Required:

Analyse and report on the Financial Reporting practices of a leading Australian organisation that prepares group accounts, preferably operating in a closed group.

Identify, to the extent possible from public records, the information available to users and the quality of the Financial Statements.

You should produce a report of 1,500 words on your chosen organisation, addressed to an audience of experts on a panel who are reviewing current reporting requirements for group accounts.

They are seeking your input on reporting quality and if disclosures within closed groups are informative enough for users.

Introduction

The main focus of the assessment is to review the reporting practice of Fortescue Metal Group (FMG) which is engaged in mining operations and is the fourth largest producer of iron ore in the world.

The business has always followed a model of acquiring smaller companies so that it can boast up its own financial reports and therefore the company has fully owned subsidiaries as well.

The analysis would try to gain an understanding of the group reporting process and how the same can be linked to relevant accounting standards and GAAP principles (Weygandt, Kimmel & Kieso, 2018).

Further the analysis would be highlighting the features of Close Group Accounting practice and some of the issues associated with such accounting practice. The analysis would be portraying the characteristics of closed group accounting practices and how information are integrated in the financial reports. 

Discussion

Understanding of the Group Accounting Practices 

Basis of Preparation

As per the financial situation of the company considered, the business has numerous subsidiaries which are partly own as well as fully own companies. For presentation the financial information, GAAP framework requires information to be portrayed in a combined manner with appropriate notes to accounts (Robinson, 2020). The Company and its subsidiaries, which are the entities under the Company's management, are included in the consolidated financial statements.

In order to gain a proper understanding of the financial reporting framework of Fortescue Metal Group, the financial reports for the company for 2023 is considered. The basis of preparation of the financial reports show that consolidation approach is applied where financial information for Fortescue Metal Group and its subsidiaries are consolidated (Investors 2023).

Further the preparation of the financial reports also follow relevant accounting standards which are issued by IASB. Following the principles of GAAP Framework, the financial reports are being prepared following historical cost estimates with the exception of financial instruments (Schroeder, Clark & Cathey, 2022). The financial statements are prepared in a consolidated manner so that the investors have access to entire group’s performance and accordingly decisions are taken.

Reporting for Key Items

For the purpose of ensuring that full disclosure principle is maintained, the management has ensured that detailed notes to accounts are maintained and these are properly referenced as to what accounting standards are being used. For instance, property, plant and equipment forms a important part of the balance sheet and the management has used guidelines of IAS 16 to identify any impairment charges and ensure that the assets are appropriately valued to be portrayed in the annual reports (Kieso et al., 2019).

The notes to accounts section of the annual report shows that the management has incorporate fixed assets from Iron Bridge CGU where recoverable amount of the asset is measured by following FVLCD approach. As per this approach, discounted cash flows on the basis of different factors are considered and appropriate valuation of the asset is done.

The management has appropriately portrayed intangible assets and its segments in the notes section. This involves a much detailed information regarding the additions, transfers and impairment made to the asset (Bonacchi, Cipollini & Zarowin, 2018). All these aspects effectively portray that the management has followed full disclosure policy while integrating the items of subsidiary businesses. 

 

Source: (Investors., 2023)

The table above appropriately shows that assets which the business possess and appropriately classifies the same. The analysis appropriately shows that depreciation charges and additions which are made to the asset so that the same can be established appropriately. 

Principles for Reporting and Consolidating Subsidiary Accounts

Subsidiaries' financial statements are produced using identical accounting principles for the same reporting period as the Company. Unrealized gains and losses from intra-group transactions, as well as all intercompany balances and transactions, have been completely removed. From the date of purchase through the date of disposition, subsidiaries are consolidated.

The business combinations of the Group are accounted for using the acquisition method of accounting (Schaltegger & Burritt, 2017). Except as otherwise provided herein, identifiable assets acquired and liabilities inherited in a business combination are initially measured at their fair values at the time of acquisition date.

The consolidation technique which is used by the business shows that principles of accounting standards and even some of the prominent GAAP principles are followed (Dumay et al., 2016). This shows that the financial reports are formulated in a detailed manner and information are presented systematically so that the same are understood by the users.

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Source: (Investors., 2023)

The extract above appropriately shows the new business which was wholly acquired by Fortscue Metal Ltd in 2023. The cash consideration which is portrayed in the extract above shows the purchase consideration for the business. The management would be portraying the financials of this company from next year onwards in its consolidated financial statements.

In order to establish that the business has followed the principles of GAAP, the revenue recognition and measurement criteria for Fortescue Metal Group can be assessed. The Group's main businesses are the production of iron ore and the provision of associated goods and transportation services.

When control of the products or services is transferred, the amount of revenue that the group anticipates to be entitled to in return for those goods or services is acknowledged (Handbook Consolidation., 2023). The recognition criteria for the revenue is clear and accurate for the business and it is according to this aspect that decisions are appropriate taken for providing notes for revenue sections. 

In an overall basis, it can be said from the financial report formulated by Fortescue Metal Group that principles of GAAP are followed and it is ensured that all numerical information are supported by appropriate explanation and notes. In addition to this, principle of Consistency and continuity is also followed as the business has followed such an approach for reporting continuously over the last few years.

All the information which are incorporated in the financial reports are material and thereby relevant for the investors so that they can take decisions on the basis of the same. In an overall basis, it can be said that the management has formulated their financial reports appropriately following relevant accounting standards and GAAP principles.

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Discussion On Closed Group Accounting and Its Issues

Concept and Approach of Closed Group Accounting

Group Accounting or also known as Consolidated Accounts are prepared by companies which are holding companies and have controls over numerous subsidiary businesses.

For the purpose of Group Accounting the financial information for the subsidiary businesses needs to be consolidated so that the same can be presented in a complete manner (Group (consolidation) accountant 2023).

Group accounting practices are followed in some of the largest MNCs which has complex transactions. Group

Accounting for such companies ensures that all relevant information are incorporated in the final reports and the management can also rely on the complete report to understand the overall performance of the entity as a whole. 

Issues Associated with Closed Group Accounting Approach

There are some challenges which arises when a business looks to maintain group accounting framework. Firstly, the approach is old fashioned and does involves complex treatments when minority interest are involved and inter-profits as well. It can be difficult to keep a track on the flow of transactions and therefore accuracy is also a major concern for the approach.

Secondly there are several cases that combined accounts covers up for the subsidiary losses and low performances and this can provide an inaccurate picture to the users of the financial reports and also the management of the company (Dumay et al., 2016).

Thirdly, there are instances where there is a lack of clarity as to why such transactions are to be integrated and why the subsidiaries cannot make their own accounts. In an overall basis, it can be said that issues are there with Group Accounting approaches and this should be considered at a corporate level as well.

Analysis of Closed Group Accounting 

The analysis of the Fortescue Metal Group shows that the management follows a closed group accounting approach for their financial reports and ensures that all transactions of the subsidiaries are incorporated as well.

The Group accounting practice for the business has been followed consistently which is one of the principles of GAAP and a detailed note on the consolidation is incorporated in the note section which makes the process easier to understand.

However, it is to be noted that some of the aspect of the reporting process does get complex such as where judgements are to be made for impairments or measurement for intangible assets.

The financial information which is presented for the business of Fortescue Metal Group is appropriate and are relevant for the investors as well. In addition to this, the approach provides a clear picture regarding the financial position of the business.

In an overall basis, it can be said that the reporting process for the business is appropriate and further the detailed notes would assist the users to interpret the performance of the business.

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Conclusion

The analysis undertaken above shows the reporting process which is followed by the business of Fortescue Metal Group which is engaged in mining operations. The business follows Group accounting practice where financial information from all subsidiary are integrated and presented in a combined manner.

The analysis shows the approach significance with the principles of GAAP and relevant accounting standards which are applicable. The analysis appropriately shows the issues which are associated with the Group Accounting practice and also how the same can promote clarity for the users.

In an overall basis, it can be said that the accounting practice which is followed by Fortescue Metal Group is appropriate and consistent with GAAP principles.
 

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References

Bonacchi, M., Cipollini, F., & Zarowin, P. (2018). Parents’ use of subsidiaries to “push down” earnings management: Evidence from Italy. Contemporary Accounting Research, 35(3), 1332-1362.
Dumay, J., Bernardi, C., Guthrie, J. & Demartini, P., (2016), September. Integrated reporting: A structured literature review. In Accounting forum (Vol. 40, No. 3, pp. 166-185). No longer published by Elsevier.
  Group (consolidation) accountant (2023). Available at: https://careernavigator.accaglobal.com/gb/en/job-profiles/proficient/group--consolidation--accountant-.html (Accessed: 15 September 2023).
Handbook: Consolidation. (2023). Retrieved 17 September 2023, from https://frv.kpmg.us/reference-library/2022/handbook-consolidation.html
Investors (2023). Available at: https://fortescue.com/investors#anchor-2 (Accessed: 15 September 2023).
Kieso, D.E., Weygandt, J.J., Warfield, T.D., Wiecek, I.M. & McConomy, B.J., (2019). Intermediate Accounting, Volume 1. John Wiley & Sons.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Schaltegger, S. & Burritt, R., (2017). Contemporary environmental accounting: issues, concepts and practice. Routledge.
Schroeder, R.G., Clark, M.W. & Cathey, J.M., (2022). Financial accounting theory and analysis: text and cases. John Wiley & Sons.
Weygandt, J.J., Kimmel, P.D. & Kieso, D.E., (2018). Financial accounting with international financial reporting standards. John Wiley & Sons.