4) |
|
Total land and buildings |
301.6 |
370.2 |
|
Plant and equipment |
|||
At cost or written down value |
1281.7 |
1403.4 |
|
Accumulated depreciation |
(702.0) |
(653.3) |
|
Total plant and equipment |
579.7 |
750.1 |
|
Total |
881.3 |
1120.3 |
- The economic life over which assets are depreciated is buildings – 10 to 40 years; and plant and equipment – 2 to 40 years. The average life of buildings is 18 years; and plant and equipment is 14 years.
Source: CSR Limited 2013
Next parts that shall be assessed are the demonstration of the carrying amount at the beginning and the end of the period, additions, disposals amount and the net exchange differences occurred by translating the financial statements between countries.
By observing figure 4 below, it can be seen that all these required information were stated, that indicates that most of the disclosure requirements in paragraph 73to 76 were adequately satisfied.
AASB (2013) requires an entity to provide the information of impairment losses and the revaluation of PPE if revalued amount is stated, which stated in paragraph 76. This could be also satisfied as note (*) in the figure 4 shows the data when the write downs and impairments were occurred and its cause.
Figure 4: The disclosure of PPE in CSR in March 31, 2013
($MILLION) |
NOTE |
LAND AND BUILDINGS |
PLANT AND EQUIPMENT |
Balance at 1 April 2012 Capital expenditure Disposed Depreciation and amortisation Write downs and impairments* Foreign currency translation Reclassifications Transferred (to) intangible assets Transferred (to) from inventories and other assets Balance at 31 March 2013 |
370.2 0.4 (3.4) (13.1.) (45.5) - 2.4 - (9.4) 301.6 |
750.1 50.1 (1.9) (72.6) (142.9) 0.1 (2.4) (1.5) 0.7 579.7 |
|
Balance at 1 April 2011 |
385.9 |
748.6 |
|
Capital expenditure |
10.2 |
87.7 |
|
Disposed |
(4.0) |
(1.7) |
|
Depreciation and amortisation |
(13.2) |
(71.8) |
|
Write downs and impairments** |
(2.0) |
(2.3) |
|
Foreign currency translation |
0.4 |
1.7 |
|
Reclassifications |
0.8 |
(0.8) |
|
Transferred from intangible assets |
- |
0.4 |
|
Transferred (to) from inventories and other assets |
(6.0) |
4.4 |
|
Assets acquired on purchase of business |
7 |
- |
1.6 |
Assets disposed on sale of businesses |
(1.9) |
(17.7) |
|
Balance at 31 March 2012 |
370.2 |
750.1 |
* Valuation of the Viridian business (Glass segment) as at 31 March 2013 resulted in asset write downs and impairments of property, plant and equipment of $184.7 million. Refer to Note 3 for further details. In addition, write downs of $3.7 million of plant and equipment have been recorded in the Building Products business.
** During the year ended 31 March 2012, asset write downs and impairments of $4.3 million related to site closures in the Building Products business.
Source: CSR Limited 2013
3.3. The disclosures of PPE and the qualitative characteristics of useful financial information
As discussed in section 3.1 and 3.2, it is understood that the objective of the disclosure of PPE is to assist users to understand an entity’s investment, their risks and opportunities by providing the information of depreciation, impairment losses and a change in carrying amount during the period. Besides, it could be concluded that CSR could adequately content the requirements for the disclosure of PPE. To improve its usefulness, it is quite important to evaluate whether the disclosure of PPE has included the qualitative characteristics: relevance, faithful representation, comparability, verifiability, timeliness and understandability, which were mentioned in section 1.
The disclosures of PPE in CSR may have satisfied at least two fundamental qualitative characteristics: relevance and faithful representation and three enhancing qualitative characteristics: comparability and timeliness and understandability. Firstly, the information is probably relevant and faithful as it is useful for users to make decisions about investing resources to an entity and it was faithfully represented without errors. Also, the disclosure of PPE provided both the current period and the previous period that could enable users to compare the entity’s performance throughout the periods. Moreover, this information is up to data and concisely written that could satisfy timeliness and understandability. However, verifiability is the characteristic that is quite difficult to be assessed accurately and therefore it could not confidently be stated that it was fulfilled. Although the numbers or quantities may have been presented without errors, it is almost impossible for the entity to perfectly predict future cash flows (Maines & Wahlen 2003). While this is a disappointing reality, actions for enhancement should be taken. The disclosure of the information about underlying economic factors is considered to be significant to improve the reliability of accounting information (Maines & Wahlen 2003). This could let users to obtain more reliable information from the disclosure of PPE for their future investment due to its enhancement in transparency.
4. Conclusion and recommendations
This paper demonstrated the importance of certain characteristics that should be included in the financial statements to provide useful and reliable financial information for users. This also significantly linked to the objective of GPFR: to provide useful and relevant financial information for external and existing users and thus it helps user’s to make business decisions. Besides, this reality could sufficiently advocate that the concept of the role of CFFR is to assist Accounting Standard Board to set accounting standards and rules. Through thorough analysis on the disclosures of PPE in CSR, it can be concluded that the disclosure requirements for PPE were sufficiently satisfied. However, since there may be the limitation in accuracy of providing the information about future net cash flows by analysing the current economic circumstances, at least one of qualitative characteristics: verifiability may have not been contented. Hence, notwithstanding the disclosures of PPE in CSR is considered to be useful and reliable, the information about underlying economic assumption could be provided to enhance its verifiability.
5. List of references
Australian Accounting Standards Board 2012, Glossary of Defined Terms, Australian Accounting Standards Board, viewed 18 April 2014, <http://www.aasb.gov.au/admin/file/content102/c3/AASB_Glossary_30_September_2012.pdf>
Australian Accounting Standards Board 2013, Property, Plant and Equipment, Australian Accounting Standards Board, Melbourne.
CSR Limited 2013, CSR Limited Annual Report 2013, CSR Limited, North Ryde, viewed 18 April 2014, < http://www.csr.com.au/Investor-Centre-and-News/Annual-Meetings-and-Reports/Documents/CSR%20Annual%20Report%2031%20Mar%202013.pdf >
IFRS Foundation 2010, Conceptual Framework for Financial Reporting 2010, ISBN 978-1-907026-69-0, IFRS Foundation Publications Department, London.
IFRS Foundation 2013, A Review of the Conceptual Framework for Financial Reporting, ISBN: 978-1-909704-04-6, IFRS Foundation Publications Department, London.
Maines, L, & Wahlen, J 2006, 'The Nature of Accounting Information Reliability: Inferences from Archival and Experimental Research', Accounting Horizons, vol. 20, no. 4, pp. 399-425.
6. Appendix
Amortisation |
The depreciable amount of an asset that is systematically allocated over its useful life. |
Carrying amount |
The amount of an asset recognised after deducing accumulated depreciation and amortisation and impairment losses. |
Cost |
The amount of cash payment occurred when acquiring an asset. |
Depreciation |
The depreciable amount of an asset that is systematically allocated over its useful life. |
foreign currency transaction |
A transaction that requires conversion in a foreign currency. |
Impairment loss |
The excess amount occurred by subtracting the recoverable amount from the carrying amount. |
Property, plant and equipment |
Tangible assets that are held for administrative purpose and expected to use over one period. |
Revaluation |
The process of restating the value of assets and liabilities. |
Useful life |
The period of an asset that is expected to be usable. |
Table 1: Variables mainly used in the disclosures of PPT
Source: Australian Accounting Standard Board 2012
Table 2: Abbreviations
AASB |
Australian Accounting Standard Board |
CFFR |
Conceptual Framework for Financial Reporting |
GPFR |
General Purpose of Financial Report |
IASB |
International Accounting Standard Board |
PPE |
Property, Plant and Equipment |
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