1. Nature & Regulation of Companies and Their Operations

Question 1

What are the attributes of a company?

Answer 1

Formed in accordance with the Corporations Act 2001
Limited liability
Legal capacity of an individual
Powers of a body corporate
Must be registered for GST
Can raise funds by issuing shares, debentures and notes
Can be sued and sue others
More regulated than sole traders and partnerships

Question 2

What are the different types of companies?

Answer 2

Proprietary Company
Public Company
Listed Corporation
Disclosing Entities
Foreign Company
No-Liability Companies

Question 3

What is a proprietary company?

Answer 3

Limited by shares 
Unlimited with share capital
Less than 50 shareholders
Must be classified as large or small
At least 1 Director
Large must be audited, small will be audited I requested by a shareholder or ASIC

Question 4

What does Pty Ltd stand for

Answer 4

Pty - proprietary company

Ltd - Limited

Question 5

What is a public company?

Answer 5

Not required to have share capital
May be a company limited by guarantee (one member guarantees in case of liquidation)
Able to invite the public to subscribe for shares, debentures notes or loans, and have these listed to be easily transferred
Must be audited
Prepare financial statements in accordance with accounting standards and regulations
Must have at least 3 directors, 2 which reside in Australia
Must have a secretary which is an Australian resident

Question 6

What is a no-liability company?

Answer 6

To be used in mining projects to attract investors, it is a public company.
Investors do not have to contribute to debts and liabilities if they buy shares

Question 7

What documents are needed to form a company?

Answer 7

Must lodge a form with ASIC to include
Type
Proposed name
Address’s and birth certificates of members, directors and secretary
Address of office and opening hours
Info on the shares
The State or Territory in which to be registered

Question 8

What is replaceable rules?

Answer 8

Rules contained in the Corporations Act relating to the dealings between management and shareholders; if the company wishes to reject any of these rules it must adopt a constitution

Question 9

What does ASIC do to register a company?

Answer 9

ASIC will give the company an ASN.
Register the company in accordance with the Act.
Issue a cert which states the company’s name, it’s ACN, type of company, date of registration.

Question 10

What is a company’s constitution?

Answer 10

A document containing the rules for managing a company, particularly in terms of the relationships between directors and members. It specifies rules adopted by the company as alternatives to the replaceable rules in the Corporations Act

Question 11

If the company chooses to form a constitution does it have to be lodged with ASIC?

Answer 11

Yes. At registration or within 14 days

Question 12

What types of records are required to manage a company?

Answer 12

Minute books of meetings
Financial records
Appropriate financial statements for those records 
Registers of members 
Debenture holders 
Options holders

Question 13

What are the difference between shares and debentures?

Answer 13

Shares buy a stake in the company

Debentures is usually an interest only lone the company has taken out

Question 14

What is an option?

Answer 14

An instrument which gives the holder the right to buy or sell a certain number of shares or debentures in the company by a specified date at a stipulated price

Question 15

When does a company have to provide a disclosure document?

Answer 15

When offering shares, debentures and options. With a few minor exceptions

Question 16

What is a disclosure document?

Answer 16

May either be a prospectus, short form prospectus, a profile statement or an offer information statement. Depending on the circumstances

Question 17

Who is the AASB?

Answer 17

Australian Accounting Standards Board. It is a government developed board to establish the standards in Australia which companies must comply with

Question 18

Who is the FRC?

Answer 18

The Financial Reporting Council.

It’s main role is to act as the overseer and advisory body to the standard setters the AASB and AUASB

Question 19

Who is IASB?

Answer 19

The International Accounting Standards Board. They were established to set standards for the growing global companies. Most countries now adopt their standards.

Question 20

What does ASIC do?

Answer 20

The Australian Securities and Investment Commission is an independent government body set up to enforce and administer the Corporations Act and financial services law to protect consumers, investors and creditors

Question 21

What does the ASX do?

Answer 21

The Australian Securities Exchange is a public company operating Australia’s share markets

Question 22

What does the FRP do?

Answer 22

The Financial Reporting Panel to resolve disputes between ASIC and companies concerning accounting treatments of their financial reports

Question 23

What is GPFRs?

Answer 23

General Purpose Financial Reports are financial reports intended to meet the needs of users who are unable to command all the information that they need from a company in order to make economic decisions

Question 24

What are the 6 steps a company must do to make an offer of securities?

Answer 24

Prepare the disclosure document
Lodge the document with ASIC
Offer the securities
If the disclosure document has changed lodge a replacement document or refund
Hold all application money in trust until the securities are issued
Issue the securities

Question 25

How can shares be paid for?

Answer 25

Paid in full on application Paid by instalments Can also be part paid on allotment and to call

Question 26

What happens if the shares are undersubscribed?

Answer 26

When share issues are undersubscribed and the issue is not underwritten, the company merely issues the number of shares subscribed for, provided that any minimum subscription, which may be stated in the disclosure document, has been reached.

Question 27

What happens when shares are oversubscribed?

Answer 27

When shares are oversubscribed, directors may allocate shares to applicants as they see fit. Excess application money may be kept by the company for the payment of allotment or future calls, or may be refunded to unsuccessful applicants.

Question 28

What happens to calls which are collected in advance?

Answer 28

Any amount kept by the company for future calls is credited to a Calls in Advance account, which is reported as an addition to share capital in financial statements.

Question 29

How does a company account for the forfeiture and reissue of shares?

Answer 29

These rules were removed by the Review Act and are not included in the current Corporations Act. However, if a company wishes to have rules for forfeiture (and reissue) of shares, it is allowed to specify such rules in its constitution. If a company’s constitution is silent, then shares cannot be forfeited.

Question 30

What can a company do with forfeited shares?

Answer 30

Shares forfeited may be either cancelled or reissued, depending on the company’s constitution. Any surplus arising from forfeited shares, after payment of appropriate costs, may be either refunded to the former shareholders or kept by the company.

Question 31

How must a company account for share issue costs, including underwriting commission, and formation costs?

Answer 31

``` A company is required to distinguish between the costs of issuing equity instruments such as shares, and the costs of formation. Apart from underwriting costs, transaction costs on share issues also include printing costs stamp duties taxes professional advisers’ fees brokerage fees. ```

Question 32

What do formation costs include?

Answer 32

Costs of registration and other costs for professional legal and accounting advice before a company is registered.

Question 33

Why do share issue costs and formation costs have to be recorded separately?

Answer 33

They must be treated differently under accounting standards.

Question 34

Are formation costs treated as an expense?

Answer 34

Yes

Question 35

How are share issue costs treated?

Answer 35

As a contra to the Share Capital account and hence are deducted from share capital in determining the amount of equity raised from the share issue.

Question 36

What are the three additional ways a company can increase its share capital?

Answer 36

Rights Issues Private Placements Bonus Issues

Question 37

What is a Rights Issue?

Answer 37

An issue of new shares with the terms of issue giving all existing shareholders in a particular class of shares the right to an additional number of shares in the same proportion as their current shareholdings

Question 38

What is Private Placements?

Answer 38

A private placement or private issue is an issue of shares to institutional investors such as life insurance companies and superannuation funds.

Question 39

What is Bonus Issues?

Answer 39

An issue of shares to existing shareholders in the proportion of their current shareholdings at no cost to the shareholders.

Question 40

What are share options?

Answer 40

A share option is an instrument that gives the holder the right to buy or sell a certain number of shares in the company by a specified date at a stipulated price. They may or may not be issued for a fee.

Question 41

What is the accounting treatment when share options are issued and exercised?

Answer 41

Any amount received by a company on issue of options is transferred to Share Capital if the options are exercised or to a Lapsed Options Reserve if the options lapse.

Question 42

What are redeemable preference shares?

Answer 42

Redeemable preference shares, depending on their terms of issue, may be classified as equity or a liability, or a combination of both equity and a liability

Question 43

How can redeemable preference shares be redeemed?

Answer 43

Redeemable preference shares may be redeemed out of a fresh issue of ordinary shares or out of profits. If out of profits, ASIC Regulatory Guide 68 ensures that share capital is not reduced

Question 44

What happens to the premium if preference shares are treated as equity?

Answer 44

Any premium paid on the redemption of preference shares is regarded as an additional dividend and is debited to Retained Earnings if the preference shares are treated as equity

Question 45

What happens to the premium if preference shares are treated as a liability?

Answer 45

If the preference shares are treated as a liability, any premium on redemption is regarded as an expense

Question 46

How may shares be converted into other shares?

Answer 46

A company is entitled under the Act to consolidate its shares or to split its shares. A company can also convert its ordinary shares into preference shares and vice versa, provided that the company complies with the strict requirements of the Act in doing so.

Question 47

Are the accounts affected by converting shares?

Answer 47

No accounts are affected by share consolidations or share splits, as all amendments are made in the share register.

Question 48

What are share splits?

Answer 48

An action which converts a company’s shares into a larger number of shares, with a corresponding adjustment to the issue price

Question 49

What are share consolidations?

Answer 49

Actions which convert a company’s shares into a smaller number of shares, with a corresponding adjustment to the issue price

Question 50

What are share conversions?

Answer 50

An action whereby ordinary shares are converted into preference shares, or vice versa

Question 51

What types of share buy-backs are permitted under the Act and how are they accounted for?

Answer 51

A company can buy back its shares from existing shareholders under five different buy-back schemes permitted under the Act — a minimum holding buy-back, an employee share scheme buy-back, an on-market buy-back, an equal access scheme and a selective buy-back.

Question 52

How are share buy-backs accounted for?

Answer 52

Accounting for share buy-backs permits a company to reduce (debit) any equity account that it chooses.

Question 53

What are debentures?

Answer 53

Debentures usually represent secured, long-term liabilities on which interest must be paid. Under the Act, debentures also include unsecured notes and convertible notes.

Question 54

How does a company account for their issue and redemption?

Answer 54

Debentures may be issued and redeemed at nominal value, at a premium, or at a discount.

Question 55

What is the nature of an asset?

Answer 55

The characteristics of assets in the Conceptual Framework are controlled future economic benefits arising from a past event.

Question 56

What is the nature of a liability?

Answer 56

The characteristics of liabilities in the Conceptual Framework are present obligations from past events resulting in a future sacrifice of economic benefits.

Question 57

What is the nature of equity?

Answer 57

Equity is simply a residual, namely assets minus liabilities.

Question 58

What is the nature of income?

Answer 58

Income represents increases in economic benefits during the accounting period either as inflows or enhancements of assets or as decreases in liabilities that result in increases in equity, other than those relating to contributions from owners. Revenues and gains are different parts of income.

Question 59

What is the nature of an expense?

Answer 59

Expenses represent decreases of economic benefits during the accounting period in the form of outflows or reductions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to owners

Question 60

What is a contingent asset?

Answer 60

A possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Question 61

What is control in relation to conceptual framework?

Answer 61

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Question 62

What is a constructive obligation?

Answer 62

An obligation that derives from an entity’s actions where (a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities, and (b) as a result, the entity has created valid expectation on the part of those parties that it will discharge those responsibilities

Question 63

What is a provision?

Answer 63

Defined as a ‘liability of uncertain timing and amount’.

Question 64

What is a contingent liability?

Answer 64

(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) a present obligation that arises from past events but is not recognised because (i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or (ii) the amount of the obligation cannot be measured with sufficient reliability

Question 65

What are the recognition criteria for including the elements in the accounts?

Answer 65

The current recognition criteria for all of the elements are (a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and (b) the item has a cost or value that can be measured with reliability.

Question 66

With the accounting standards are contingent assets and liabilities included in the financial statements?

Answer 66

Generally, under AASB 137, contingent assets and contingent liabilities, by their very nature, should not be recognised by inclusion in the financial statements of the entity.

Question 67

What is a qualifying asset?

Answer 67

In the context of borrowing costs, an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Question 68

What is reliability?

Answer 68

The quality of information that exists when the information can be depended on to faithfully represent, without bias or material error, the transactions or events that it purports to represent

Question 69

What is measurement?

Answer 69

The process of determining the monetary amounts at which the elements are to be recognised and carried in the financial statements. It involves the assignment of monetary numbers to particular attributes of the item being measured

Question 70

What is fair value?

Answer 70

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 71

What are the methods of measuring assets?

Answer 71

Common methods are either at cost (depreciated if necessary) or at fair value, and assets are usually classified as either current or non-current.

Question 72

How are expenses measured?

Answer 72

Expenses are measured variously depending on the accounting standards, and are classified either by nature or by function in financial statements.

Question 73

How is income measured?

Answer 73

Income, including revenues, is to be measured at the fair value of any consideration received or receivable.

Question 74

How is equity measured?

Answer 74

There are no specific measurement methods for equity apart from the measurement of assets and liabilities.

Question 75

How are liabilities measured?

Answer 75

The most common methods of measuring liabilities are either at nominal or face value or at discounted present value, and liabilities are usually classified as either current or non-current unless a liquidity classification is more relevant.

Question 76

What are dividends?

Answer 76

Simply a distribution of cash or equity instruments to the shareholders of the company.

Question 77

What are the three main parts of equity?

Answer 77

Capital Other reserves Retained earnings

Question 78

When are dividends paid?

Answer 78

Dividends may be paid during the financial year (interim) or after the end of the financial year (final).

Question 79

How are dividends decided?

Answer 79

In most companies, a liability for final dividends cannot be recognised by the company until the dividend has been approved by shareholders at the annual meeting. A company’s constitution should be consulted to determine dividend rights.

Question 80

Are preference share dividends different?

Answer 80

Preference shareholders may have rights to dividends such as cumulative rights and partici- pating rights.

Question 81

What can the company pay as a dividend?

Answer 81

Dividends may be paid to shareholders in the form of shares as an alternative to cash.

Question 82

What is a reserve?

Answer 82

There is no definition of a reserve in the accounting standards or in the Corporations Act; however, it is regarded as a separate component of equity.

Question 83

How are movements in surplus accounted for?

Answer 83

Movements in a revaluation surplus must be part of other comprehensive income and expense and cannot be reclassified in a later period as part of profit or loss, but may be transferred to retained earnings.

Question 84

What are the four main financial statements a company must prepare?

Answer 84

The statement of profit or loss and other comprehensive income The statement of financial position The statement of changes in equity The statement of cash flows.

Question 85

What does the statement of profit or loss and other comprehensive income show?

Answer 85

Both the company’s income (revenues and gains) less expenses for the year, to determine the company’s profit, to which is added other items of comprehensive income.

Question 86

How must expenses be classified in a statement?

Answer 86

Either by nature or by function.

Question 87

What does the Retained Earnings account show?

Answer 87

The movements in the profits for the year, less any dividends paid or payable, and is adjusted as well for any transfers to or from other reserve accounts.

Question 88

What does the changes in equity account show?

Answer 88

The statement of changes in equity shows details of the changes in each equity account, as well as the beginning and ending balances of those accounts. Also shows the company’s total comprehensive income for the year.

Question 89

What does the statement of financial position show?

Answer 89

Shows the assets, liabilities and equity of a company as at the end of the reporting period.

Question 90

How are statements formatted?

Answer 90

The statement can be presented in several different formats depending on which information is considered most important. Assets and liabilities are usually classified as current or non-current in the statement.