Corporate Accounting Finance and Decision Making - Case Study Example

Running header: Accounting Accounting Author’s Name Institutional Affiliation Part 1 Distinction between the stewardship role of accounting and the valuation or decision usefulness objectives of financial accounting and their relationship to the IASB conceptual framework Introduction Users of financial accounting information differ with their information needs and demand for information differing as well. There are two major uses of financial information based on the IASB conceptual framework although their use will depend on the circumstances of the particular firm. These are the roles played by financial accounting information. One of the major roles of accounting information is its stewardship role which entails using the accounting information to affect the behavior of the firm as well as their cash flows for instance through the contractual arrangements used by capital and debt providers. Another major role played by accounting information is that of enabling decision makers make informed decisions while also helping in valuing claims to reporting firms. This is its decision usefulness or valuation role. As such, accounting information plays a great role in ensuring that sound financial decisions are made hence ensuring the success of firms while ensuring that those entrusted with managing other people’s resources in a firm are accountable at all times. This is in line with IASB conceptual framework. As such, this essay seeks to distinguish between the stewardship role of accounting and the valuation or decision usefulness role of accounting and explaining how the two roles are related to the IASB conceptual framework. Distinction between the stewardship role and the valuation or decision usefulness objective of accounting information Stewardship refers to the efficient administration of resources and the execution of plans on behalf of other stakeholders. Thus, the stewardship role of accounting entails helping gauge whether a firm’s management is effectively and faithfully discharging their stewardship role in managing the firm. This does not only include custody and safekeeping of the firm’s resources but also efficient and profitable use and protection of the resources as much as possible from economic impact factors prevailing in the economy such as deflation, technological and social change and inflation. IASB views the stewardship role as that of accountability by the firm’s managers to its proprietors (O’Connell, 2007). The stewardship role of accounting arises from the agency relationship existing between proprietors and managers. Although managers are supposed to maximize proprietor’s profits, they have an incentive to misrepresent the firm’s performance to their favor and to the detriment of owners. This calls for prudence in financial reporting and detailed reporting on related party transactions and directors’ remuneration in line with IASB framework. Stewardship information is also interactive as it is able to prompt proprietors to influence management’s actions and hence affect future cash flows. Thus, it can be concluded that the stewardship role of accounting involves determining whether those charged with the responsibility of managing the firm are doing it efficiently and effectively through the use of financial information. On the other hand, valuation or decision usefulness refers to the quality of accounting information that enable users make informed financial decisions. Standard setters such as IASB have in many times termed the overall objective of financial reporting as that of providing information which is useful to the present and potential investors as well as creditors as well as other users that would help them in making rational and informed credit, investment and such other financial related decisions. The decision useful objective thus partly serves the purpose of assessing the amounts, uncertainty and timing of projected cash receipts from the firm. IABS recognize that decision useful accounting information ought to help both the present and prospective stakeholders of the firm such as investors and creditors in assessing the amounts, timing and uncertainty of the firm’s future cash inflows as well as outflows which will in turn help them in making informed financial decisions regarding the firm. However, in order for accounting information to play its decision usefulness or valuation role, it has to have predictive ability (Frc.org.uk, 2014). This is based on the fact that informed decisions cannot be made without the use of implicit or explicit predictions and thus accounting information that is useful for decision making ought to have strong predictive ability. In other words, the best accounting measurements ought to provide accounting data with the most powerful predictive ability. This is in line with the IASB conceptual framework. From the discussion above, it can be argued that decision usefulness and stewardship differ in terms of their meaning and also in terms of their information requirements. In other words, stewardship mainly involves use of historical information in order to gauge the results of managerial performance during a certain period and hence be able to gauge whether they have fulfilled their stewardship role as far as organizational resources are concerned. On the other hand, decision usefulness of accounting information rests in its predictive nature and hence makes use of information on future estimates in making decisions about the future. It should however be noted that despite the differences, stewardship could be seen as part of decision usefulness (Cascino, etal, 2014). This is because gauging managerial stewardship is part of decision making and will help proprietors decide on whether to continue investing in the company or not and whether to replace the current management depending on their ability to play their stewardship role. In this regard therefore, it can be argued that stewardship and decision usefulness are related in that the stewardship role is a part of the main objective of accounting information which is valuation or decision usefulness. How valuation or decision usefulness objective and stewardship role are related to the IASB conceptual framework The stewardship role and valuation or decision usefulness objective of accounting information are all related to the IASB conceptual framework. The IASB conceptual framework gives the basic concepts that guide the preparation as well as presentation of accounting information. In other words, the framework lays down the objectives of financial reporting, the characteristics of useful financial information among other important elements of accounting reporting. As such, the framework acts as a guide to the preparers of financial information on how they have to prepare and present the information if it is to serve its objectives of valuation or decision usefulness and its stewardship role (Whittington, 2008). The IASB in laying down the purpose of financial reporting states that the purpose of financial reporting is to present the various users including the lenders and investors among others with information which they use in making various decisions such as buying and selling decisions, credit decisions and investing decisions among other related decisions (Cascino, etal). IASB also sees the role of financial reporting as that of helping users’ access information about resources of the firm so as to assess the firm’s prospects for future cash flows and also to assess whether the management has been effective in discharging its responsibilities in using the firm’s resources. In so doing, the IASB does appreciate the two objectives of financial reporting which are stewardship and provision of decision useful information which are the qualities that users look for when seeking for accounting information. In addition, the IASB conceptual framework does provide information about the elements or qualitative characteristics that accounting information has to possess if it has to be useful. In my opinion, useful accounting information is the one that will help in decision making (valuation/decision usefulness) and safeguarding organizational resources (stewardship). In other words, the conceptual framework tells us what decision useful accounting information is like. In this regard, IASB states that useful accounting information should be relevant and must faithfully represent what it purports to represent. It also states that such factors as comparability, verifiability, timeliness and understandability will enhance the usefulness of financial information. Thus, the stewardship and decision usefulness objectives are related to the IASB conceptual framework in that the stewardship role and the valuation or decision usefulness objectives tell us the objectives of accounting information in satisfying the needs of users or what informational needs users look for in accounting information. On the other hand, the conceptual framework tell us what we have to do or what preparers must ensure that the accounting information contains if it is to satisfy the needs of users. In other words, users look for accounting information that will help gauge whether management have adequately played their stewardship role and that which will help them make informed economic decisions. On the other hand, the IASB conceptual framework act to guide the preparers in preparing accounting information that serve the above purposes. This is the relationship that exists between the stewardship role and valuation or decision usefulness objective of accounting information and the IASB conceptual framework. Part 2 Qantas airways impairment policy Identification of an asset’s Cash Generating Unit (CGU) involves judgement based on how Management monitors the Qantas Group’s operations and how decisions to acquire and dispose of the Qantas Group’s assets and operations are made. Management has identified the lowest identifiable group of assets that generates largely independent cash inflows being Qantas International, Qantas Domestic, Qantas Freight, Qantas Loyalty and the Jetstar Group CGUs. The value in use is determined by discounting the future cash flows forecast to be generated from the continuing use of the units and is based on the following assumptions: Cash Flows: Cash flows are projected based on the approved Financial Plan. Cash flows to determine a terminal value are extrapolated using a constant growth rate of 2.5 per cent per annum, which does not exceed the long-term average growth rate for the industry. Cash outflows include capital expenditure for the purchase of aircraft and other property, plant and equipment (Qantas Airport, 2015). These do not include capital expenditure that enhances the current performance of assets and related cash flows have been treated consistently. Discount Rate: A pre-tax discount rate of 10 per cent per annum has been used in discounting the projected cash flows of the CGUs, reflecting a market estimate of the weighted average cost of capital of the Qantas Group (2014: 10.5 per cent per annum). The discount rate is based on the risk-free rate for 10 year Australian Government Bonds adjusted for a risk premium to reflect both the increased risk of investing in equities and the risk of the specific CGU. The following CGUs have goodwill and other intangible assets with indefinite useful lives as follows: 2015 2014 Goodwill $m $m Qantas domestic 10 10 Qantas loyalty 13 5 Qantas freight 49 49 Jetstar group 134 131 206 195 Other intangible assets with indefinite useful lives Qantas international 35 35 Jetstar group 25 22 60 57 Origin energy impairment policy Impairment testing The recoverable amount of the Energy Markets goodwill has been determined using a value in use model which includes an appropriate terminal value. The key inputs and assumptions in the calculation of value in use are: Period of cash flow projections: Either 40 years, or the life of each Generation asset, based on the Group’s five-year business plan. The Energy Markets business is considered a long-term business and as such projection of long-term cash flows is appropriate for a more accurate forecast (Origin Energy, 2015). Customer numbers and customer churn: Based on review of actual customer numbers and historical data regarding movements in customer numbers and levels of customer churn. The historical analysis is considered against current and expected market trends and competition for customers. Gross margin and other Operating costs per customer: Based on review of actual gross margins and cost per customer and consideration of current and expected market movements and impacts. Discount rate: Pre-tax discount rate of 9.1 per cent (2014: 12.2 per cent). Intangible 2015 2014 $m $m Goodwill at cost-energy markets 4,815 4,815 Goodwill at cost –contact energy - 506 Software and other intangible assets at cost less impairment loss 1,134 1,354 Less accumulated amortization -468 -472 5,481 6,203 Whether Stewardship role aligns to stewardship or valuation role In both cases, impairment of assets align with both the stewardship and valuation role. In both cases, the companies’ management have come up with a method of measuring the value of their intangible assets. They need to know how the firm’s intangible assets were impaired during the previous period and hence how much they are worth currently. This is important in valuing the firms so as to enable various classes of stakeholders make informed decisions regarding the firm. These could be investment, credit and sale decisions among others. Furthermore, a firm would want to know how much it is worth in the market and if it was to be sold today (Cascino, 2016). Thus, impairment of assets help the firm in establishing or estimating its actual value for the benefit of the stakeholders who make various financial decisions. Apart from the valuation role, impairment of assets aligns to the stewardship role. This is because the management is in charge of the management of the company’s assets be they tangible or intangible. Since impairment of assets helps in determining how much the intangible assets are, then in helps the management in stewardship role. This is because it helps in gauging the actual worth of the firm. In case, impairment is not carried out, the firm would for instance be sold at a lower value if it were to be sold today hence resulting in loss for proprietors owing to the management’s failure to undertake their stewardship role properly. As such, it can be concluded that impairment of assets aligns with both the stewardship and valuation role. References: O’Connell, V2007, Reflections on stewardship reporting, Accounting horizons, vol. 21, no.2, pp. 215-227. Frc.org.uk, 2014, A review of the conceptual framework for financial reporting, Retrieved on 19th September 2016, from; https://frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRC- response-to-IASBs-A-Review-of-the-Conceptual.pdf Cascino, S, Clatworthy, M, Osma, B, Gassen, J, Imam, S&, Jeanjean, T2014, Who uses financial reports and for what purpose? Evidence from capital providers. Accounting in Europe, vol. 11, no. 2, pp.185-209. Whittington, G2008, Harmonization or discord? The critical role of the IASB conceptual review, Journal of Accounting and Public Policy, vol. 27, pp. 495-502. Cascino, S, Clatworthy, M, Osma, B, Gassen, J, Imam, S&, Jeanjean, T2016, Professional investors and the decision usefulness of financial reporting, ICAS & EFRAG Origin Energy, 2015, Annual Report Qantas Airport, 2015, Annual Report. Read More