Week 1 Important

Question 1

Why do shareholders need financial information?

Answer 1

assess the profitability/performance etc of the business

Question 2

Why do banks need financial information?

Answer 2

assess whether the business will be able to pay its debts

Question 3

Why do suppliers need financial information?

Answer 3

assess whether the business will be able to respect their credit terms

Question 4

Why do trade creditors need financial information?

Answer 4

assess the credibility of the business

Question 5

Why do employees need financial information?

Answer 5

job security

Question 6

• Identify the users with the power to demand SPECIAL PURPOSE FINANCIAL STATEMENTS

Answer 6

Bank – Shareholders - Employees - ATO

Question 7

Identify the users that can only rely on GENERAL PURPOSE FINANCIAL STATEMENTS

Answer 7

Suppliers – Trade creditors

Question 8

Determine whether Seaside Ltd is a small proprietary company under the ASIC Corporations Act 2001.

Answer 8

TEST:

1. Its gross operating revenue is less than $25 million
2. Its gross assets are less than $12.5 million
3. It has fewer than 50 employees

Question 9

As Seaside’s accountant, advise the company about its possibilities to prepare GENERAL purpose financial statements in compliance to AASB, and/or SPECIAL purpose financial statements.

Answer 9

When there is a conflict between SAC1 and the Corporations Act 2001, the requirements in Corporations Act supersedes. Hence in this scenario, Seaside Ltd is not required to prepare general purpose financial reports. The main disadvantage of the Corporations Act 2001 is that in some cases, it does not serve the demands of financial users as demonstrated in this case. However, the advantage of the Corporations Act 2001 requirement is that it removes the subjectivity in the definition of a reporting entity.

Question 10

Role of Australian Securities and Investments Commission (ASIC)

Answer 10

Briefly, ASIC is responsible for administering corporations legislation within Australia (which includes various reporting requirements). According to its own website, the role of the ASIC is to enforce and regulate company and financial services laws to protect consumers, investors and creditors.

Question 11

Role of Australian Accounting Standards Board (AASB)

Answer 11

The role of the AASB is to develop a conceptual framework. It is also responsible for ‘making’ accounting standards that have the force of law under the corporations legislation, as well as formulating accounting standards that are to be used by reporting entities that are not governed by corporations legislation, inclusive of entities operating in the not-for-profit sector and public sector entities.

Question 12

Role of Australian Securities Exchange (ASX)

Answer 12

The ASX provides numerous disclosure requirements for entities listed on the securities exchange. The principal aim is to help ensure that information is disseminated in an efficient and timely manner.

Question 13

Role of Financial Reporting Council (FRC)

Answer 13

The FRC oversees the operations of the AASB. It also appoints the members of the AASB (other than the chairperson). The FRC, however, is not to direct the development of accounting standards by the AASB, or to veto accounting standards that are released by the AASB.

Question 14

What is the IASB and how does it affect financial reporting regulation in Australia?

Answer 14

The International Accounting Standards Board (IASB) releases International Financial Reporting Standards (IFRS). IFRS are adopted directly by some countries, whilst others (such as Australia) release standards under the name of their domestic accounting standard setter but based upon the standards issued by the IASB.

Question 15

Provide a justification as to why large companies should have to produce financial statements that comply with
accounting standards but small companies should not have to do this.

Answer 15

The existence of this differential reporting requirement for small and large proprietary companies is based on the assumption that the limited number of parties with a material interest in ‘small’ companies would conceivably be able to request information to satisfy their specific needs. However, it is assumed that the majority of stakeholders in ‘large’ companies do not have this ability.

Question 16

What does it mean to say that some financial statements are ‘true and fair’? How would a director try to ensure that
the financial statements are true and fair before he or she signs a directors’ declaration?

Answer 16

The ‘true and fair’ requirement is a qualitative reporting requirement. A current problem is that our qualitative requirement to present true and fair financial statements is very unclear as there is no definitive explanation of what it means. for financial statements to be considered true and fair, all information of a ‘material’ nature should be disclosed so that readers of the financial statements are not misled. Also, there would be a general assumption that the financial statements comply with the relevant accounting standards and other generally accepted accounting principles.

Question 17

What is the relevance to Australia of Interpretations issued by the International Financial Reporting Interpretations Committee?

Answer 17

The Interpretations cover both newly identified financial reporting issues not specifically addressed in IFRSs and issues where unsatisfactory or conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance, with a view to reaching consensus on the appropriate treatment.