Week 1 Everything

Question 1

What is financial accounting?

Answer 1

Financial accounting is a process involving collecting, processing, and disclosing financial and other information about an entity.

Question 2

Financial accounting is undertaken to meet

Answer 2

The decision-making needs of parties external to the entity and the accountability obligations of the entity to those external parties.

Question 3

The difference between financial accounting and management accounting

Answer 3

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.

Question 4

Why is Financial Reporting extensively regulated?

Answer 4

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.

Question 5

The regulations require entities to provide information which is

Answer 5

Relevant
Reliable 
On a timely basis 
Comparable
Understandable

Question 6

What are the incentives for managers and directors to prepare biased financial reports

Answer 6

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.

Question 7

Who are the users of financial reports?

Answer 7

Owners
Managers
Lenders
Suppliers
Customers
Investment analysts 
Competitors 
Employees
Government 
Community Representatives

Question 8

What do the users of financial reports have in common

Answer 8

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.

Question 9

General Purpose Financial Reports

Answer 9

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

Question 10

Special Purpose Financial Reports

Answer 10

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.

Question 11

Reporting Requirements of Corporations Act

Answer 11

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.

Question 12

Why is it necessary for Financial Reports to be Audited?

Answer 12

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.

Question 13

Four main bodies that formulate and/or enforce accounting regulations in Australia

Answer 13

The Australian Securities and Investments Commission (ASIC)

The Australian Accounting Standards Board (AASB)

The Financial Reporting Council (FRC)

The Australian Securities Exchange (ASX)

Question 14

The Australian Securities and Investments Commission (ASIC)

Answer 14

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

Question 15

The Australian Accounting Standards Board (AASB)

Answer 15

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.

Question 16

The Financial Reporting Council (FRC)

Answer 16

Oversees the activities of AASB and appoints its members

Question 17

The Australian Securities Exchange (ASX)

Answer 17

The company managing the Australian stock market: sets uniform trading rules, ethical standards, listing requirements and corporate governance guidelines

Question 18

Application of Australian Accounting Standards states that the requirements of nearly all AASB Accounting Standards and Interpretations apply only to:

Answer 18

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]

Question 19

Reporting Entity

Answer 19

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.

Question 20

For an entity or group to be a reporting entity

Answer 20

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.

Question 21

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:

Answer 21

Public Companies

Large Proprietary Companies

Disclosing Entities

Question 22

Disclosing Entities

Answer 22

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

Question 23

Differential reporting

Answer 23

PHOTO 7/3/19

Question 24

The two tiers

Answer 24

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

Question 25

Tier 1 entities comprise of:

Answer 25

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].

Question 26

Tier 2 entities comprise of:

Answer 26

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)

Question 27

What about small proprietary companies

Answer 27

They are exempted from complying with accounting standards.

Question 28

A company is a “small proprietary company” if it meets two of the three tests:

Answer 28

Its gross operating revenue is less than $25 million

Its gross assets are less than $12.5 million

It has fewer than 50 employees

Question 29

Reasons for the exemption of small proprietary companies

Answer 29

Cost and benefit trade-off

Level of impacts on economy and society

Question 30

Process of Australia adopting IFRSs

Answer 30

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

Question 31

Regulation of Reporting on Social and Environmental Performance

Answer 31

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.

Question 32

Reporting on an entity’s social performance could include information about matters such as:

Answer 32

Labour practices

Human rights performance Ethics

Question 33

Reporting on an entity’s Environmental Performance could include information about matters such as:

Answer 33

Materials usage
Recycling
Carbon emissions

Question 34

Corporations Act [s295 (1)] requires the Annual Financial Report to consist of:

Answer 34

Financial Statements for the year

Notes to the Financial Statements

Director’s Declaration about the Financial Statements and Notes.

Question 35

Financial Statements required by the Corporations Act

Answer 35

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)

Question 36

The notes include

Answer 36

comprising significant accounting policies and other explanatory information

Question 37

Corations Act [s296] requires Financial Reports to comply with:

Answer 37

Accounting standards issued by AASB and regulations

Question 38

Requirement to present a True and Fair View

Answer 38

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.

Question 39

Corporations Act [s314] requires the annual report to include an

Answer 39

Auditor’s Report on the Financial Report prepared by directors to ensure compliance with AASB standards, true and fair view and the corporations act.

Question 40

Director’s Report – General Requirements

Answer 40

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]

Question 41

General information includes

Answer 41

A Review of Operations and the Results of th1ose Operations for the year

Question 42

Specific information includes

Answer 42

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

Question 43

The Corporations Act [s300A] requires details of Key Management Personal Remuneration

Answer 43

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

Question 44

Significance of Materiality in Financial Reporting

Answer 44

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

Question 45

Definition of Materiality

Answer 45

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.