Week 1 Everything Flashcards
What is financial accounting?
Financial accounting is a process involving collecting, processing, and disclosing financial and other information about an entity.
Financial accounting is undertaken to meet
The decision-making needs of parties external to the entity and the accountability obligations of the entity to those external parties.
The difference between financial accounting and management accounting
Financial Accounting provides information for decision making by, and accountability to external users such as investors whereas Management Accounting provides information for decision making and control by internal users such as management. Financial Accounting is heavily regulated for example by the Corporations Act whereas Management Accounting is not regulated as management decides which information is required and how it is processed and reported.
Why is Financial Reporting extensively regulated?
To ensure that external users are provided with the information required for decision making and accountability. In the absence of regulation, external users with more economic resources or political power, are likely to obtain more information about an entity, and receive information earlier than other external users with less economic resources or political power.
The regulations require entities to provide information which is
Relevant Reliable On a timely basis Comparable Understandable
What are the incentives for managers and directors to prepare biased financial reports
To retain their positions, when the entity has performed poorly
To increase their remuneration, when they entitled to receive performance bonuses dependent on profit, and/or other figures in the financial report.
Who are the users of financial reports?
Owners Managers Lenders Suppliers Customers Investment analysts Competitors Employees Government Community Representatives
What do the users of financial reports have in common
They are all connected to the business in some way. Every user has a different interest in the business. These interests can sometimes be conflicting. But all users need financial information to make economic decisions.
General Purpose Financial Reports
General Purpose Financial Reports are designed to satisfy the common information needs of a range of users, who are unable to command financial reports such as an annual company report. General Purpose Financial Reports must comply with the requirements of Corporations Act, AASB Accounting Standards, and (if listed) ASX Listing Rules
Special Purpose Financial Reports
Special Purpose Financial Reports are designed to cater for the specific information needs of a specific user who has the power to command the specific information they require such as an income tax return proved to the ATO.
Reporting Requirements of Corporations Act
Corporations Act [s292(1)] requires Public Companies, Large Proprietary Companies, and Other Disclosing entities to prepare a Financial Report and Director’s Report for each financial year.
Why is it necessary for Financial Reports to be Audited?
Directors have strong incentives to prepare biased financial reports. Users of financial reports are aware reports prepared by Directors may be biased.Therefore the examination of the Financial Report by an independent Auditor, helps establish the creditability of the Financial Report, so that users can rely on the financial report for decision making.
Four main bodies that formulate and/or enforce accounting regulations in Australia
The Australian Securities and Investments Commission (ASIC)
The Australian Accounting Standards Board (AASB)
The Financial Reporting Council (FRC)
The Australian Securities Exchange (ASX)
The Australian Securities and Investments Commission (ASIC)
Outlines the responsibilities of company’s directors. Establishes which companies are or are not required to comply with Australian Accounting Standards. Responsible for administering corporation legislation and enforcing the Corporations Act
The Australian Accounting Standards Board (AASB)
Develops, in the public interest, a single set of high quality, understandable accounting standards that require transparent and comparable information in general purpose financial statements.
The Financial Reporting Council (FRC)
Oversees the activities of AASB and appoints its members
The Australian Securities Exchange (ASX)
The company managing the Australian stock market: sets uniform trading rules, ethical standards, listing requirements and corporate governance guidelines
Application of Australian Accounting Standards states that the requirements of nearly all AASB Accounting Standards and Interpretations apply only to:
Each entity and group that is required to prepare financial reports by the Corporations Act and that is a reporting entity
Financial reports of other reporting entities, (e.g. government departments, superannuation funds, not for profit entities such as charities, sporting clubs)
Financial reports that are, or are held out to be, general purpose financial reports. [AAB1057.5]
Reporting Entity
An entity (including a group) in respect of which it is reasonable to expect the existence of users who rely on the entity’s general purpose financial statements for information that will be useful to them for making and evaluating decisions about the allocation of resources.
For an entity or group to be a reporting entity
There must be at least one group of users who regularly require financial information about the entity and
are unable to command information they require such as small shareholders and creditors, and therefore rely on the entity’s general purpose financial reports unlike banks and tax authorities that have the power to obtain special purpose financial statements suited to their needs.
Which entities needs to prepare annual reports?
Corporations Act [s292(1)] requires the following entities to prepare a Financial Report and Director’s Report for each financial year:
Public Companies
Large Proprietary Companies
Disclosing Entities
Disclosing Entities
Disclosing entities are public companies and unit trusts which are listed on a securities exchange, or have made a public issue of securities via a prospectus
Differential reporting
PHOTO 7/3/19
The two tiers
Public Companies, Large Proprietary Companies and other Disclosing Entities which are required to prepare a Financial Report and a Director’s Report by the Corporation Act (slide 34), and are reporting entities, are divided into two tiers by AASB1053: Application of Tiers of Australian Accounting Standards
Tier 1 entities comprise of:
For-profit private sector entities that have public accountability, (e.g. some public companies)
The whole of Government: Commonwealth, State, Territory and Local Governments [AASB1053.11].
Tier 2 entities comprise of:
For-profit private sector entities that do not have public accountability (e.g some public companies, and all large proprietary companies);
Not-for-profit private sector entities; (e.g. charities, sporting clubs) and
Public sector entities other than whole of government, (e.g. RMIT)
What about small proprietary companies
They are exempted from complying with accounting standards.
A company is a “small proprietary company” if it meets two of the three tests:
Its gross operating revenue is less than $25 million
Its gross assets are less than $12.5 million
It has fewer than 50 employees
Reasons for the exemption of small proprietary companies
Cost and benefit trade-off
Level of impacts on economy and society
Process of Australia adopting IFRSs
VERY SIGNIFICANT (and somewhat controversial) event in Australia. In 2002 the Financial Reporting Council decided that Australia had to adopt accounting standards issued by the International Accounting Standards Board (IASB) from 1 January 2005. In Australia the International financial reporting standards (IFRS) are converted into Australian accounting standards with the AASB prefix
Regulation of Reporting on Social and Environmental Performance
It is common for entities and groups to report on their social and environmental performance. It is mostly unregulated other than areas sick as compliance with environmental laws. Therefore reporting on entity’s social and environmental performance is largely voluntary. Therefore individual entities and groups can determine what to cover and how to cover it.
Reporting on an entity’s social performance could include information about matters such as:
Labour practices
Human rights performance Ethics
Reporting on an entity’s Environmental Performance could include information about matters such as:
Materials usage
Recycling
Carbon emissions
Corporations Act [s295 (1)] requires the Annual Financial Report to consist of:
Financial Statements for the year
Notes to the Financial Statements
Director’s Declaration about the Financial Statements and Notes.
Financial Statements required by the Corporations Act
Includes:
Statement of financial position
Statement of profit or loss and other comprehensive income
Statement of changes in equity
Statement of cash flows for the period
Notes
Comparative information (previous period)
The notes include
comprising significant accounting policies and other explanatory information
Corations Act [s296] requires Financial Reports to comply with:
Accounting standards issued by AASB and regulations
Requirement to present a True and Fair View
Corporations Act [s297] requires the Financial Statements and Notes to give a true and fair view of the financial performance and financial position of the entity; and if consolidated financial statements are required, they must give a True and Fair View of the financial performance and financial position of the Group.
Corporations Act [s314] requires the annual report to include an
Auditor’s Report on the Financial Report prepared by directors to ensure compliance with AASB standards, true and fair view and the corporations act.
Director’s Report – General Requirements
Corporations Act requires the Annual Director’s Report for an Entity or Group to include both General information [s299-s299A] and Specific information [s300-s300A]
General information includes
A Review of Operations and the Results of th1ose Operations for the year
Specific information includes
Specific information required to be provided by all Public Companies, Large Proprietary Companies, and Other Disclosing Entities [s300(1)-(9)] such as details of dividend paid and names of directors
The Corporations Act [s300A] requires details of Key Management Personal Remuneration
to be included in a separate Remuneration Report including the composition of remuneration: base salary; benefits; short and long-term performance bonuses (incentives), paid in cash, options or shares
Significance of Materiality in Financial Reporting
AASB Accounting Standards and Interpretations only apply to Financial Reports, where the information resulting from applying those AASB Accounting Standards and Interpretations is material. The accounting policies specified in AASB Accounting Standards and Interpretations do not need to be applied where their effect is immaterial
Definition of Materiality
AASB108.5 defines information as being material if its omission or misstatement of the information could, individually or collectively, influence the economic decisions that users make on the basis of the financial reports.
