JB Hi-Fi's Financial Reports: Rules, Concepts & Qualitative Characteristics - Essay Sample

Introduction

The financial reports and accounting records are presented according to specific rules and regulations. Financial reports are developed based or accounting concepts, conceptual framework as well as based on qualitative characteristics of financial information. JB Hi-Fi Limited is a company registered in Australia; thus, the company is required to present the annual reports following the required conceptual framework. The company also has subsidiaries cross the country which means it has to prepare consolidated financial statements every fiscal year. The aim of this essay is to examine the accounting concepts, conceptual framework, issues of measurement and qualitative characteristics of financial information as used in the presentation of the annual reports of JB Hi-Fi Limited.

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Description of Accounting Concepts

Accounting concepts are assumptions or basis of accounting. Accounting records and information are based on accounting concepts to provide information to the users of financial information. JB Hi-Fi uses its financial reports using accounting concepts.

Business Entity Concept

According to this financial concept, the business entity is treated separately with its owner in terms of financial transactions (Andon et al. 2015, p.986). JB Hi-Fi Limited is considered a separate entity between its shareholders and the business as the company is limited by shares (2017 Annual Report, 2018, p.68). All the money invested in the company by being used for financing the activities of the company and are credited in every shareholder account. Moreover, whenever a shareholder sells his shares in the company, the total amount invested by him or her is reduced. The shareholders are not involved in the day to day activities of the company, but they have company directors who are responsible for day to day running of the entity.

Monetary Measurement Concept

Accounting records of a company are maintained in monetary terms. At JB Hi-Fi Limited, all financial transactions are recorded in monetary terms. All transactions are recorded in terms of the Australian dollar. The Australian dollar is the main currency used by the company for all its financial activities. All entries into the accounting records are presented using the Australian dollar.

Dual Aspect Concept

The concept provides that every business transaction has a dual effect. Whenever a particular account is credited there is another account which is debited. JB Hi-Fi limited applies this concept while recording all business transaction for example expenses of the company are debited are credited in the specific ledger and credited in the bank account of the company.

Going Concern Concept

A business is expected to be in operation for a foreseeable future. JB Hi-Fi Limited is expected to remain operational for an extended period. The company does not engage in business activities that would lead to its liquidation or stoppage of services but to continue providing all services.

Cost Concept

The cost concept provides that all fixed assets are recognised and measured at original cost in the first year of accounting. In the subsequent years of usage, the assets are subjected to depreciation and amortisation. JB Hi-Fi Limited recognises its assets at original cost, and they are subjected to depreciation every financial year, for example, the property, plant, and equipment are recognised in the balance sheet with original cost, accumulated depreciation to determine the carrying value of the assets.

Accounting Cycle Concept

The concept provides that a company or business always chooses a particular period to complete a cycle of the accounting process which may be weekly, monthly, quarterly, semi-annually and yearly. JB Hi-Fi Limited presents its financial results yearly, quarterly and semi-annually. The financial year of JB Hi-Fi Limited ends on 30th June. All annual reports are accounted as on 30th June.

Accrual Concept

Revenues and expenses are identified with a specific time for example monthly, half year and year. At JB Hi-Fi limited revenues are accounted for the quarterly, half year and even monthly. Some costs of the company are estimated monthly such as income, rental expenses, and maintenance costs.

Matching of Cost and Revenue Concept

Profit making is the primary concern of most businesses, and this requires measuring profitability is essential. According to this concept, a company needs to ascertain profit made by matching revenues and expenses during that accounting period. JB Hi-Fi Limited accounts for all costs and revenues within a single fiscal year; other costs are carried forward as prepayments while revenues are transferred as accruals.

Realisation Concept

Realisation concept states that profit is recognised only when earned. Profits of the company are realised only when the customer has received the services which he or she has paid for (Power 2010, p.210). JB Hi-Fi Limited operates a store business. Therefore, profits are realised when the goods are delivered to the buyer.

Conceptual Framework and the Issue of Measurement

Conceptual Framework

A conceptual framework is a set of rules and standards that guide the nature, function, and limits of financial statements of a company. The conceptual framework also prescribes how the financial statements are used and measured within a particular accounting period and year (Linsmeier 2016, p.485). The annual reports of JB Hi-Fi Limited provide that the general purpose financial statements are prepared by the Australian Accounting Standards (AAS) and interpretations issued by the Australian Accounting Standards Board (AASB). The preparation of financial statements also complies with International Financial Reporting Standards (IFRS).

According to the Australian Accounting Standards Board (AASB), all companies are required to present annual reports which disclose all financial information affecting all stakeholders in the company (Newberry 2015, p. 371). The board also requires the company to include consolidated financial statements in the financial statements presented in the financial reports. Moreover, this is a consideration of the International financial reporting Standard 1 (IFRS 1). The board further requires the financial statements to be presented in a manner that ensures comparability with previous accounting periods. JB Hi-Fi Limited has complied with the required conceptual framework of the company. The company presents consolidated financial statements, as well as all statements, are presents in a manner that allows comparison with the previous financial year. The extract below from the annual report of JB Hi-Fi Limited shows compliance with the required conceptual framework.

Figure 1: extract from the annual report of JB Hi-Fi Limited (Source:Jbfi.au.com, 2019)

Figure 2: Extract from the annual report of JB Hi-Fi Limited

Issues of Measurement

Measurement in accounting is the quantification of business activities in monetary terms (Christensen, Nikolaev and Wittenberg-Moerman,2016, 397). Measurement also ensures that financial transactions are recognised and measured in the right accounting period in the accounting records of a company.

The financial statements of JB Hi-Fi Limited are prepared at historical cost except for the financial assets and liabilities as well as specific classes of assets which are measured at fair value (Abbott and TanKantor 2018, p.266). Final dividends are recognised in the previous financial year while interim dividends are recognised in the current year. Plant and equipment of JB Hi-Fi Limited are stated at cost less depreciation and impairment. Depreciation is estimated using the straight-line method. Inventories are measured at the lower of cost and net realisable value. Net realisable value is the total selling price less the total costs required to make the sale (Kulikova 2015, p.406). Goodwill of the company is measured at the excess of the cost of acquisition over the fair value of the company's net realisable assets at the date of acquisition.

The borrowings of the company are measured at amortised cost. Initially, they are measured at fair value but in subsequent measurements transaction costs incurred leading to them being measured at amortised costs. The provisions of the company are measured at present value which represents the carrying amount of the provisions. The financial instruments; financial assets and liabilities of JB Hi-Fi Limited are measured at fair value.

Fundamental Qualitative Characteristics - Understanding of Relevance and Representational Faithfulness

The fundamental qualitative characteristics of financial information provided that the financial information presented in the financial statements can aid in decision making by the stakeholders of the company. Financial statements are useful when they are relevant and when they present the faithfully the financial information they are expected to present. Therefore, this section examines the fundamental qualitative characteristics of relevance and faithful representation of JB Hi-Fi Limited financial statements.

Relevance

Relevant financial information is the information presented in the financial reports and can lead to decision making by the users of financial information (Collier 2015, p.1). Relevance provides that financial information is material in decision making. Materiality means that omission or inclusion of particular financial information will affect the decision making of stakeholders. The financial reports of JB Hi-Fi Limited present relevant financial information. JB Hi-Fi Limited has presented the earnings per share information which is likely to influence the shareholders to invest more in the company. Therefore, earnings per share is a material statement in the purchase of JB Hi-Fi Limited shares and if the information is presented the shareholders may be reluctant to buy the shares.

Also, the statement of financial position of the company is relevant in decision making with the company. Company lenders and creditors deal with the company by looking at the balance sheet. The balance sheet contains relevant financial information such as total assets of the company which can be used to cover the liabilities of the company. The information on the balance sheet also shows the true value of the company as it indicates the proportion of equity that if financed by debt and the portion financed by shareholders capital.

Faithful Representation

Faithful representation requires that financial information be presented in a manner that shows the true economic substance rather than legal form (DeFond et al. 2018, p.91). Faithful representation, therefore, emphasizes substance over form which means that a transaction has to be accounted for according to substance and economic reality. JB Hi-Fi Limited complies with faithful representation in the financial reports.

The company has provided for leases by estimating the lease accruals since the premises they use are used and not owned by the company. Therefore, the company considers its stores as assets of third parties which have to be restored to the original condition in case the company stops operation in the premises.

JB Hi-Fi Limited does not represent biased revenues and profits. Notes on how revenues and profits are recognised have been provided in the annual reports to show the true economic value of the company. Taxation expenses have been estimated in the current year to determine the true profit value.

Nevertheless, to ensure relevance and faithful representation JB Hi-Fi Limited has ensured comparability, verifiability, understand ability and timeliness of the financial statements. Comparability is achieved when current results are compared with previous years while timeliness provides that the statement is presented on 3...