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Company Accounting > 1. Nature & Regulation of Companies and Their Operations > Flashcards

1. Nature & Regulation of Companies and Their Operations Flashcards

1
Q

What are the attributes of a company?

A

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

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2
Q

What are the different types of companies?

A 
Proprietary Company
Public Company
Listed Corporation
Disclosing Entities
Foreign Company
No-Liability Companies
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3
Q

What is a proprietary company?

A 
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
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4
Q

What does Pty Ltd stand for

A

Pty - proprietary company

Ltd - Limited

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5
Q

What is a public company?

A

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

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6
Q

What is a no-liability company?

A

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

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7
Q

What documents are needed to form a company?

A

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

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8
Q

What is replaceable rules?

A

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

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9
Q

What does ASIC do to register a company?

A

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.

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10
Q

What is a company’s constitution?

A

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

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11
Q

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

A

Yes. At registration or within 14 days

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12
Q

What types of records are required to manage a company?

A 
Minute books of meetings
Financial records
Appropriate financial statements for those records 
Registers of members 
Debenture holders 
Options holders
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13
Q

What are the difference between shares and debentures?

A

Shares buy a stake in the company

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

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14
Q

What is an option?

A

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

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15
Q

When does a company have to provide a disclosure document?

A

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

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16
Q

What is a disclosure document?

A

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

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17
Q

Who is the AASB?

A

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

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18
Q

Who is the FRC?

A

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

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19
Q

Who is IASB?

A

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

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20
Q

What does ASIC do?

A

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

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21
Q

What does the ASX do?

A

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

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22
Q

What does the FRP do?

A

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

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23
Q

What is GPFRs?

A

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

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24
Q

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

A

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

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25
Q

How can shares be paid for?

A

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

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26
Q

What happens if the shares are undersubscribed?

A

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.

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27
Q

What happens when shares are oversubscribed?

A

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.

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28
Q

What happens to calls which are collected in advance?

A

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.

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29
Q

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

A

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.

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30
Q

What can a company do with forfeited shares?

A

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.

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31
Q

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

A 
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.
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32
Q

What do formation costs include?

A

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

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33
Q

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

A

They must be treated differently under accounting standards.

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34
Q

Are formation costs treated as an expense?

A

Yes

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35
Q

How are share issue costs treated?

A

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.

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36
Q

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

A

Rights Issues
Private Placements
Bonus Issues

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37
Q

What is a Rights Issue?

A

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

38
Q

What is Private Placements?

A

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

39
Q

What is Bonus Issues?

A

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

40
Q

What are share options?

A

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.

41
Q

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

A

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.

42
Q

What are redeemable preference shares?

A

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

43
Q

How can redeemable preference shares be redeemed?

A

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

44
Q

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

A

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

45
Q

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

A

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

46
Q

How may shares be converted into other shares?

A

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.

47
Q

Are the accounts affected by converting shares?

A

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

48
Q

What are share splits?

A

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

49
Q

What are share consolidations?

A

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

50
Q

What are share conversions?

A

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

51
Q

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

A

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.

52
Q

How are share buy-backs accounted for?

A

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

53
Q

What are debentures?

A

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

54
Q

How does a company account for their issue and redemption?

A

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

55
Q

What is the nature of an asset?

A

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

56
Q

What is the nature of a liability?

A

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

57
Q

What is the nature of equity?

A

Equity is simply a residual, namely assets minus liabilities.

58
Q

What is the nature of income?

A

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.

59
Q

What is the nature of an expense?

A

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

60
Q

What is a contingent asset?

A

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.

61
Q

What is control in relation to conceptual framework?

A

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.

62
Q

What is a constructive obligation?

A

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

63
Q

What is a provision?

A

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

64
Q

What is a contingent liability?

A

(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

65
Q

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

A

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.

66
Q

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

A

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.

67
Q

What is a qualifying asset?

A

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.

68
Q

What is reliability?

A

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

69
Q

What is measurement?

A

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

70
Q

What is fair value?

A

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

71
Q

What are the methods of measuring assets?

A

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

72
Q

How are expenses measured?

A

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

73
Q

How is income measured?

A

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

74
Q

How is equity measured?

A

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

75
Q

How are liabilities measured?

A

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.

76
Q

What are dividends?

A

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

77
Q

What are the three main parts of equity?

A

Capital
Other reserves
Retained earnings

78
Q

When are dividends paid?

A

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

79
Q

How are dividends decided?

A

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.

80
Q

Are preference share dividends different?

A

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

81
Q

What can the company pay as a dividend?

A

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

82
Q

What is a reserve?

A

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.

83
Q

How are movements in surplus accounted for?

A

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.

84
Q

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

A

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.

85
Q

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

A

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.

86
Q

How must expenses be classified in a statement?

A

Either by nature or by function.

87
Q

What does the Retained Earnings account show?

A

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.

88
Q

What does the changes in equity account show?

A

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.

89
Q

What does the statement of financial position show?

A

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

90
Q

How are statements formatted?

A

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.

Company Accounting (11 decks)

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