The Significance of Financial Statements

1. Financial statements shouldContain only information that represents phenomena that have existed or occurred external to the reports and their underlying documentation’ and external to the thoughts of the issuers about the future.Reflect nothing that didn’t happen or that’s fictitious by definition.Reflect the use of only those formulas that track the financial effects of events that have occurred.Reflect the existence of the reporting entity apart from all other entities with which it’s associated.Not incorporate false assumptions.Emphasize the needs of the users of the statements if the needs or desires of other parties to financial reporting conflict with the needs of the users.Obey the rules of arithmetic.

2. Discuss the above in terms of the following “A major challenge to the profession is to move issuers of financial reports to make disclosures confirm more to the advice of Warren Buffet.”

3. What is a financial instrument? What is a financial asset? What is a financial liability? What is a derivative?How are financial assets classified and measured?On 3 March 20X3, CBA entered into a fixed-price forward contract to purchase 3 tons of aluminum in 6 months. According to terms of the contract, CBA can either take physical delivery at the end of 6 months, or to pay or receive a net settlement in cash based on the change in market price of aluminum. Is this a financial instrument? Briefly explain  the definitions of hedging instrument and a hedged item.

The issue that has been presented in the question refers to the fact that the financial statements of a corporate entity are the most important documents that belong to a corporate entity. This means that the financial documents that are prepared by an organization state the financial particulars of the business entity. The financial documents that belong to a corporate entity include the financial statements like the cash flow statement, statement of financial position and the comprehensive income statement. The financial documents indicate the accounting position of the corporate entity. The financial statements not only are effective for the management of the company but also the third party investors of the company. The management of the corporate entity utilizes the accounting statements of the company for the purpose of finding out the loopholes of the essential business operations. Moreover, the specific areas that require immediate attention by the administration of the company or else will result in a particular loss is easily identified with the help of the accounting report that is published by the particular corporate entity. It should be noted here that the third party investors also are able to acquire the required business information from the financial statements of the corporate entities (Ali, Akbar & Ormrod 2016).

Guidelines for Preparation of Financial Statements

This particular study aims to find out the particulars of the format in which the financial statements have been prepared and the accounting guidelines that have been followed for the preparation of the financial statements in the corporate entities. Moreover, the significance of the issuing of the standards have also been revealed in this particular study.

The issue that has been presented in the case study refers to the significance of the financial statements that are prepared by the administration of the corporate entities. The financial statements consist of the essential accounting information that is required by the third party investors as well as the very own management of the corporate entity. Therefore, it can be understood that the accounting report of a corporate organization is of utter importance and should be prepared accordingly (Ali, Akbar & Ormrod 2016).

The first point that has been mentioned in the case study refers to the fact that the financial reports should contain the information that have already occurred or will occur in the near future. This means that the financial statements that have been prepared should be carried out in such a way that they represent the fair image of the company. It must be noted here that it is the primary duty of the financial report preparers to prepare the financial report in such a way that they convey a sense of clarity and conciseness on the part of the users of the financial statements. This can be further explained with the help of the particular accounting standard of AASB 101. This particular standards that has been established by the Australian Accounting Standards Board. This particular accounting standard defines the purpose of the financial statements or the particular reasons for which the financial statements are prepared by the corporate entity. The accounting statements reflect an organized representation in regards to the financial performance or position of a corporate entity. The objective of the financial statements is to facilitate the providence of the financial information in regards to the financial particulars like the financial position, performance and the cash flows that are required by the third party investors for the purpose of making the economic decisions. The financial statements that have been prepared reflect the results of the stewardship of the management in regards to the resources that have been entrusted to it. In addition to this, it has been mentioned in the particular accounting standard of AASB 101 that the accounting reports in order to meet its objectives should provide the required information in regards to the assets, liabilities, equity, expenses and income, cash flows and contributions by the owner of the corporate firm (Ali, Akbar & Ormrod 2016).

Accounting Standards and Disclosures

It has been further mentioned in the accounting report of the corporate organization that the accounting statements that are prepared by the management of the corporate entity should not include any kind of financial components that have not been incurred in reality. Moreover, the financial components should not be fictitious in nature. The particular formulas that have been utilized for the purpose of preparation of the financial statements should also be clearly mentioned in the accounting report of the organization. Moreover, the accounting statements should be prepared in accordance to the proper arithmetic rules. This has been further explained in the Australian Accounting Standard 101. The financial statements that have been prepared explain the aspect that the financial statements have been prepared on the basis of the financial performance and the cash flows of a business entity. It has been further mentioned in the accounting statements of the financial organization that the fair presentation of the accounting statements of a corporate entity require the faithful representation in regards to the effects of the transactions, other conditions and the events that are carried out in accordance to the criteria of recognition, definitions for the assets, expenses, income and liabilities that have been established in the framework. The application of the Australian Accounting Standards has also mentioned the fact that the additional disclosures are necessary for the purpose of the fact that the clarity of the financial statements display a fair representation of the financial information that has been reflected by the accounting statements of the organization.

It has been further mentioned in the accounting statements of the corporate organization that the financial statements comply with the International Financial Reporting Standards will result in the unreserved and explicit statement in regards to such compliance in the notes. In regards to all other circumstances an entity shall result in the achievement of the fair presentation of the business entity. This means that the fair representation of the accounting policies will result in the preparation of the accounting statements and have been mentioned in the AASB 108 have established a hierarchy of authoritative guidance that the management has considered in the absence of the Australian Accounting Standard. Moreover, for the purpose of presenting the information includes the accounting policies that facilitates the providence of information that has been relevant, comparable, reliable and understandable information. Furthermore, the provision of the additional disclosures in regards to the compliance with the specific requirements that have been mentioned in the Australian Accounting Standards (Balsmeier & Vanhaverbeke, 2018).

The Importance of Accounting Disclosures

Therefore, it can be concluded that the financial statements should have been prepared in such a way that they represent a fair image of the corporate entity. Furthermore, the particular accounting standards of AASB 101 and 108 should be adopted for the preparation of the accounting statements. Furthermore, it should be note here that the business entity cannot result in the rectification of the inappropriate accounting policies either by the providence of the disclosures, notes or other explanatory materials. The objective of the accounting statements should be met with while preparing the financial report of the corporate entity and this is the primary requirement of the accounting standards that have been established by the Australian Accounting Standards Board.

The issue that has been presented in the question refers to the particular comment that has been presented by the expert Warren Buffet. The comment refers to the explanation that the significance of accounting disclosure can be understood with the help of the third party investors or the users of the financial statements. This means that the accounting disclosures refer to the disclosures that are included within the financial report of a corporate entity. The disclosures that have been included in the financial report of the corporate entity provides the required information in regards to the different accounting treatments and the other mentionable factors in the annual report of the corporate entity. For instance, an example of a particular accounting disclosure might refer to the disclosure in regards to the treatment of the fixed assets or other assets of the corporate organization. It must be noted here that a single financial component like the fixed assets or the other financial components shall either be valued at fair value method or historical cost method. The fair value method is an entirely different accounting treatments in comparison to historical cost treatment. Now the treatment of the accounting components by a particular method should be disclosed in the annual report of the corporate entity. Moreover, the details of the method that has been utilized by the accountant of the company in the valuation of the assets should also be mentioned in the annual report of the corporate entity.

The utility of the accounting disclosures on the other hand depend on the users of the financial statements of the corporate organization. This is because the providence of proper accounting disclosures help the users of the accounting statements to understand the financial and the liquidity position of the corporate entity. Therefore, it can be assumed that more and more information that has been provided by the corporate entities will result in the better knowledge of the investors of the company and other related stakeholders of business that will facilitate the particular process of taking essential economic decisions. This means that the providence of accounting disclosures is a very god practice and should be adopted by all the corporate entities (Balsmeier & Vanhaverbeke, 2018).

However, it should be noted here that certain experts are of the opinion that providence of too much disclosure will result in the disclosure overload which will restrict itself from achieving its own goals. This means that the particular feature of disclosure overload results in the providence of the information that is not required by the investor and results in unwanted confusion in regards to the available information. Moreover, the experts also have been of the opinion that the disclosure overload also results in the lengthening of the reports which ruins the quality of the financial information that has been provided in the annual report of the corporate entity. The investors and the stakeholders of the business that have been choosing the corporate entities in regards to investment in the financial organizations majorly depend upon the quality of the financial report that has been published by the management of the corporate entity. Therefore, it can be naturally assumed that the availability of the information that has been presented in the financial report of the corporate organization is of primary importance to these entities. The providence of more and more information will make it easy for the stakeholders of business to interpret the information and take the necessary steps for making the economic decisions. Therefore, the particular argument that the disclosure overload ruins the quality of the accounting statements cannot be held as true and applicable (Balsmeier & Vanhaverbeke, 2018).

The issue that has been represented in the question reflects the fact that the particular explanation in regards to the financial instruments have been asked to clarify. This means that the financial instruments refer to the real or the virtual documents that result in the representation of a legal agreement that involves any kind of monetary value. The financial instruments that have been based on equity refer to the fact that they represent the entity with whom the particular asset belongs to or the ownership of the asset. The financial instruments that have been based on debt represent a loan that has been made by an investor to the owner of the asset. The next type of financial instrument refers to the foreign exchange instruments is a unique type of financial instrument. The different categories of the financial instruments include the common share equity and the preferred share equity (Perkins, 2016).

The different types of financial instruments can be further explained as the short term based financial instruments that last for a year or less. The securities of this type are available in the form of commercial papers and the T-bills. The long term financial debts on the other hand last for more than a year. The securities of this type are available in the form of bonds. The securities that are available in the form of equity based financial instruments are stocks. The exchange traded derivatives in this category include the stock options and equity futures. It must be noted here that there are no securities under foreign exchange. The cash equivalents are available in regards to the spot foreign exchange. The exchange traded derivatives that are available under the foreign exchange refer to the currency of the future. Therefore, financial instruments refer to the particular instruments that have been utilized for the purpose of raising the much required funds.

The component of financial asset refers to the particular tangible liquid asset that acquires value in regards to a contractual claim. The relevant examples of a financial asset are cash, stocks, bank deposits and bonds. It must be noted here that the financial assets do not have the physical worth that has been inherent in nature unlike the other assets like land, property, physical assets that are tangible in nature and commodities. To be more precise, the concept of financial assets have been defined by the International Financial Reporting Standards include the financial component of cash, equity instrument of another equity, the right to receive financial asset from another entity, the right to proceed the exchange of the financial liabilities or the assets. The financial components of financial derivatives, bonds, deposits and equity stakes are included under the category of the financial assets.

The financial assets like the stocks are an important type of the same. An investor that has been buying the stocks have become the owner of the company and has shared the profits and the losses of the corporate entity. The bonds are the financial assets that have financed the short term projects. The financial assets like the bonds state the amount of money that has been owed, the payment of the interest rate and the maturity date of the bond.

The difference between the financial assets and the other assets can be defined as the financial assets that derive their value from the contractual claims in regards to an underlying asset. The other assets include the intangible and the real assets that draw their values from the properties and the substances that range in the category of commodities, precious metals and real estate (Perkins, 2016).

The financial liability refers to the particular financial component that has been defined by the International Financial Reporting Standard. It has been mentioned by the accounting body that the component of financial liability can be of two types. A financial liability refers to that particular contractual obligation that has been utilized for the purpose of delivering the cash from one entity to another. Moreover, a financial liability refers to the unfavorable exchange of the financial assets or the liabilities. A contract that has been settled in regards to the equity of an entity and has been a non-derivative in nature. The examples of the financial liabilities refer to the examples of accounts payable, the loans that have been issued by the entities and the derivative financial liabilities.

The component of derivative refers to the contract that has derived its value in regards to the performance of an entity that has been underlying. The financial derivative refers to the contract between two or more parties that have been based upon the asset or the assets. This means the component of the financial derivatives refer to the particular financial components like the stocks, bonds and other related components. It should be noted here that the price of the financial derivatives might fluctuate with the rise or fall in the market price. This means that the component of financial derivative is exposed to the market forces and might result in a potential loss or gain. The financial derivatives are an important components and is chosen by the investors or the company owners for the purpose of acquiring the desired amount of money (Perkins, 2016).

The issue that has been presented in the question refers to the classification of the financial assets which can be subdivided into the category of current, non-current assets and the intangible assets. The intangible assets refer to the particular assets that are not physical that is not tangible in nature and is generally valued on the basis of the fair value consideration. The current assets or the non-current assets on the other hand refer to the asset that might have been incurred within a period of twelve months or more respectively. The assets are generally valued on the basis of fair value method.

No, this is not a finer instrument as the particular transaction has been based upon a particular contract. Moreover, there is no facility available in regards to the receipt of the returns from the financial asset or the financial instrument. Therefore, it is not considered as a finer instrument.

A hedging instrument can be referred to as the contract whose fair value can be utilized for the purpose of offsetting the changes in the amounts of the cash flows or the fair value that has been obtained in regards to a hedged item.

A hedged item on the other hand is similar to a financial derivative that has been explained in the earlier part of this particular study.

Conclusion

The discussion above has helped in understanding that there are certain significant points that should be included in the financial statement of the company. It can be seen that too much information can lead to information overload.

References

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