Centro Case Study
In terms of Conceptual Framework, the first issue, the incorrect classification, unsatisfied one of the qualitative characteristics of financial statement – reliability. Framework paragraph 32 states that ‘Information might unreliable in nature or representation that its recognition may be potentially misleading.
The CERT. recognized short-term liability as non-current liability, which might enable balance sheet of 2007 look better, but this classification provided unreliable and biased information to shareholders and creditors and thus affected their decision-making. He second problem, the failure of disclosure was inconsistent with relevance harmonistic. Because, according to Framework paragraph 30, omission or misstatement of significant information could affect the economic decision of users of financial statement. The failure to disclose US $1. 75 million would decrease liability of 2007 and make statement of financial position illusion.
Thereby, shareholders and creditors might overestimate the financial position of the company.
Part B According to Corporation Act 2001 , the directors have responsibility to ensure that the disclosure of financial report should be accurate, completed and comply with elevate accounting standards. Section 180(1) requires the directors to meet a fundamental standard and perform their action with a degree of care and diligence as a reasonable person would do it hey were in the same situation . This standard Nas further presented in Daniels v Anderson (1995) 37 ANSWER 438, stating that all the directors should have a minimum level knowledge about their business.
That means they are required to be familiar with business operations and financial status of their company so that they could monitor the management and supervise some potential conducts.
To achieve this requirement, all directors in Centre case must carefully review the financial statements. They should Judge whether the financial statements are complied with their knowledge of the company’s financial status and the relevant accounting standards before giving the declaration required by sass(4).
Although true and fair view does not have actual definition in legislation, it is an overriding concept in accounting (ASSAI, 2007). In practice, true means that accounting information should reflect the reality of economic transactions, fair means completely ND fairly reflecting the financial performance and avoiding any misstatement in financial statements. In this respect, it requires that the financial statements should be made in accordance with the accounting standards and accountants should act on the basis of generally accepted accounting principle.
In Centre case, although the presentation of the interest-bearing liability in Center’s financial statement reflects the true transaction, the incorrect classification of the liability is inconsistent with the accounting standards ISOBAR , thus this statement goes against the true and fair ‘IEEE.
Furthermore, another violation of true and fair view is the company failed to disclose important financial information in the statements. The substance of accounting standards is to reflect real economic activities during recognition measurement and disclosure thereby embodies true and fair view under ASSAI (2007).
Therefore, in the general case, it is possible for a company to present their financial position and performance in a true and fair view if the company could make their financial statements comply with the accounting standards. In particular case, if insisting with the accounting standards could not result in a true and fair view, the proper solution is to disclose the information in the notes. If they do so, the company probably presents their financial status in a true and fair view.
Part C As analyzed above, in this case, Centre group has breached ISOBAR and SAAB’S 10 because of incorrect classification and failure to disclose guarantees.
Besides, our group concludes that only when complying with accounting standards and principles, it is possible to have a true and fair view. Recently, the concept of creative accounting rises. In contrast with a true and fair view, the information provided in financial statements through creative accounting might be biased and unreliable, as the purpose of creative accounting is to make a choice of accounting standards which satisfies the requirements expected by the financial statement preparers (Henderson et al, 2010).
However, ‘creative’ here refers to extending the accounting standards instead of breaching them; therefore, in fact, it still complies with the accounting standards (Archer, 1996). As a result, we consider it is reasonable to say ‘creative accounting is complying with rather than deviating from the accounting standards’ (Financial Review, 2012).
There has been argued that whether accounting Mould mislead external users or not when accounting standards are complied with. In order to decide which opinion is more reasonable, the arguments are as below. Many usually applies creative accounting by choosing a suitable accounting policy :e. G. The choice of depreciation method) or changing the time of recognition benders et al, 2010), and these practices are actually complied with accounting tankards, because it is Just a spread of standards due to the alternatives of the standards.
But the reason to do this is to mislead users, as it provides unreliable information, making its financial report look better with more profit or less debt.
For example, in order to get loan from the bank, the company uses lease arrangement, also known as ‘off balance sheet finance’, to meet the limit of gearing ratio by the bank. Such ‘off balance sheet finance’ is not prohibited in the accounting standards, that is, it does not violate the standards, but it misleads the bank into approving the non, although the company Just attempts to protect itself from liquidation not deliberately intends to mislead (Archer, 1996).