It is known that financial reporting is prepared for external users, such as shareholders, government, existing and potential investors. Different type of users has different definition and recognition for the elements of statement. As a result, IASB issued a conceptual framework for consistency in those financial reports. The following paragraphs go into three parts: (a) How Conceptual Framework of International Accounting Standards Board (IASB) promotes a high quality on financial report. (b) Analysis 2017 MTR’s annual report in four features: relevant, comparability, faithful representation, and understandability. (c) Discuss the most important in qualitative characteristics of financial information.
International Accounting Standards Board is an independent body. The latest version of conceptual framework published in 2018. The Conceptual Framework of IASB (2010) contains a series of fundamental principles and definitions on the basis on financial accounting. It gives some guidance on how these principles used in their reporting. The main purpose is improving the transparency of the corporate reporting by providing useful financial information regarding to the reporting entity to meet the needs of most of users for economic decision-making.
According to The FRC (2017), a high-quality financial report has nine features, for example, clarity, true and fair, consistency, and disclosure of risk strategies. Melville (2014) pointed out the financial report should possess the basis features which are relevance and faithful representation. Comparability, verifiability, timeliness and understandability can improve the quality of the financial report.
The conceptual framework of IASB has identified the most important definitions in the financial statement – Asset and Liabilities. A high-quality financial report should recognize and disclose the items in the report if it meets the criteria. Sharma ; Dharni (2016) pointed out IASB leads firms to include those intangible assets for analysis of the information more accurately.
Technology such as networking, has defined as intangible assets in compliance with IAS38 of the framework. For example, Facebook, networking is the most importing asset since it can generate future economic benefits: Facebook though their programmer for generating advertising profits. Moreover, Facebook have power to control future economic benefit arises from the resource, such as patent can legally protect the benefits. However, employees are not recognized as intangible asset since the staff members may resign their job without company control. Hussein ; Seow (2002) highlighted intangible assets are the indictor for external users to evaluate the market price nowadays, especially for those new economy companies.
For reliable cost measurement on intangible asset, it is difficult to quantify the amount on intangible asset so that the accounting requirements has more restrictive than tangible assets. It has three measurements, which are purchase price, market price or measured by experts. For internal generated asset, such as goodwill, Melville (2014) claimed that goodwill cannot be measured in a reliable way and the value is fluctuated. It typically refers to the knowledgeable employees, products and services quality, reputation etc. Elliott ; Elliott (2017) stated that if internal generated goodwill can be included in the financial position statement, it may be reduced the gearing ratio that misleading investors’ decision marking (p 472). The framework avoid the value incensement from intangible assets. It can get closer between financial position statement and market capitalization.
Comparison with 2018 New Standard
The new standard framework will be effective from 1 Jan 2019. One of the changes is eliminate the classification of finance or operating lease. In past, companies can use operating lease to reduce the liabilities. For example, leasing aircrafts from a dealer and the lessee makes payments for the right of use the aircrafts. Those asset and liabilities are not required to report in the financial position statement, it just reports to income statement as a rental expense. Levine (2018) stated that in the new accounting standard of IFRS 16, operating lease should recognize as assets and liabilities and record in financial position statement. Thus, the new accounting treatment in conceptual framework of IASB has brought about external user more transparency and limited creative accounting.
In 2017 MTR Annual report, there are three relevant information may influence investors’ making economic decisions. With reference to MTR (2017), business review (p 38-79) has shown the market share almost accounted for 50% in transportation in Hong Kong. Furthermore, the section displays all the segment of business financial performance and its strategies, such as station commercial business, Hong Kong property, and overseas business. As a shareholder, the materially information can provide clear mind for business operation’s goal and prediction of MTR.
For Ten-Year Statistics (MTR, 2017, p 100-102), it contains statement of financial position, income statement for past ten years. The relevant information such as financial ratios, revenue, can help shareholders to confirm their past evaluations and assess the ability of MTR to pay dividends in next year as well as the earning power. For example, shareholder can calculate the dividend growth model for evaluation of the share price whether it should be bought, held or sold.
Another information may affect difference in making decisions is CEO’s review of operations and outlook (p 18-37). The CEO reported the past and future performance showing the expectations and commitments to shareholders and stakeholders. CEO pointed out not only good news but also unsatisfying information, like the advertising revenue has decreased in this year. In terms of the business development, rail development will be benefited by Government strategies on “Major Roads beyond 2030”. The information builds up shareholders’ confidence on MTR’s prospect.
It is suggested that identifying and analysis of the strength, weakness, opportunities and threats (SWOT analysis) for MTR corporation. Although it may be included in CEO review, it can be separated in SWOT section for making a clear message to readers.
Apart from relevance, faithful representation is another fundamental accounting principle. It can be found that Independent Auditor’s Report (MTR, 2017, p 198-200). All the figures are audited by KPMG, which is the one of the big four accounting company and a large international audit company. The audit report of MTR (2017) claimed that KPMG gives a true and fair view of the financial statements including financial position, cash flow and profit and loss account. For example, the audit report mentioned that MTR reviewed the fixed assets yearly by management for potential impairment indicators. In addition, KPMG provided independence and objective audit process for entity of MTR. This implied MTR has followed the accounting standards, the reports are complete, neutral, prudence and faithful representation.
In respect of free from error, MTR has claimed that it has provision for the uncertainty items, like useful life of property, plant and equipment, income tax, which stated in notes 52 Accounting estimates and judgments (MTR, 2017, p 292-293). It should be free from material error since MTR is based on its designed lives, maintenance programme and actual usage experience for estimation of useful life. It assists the shareholders to make financial decision on reliable information.
Apart from that, cash flow statement (MTR, 2017, p 205) represents neutral information which accrual basis is not used in cash flow statement. The format of cash flow statement is standardized which in accordance with new requirement of HKAS 7. Creative accounting cannot be used in cash flow statement. For example, the change of dividends paid were increased.
On the other hand, MTR has not enough information regarding to internal audit. The only information has revealed in Corporate Government Report (P. 128). The descriptions of internal audit are not adequate. It may not give investors a full picture about the result of internal audit.
For enhancing the qualitative of reporting, the financial report should possess comparability. IASB (2010) has not allowed different accounting treatment for an item because of reducing the consistency. The consolidated accounts presented by accounting standards which stated in Principal Accounting Policies of note 2 (MTR, 2017, p 201-217). It denoted that MTR has applied consistent accounting policies. For example, the receivables are reviewed each reporting period to determine whether there is any impairment loss. What is more, all the statements have provided two years figure for comparison. The consistent and comparable information are more competitive between MTR and other company for making different decision of shareholders.
In addition, it can be seen the trend of dividend per share, revenue, operating profit during 2013 to 2017 in highlights 2017 financial (MTR, 2017, p 10-11). These key figures enable shareholders to compare the financial performance. For instance, dividend per share has ascended steadily from $0.92 per share in 2013 to $1.12 per share in 2017. To shareholders, the chart shown the similarities and differences of dividend per share can be identified and evaluated in making their own decisions.
It is recommended that showing each project profitability for comparison. MTR has many projects would be developed in future. For instance, Shatin to Central Line, LOHAS Park shopping center and the Tai Wai shopping center. It may be evaluated each project that would be increased the profits in the future.
Understandability improves the presentation of MTR report. In this annual report, the colorful pictures and cheerful employees’ photos are accounted for about half of 296 pages. It explained that working in MTR is happy and valuable. What is more, the financial information has provided a lot of charts, pies, graphics to present its performance, like the pie of market share of major transport operators in Hong Kong (MTR, 2017, p 43). The diagrams make information easier to understand since the annual report involves a mass of MTR performance information.
Besides, MTR (2017) is exhibited a linear graphic of the relation between share price performance and Hang Seng Index (HSI) in the section of Investor Relations (p 102-103). The curve diagram shown that the total share price performance of MTR has greater than HSI. It provides a clear and concise presentation to the stockholders.
Additionally, MTR (2017) not only has a content page (p 3) for grouping the similar information but also has another content of consolidated accounts and notes (p 197). For shareholders, the classified titles have made a convenience for finding useful information and saving time. For example, it can be easily to find that the note of operating expenses in page 219 from the content.
However, it seems that the glossary (MTR, 2017, p 295) is not much functional. For instance, the explanation of Government, it may not necessary to state in the glossary since financial reports are expected to prepare for people who have reasonable knowledge basis according to IASB (2010). On the other hand, the formula of the financial ratios should be included for the shareholders who unfamiliar with the calculations.
In my viewpoint, faithful representation is the most important qualitative characteristic. The reliable financial reporting strengthens confidence on the stockholders. Imaging that if the financial report are not complete, neutral, and free from error, shareholders would be lack of confidence with your company and not willing to invest your company. Building up a faithfulness and truthfulness of an organization is not easy. A lower level of faithful representation would be fallen into a poor reputation and affect the competitive advantage. Without valid information, which will cause the shareholders and potential investors lack of interest in your annual report even if it possesses high quality of relevance, understandability and comparability.
On the contrary, it is evidence that a faithful representation report implied it follows accounting standards and the true information conducted by external auditor. It allows users to forecast future earning power from the completed disclosure, such as statement of cash flow, which is no bias, and using actual basis. While the financial report meets the high degree of faithful representation, the shareholders have more confident for holding, investing your company. Therefore, faithful representation is the most vital qualitative characteristics in the financial reporting.
Overall, IASB improves the transparency of the corporate reporting by providing useful financial information for users’ economic decision-making, which including faithful representation, relevant, comparability, and understandability. By studying the MTR annual report, the examples have shown how the characteristics improve the financial report as well as be useful to shareholders. It is considered that faithful representation is most significant qualitative characteristic because reliable information can build up investors’ confidence. The external users depend on the valid information for making their own investment decisions. Fulfilling the requirements of completeness, neutral, free from material error can improve the transparency.
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