22 Accounting: Business Reporting for Decision Making
The problem with the time delay is that a lot can happen to business entities within a few months.
- An increase in market competition can dramatically change future demand for an entity’s products.
- An unsettled legal dispute can be resolved in the months subsequent to the end of the financial year.
- Fire and flood can damage an entity’s stockholdings.
While entities are required to disclose after reporting day events that are material, there will always
be some information that is not accurately reported by the time the annual report is available to the
users.
Historical information
Despite one of the major roles of accounting information being an assessment of the future perfor-
mance of the entity, the information in financial statements is based on past transactions and there-
fore does not provide forecast information. For example, the expenses and income are reported in the
statement of profit or loss for the financial period past. They are not an accurate indication of what
the future income and expenses will be. Nevertheless, a review of the past is often the best guide to
future performance.
Subjectivity of information
Accounting information is prepared based on generally accepted accounting principles (GAAP),
which provide accounting standards for preparing financial statements, but there is much subjectivity
(choice) involved in the inclusion of items to be reported and the choice of accounting policies to adopt.
For example, entities can choose the value that an asset will be reported at in the financial statements.
They can report certain assets at cost or current market value. JB Hi-Fi Ltd reports most assets at his-
torical cost; however, certain financial assets and classes of property, plant and equipment are revalued to
fair value (current market value). There are also choices for inventory valuation methods, when to recog-
nise revenue, and the disclosure of additional financial information. JB Hi-Fi Ltd recognises revenue at
the fair value of the consideration received or receivable.
Potential costs of providing accounting information
Providing accounting information to various users involves potential costs. The two types of costs dis-
cussed here are information costs and the cost of releasing information to competitors.
Information costs
Various costs are involved in gathering, summarising and producing the information contained
in the financial statements. The implementation of accounting software programs (such as MYOB,
QuickBooks and other custom-made software) assists in decreasing these information costs,
but there are still substantial collating and printing costs to be met in order to produce financial
statements.
Consider the recording of the different assets that an entity such as the Qantas Group would have to
keep updated. Figure 1.4 shows a snapshot of the property, plant and equipment note (note 16) to the
Qantas Group 2015 financial statements. As you can see, there are various categories of property, plant
and equipment reported along with their cost and accumulated depreciation during the period 2014 and
Release of competitive information
The information disclosed in an entity’s financial report potentially contains proprietary information that
could be used by competitors to strengthen their market position. An example of this information is the
disclosure of segment data that is found in the notes to the financial statements. Consider the segment
report in illustrative example 1.1. As you can see, it reports an entity’s segment information, including
different types of revenue and profit. This information does give the user (possibly a competitor) an
insight into where an entity’s main profits are derived from. It also informs potential competitors of the