The Importance of Relevance and Reliability in Accounting

Answer 1:

Relevance and reliability , according to the conceptual framework of accounting are two of the most important concepts. Thus in order for the accounting information to be useful for the users of the financial statements, the data should be both reliable and relevant. Relevant financial information is information that has the capacity to make a modification in the decisions made by investors, lenders and other creditors. To be relevant, the information must predict future effects and must provide  a positive value. Reliable information includes data that is represented in a true and fair manner.it can be also termed as faithful representation(Magnan, Menini & Parbonetti,2015). Reliable financial information should be neutral ,clear and free from all ambiguity.

Relevance and reliability are often considered to be two contending attributes in a piece of financial data. This signifies that in order to make a data more reliable, there has to  be a compensation in relevance and vice versa. This is a fundamental challenge in the discipline of accounting. It can be illustrated with the help of an example. In accrual basis of accounting, when there is credit sales it is recorded as revenue. This makes the revenue information more relevant because it reflects the sale that we have actually done but less reliable since there is no such figure in the cash account because the sales have been done in credit(Christensen et al.,2016). Hence there is always a compromise between relevance and reliability of financial information. Therefore it can be concluded that in some cases, relevance and reliability could be in conflict

Answer 2

Being listed on the ASX, Laurie Farms will get offered a host of benefits including getting additional funding capital from a host of public investors that would help the firm in expanding their operations.In addition this will help the firm in obtaining additional leverage when applying for loans from public institutions.Listing will  also help the firm in getting more liquidity and ready marketability of securities(Lau,2015).According to the ASX, the principles of good corporate governance lay down a  framework of rules and regulations that will help the firm in running its operations ethically.A good corporate governance lays down rules for a listed  company to act ethically and responsibly.It also advocates a solid basis for management and misunderstanding .A company listed in the stock exchange must disclose and publish the corresponding roles and tasks of its Board and management and in what way their performance is watched and appraised.It should have a proper  structure in place that verify the truthfulness of its corporate reporting.It should also make opportune and stable revelation of matters that are expected to have a material effect on its accounts(Tricker & Tricker, 2015).If the company follows these rules of good corporate governance, this will help the company in achieving a strong ethical platform from where they can run their business ethically.So if Laurie firm maintains proper disclosure , diversify their corporate reporting practises and run their business ethically , this will  bring a positive goodwill for the company. This will also help the company in  attracting investors and achieving a high standing in the stock market and help in getting more funds from public investors.This will help the firm in getting finance from banks and other financial institutions.A good corporate governance will promote a positive image of the company and also help them in their expansion plans if they wish to undertake such plans in the future(Tricker & Tricker, 2015).

Answer 3

Benefits of Listing on the ASX

The financial statements provides a portrait of the concern’s finances at a specific point in time. From the Balance Sheet above, it can be seen that it is fragmented into two crucial divisions. Assets are placed on the upper end of the balance sheet and the company’s liabilities and shareholder’s equity are placed on the bottom side of the balance sheet. Assets are the resources that the company makes use of  operating  the corporate while the liabilities and equity are the two bases that fund the assets of a business. It is also evident that the Balance Sheet is in stability where the value of combined assets equals the combined value of the obligations and equity of the shareholders value(Lawless, Lydon & McIndoe-Calder, 2015). Another fascinating feature of Balance Sheet is that it is very well organized. The assets and liabilities part  of the balance sheet are prepared by how current and relevant the account is. The assets side are categorised from most liquid and ranges till least liquid. For the Liabilities section, the accounts are prearranged from short to long term borrowings and consist of other obligations as well(Vukadinovi? et al.,2018). On further analysis of the financial statement, it is seen that the amount of current assets is sufficient enough to pay off the current liabilities .There is sufficient working capital in the business to meet the daily operational expenses of the company. The fixed assets have been valued in accordance with the relevant accounting principles and have been valued at cost. However no depreciation has not been provided on the fixed assets. There is also no evidence of any outstanding  or prepaid expenses or income in the balance sheet. There is a long term loan that delivers a corporate with working capital which when applied can  be used to obtaining assets ,which  in turn can be used to generate supplementary proceeds for the corporate. Thus it can  be concluded that although there is a long term loan n the business, yet the overall financial position is sound.

Answer 4

The compiling of talents,skills and knowledge of a company’s workforce is the definition of human capital. Intellectual property refers to the creations of the mind and transforming these ideas into commercial assets(Cuozzo et al.,2017).Both of these have become a significant success factors in the organization’s road to growth and profitability.In today’s information age,human capital and intellectual capital are valuable assets and can transform an enterprise’s overall financial position by leaps and bounds.Such assets raise the competitive advantage of the firm and can help the firm in claiming a  dominant market position.  Society has gradually shifted towards an age of information and technology but the accounting practises have not transitioned with it(Cuozzo et al.,2017). The question remains whether they should be reported on the financial statements or not. Some points that warrant their inclusion are:

• Most of the organizations are knowledge based and requires the use of people’s talents and abilities to produce quality results. The intellectual capital can help turn ideas into commercially successful products. Without these two assets, the organization would not be able to function.
• The human capital and intellectual property create competitive advantage for the organization, which helps the firm in maintaining a significant market share.
• Without the brain power of human capital and the value of intellectual property, the organization could not achieve their mission.
• Human capital  and intellectual property is supposed to help managers in informed decision making(McCracken et al., 2018).

Some points that do not warrant their inclusion in the financial statements include:

• It is very difficult to quantify human capital and intellectual property and as such  is difficult to measure.
• Since both are line items in the Balance Sheet it could be very easily wrought and thus misrepresent  the balance sheet(Bradner & Contreras,2017).
• It is very difficult to maintain consistency in the determination of human capital and intellectual property.

References:

Bradner, S., & Contreras, J. (2017). Intellectual Property Rights in IETF Technology (No. RFC 8179).

Christensen, H. B., Nikolaev, V. V., & WITTENBERG?MOERMAN, R. E. G. I. N. A. (2016). Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), 397-435.

Cuozzo, B., Dumay, J., Palmaccio, M., & Lombardi, R. (2017). Intellectual capital disclosure: a structured literature review. Journal of Intellectual Capital, 18(1), 9-28.

Lau, A. (2015). Why bidder shareholders should get a say. Equity, 29(6), 21.

Lawless, M., Lydon, R., & McIndoe-Calder, T. (2015). The financial position of Irish households. Central Bank of Ireland Quarterly Bulletin, (1), 66-89.

Magnan, M., Menini, A., & Parbonetti, A. (2015). Fair value accounting: information or confusion for financial markets?. Review of Accounting Studies, 20(1), 559-591.

McCracken, M., McIvor, R., Treacy, R., & Wall, T. (2018, March). A study of human capital reporting in the United Kingdom. In Accounting Forum (Vol. 42, No. 1, pp. 130-141). Elsevier.

Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Vukadinovi?, P., Cerovi?, S., Matovi?, V., & Stevanovi?, G. (2018). Financial position and credit rating of companies in circular economy in Serbia. Industrija, 46(2), 77-98.