Solved by verified expert :Studying Corporate Accounting
HA2032
Corporate Accounting
Topic 1
Corporate
Regulation & Reporting
Regulatory
1
Reporting
environment
environment
Reports &
Company
lifecycle
disclosures
Company
2
Share
formation
Owners
4
capital
equity
3
Raising funds
Via
Via
equity
debt
Investing in related entities
Inter-company
Cash flow
11
transactions
8
consolidation
Business
combinations
5
Consolidation
Direct
minority
interest
9
and
process &
elimination
6
7
12
Indirect minority
External
Corporate
groups
interest
administration
10
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Characteristics of Companies
Types of Companies
§ Separate
legal identity
§
Limited liability
§
Ownership by share
§
Perpetual succession
§
Ability to raise capital
§
Professional management.
§Allowable
company structures in Australia:
Øpublic
companies
Øsmall
proprietary companies
ØLarge
proprietary companies
§
Mode of participation
Øshare
company
Øguarantee
company.
§
Extent of liability
Ølimited
liability
Øno
liability
Øunlimited
liability.
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Types of Companies (cont)
Historical evolution of regulation
§ Special
types of companies
Øinvestment
Øbanking
Ølife
insurance
Øforeign.
§ Companies
were uncommon until the late 19th Century
§ Based
on British system
§ Mainly
restricted to government/quasi-government and religious organisations
§ Early
concern over fraud and manipulation
§ Limited
liability was applicable since 1855
§ Australia
Øinitially
administered by states
•
no uniformity until 1960s
• Uniform
Companies Act.
ØNational
Cooperative Scheme (1981)
•
National Companies and
Securities Commission.
ØCorporations
Act 1989and the Corporations Law.
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The Corporations Act and reporting
§ Accounting
requirements are generally of two types:
1 requirements
that relate to the way in which financial data are recorded in the company’s
accounting system
2 requirements
that relate to the drawing up of compulsory reports that are prepared for the
benefit of company members and others.
.
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The FRC and the AASB
§The
Financial Reporting Council (FRC):
Øformed
in 2000
Ø
its powers and responsibility
are specified in s.225 of ASIC Act:
Øoversees
the AASB and its activities
Øfunds
AASB
Øprovides
oversight of accounting standard-setting process.
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The FRC and the AASB (cont)
§ The
Australian Accounting Standards Board (AASB)
§ Replaced
the ASRB in 1991
§
Functions include:
Ødevelop
a conceptual framework
Ømake
accounting standards
Ø
participate in, and
contribute to, the development of a single set of accounting standards.
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International standards and AASB
§ In
2002, the FRC announced that Australia would adopt International Accounting
Standards Board (IASB) standards in full from the 1st January 2005.
§ Most
AASB standards have been replaced with (IFRS).
§ All
of IFRSs have an AASB equivalent, three groups of AASB standards:
1
three-digit numbers:
corresponding to IAS series
2
one-digit numbers:
corresponding to IFRS series
3
four-digit numbers: existing
Australian standards with no corresponding IFRS.
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AASB accounting standards
§AASB
accounting standards have the ‘force of law’ under s.334(1) of the Corporations
Act in the following ways:
Øcompany
directors must ensure the company’s financial statements comply with accounting
standards
Øauditors
of companies are required to state whether accounts have been made out in
accordance with accounting standards.
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Other accounting authorities
§ Most
important sources of authority for financial reporting:
ØThe
Corporations Act
ØAASB
accounting standards
ØOther
authorities:
1
Urgent Issues Group (UIG)
2
Accounting bulletins
3
ASX listing rules
• An
entity whose securities are listed must agree to abide by the rules of the
exchange.
• These
rules do not conflict with the Corporations law or accounting standards, but
are complementary or additional to those authorities.
4ASIC practice notices
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Enforcement of financial reporting reqmt
§ ICAA
and CPA Australia enforce financial reporting-related requirements through
rules of professional conduct
§ ASIC
is responsible for enforcement of accounting standards
§ Auditor
must advise ASIC if the company does not comply with accounting standards.
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Reasons for corporate disclosure
§ Public
interest
§ Protection
of members
§ Predicting
investment returns
§ Stewardship
§ Information
useful for decision-making
§ Arguments
against compulsory reporting:
Ødecision
usefulness: too little or too much information
Øself-interest
of profession
Øaccountability:
misleading published financial reports.
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Thrust of legislative reforms
§ Streamlining
reporting requirements
§ Specification
in accounting standards rather than the law
§ Simplification
of corporate administration
§ Differential
reporting requirements
§ Re-organisation
of legal provisions
§ Changes
to corporate governance
§ 1st
Corporations Law Simplification Act 1995
§ Company
Law Review Act 1998
§ Corporations
Act 2001.
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Objectives of Corporations Act
§ The
Act requires financial reports give a ‘true and fair view’ of the financial
position and performance of the entity (s. 297)
ØMeaning that mere compliance
with accounting standards may be insufficient (s.295(3))
Ø‘True and fair’ is not
defined by the Act
ØHowever, it is based on
reasoned judgment and ethical fair play
ØFlexibility
and interpretation are integral to relevance and reliability of financial
information.
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Objectives of Corporations Act (cont)
§
AASB 101 Presentation of
Financial Statements states that:
Ø ‘A
financial report shall present fairly the financial position, financial
performance and cash flow of an entity. Fair presentation requires the faithful
representation of the effects of transactions, other events and conditions in
accordance with definitions and recognition criteria for assets, liabilities,
income and expenses set out in the Framework. The application of
[accounting standards], with additional disclosure when necessary, is presumed
to result in a financial report that achieves a fair presentation.’
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The conceptual framework (cont)
§ SACs
are benchmarks used in developing accounting standards and can be used to
analyse and understand accounting standards requirements.
§ The
IASB Framework predates the SACs in 2005. However, it is not as
comprehensive as the four Australian SACs.
§ Thus,
the AASB retains SACs 1 & 2 to fill in the gaps in the Framework.
SACs 3 & 4 are withdrawn.
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The conceptual framework
§In
the 1990s, a set of Statements of Accounting Concepts (SACs) started to
develop. The four issued SACs are (were):
ØSAC
1: Definition of the Reporting Entity
ØSAC
2: Objectives of General Purpose Financial Reporting
ØSAC
3: Qualitative Characteristics of Financial Information
Ø
SAC 4: Definition and
Recognition of the Elements of Financial Statement.
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The reporting entity and its users
§ Reporting
entity concept – to help decide which entities must comply with accounting
standards
§ Each
reporting entity is required to prepare financial reports in accordance with
Part 2M.3 of the Corp Act
§ Financial
reports are general purpose financial reports
§ Part
2M.3 requires financial report each year from:
Øall
disclosing entities formed in Australia
Øall
public companies
Øall
large proprietary companies
Øall
registered schemes
Øsmall
proprietary companies under some circumstances e.g. controlled by a foreign
company.
§ However,
they are not necessarily reporting entities.
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The reporting entity and its users (cont)
§ Most
small proprietary companies are not reporting entities
§ Most
accounting standards only apply to reporting entities, except core accounting
standards, AASB 101 & 107.
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Elements of financial statements
§ Definition
and recognition criteria of elements are now contained under the Framework,
prior to 2005 they appear in SAC 4.
§ Assets
ØFuture
economic benefits are expected to flow in to the entity
ØResource
controlled by the entity
ØResulting
from past transactions or other past events
§ Liabilities
ØThe
entity is presently obliged
ØResulting
from past transactions or events
ØThe
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
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Characteristics of financial information
§All reports
should be characterised by:
Øaccrual
basis
Øgoing
concern.
§ All
reports should possess these desirable characteristics:
Øunderstandability
Ørelevance
Ømateriality
Øreliability
Øcomparability.
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Classification related terms
§Current
versus non-current
§
Tangible versus intangible
§
Monetary versus non-monetary
§
Financial instruments (AASB
132)
ØFinancial
assets versus other assets
ØFinancial
liabilities versus other liabilities
ØEquity
instruments.
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Measurement
related terms Topic 1 tutorial questions
§
Historical
cost
§
Replacement
cost
§ Chapter 2
§
Current
cash equivalent
Qu
2.7, 2.11,
2.12
§
Net
present value
§
Net
realisable value
§ Chapter 3
§
Lower of
cost and net realisable value
Qu
3.1, 3.8,
3.14
§ Recoverable
amount
§ Fair
value
§ Marking
to market.
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© Holmes Institute 2011
