Business Accounting The Process of Financial Reporting

Question: Describe about the Business Accounting for The Process of Financial Reporting. Answer: Introduction The present study concentrates on the evaluation of the notion of prudence in the process of financial reporting with special reference to the functionalities of the corporation Sea link Travel Group. In addition to this, the present segment also emphasizes on the reason behind the significance of prudence in financial reporting and elucidates different examples of application of the prudence in the annual report of Sea Link Travel Group. Thereafter, the present section sheds light on the discussion as to application of prudence. Furthermore, the present segment also expounds in detail different implications of the applications of prudence for financial reports in future financial year. Sea Link Travel Group is an Australian public corporation that functions as tourist as well as travelservices. 1: Evaluation of the concept of Prudence As mentioned in the Framework for the Preparation and Presentation of Financial Statements that is the complied framework issued by AASB, prudence can be considered as the addition of a certain degree of concern in the process of establishment of judgement required in presenting the approximation necessary under circumstances of uncertainty (Aasb.gov.au 2016). The maintenance of prudence can help in avoiding overstatement of the assets as well as income and understatement of the liabilities as well as expenses. The preparers of the financial declaration need to deal with the uncertainties that unavoidably surround definite events as well as state of affairs that include the collection of different doubtful receivables, plausible economic life of plant as well as equipment including the number of the warranty claims that might happen (pwc.in 2016). The notion of prudence also referred to as the conservatism principle can therefore, be regarded as the accounting principle that calls fo r the need of registering diverse assets as well as liabilities as soon as they take place but recording revenues only after realization or when they are necessarily assured as mentioned in AASB 118 (Aasb.gov.au. 2016). Therefore, in the present case, the management o f the company Sea link Travel Group need not recognize assets at a greater value that the particular amount that can be recovered from the sale or application. Similarly, the management of Sea Link Travel Group also need to ensure that liabilities are not identified at a lower value than what is anticipated to be in the forthcoming period (Sealinktravelgroup.com.au 2016). 2: Reason behind the significance of prudence in financial reporting As mentioned in the Framework for Preparation and Presentation of Financial Statements (AASB CF), the concept of prudence has need of exercising a degree of caution in the process of adoption of strategies and significant approximation (accaglobal.com. 2016). This can ensure that the assets as well as the income of the business entity are not overemphasized while liabilities and at the same time expenses are not understated. Therefore, the justification behind prudence is that the accounting principle can help in ensuring that the corporation need not identify an asset at a value that is higher than the amount that is anticipated to be recovered from the sale or application (Ifrs.org 2016). There remains inherent risk associated to the overstatement of the assets and the earnings of the corporation by the management. This also includes understatement of the liabilities as well as expenses. In addition to this, the risk essentially stems from the fact that corporations often gain adva ntage from enhanced-reported profitability in addition to lower gearing through cheaper resource of finance and at the same time higher prices of share. Again, there exists risk associated to the advantage provided in the process of selection of the accounting strategies and approximations that might again lead to bias in the process of preparation and at the same time presentation of the financial declarations directed at enhancing profitability as well as financial position by means of inventive accounting procedures. Therefore, the notion of prudence can help to make certain that this kind of bias can be encountered by the implementation of concern for process of approximation and the acceptance of accounting strategies. 3: Examples of application of the prudence in the annual report of Sea Link Travel Group The analysis of the financial statements of the corporation Sea Link Travel Group is presented as per the requirements of the Australian Accounting Standards as well as the Corporations Act 2001. As mentioned in the annual declaration of the company Sea Link Travel Group, the adherence to different accounting principles can ensure maintenance of internal controls that can enable the process of preparation of financial declaration free from material misstatement (Sealinktravelgroup.com.au 2016). The company maintains prudence to ensure presentation of the true and fair view to the users of the financial statements. For example, the revenue identification is essentially carried out on condition of the fulfillment of certain recognition criteria that can help in averting the overstatement of the same. Revenue of the corporation Sea Link Travel Group registers revenue when the significant risks as well as rewards of the possession of the goods can be passed to the purchaser and the cost borne can be enumerated reliably (Tourism | australia.gov.au 2016). Again, the revenue of the corporation from the ferry services are essentially recognized based on the departure date in which the consumers or else the groups that have made payments for the travel associated to the services have in reality departed. In addition to this, the revenue is also identified as the interest accrues by application of the effectual interest mechanism. In addition to this, the government grant can also be recognized at the time when there is rational assurance that the particular grant will be collected and it also adheres to different connected conditions. Again, yet another example of maintenance of prudence by the management of Sea Link Travel Group is recognition of the government grants. As per AASB 120, government grants need to be identified in profit or else loss on a methodical foundation over the time in which the business entity can identify as expenses the associated costs for whi ch the specific grants are proposed to compensate (Aasb.gov.au 2016). There are two different approaches that is the income approach and the capital approach for identification of the grant as per the standard. As per the annual statement, it can be hereby ascertained that the management of the corporation sea Link Travel Group abides by the accounting principles of prudence to avoid overstatement of the earnings and understatement of the liabilities. Discussion concerning application of prudence The applicability of the concept of prudence refers to the accounting principle that is essentially directed at the aversion of the registering different unrealised benefits and to be on guard for registered losses that can probably arise. The notion of prudence can be implemented while valuation of diverse current assets that comprises of the inventories, trade receivables, and present investments in the financial reports of Sea link Travel Group. In addition to this, the prudence also has the need for provisions for different probable events associated to loss that comprises of provision for doubtful debts. Again, the principles also include different accounting principles that refer to valuation of the inventories as per AASB 102 (Inventories) well as accounting for investments. Therefore, there is an insinuation of prudence in the standard on diverse fixed assets. Grounded on the principles of prudence, the accounting principle mentions that the valuation of the inventories needs to be valued with the intention of presentation of the financial declarations at cost or else the net realizable value and application of the one that is of lower value. In this way, the business concern also recognizes different probabilities regarding loss that are likely to stem owing to the decrease in the overall selling price of the entire commodity. However, the inventories are essentially valued at cost otherwise at the market value for a l ong period until the new standard on the prudence became operative. As mentioned in the annual report of the corporation Sea Link Travel Group, the inventories are essentially valued at the lower of the cost as well as net realisable worth (Sealinktravelgroup.com.au 2016). Again, the expenses of the firm are also identified net of the amount of the goods and services tax barring certain cases (accaglobal.com 2016). 4: Implications of the applications of prudence for financial reports in future financial year The application of the prudence in financial reports of the company Sea Link includes making provisions for doubtful debts in anticipation of actual bad debts, no provisions for discounts on creditors (Aasb.gov.au 2016). This also includes making provisions for discount on debtors with regard to discount, valuation of the stock-in-hand at the market price or else the cost price, whichever is lesser. In the present case, the company is said to government grant only when there is practical assurance regarding the receipt of the grant and compliance with other attached stipulations (PwC 2016). This practice is in compliance with the principles laid down in the definition, scope and accounting treatment of grant as conditioned under AASB 120 (Aasb.gov.au. 2016). As mentioned in the annual report of the corporation, Government grants are documented in profit or loss on a methodical basis over the time in which the business concern identifies as expends the associated costs for which the p articular grants are proposed to compensate (Sealinktravelgroup.com.au. 2016). This also complies with the accounting principles stated under AASB 120 10A (recognition and measurement). Again, the annual statement of the company Sea Link Travel Group states that Government grants when identified as assets are credited as deferred income in fair value and declared in the comprehensive income over an anticipated economic life of the respective asset by identical amount of annual installments. This also adheres to the principle as mentioned under AASB 120 paragraph 24 (Presentation of Grants Related to Assets) (Aasb.gov.au 2016). Therefore, it can be hereby inferred that there is maintenance of prudence in this case. Again, the prudence in statement of revenue requires adherence to certain principles. As mentioned in the conceptual framework AASB, revenue needs to be earned that stems from different business activities (Accaglobal.com 2016). This revenue also needs to augment economic benefits. In line with the requirement of the accounting standard, the management of the company Sea link Travel Group also identifies revenue to the extent that becomes possible that economic advantages can flow to the business entity that in turn can permit reliable measurement of the revenue (Sealinktravelgroup.com.au 2016). Conclusion The above study helps in understanding the notion of prudence as per the Framework for the Preparation and Presentation of Financial Statements that is the complied framework issued by AASB. This provides a clear overview regarding the importance of maintenance of prudence that can help in avoiding overstatement of the assets as well as income and understatement of the liabilities as well as expenses. Thereafter, the study provides deep insight regarding the justification behind prudence that replicates the fact that accounting principle can help in ensuring that the corporation need not identify an asset at a value that is higher than the amount that is anticipated to be recovered from the sale or application. In addition to this, the present study also elucidates in detail the implementation of the notion of prudence with special reference to the operation of Sea Link Travel Group. References Aasb.gov.au. 2016.Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au [Accessed 26 Sep. 2016]. Accaglobal.com, A. 2016.Global body for professional accountants | Accountancy | ACCA | ACCA Global. [online] Accaglobal.com. Available at: https://www.accaglobal.com [Accessed 26 Sep. 2016]. Ifrs.org. 2016.IFRS - Home. [online] Available at:https://www.ifrs.org[Accessed 26 Sep. 2016]. 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