HA3011 Accounting Concepts in Context of Orica Limited Assessment Answer
Accounting Concepts in context of orica limited
With the increasing business implication worldwide level, company record and maintain its daily transactions in the books of account by following the set accounting format and rules. These recording and maintaining of the record are called accounting or in layman's term bookkeeping. To present, recognize, measure and disclose the details present in the company's financial statement, companies require a set of criteria termed as Accounting Framework (Weygandt, Kimmel, KIESO & Elias, 2010). These frameworks have the same set of accounting concepts, standards, and qualitative characteristics. The framework used by the company to construct their financials must be the one which is recognized. Most companies prefer to use the frameworks which are recognized by GAAP and IFRS. These two accounting systems are acceptable worldwide due to their broad-based design and can be applied through almost all businesses. If the company's financial system is not according to these frameworks, it would be very difficult for the company to communicate its financials to the auditors, shareholders, investors or outside world. In this report, these financial accounting frameworks would be discussed in detail in the context of company name Orica Limited (Orica Limited, 2019).
Orica Limited is one of the largest organization of Australia and deals into commercial explosives. It provides the specialist ground support services in mining and tunneling. It also provides innovative blasting system to the mining, oil, and gas construction markets and quarrying. For the extraction of gold, this company provides sodium cyanide. The company was founded in 1874 and currently listed in Australian Securities Exchange. Orica is Functional in all over the world including Australia, Asia, Pacific, Europe, Middle East, Africa, Latin America, North America (Parker, 2013). Orica has announced revenue of $5,374 million and EBIT of $618 million for the fiscal year 2018. The dividend announced by the company for 2018 was 51.5 Crore. This report highlights the accounting concepts, frameworks being used by the Orica in preparing their financial statement and annual reports (Orica Limited, 2019).
Descriptions of Accounting Concepts
Both theoretical and practical accounting needs accounting principles. These accounting principles are based on few assumptions known as the accounting concepts. The reasons for using these accounting concepts are to provide the accounts with uniformity and consistency. These accounting concepts form the foundations on which accounting records are prepared and maintained (Cheung, Evans & Wright, 2010). By following these accounting concepts an organization made sure that the annual report and financial statement presented by it to the board and other users are informative and reliable. It would help them in making decisions and provide the information that where company is heading in the near future (Orica Limited, 2019). Existing and potential creditors, investors and other users use this information to make credit and investment-related decisions. It would help them in understanding the time, amount delay or uncertainty in the cash inflows in an organization. The Financial statements also help users in identifying the main economic resource of an organization, organization's claim on that resource and how this resource would affect by the transactions and events happening in company. Accounting concepts also help any firm to solve the accounting disputes by providing the guidelines. Some of the basic accounting concepts being used in Orica are listed below and explained in detail.
1) Business Entity Concept:
This concept explains and based on the fact that business and owner are two different entities and should not be considered as one. One is separate from the other one. It helps an accountant in establishing which ones are business transactions and which ones are personal ones. All business entities are following this concept and is used by Orica as such. For example, if the owner invests some money in the business, it would be treated as liability of the company and would be charged under the same in the book of accounts. Similarly, if an owner takes some money from the business it would not be counted as an expense on the part of company. This concept helps in determining the profits and loss of company irrespective of its owner and restraint from recording the owner's personal transactions (Orica Limited, 2019).
2) Money Measurement Concept:
This concept states that all the transactions made by the company should be recorded in terms of money only. The money used should be that of country’s prevalent currency. Such as all the transactions made in Orica in Australia are recorded in Australian dollar. Therefore, transactions like purchase of raw materials at A$ 5000 would be recorded in the financials of the company whereas the personality attributes employees bring in the company like honesty, hard work are not recorded in financials. These attributes do contribute toward the profit and loss but can not monetize. Also, the transactions are recorded in monetary term and not their physical units like if 10-acre land is there, its monetary value would be recorded in accounts and not the quantity. It helps an accountant to decide what to charge and not charge in financials. It makes accounts easy to understand. It further promotes the comparison of finance between 2 companies or within the same company at two different periods (Orica Limited, 2019).
3) Going Concern Concept:
This concept believes that the business entity or company will go on for indefinite period of time. It means that business will continue to live on and cannot be destroyed, shut or dissolved in the near future (Musvoto & Gouws, 2011). This concept is important information of balance sheet and financial statements. Depreciation is charged on fixed assets. It provides the confidence to investors and users that they will continue to get the value for their money. According to this concept, when an asset is purchased, its value is distributed in coming years and only a part of the expense is charged into that year's expense (Hahn, 2011). Going concern focuses on the fact that the business will fulfill all its responsibilities (Orica Limited, 2019).
4) Accounting Period Concept:
This concept helps in dividing the business life into different intervals or different part. Each business chooses a business cycle to function which comprises specific time period. The financial statements and balance sheets are made for this specified time period. In the case of Orica the accounting period is of one year that is the calendar year. The accounting year is from January to December. So the balance sheets and the financial statement need to be prepared every year in this specified time. The accounting period is very important concept for all parties related to business because it communicates the profit and loss, earnings and revenues, tax computation of company and hence communicates the position of company for that year. This concept helps the business and its users to analyze and compare the business performance for two given financial years and also with that of other businesses.
5) Accounting Cost Concept:
It specifies that all the material and assets purchased in the company should be recorded at their purchased price including their transportation cost, acquisition cost and installation cost. The cost recorded must not be the market price of the asset. The price paid for acquiring any land or machinery should be charged to accounts and not its current market price. If a piece of machinery is purchased, the amount charges to accounts would be total of cost price plus transportation price plus installation price. This cost is also known as historic cost and as such used in Orica Limited to make their balance sheet and annual reports. In Orica this concept helps showing acquired price and then verifying it with supporting documents. It helps in calculating depreciation of assets as well (Orica Limited, 2019).
6) Dual Aspect Concept:
This concept forms the foundation of the accounting system and is followed by almost each and every organization in world including Orica. Without this concept, no annual report, balance sheet or financial statement could be made. The basis of this concept is that each transaction has dual effect on the book of accounts. It affects both of the opposite sides of accounts respectively. For example, if any good is purchased by company, it would be charged under expenses as well as goods received. So, the assets always equal to claim of owners and outsiders that is the owner's capital and outsider's liability. This rule is the basic principle in bookkeeping. In Orica, every transaction has an equal effect on asset and liability and hence is recorded on both sides of the balance sheet. It also helps in the detection of an error while preparing the accounts (Orica Limited, 2019).
7) Realization Concept:
This concept specifies that that revenue generated by any transaction would only be recorded when it is realized. That is revenue would be entered in the account books only when the company has legal rights to receive money. When cash is received or the rights of goods have been transferred, the company would be entitled to realize the revenue. It is not realized only by generating the order. Orica is following this concept and realize there revenue once goods or services are delivered (Orica Limited, 2019).
8) Accrual Concept:
This concept used in Orica states that expenses and revenues are recorded in the book of accounts in the accounting period to which it relates. That is irrespective of the time of cash receipt or cash payment, revenues will be recognized when realized and When cash become due and payable, they would be recognized in expenses (Christensen & Parker, 2010). Businesses use this concept to determine actual earning and actual expenses and thus calculates the net profit of the organization.
9) Matching Concept:
This concept states that there should be equal entries for each and every transaction in revenue and expense. That is whenever revenue is realized, the expense incurred to get that revenue should be recognized as well. Both of these records should be in same accounting period. So basically, for each entry of revenue, an equal expense entry should be charged. This concept helps in calculation of profit and loss of an organization. It applies to all the businesses following international business standards and concepts. Orica also follows the same concept in all its offices around the globe (Orica Limited, 2019).
Understanding of Financial Reporting Issues
With the rise of different accounting standard and so much complexities within the business, Orica along with other businesses are facing some financial reporting issues. Firstly, to make their organization's financial more efficient and transparent, there is immense pressure on accountants to have high-quality reporting and analysis. The end users need transparency, insights access to information which helps them in better budgeting, FP&A process and future forecasts. This becomes an issue when people with no background of finance and no context get this information, misunderstand it and its implications and start questioning. This leads to the spending of time on explanation than actually using this information for something better. The solution Orica has found for this issue is to find a more efficient technology which can organize and run reporting automatically. Secondly, introduction of new regulations and compliances. It seems that as soon as team understands and adjusts with ne laws, some new regulations are announced. As per Orica one can only embrace it. Thirdly complex technologies like ERP. They cannot give reporting solutions you require. They are also costly and keeps on updating. So the financial team has to use somewhat outdated technology. The solution Orica has come up with for this is to move ERP to the Cloud-based software so that users can access data and finding from one place thus creating transparency and efficiency (Carson, Fargher, Geiger, Lennox, Raghunandan & Willekens, 2012). Fourth, so many technologies to work with. It has found that Orica has at least 16 reporting systems. That means so much data to manage, align, check, organize for the findings. The information goes through multiple systems thus creating mistakes in between. Use of integrated data system and removal of some of the reporting system was the solution Orica came up with (Kaplan, and Atkinson, 2015).
Conceptual Framework and their influence
Conceptual Framework as set by IASB AND IFRS helps in creating accounting policies. Conceptual Framework helps users to manage and understand these accounting policies and then apply it to their financial statements and records (Kieso, Weygandt, and Warfield, 2016).
In Australia, AASB is responsible for setting up of these conceptual frameworks. These frameworks prescribe that what should be the function and limits of the accounting system and financial statements. It provides the basic framework for the setting of accounting standards and resolving the disputes regarding accounting and it prevents the repetition of accounting principles. Conceptual frameworks play a vital role as it helps in the understanding of accounting information. It provides harmony as it suggests most appropriate accounting treatment allowed by accounting standards.
The conceptual framework makes use of certain methods to measure assets, liabilities, income, and expenses. These methods cost current method, fair value method, present value method, historic cost method (Georgiou & Jack, 2011). Most of the companies along with Orica uses Historic cost method.
Historic cost method uses the cost of purchase at the day of acquisition. The original cost of the item is recorded in financial even if the market price has been increased due to inflation (Effiong, Udoayang & Asuquo, 2011). It is used in Orica because it is easy to use and manage because no requirement of market price check. Secondly it is verifiable, reliable and easy to understand. Comparison of original and current cost can be ascertained.
Australian Accounting Regulatory Framework
Australian Accounting Standard Board is the main board which regulates and maintains financial reporting standards in Australian companies, whether they are a public entity or private entity. It is a government body which facilitates and help in developing global standards. It makes sure of Australian participation in the World's accounting standard (Nobes, and Stadler, 2015).
From the study of this report, it has been found that there are various accounting concepts and standards which are in play in the accounting world. All of the organizations in their way use these standards to present their financials to the world. To follow these standards and concept is utmost for the finance department of the organization as it makes the basis for all the creditors, investors and shareholders to get trusted, transparent and reliable information. We have found in the report that Orica as a public entity is to follow all the accounting systems laid by various international boards. Its financials are up to date and are understandable by all the users in the correct context. The crux of this report is that the company strengthen its accounting and recording framework by complying with the accounting standards and law.