Qantas - Relevance of Accounting Theories and the Conceptual framework in the Preparation of Financial Statements PDF

Preview

Summary

Relevance of Accounting Theories and the Conceptual framework in the Preparation of Financial Statements...

Description

12/21/2018

Relevance of Accounting Theories and the Conceptual framework in the Preparation of Financial Statements Qantas Airways Ltd

Executive Summary Professional practitioners such as Accountants have the power to influence what is normal, stigmatised and even override social taboos. The conceptual framework provides a guideline to assist policy makers develop standards in aspects where existing standards are ambiguous (Monson, 2001). This report elucidates various accounting theories associated with the conceptual framework and compares this to the operations for Qantas Airways Limited. Two situations which have received significant industry and media coverage, this being around liability recognition and frequent flyer points. These cases have been examined and compared against the benchmarks set by the conceptual framework and relevant accounting theories. Often, discrepancies arise when accountants are provided with the choice, wherein the reports prepared may be inconsistent with the needs of stakeholders (Rankin et al., 2018). Therefore, the purpose of this report is to assess the adherence of various rules and legislation, the General Purpose Financial Statements presented by Qantas Airways, explore the effectiveness of Qantas in meeting its obligations set by the framework, and identify any gaps which may exist when preparing reports for users.

Introduction Qantas is Australia’s flag carrier airline which operates globally. The airline is largest in terms of fleet size (131), international flights, and 85 international destinations. The domestic Australian market owns roughly 65% of shares in Qantas and carries 14.9% of total passengers travelling in and out of Australia (Qantas Annual Report, 2016). Being a national carrier, it is particularly important for Qantas to justify its financial and social obligation, as it can attract damaging media attention. For communities, both financial and nonfinancial reports become a part in evaluating their trust in businesses and this is becoming increasingly important. In addition to this, industry benchmarks the importance of non-financial reports such as environmental, social and corporate governance. If these disclosures do not exist, it may be indicative of the organisation’s corporate accountability and responsibility (the lack thereof) (Savitz and Weber, 2013). Thus, public reporting through their annual reports and social media becomes an essential tool to demonstrate that the company conforms with the expectations of the society

Conceptual Framework The conceptual framework is the backbone of general purpose financial reporting; a tool which guides development of standards in aspects of inconsistencies. This normative theory is prescriptive in nature; to help standard setters in creating consistent and effective policies in an event policies conflict. The qualitative characteristic which determines useful financial information is dependent on Relevance and Faithful Representation (Monson, 2001). Relevance ensures that the financial information which can influence user’s decision making is made known in all aspects of materiality. On the other hand, the purpose of Faithful Representation is to establish confidence and trust in financial information (Rankin, 2018).

Representation of balance sheet items In the case of Qantas, the relevance of the conceptual framework is evident in the annual reports and audit declarations; wherein the financial statements are objective, and qualitative characteristics sufficiently inform users of the company’s position. As a part of its listing with the ASX, its consolidated financial reports are its general purpose financial statement which conform with the Australian Accounting Standards Board (AASB) and the Corporation Act of 2001 (as seen in Qantas’s annual reports) On the balance sheet, Qantas’s negative working capital position (equivalent to a Current Ratio of less than 1:1) is opposite to what most accounting textbooks describe as being an optimum rule of thumb,

which is about 2:1 (Smith and Birney, 2002). Does this mean that the company is insolvent and cannot fulfil its short-term liabilities? Qantas leverages the capital owed to suppliers to finance their operating costs. The figures for cash reserves are low as Qantas use the long-term capital raised when their customers prepay their flights, resulting in a reduced need for borrowing. On the other hand, banks are willing to prepay Qantas to promote Frequent Flyer deals on customer credit cards. This means that Qantas sufficiently has the capacity to pass the acid test to pay debts, by tapping into its unique sources of funding, i.e. upfront payments for Frequent Flyer program by banks (Jacobs, 2018). But what happens when $1.18 billion worth of liabilities unrecorded on the balance sheet? Social contract is a theory which explains how businesses interact with the society. To remain legitimate and competitive in the future, companies often have implicit (financial) and explicit (employee health and safety/environment etc) expectations set by society to adhere to, often referred to as the triple bottom line (Savitz and Weber, 2013). The society, therefore, has significant power to revoke the social contract (Thomson, 2014). Currently, lessees are required to classify lease liabilities either as operating or finance leases. In practice, companies have the option to either recognise all or no liabilities. IFRS 16 is a new lease standard which was recently introduced which will come into effect on the 1st of January 2019 (King, 2016). For companies which lease out significant functions of their property plant or equipment as a lease, particularly those who disclose these as an “off-balance sheet” item. It is expected that the impact of this standard would be substantial in areas of financial reporting, asset financing, IT, and controls (PWC, 2018)

Qantas is now required to reclassify off balance sheet leases and recognise these as a balance sheet liability. Depreciation will replace lease and interest expenses, and operating leases will be recognised in a manner which accelerates lease expenses. Considering the principle of relevance and faithful representation outlined by the conceptual framework, the new standard virtually affects all commonly used financial ratios which users use to measure performance, such as current ratio, gearing, asset turnover, EBITDA and operating cash flows (PWC, 2018). These changes would affect credit ratings wherein financial institutions would need to reconsider the increase in risk-weighted assets, and possibly trigger behavioural changes among stakeholders. If this $1.18 billion worth liability have substantive impacts on commonly used ratios by stakeholders, have the reports in the past been sufficiently represented faithfully, in a simplistic manner to cater to those without accounting knowledge?

Measurement In an accounting context, measurement is the method by which figures on financial statements are determined (Schalock and Verdugo, 2012). The conceptual framework prescribes that financial reports should be useful to various stakeholders who provide resources to the entity. The way in which companies measure items have a great impact on the characteristic of financial information produced. However, there are several limitations to measurement, particularly in respect to intangibles, given the number of ways of quantification. One area where Qantas has received criticism is around Frequent Flyer Points. The frequent flyer program is used as a marketing tool to entice flyers into purchasing their flights via Qantas. These points are sold to third parties such as credit card businesses, and hotels for promotion. For the financial year ending 2018, the unredeemed Frequent Flyer revenue received in advance accounted to $2.3 billion. This material liability estimate is inherently complex, and the fair value of these points is subject to judgement (Qantas annual report, 2018). Currently, not only does the airline benefit from its negative working capital position, Qantas is able to tap into this funding by banks for their frequent flyer points.

Qantas was recently in the news wherein passengers’ points vanished from their accounts (Schneider, 2018). The uproar was due to insufficient communication. This act was deemed callous, and

insensitive approach to generate revenue for Qantas (news.com.au, 2018). The customer loyalty gained from the frequent flyer program contributes significant profits to Qantas’s bottom line. While legitimacy theory considers the responsibility of organisation on the society, stakeholder theory relates to the ethical and moral treatment toward individual stakeholders, rather than society. Organisations are required focus on managing the optimal balance among stakeholders and maximising value, rather than merely concentrating on maximising profit for owners (as described in agency theory). If accounting information misleads users to make inappropriate decisions, the information cannot be deemed useful and provides negative insight on how management perform or manage their resources (Rankin et al., 2018). The International Accounting Standards Body (IASB) is receiving increasing pressure to reinstate the principle of Prudence in the Conceptual Framework. Prudence guides accountants to exercise a degree of caution for the purposes of realising liabilities and expenses (Barker, 2015). Yet, this theory also requires accountants to increasingly become aware, and adopt strategies as well as approximations wherein income and assets are not overstated, and liabilities or expenses are not understated Barth (2013).

Conclusion Considering the Corporations Act 2001, Listing Rules set by the ASX and the Auditors report, it is fair that Qantas fundamentally conforms with the requirements set out by these regulations and disclosure policies expected from the company. Qantas takes proactive measures through their constant disclosure strategy to boost investors’ confidence regarding the integrity of their reports. However, while the conceptual framework models all accounting standards in existence, in reality the adherence to the conceptual framework may not always be possible (Rankin et al., 2018). The effectiveness of Qantas in adhering to the conceptual framework in both financial and non-financial aspects were analysed, to gauge their relevance and faithful representation as a part of their legitimacy and social contract with users.

References Barker, R. (2015). Conservatism, prudence and the IASB's conceptual framework. Accounting and Business Research, 45(4), pp.514-538. Barker, R. and Teixeira, A. (2018). Gaps in the IFRS Conceptual Framework. Accounting in Europe, 15(2), pp.153-166. Jacobs, S. (2018). These figures reveal a big secret behind the success of Qantas as it heads for a record profit. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/qantas-profit-guidance-other-peoples-money-2018-5 [Accessed 21 Dec. 2018]. King, A. (2016). Lease accounting standards will shift debt back to companies. [online] Australian Financial Review. Available at: https://www.afr.com/business/accounting/new-accounting-standardswill-shift-debt-back-to-companies-20160113-gm4xqm [Accessed 11 Dec. 2018]. Monson, D. (2001). The Conceptual Framework and Accounting for Leases. Accounting Horizons, 15(3), pp.275-287. PWC (2016). IFRS 16: The lease standards are changing. Are you ready?. [ebook] Available at: https://www.pwc.com.au/assurance/ifrs/assets/ifrs16lease-brochure.pdf [Accessed 11 Dec. 2018]. Qantas (2016). Qantas Annual report. [online] Available at: https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf [Accessed 15 Dec. 2018]. Qantas (2018). Qantas Annual report. [online] Available at: https://www.qantas.com.au/infodetail/about/corporateGovernance/2018AnnualReport.pdf [Accessed 15 Dec. 2018]. Rankin, M., Ferlauto, K., McGowan, S. and Stanton, P. (2018). Contemporary issues in accounting. Savitz, A. and Weber, K. (2013). The triple bottom line. San Francisco, Calif.: Jossey-Bass. Schalock, R. and Verdugo, M. (2012). A Conceptual and Measurement Framework to Guide Policy Development and Systems Change. Journal of Policy and Practice in Intellectual Disabilities, 9(1), pp.63-72. Schneider, K. (2018). Qantas passengers furious after frequent flyer points vanish. [online] NewsComAu. Available at: https://www.news.com.au/travel/travel-advice/flights/qantas-passengersfurious-after-frequent-flyer-points-vanish/news-story/91d54ce2573fe067f64e54f62d1cfc29 [Accessed 6 Dec. 2018].

Smith, R. and Birney, R. (2002). Financial accounting basics. New York: McGraw-Hill. Thomson, I. (2014). Responsible social accounting communities, symbolic activism and the reframing of social accounting. A commentary on new accounts: Towards a reframing of social accounting. Accounting Forum, 38(4), pp.274-277. Wenger, M., Thomas, M. and Babb, J. (2013). Financial reporting comparability: toward an XBRL ontology of the FASB/IFRS conceptual framework. International Journal of Electronic Finance, 7(1), p.15....