Introduction to the Regulatory Environment And the Conceptual FRAMEWORK Flashcards
1
Q
what are the major sources of financial reporting regulation in Aus?
A
The Corporations Act 2001
Australian Accounting Standards
The Conceptual Framework
ASX Listing Rules
2
Q
as accountant what two qs need to be answered?
A
- is entity required to prepare a financial report? - Corporations Act 2001
- if so, does it need to comply with Aus Accounting Standards? - It is a Reporting entity?
3
Q
The Corporations Act requires the preparation of financial reports for all:
A
Disclosing entities - With few exceptions, entities whose securities are listed on a securities exchange are disclosing entities.
Large proprietary companies – more details on the next few slides
Public companies – any company other than a proprietary company
Registered schemes – managed investment scheme that is registered
under s. 601EB of the Corporation’s Act
4
Q
The Corporations Act: Proprietary Company are limited by?
A
shares - where shareholders are afforded more protection when it comes to the level of liability they face for company debts
5
Q
The Corporations Act: Proprietary Company are unlimited….
A
company with share capital - where members’ or shareholders’ liability is not limited
6
Q
The Corporations Act: Proprietary Company have no more than
A
50 non-employee shareholders
7
Q
The Corporations Act: Proprietary Company does not offer…
A
securities for which disclosure to investors is requried
8
Q
The Corporations Act: Proprietary Company classified into
A
small or large
9
Q
The Corporations Act: Proprietary Company all non-proprietary companies are…
A
public companies
10
Q
The Corporations Act: Proprietary Company - small ones satisfies at least two following criteria?
A
- consolidated revenue for financial year and entities it controls less than $25 million
- value of gross assets at end of financial year and entities it controls is less than $12.5 million
- less than 50 employees at end of financial year
11
Q
The Corporations Act: Proprietary Company large one…
A
does not satisfy criteria of small company
12
Q
Reporting Entity: defined in?
A
Statement of Accounting Concepts (SAC) 1
13
Q
Reporting Entity: is an entity in which it is reasonable to expect existence of users who depend on…
A
- general purpose financial reports
- indicators of users’ existence (dependent on financial reports for decision making)
- separation of management from economic interest
- economic or political importance/influence (impact on external parties)
- financial characteristics (size/indebtedness of entity)
14
Q
Reporting Entity: the concept used to determine whether entities require?
A
GPFR - requires professional judgement
15
Q
Reporting Entity: critical factor in identifying whether reporting entity is ?
A
is the existence of users who depend on GPFSs to make resource allocation decisions.
16
Q
Reporting Entity: if yes…
A
- prepare GPFS
17
Q
Reporting Entity: if no.
A
report under Corporations Act 2001
18
Q
Reporting requirements under the Corporation Act: disclosing entity?
A
- comply with continuous disclosure requirements
- annual and half year reports
- financial statements required by Aus Accounting Standards
- notes to financial statements
- report audited
- lodge report with ASIC
- report to members within specific time
19
Q
Reporting requirements under the Corporation Act: small proprietary company
A
- not required to prepare annual financial reports (ch 2M Corporations Act), unless controlled by foreign companies or direct by ASIC or shareholders with at least 5% voting rights.
- shareholder can request for financial reports through
20
Q
Reporting requirements under the Corporation Act: Large proprietary company
A
- prepare annual financial reports
- have reports audited
- send annual report to members within 4 months of end of financial year
21
Q
Reporting requirements under the Corporation Act: Public Companies
A
- prepare annual reports
- report audited
- lodge report with ASIC
- send reports to members
(both within 4 months)
22
Q
Reporting requirements under the Corporation Act: Registered Scheme?
A
- prepare financial report, director’s report and auditors report/ financial year
- lodge with ASIC
- send report to members within 3 months end of financial year
23
Q
- Australian Accounting Standards: what standards must all entities that are required to prepare financial statements apply?
A
AASB 101 - Presentation of Financial Statements
AASB 107 - Statement of Cash Flows
AASB 108 - Accounting Policies, Changes in Accounting Estimates and Errors
AASB 1048 - Interpretation of Standards.
24
Q
- Australian Accounting Standards - what does tier 1 and 2 define?
A
what accounting standards reporting entities have to follow
25
2. Australian Accounting Standards Tier 1 which entities?
reporting requirements:
- for‐profit private sector entities that have public accountability
- the Australian Government and State, Territory and Local Governments.
26
2. Australian Accounting Standards tier 2 which entities??
- for‐profit private sector entities that do not have public accountability
- not‐for‐profit private sector entities
- public sector entities (for‐profit or not‐for‐profit)
- Territory and Local Governments.
27
2. Australian Accounting Standards tier 1 -
full International Financial Reporting Standards (IFRS) as adopted in Australia (AASB
28
2. Australian Accounting Standards tier 2 -
reduced disclosure requirements (RDR):
29
3. The Conceptual Framework issued by and purpose?
Issued by the AASB
The purpose is to provide a coherent set of principles
30
3. The Conceptual Framework assists with?
Assists with standard consistency
Assists preparers deal with issues not addressed by a standard
Assists auditors in forming an opinion on compliance
Assists users to interpret statements
31
4. ASX Listing Rules include requirements for.. and primary focus...
for continuous disclosure and periodic reporting
Primary focus on disclosure
32
one of key players in financial reporting regulation in Aus is... (FRC)
Financial Reporting Council - advises gov on standard setting, appoints members to AASB and monitors AASB and gives direction
33
one of key players in financial reporting regulation in Aus is... (AASB)
Australian Accounting Standards Boards - develops conceptual framework, public consultation on draft standards and transforms International Accounting Standards and International Financial Reporting Standards in Australia standards
34
one of key players in financial reporting regulation in Aus is... (ASIC)
Australian Securities and Investment Commission
- regulate compliance with financial reporting and auditing requirements for reporting
- investigate non-compliance of companies
35
Rules-based vs. principles-based standards:
| rule based?
are sets of detailed rules that must be followed when preparing financial statements.
36
Rules-based vs. principles-based standards: Principle based?
- generally accepted accounting principles (GAAP) used as conceptual basis for accountants
- broad basis for accountants to follow
- focus on economic substance of transaction
37
Advantages of principles-based standards:
- simpler
- broad guidelines apply to many situation
- improve representational faithfulness of financial statements
- allow accountants use prof. judgement
- managers less likely to attempt earning management
38
Disadvantages of principles-based standards
- select treatments that doesn't reflect underlying economic substance
- comparability among financial statements reduced
39
Professional judgement in accounting: theories help us to...
predict accounting policy choice
understand the implications of alternative accounting policies
provide a source of guidance in accounting policy decisions.
40
Advantages of regulation:
- increased efficiency in allocating capital (without it may conceal/misrepresent info for decision-making)
- cheaper production (reduce reduction production of info)
- check on perquisites
- public confidence
- standardisation
- public good (to correct market imperfection)
41
Disadvantages of regulation
Difficult to achieve efficiency and equity.
Determining the optimal quantity of information is problematic.
Regulation is difficult to reverse.
Communication is restricted.
Reporting entities are different.
There is lobbying.
Monopolisation of accounting standards.
42
What is the Conceptual Framework of Financial Reporting?
‘A coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards’;
Also, it is an attempt to provide a structured theory of accounting that prescribes practice.
43
The Conceptual Framework – purpose
Establishes concepts/ideas that underlie the preparation and presentation of general purpose financial reports
- users (prepared for who?)
- elements (what info needed)
- recognition (when should elements of fin. statements be included?)
- measurement (at which amount?)
44
The IASB’s conceptual framework for financial reporting comprises 4 chapters:
Chap 1: the objective of general purpose financial reporting.
Chap 2: the reporting entity.
Chap 3: the qualitative characteristics of useful financial reporting.
Chap 4: the framework.
45
How does it differ from an accounting standard?
| Conceptual Framework
- is not an accounting standard – it is a set of principles to be followed when preparing and presenting financial statements.
- General concepts or principles – designed to provide guidance in the preparation of financial statements.
46
How does it differ from an conceptual framework?Accounting standards
– specific requirements for a particular area of financial reporting, may go beyond the framework, are mandatory and sometimes conflict with the framework.
Conceptual Framework – more broadly defines what is an asset/liability and when it should be included in financial statements.
47
Why have a framework?
consistence/logical
international comparability
transparency
emphasis decision usefulness
48
The framework – benefits technical...
- improve practice of accting by guidance
- help preparers, auditors, users
- decision making
- sets principles
49
The framework – benefits political
guard against political interference (could have major economic and social consequence)
50
The framework – benefits professional
protect accounting profession
maintain status of profession
establish unique body of knowledge
51
The framework – criticisms
- precedence of economic issue over social
- economic decision making not only thing
- no social performance indicators as guide to success
- only codification of existing practice
- barrier to enhance and develop accounting standards
- ambiguous
- self regulation to avoid stricter regulation and strike bargain with gov to not intervene
52
Conceptual Framework - The objectives of financial reporting
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit
53
Conceptual Framework - underlying assumption of framework
accrual basis - recorded when event occurs not when paid for
going concern - continuing operations and solvency - statements prepared under assumption entity continue to operate in foreseeable future (support use of prepaid expense; systematic allocation of depreciation; use of historical cost)
54
Conceptual Framework - underlying assumption (fair representation
achieved if financial statements are based on qualitative characteristics.
55
Two main concepts of capital are discussed in the conceptual framework.
Financial Capital Concept – capital is synonymous with net assets or equity.
Physical Capital Concept – capital seen as the operating capability of the entity’s assets.
56
So where is the link between conceptual framework and accounting regulation?
Regulation put in place to ensure the quality through requirements of qualitative characteristics (attributes to make the information useful for decision-making) as described in the Framework.
57
The Conceptual Framework primary users are resource providers.
equity investors: shareholders
lenders: banks
other creditors: employees, suppliers
58
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| Fundamental:
relevance
| financial representation
59
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| relevance?
Must have a quality that influences users’ decisions
of an economic nature.
• Must have predictive value and/or confirmatory value
• Example – revenue information for 2012 can be used to predict the company’s performance in 2013.
60
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| faithful rep?
Information must be complete, neutral and free from material error.
61
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| enhancing:
comparability
verifiability
timeliness
understandability
62
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| comparability/
Users can compare aspects of an entity over time and
| between entities
63
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| verifiability?
Different knowledgeable and independent observers could reach consensus that a particular piece of information is a faithful representation of the economic phenomena.
64
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| timeliness:
Having information available to decision makers on time
65
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION
| understandability:
Users should be able to comprehend the meaning of the reports.
66
Constraint on financial reporting:
Costs versus benefits:
| COSTS OF PREPARING FINANCIAL REPORTS SHOULD NOT EXCEED THE BENEFITS TO BE DERIVED FROM THE REPORTS.
67
The elements of financial statements include:
* assets
* liabilities
* equity
* income
* expenses
68
Assets:
resources controlled by the entity; result of past events; with future economic benefits
69
Liabilities:
present obligation; arising from past events; expected outflow of resources embodying economic benefits
70
equity:
residual interest in the assets after deducting all liabilities
71
income:
increases in economic benefits in the form of inflows of assets or decreases in liabilities that result in increases in equity
72
expenses
decreases in economic benefits in the form of outflows of assets that result in decreases in equity
73
RECOGNITION CRITERIA
| Asset:
probable that the economic benefit will flow to the entity; cost or other value can be measured reliably
74
RECOGNITION CRITERIA
| liability:
probable that an outflow of resources embodying economic benefits will result from settling the present obligation; amount can be measured reliably
75
RECOGNITION CRITERIA
| income:
increase in future economic benefits is probable and can be measured reliably
76
RECOGNITION CRITERIA
| expense:
decrease in future economic benefits is probable and can be measured reliably
77
measurement:
* Historical cost
* Current cost
* Realisable value
* Present value
* Fair value
78
THE ROLE OF PROFESSIONAL JUDGEMENT
REQUIRED
* Framework requires professional judgment in relation to substance over form
* Accounting treatment of some transactions is unregulated
79
THE ROLE OF PROFESSIONAL JUDGEMENT
| Issues:
• Difficult to accept that judgement is neutral and unbiased • Different judgments can lead to different disclosures
