Background

This paper explained in detail basic accounting guidelines and principles that are major ground in which legal accounting rules are based. It manly describe the use of General Accepted Accounting principles(GAAP)  as required by the Australia Accounting standards Board which performs the duty of maintaining accounting rules of the companies( both public and Private Companies)  for the purpose of ensuring that the financial statements of the company are in line with the International Financial Reporting Standards(IFRS). In Australia it is a requirement of the law for listed company like in this my study (Alumina Limited Company) to act in accordance with GAAP in preparation of financial statement(Tuzarová and Mejzlík 2018).

By use of financial statements of Alumina Limited Company as an example, this paper outline and analyses the information mentioned above in different core important sections. The first part deals with how to identify income of a company (Alumina limited Company) and the Actual measurement and recognition condition of incomes of Alumina Limited Company. The second part enlightens the significance of applying GAAP in Alumina Limited Company financial statements (Smieliauskas, Craig and Amernic 2017). The third part also states the valuation and performance of Alumina Limited Company in case of non-compliance of General Accepted Accounting Policies (GAAP). Then the last part is conclusion.

How to identify income of a company: The process of income identification involves a company’s recognition of the Revenue and the amount of expenses used which lead to a profit or loss (Dixon, Odoner and Alterbaum 2017).

FINANCIAL STATEMENT OF ALUMINA COMPAY FOR (2015-2016)

Recognition:  An item is being recognized in financial statements in case it fulfills the following conditions:

• The items fulfill the definition of component of financial statements
• The information in it can make a difference to the decision of those who uses it
• When information in the item is represented is verifiable
• When the item is measurable with the desired reliability

Measurement: It comprise of two choices: the first one is the selection of attribute that is to be determined and then the selection of unit of measurement. Alumina limited company uses nominal units of money neglecting any changes in how the items are being bought (Du, Givoly and Alhusaini 2017).

Importance of GAAP for financial reporting and business practices in general: GAAP is core to the efficient performance of the business due to decisions in regard to allocation of the available resources depends mostly on concise, credible and reliable financial information.

The financial statements of GAAP are commonly easy to be understood by both the investors and lenders in private companies (Harris and Stahlin 2018). Due to trustworthiness and reliability encouraged by GAAP reporting, many private companies realizes higher flexibility in the kind of financing open to them. They also have the advantage of financing at a lower cost due to providers’ tendency of appreciating the fundamental features of GAAP.

Implementation of GAAP in financial reporting

GAAP also assist to ease the actual shift from private to public company. If a private company changes to public, that means the company will possess various capital structure and ownership, different investment plans of investors and several accounting resources (Du, Givoly and Alhusaini 2017). So, the company must quickly satisfy regulatory needs in which they are filing, and that include taking into account GAAP financial statements.

GAAP also simplified company’s financials so as to enable both the creditors, investors and other people to develop rational investment and different financial decisions.

GAAP also helps to imparts trust among the entire public that the good or bad performance of the company is being exposed to them. In addition, it enables verification and audits to be performed on to the business’s account.

Taxpayers also made use of GAAP controlled statements prepared by the companies being owned by the government and then analyze it for the purpose of identifying whether their money is being use efficiently.

Implementation of GAAP in the financial reporting of Alumina limited company: The implementation of GAAP in Alumina Limited Company has been achieved via disclosure-and measurement principles. The principle of measurement determines and identify the actual timing the basis of all the things that are in the accounting cycle and affect the financial statements, i e the period that the actual transactions will be put in the financial statements. The principles of disclosure evaluate other important information and accurate numbers which are essential and should be included in financial statements (Ramli 2018).

Alumina Limited Company made use of Accountants who depends on their professional judgments during the process of determining how GAAP concept are being applied and interpreted.  The accountant who they employed to perform the duties of reporting organization’s financial data are mostly well informed with issues dealing with GAAP accounting. The use of accountant has made it possible for the implementation of GAAP in financial reporting. Accurate calculation of income tax of the company is being made faster hence leading to quick decision making. It also eases the preparation of the financial statement.

Example when GAAP is not used by Alumina Limited Company: The Company may intend to apply non GAAP measures named as underlying profit before tax.

Impact of non-compliance with GAAP in reporting income on performance and valuation of the companies from the investor perspective:  The application of underlying profit before tax in its outcome may bring confusion to most of the investors. The non-GAAP by Companies may put the investors at risk because most of the managers always try to cover poor performance. Though, Research studies reveals that the use of non-GAAP numbers provides additional information to investors as compare to GAAP measures. Looking at the financial statement of the Alumina Limited Company it is clear that non-GAAP numbers normally surpassed the GAAP earnings by more than 50% of the time. When a company’s uses non-GAAP measures so as to change their performance, the non-GAAP numbers always project higher percentage of the total time. The information from non-GAAP communications with all the investors always gives insights on how the company’s management looks at their performance.

Example when GAAP is not used by Alumina Limited Company

Non-GAAP measures are useful to investors because they are able to calculate them on their own. Thus, removing biases that are included in financial statements and this will enable them get accurate information on the company performance and then use them to make investment decisions.

The use of non-GAAP allows the management of the company to share estimate with investors. This disclosure enables investors to clearly understand management performance to help them to forecast on future performance of the business. Alumina Limited company uses non-GAAP financial statement in order to show their standing by use of methods and terms that are not in GAAP reporting statement (Harris and Stahlin 2018). Alumina Limited Company may decide not to use GAAP with the intention of providing alternative image of the organization and it is also being use by both managers and employees, providing both of them numbers important in operation of the organization.

Non-GAAP is mostly being used as significant method in valuing companies especially industries. This is because it provides accurate information on items used to prepare financial statement

Conclusion: The paper deeply enlightened the impact of GAAP on the income statement of the company and we found out that the principle uses many standards and defensive measures in order to enable reliable and important accounting statements. It is clearly from that Alumina Limited Company that it performs the real accounting in fiscal periods that may not match with the actual calendar periods. They only coincide with the events which take place in the company as regard to available accounting standards.

Most of the companies apply both GAAP and Non-GAAP in the formulation of income statement (Financial statement) in the determination of net income of the business entity. This is because the organization experiences good performance when they employed the use of both principles in the preparation of financial statement. Therefore, transparent institution should provide a perfect reconciliation of the result for both the (GAAP) and non-GAAP.

References

Tuzarová, S. and Mejzlík, L., 2018. The IFRS Assessment by Publicly Traded Companies. In The Impact of Globalization on International Finance and Accounting (pp. 341-346). Springer, Cham.

Dixon, C., Odoner, E. and Alterbaum, A., 2017. Bridging the “New GAAP” in Q3: SEC Guidance to Issuers.

Vonder Haar, L., 2017. The Financial Analysis and the Application of US GAAP Principles (Doctoral dissertation, University of Mississippi).

Hurst, M.S., 2017. Analysis of Financial Accounting Procedures and Applications (Doctoral dissertation, The University of Mississippi).

Du, K., Givoly, D. and Alhusaini, B., 2017. The Impact of the Codification of Accounting Standards on Compliance and Reporting Costs, and its Usefulness for Empirical Research.

Smieliauskas, W., Craig, R. and Amernic, J., 2017. GAAP as Ineffective Legal Defense of Financial Reporting: Implications for Truthfulness, Auditability, and the IASB’s Proposed 2015 Conceptual Framework.

Harris, P. and Stahlin, W., 2018. GAAP to IFRS Income Conversion Case Study: An Examination of SEC Noted Accounting Differences. The Accounting Educators’ Journal, 27(1).

Ramli, I., 2018. The Relevant Value of Accounting Information on the Adoption of the IFRS in the Capital Market: Evidence in the Indonesian Banking Industry. In State-of-the-Art Theories and Empirical Evidence (pp. 107-125). Springer, Singapore.