I have chosen MillenniumServices Group Limited (MSGL). MSGL is a cleaning, security andintegrated service specialist in the retail shopping centre, commercialproperty and commonwealth and state government sectors.IASB defines incomeas the economic benefit earned by an organization during thegiven period by increasing in asset, decreasing in liabilities whichresults increase in equity excluding contribution from owner. Income or profitis the main goal of every organization undertaking business activities. Inbusiness, income in basically categorized into sales revenue and gain.
If agarment company generated income by selling clothes then it is salesrevenue where the company earn by selling its one of the machine thenit is gain. Here are the some common sources of income that a businessentity name and record in financial statement and they are salesrevenue, interest on bank deposit, rental service on property lease by entity, dividend earned from entity’s investment and revaluation of entity’sassets. In MSGL income are recognized under the heading revenue andother income in financial statement.
Revenue is provision of service and otherincome are gain/loss from disposal of property plant and equipment,gain from contingent consideration that is acquiring of Airlite Groupand Interest.Generally AcceptedAccounting Principles (GAAP) is a set of rules and standards commonly used forpreparation of standardized financial reports to communicate organizationfinancial positions to organization stakeholders. It help investor to makeinvestment decision and efficient functioning of capital market by reducingfraud and error. GAAP is widely practiced in USA and the Financial AccountingStandard Board (FASB) regulate the GAAP. Other widely used Alternatives to GAAPis International Financial Reporting Standards (IFRS) set by the InternationalAccounting Standards Board (IASB).
In Australia, Australian Accounting StandardBoard (AASB) authorized body for developing, issuing and maintaining Australianaccounting standards and related pronouncements. GAAP identify allthe elements of financial statement like assets, liabilities, equity, revenueand expenses which must be expressed in monetary value and definesthe criteria for their recognition of financial statement.GAAP ensures theconsistent financial reporting processes, preparationof right financial statements which is understandable tostakeholders and comparable among companies to ease investor to makefinancial decision.
GAAP principles can be interpreted in differentcountries and applied in different way but the basic principle is toserve as a foundation for drafting, analyzing and reporting financial document.Financial report prepared under GAAP guidelines uphold the basic characteristicslike relevant, comparable, verifiable, understandable by stakeholders,transparency and reflective of economics. Financial statements prepared underGAAP principles benefits the organization to know the exact financial health oforganization, gain confidence of investor and attract new investors,creditors, facilitate merger and acquisition decision and forgovernment to show their stewardship in resources and gain theconfidence of citizens. MSGL prepared itsannual financial report for the year 2017 under the accounting standard andinterpretation issued by AASB. Its financial statement also complywith IFRS and IASB. Annual financial reportof MSGL consist of Statement of profit and loss and othercomprehensive income, statement of financial position, statement of changes inequity and statement of cash flows.
As AASB is used Australiainstead of GAAP (used in America) but the core function of both is to set theaccounting standard for the preparation of financial reports whichare reliable, relevant and understandable by stakeholders. All the financialreports of MSGL is prepared underthe guidelines of AASB. For example all financial reportsof MSGL are understandable, seem relevant and reliable and on top ofthat those can be compared to other companies report to makeinvestment decision. All the elements of financial statements areidentified and placed on respective report. Report clearly shows theearning per share has increased to 13.54 cents in the year 2017 which was only1.61 cents in 2016, which is beneficial for shareholdersto retain their shares and also attract new investor to buyMSGL’s shares. Statement of financial position report is prepared byunder three financial elements Assets, Liabilities and Owners Equity followingbasic accounting rules Assets is equal to Liabilities plus equity whichshows approximately 22 percent increase in net assets and owner’sequity.
This balance sheet statement analysis clearly reflects the financialposition of company.Financial report preparedwithout using guidelines of GAAP or AASB canbe irrelevant, not reliable, difficult to compare because there mustbe some common base among financial report of companies to compare, highchance of error and fraud. If MSGL financial report do not usethe guidance of AASB then elements may be falselyrecognized and measured, uniform standard in reporting. In short we can sayorganization can cheat on their financial reporting, hard to understand, loseconfidence of shareholder and difficult to make decision for investors. MSGL willlose its credibility in market, its share price will fall becausepeople do not trust on its financial report. For Example in the report earningfor lease is clearly defined based on the AASB 16, lease payment isclearly separated into principle and interest and adjusted in respectiveaccounts which is clearly understandable but if do not follow guidelines it’shard to get exact data.
From the report we can clearly understand that companypaid 2.3 million tax and earned 6.2 million profit after tax and isdistributed to shareholders which is not possible without followingaccounting standard AASB or GAAP.GAAP help investors tomake informed decision and lenders to assess to financial position ofcompany before lending money. Now people collect all the informationbefore putting their money on anything like from clothes to shares.They can easily compare with others because technology has made everythingpossible and easy, while comparing, they check the credibility and sources ofinformation. Financial reports without GAAP are not considered as crediblewhich will fail to attract investor as a result company share will notbe attractive in stock market which will reduce its marketvalue. It will also hampers the performance of company because company’sfinancial position cannot be determined exactly.
GAAP reduces the risk of taxproblem and mistakes in reporting transaction across department. Therefore GAAPensures high quality financial reporting which is essential for capitalmarket to work efficiently.