Critical Analysis Of A2 Milk Company’s Compliance With General Purpose Financial Reporting Standards

Compliance with General Purpose Financial Reporting Objectives

In the twenty-first century, companies are facing different kinds of complex issues in their different accounting and financial operations. This level of complexities can be there in the presence of complex business operations. Thus, in order to deal with these complex financial and accounting issues, business organizations must comply with the principles and standards of Conceptual Framework for Financial Reporting. It needs to be mentioned that International Accounting Standard Board (IASB) introduced conceptual framework in the year 1989 and the main aim of the introduction of conceptual framework is to bring accuracy and efficiency in the process of financial reporting of the companies (aasb.gov.au 2018). The main aim of this report is to analyze and evaluate the fact that whether A2 Milk Company has complied with the required standards, principles, objectives and characteristics of General Purpose Financial Reporting. It needs to be mentioned that A2 Milk Company is listed among the top 100 companies of Australian Securities Exchange (ASX) in the name of ‘A2M’ (thea2milkcompany.com 2018).

As per the latest annual report of A2 Milk Company, they prepare the financial statements as per the standards of Generally Accepted Accounting Practice in New Zealand by comply with the principles of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). A2 Milk Company. In addition, A2 Milk Company also complies with the standards of IFRS and International Accounting Standards Board (IASB) (aasb.gov.au 2018).

There are three major objectives of General Purpose Financial Reporting. The extent of compliance with these objectives by A2 Milk Company is discussed below:

1^st Objective: It is the obligation of the companies to provide the users with financial information related with the financial position of the companies that include information of various economic resources. A2 Milk Company provides their users with all the necessary information of their economic resource with the help of the statements of financial position (ey.com 2018).

2^nd Objective: As per the second objective, companies are required to provide the users with the information related with their financial performance. It needs to be mentioned that A2 Company provides the users with the statements of comprehensive income, statement of financial position, change of equity and others that consist of performance related financial information (ey.com 2018).

3^rd Objective: As per the third objective, the companies are needed to provide the users with all the information related to their cash flow that plays an integral part in various decision-making process of the users. In case of A2 Milk Company, it can be observed that the company publishes all information related to cash flow through the statements of cash flows (ey.com 2018).

Target Audience

Thus, based on the above discussion, it can be observed that A2 Milk Company has satisfied all three objectives of General Purpose Financial Reporting.

The main users of the general purpose financial reports are the investors, shareholders, customers, employees, tax authorities, government, creditors, lenders and others. These users need financial information of the companies for various decision-making purposes. From the above discussion, it can be observed that A2 Milk Company publishes different financial statements like income statements, statements of financial position, cash flow statements, change in equity statement and others in the annual reports. The company publishes these statements on yearly basis and they publishes them on quarterly basis. These financial statements are easily accusable as they can be obtained from the official website of the company. For this reason, the users of financial reports can easily gather and use this information for their needs (Wang 2014).          

The major elements of financial statements of the companies are assets, liabilities, equity, revenue and expenses. All these elements need to fulfill three major criteria of conceptual framework. They are:

• They need to meet the require definition.
• Their economic benefits need to be flown to or from the companies.
• The values of these elements must be measurable.

The extent of compliance with the recognition criteria of conceptual framework by A2 Milk Company is discussed below:

Asset: As per the latest annual report of A2 Milk Company, the company recognizes property, plant and equipment (PPE) at cost value after deducting depreciation and impairment costs. For depreciation on these assets, A2 Milk Company has adopted the strategy of straight-line method. Thus, the company follows the standard of AASB 116 Property, Plant and Equipment under section 334 of the Corporations Act 2001 (aasb.gov.au 2018).

In case of intangible assets, the company recognizes them when the company becomes sure that economic benefit of the company will be flown to the company. In this process, the company follows the standard of AASB 138 Intangible Assets and IAS 38 Intangible Assets (aasb.gov.au 2018).

Trade and other receivables are recognized on fair value basis and follow the principles of AASB 9 Financial Instruments. In addition, the company recognizes their inventory at the lower of cost and net realizable value; and follows the standards of AASB 102 Inventories (aasb.gov.au 2018).

Liability: In case of trade and other payables, A2 Milk Company recognizes them at faire value and carries them based on the amortized costs. In this case, the company follows the principles of AASB 9 Financial Instruments (aasb.gov.au 2018).

Equity: In this context, it needs to be mentioned that the company does not have authorized capital or par value in respect of issued capital. However, the company follows the principles of AASB 1004 Contributions for the recognition of equity (aasb.gov.au 2018).

Satisfaction of Recognition Criteria

For the recognition of different kinds of reserves, the company follows fair value process and follows the standards of AASB 1004 Contributions (aasb.gov.au 2018).

Revenue: A2 Milk Company recognizes their revenues on fair value basis on the consideration received or receivable. For this aspect, the company follows the principle of AASB 118 Revenue (aasb.gov.au 2018).

Expenses: A2 Milk Company recognizes their business expenses at the time of their occurrence. In this case, the company follows the standards of AASB (aasb.gov.au 2018).

In the presence of fundamental qualitative characteristics, financial information become most useful for the existing and potential uses for the purpose of decision-making. The extent of compliance with the fundamental qualitative characteristics of conceptual framework by A2 Milk Company is discussed below:

Relevance: Financial information is required to be relevant in order to be useful to create a difference in the decision making process of the users. For this reason, this information must have predictive and confirmatory value. In case of A2 Milk Company, it can be observed that the company provides financial information through their financial statements. Users can use this information to get the future outcome; at the same time, they can get feedback related to previous evaluation with the help of this information (Barth 2013).

Faithful Representation: Financial statements represent economic conditions of the companies in words and numbers. In order to be useful, financial information must be presented faithfully. Thus, it needs to be free from error, complete and neutral. In the audit report, EY has mentioned that A2 Milk Company has prepared their financial statements in accordance with the required standards and they are free from errors and material misstatements (Edmonds et al. 2016).  

Enhancing qualitative characteristics of financial information make them more useful. The extent of compliance with the enhancing qualitative characteristics of conceptual framework by A2 Milk Company is discussed below:

Comparability: This characteristic enables the users in identifying and understanding similarities and differences among different financial items. Faithful representation helps in retaining the comparability aspect of financial information. It needs to be mentioned that A2 Milk Company faithfully represents all financial information that leads to the comparability of financial information (Wang 2014).   

Verifiability: Verifiability assures the faithful representation of financial information; and it can be direct and indirect. The management of A2 Milk Company provides the users with necessary justification and clarification in the form of financial notes. It enables the users in verifying the financial information of the companies (Wang 2014).    

Timeliness: This characteristic makes financial information available to the users on timely basis. It can be seen that A2 Milk Company publishes their financial statements on a particular time of the year. Thus, users can access the information when necessary (Barth 2013).  

Understandability: This characteristic helps in classifying, characterizing and presenting financial information clearly and concisely. From the financial statements of A2 Milk Company, it can be observed that the company presents the financial information in simple format in order to make it user-friend. Clear explanation and presentation of financial information can also be seen (Wang 2014).   

Conclusion

From the above discussion, it can be seen that A2 Milk Company complies with the standards and principles of IASB and IFRS conceptual framework. It can also be seen that A2 Milk Company complies with the objectives of general purpose financial reporting. In addition, the company has fulfilled the recognition criteria of IFRS and AASB. Lastly, A2 Milk Company has also satisfied the fundamental and enhancing qualitative characteristics of financial information.

References

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Aasb.gov.au. (2018). Contributions. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB1004_12-07_COMPjan15_07-15.pdf [Accessed 5 Apr. 2018].

Aasb.gov.au. (2018). Financial Instruments. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-14.pdf [Accessed 5 Apr. 2018].

Aasb.gov.au. (2018). Intangible Assets. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 5 Apr. 2018].

Aasb.gov.au. (2018). Inventories. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf [Accessed 5 Apr. 2018].

Aasb.gov.au. (2018). Property, Plant and Equipment. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf [Accessed 5 Apr. 2018].

Aasb.gov.au. (2018). Revenue. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPmay09_01-10.pdf [Accessed 5 Apr. 2018].

Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), pp.331-352.

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y. and Olds, P.R., 2016. Fundamental managerial accounting concepts. McGraw-Hill Education.

Ey.com. (2018). Conceptual Framework: Objectives. [online] Available at: https://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$File/Supplement_86_GL_IFRS.pdf [Accessed 5 Apr. 2018].

The a2 Milk Company. (2018). About us – The a2 Milk Company. [online] Available at: https://thea2milkcompany.com/about-us/ [Accessed 5 Apr. 2018].

Thea2milkcompany.com. (2018). Annual Report 2016-17. [online] Available at: https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-2016-2017-Annual-Report-spreads.pdf [Accessed 5 Apr. 2018].

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.