Ch01 - Australian External Reporting Environment

Chapter 1
An overview of the
Australian external
reporting environment
Copyright 2012 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 7e
1-1
Objectives of this lecture

Understand the meaning of financial accounting and be able to
explain who is likely to be a user of general purpose financial
statements.
Understand the sources of accounting regulation within Australia
Be able to explain the general functions of the Australian Securities
and Investments Commission, the Australian Accounting Standards
Board, the Financial Reporting Council and the Australian Securities
Exchange
Be able to explain the general functions of the International
Accounting Standards Board and its direct relevance to Australian
accounting standard setting
Be aware of some of the perceived benefits of international
standardisation of financial reporting
Understand the role of an accounting standard and the process
through which it is developed
1-2
Financial accounting defined
Financial accounting is a process involving the collection and

processing of financial information to meet the decision-making
needs of parties external to the organisation.
Financial accounting may be contrasted with management
accounting, which:
focuses on providing information for decision making by parties within the
organisation
is largely unregulated
Financial accounting is more heavily regulated than management

accounting, and a great deal of regulation changes each year
(meaning a financial accountant must continually be updating
knowledge).
In this course/subject we will focus on general purpose financial
statements

1-3
General- vs special-purpose financial

statements
General-purpose financial statements (GPFS)
Comply with the IASB/AASB Conceptual Framework and
accounting standards.
Objectives of GPFS: Meet the information needs common to
users (existing and potential investors, lenders, other creditors)
who are unable to command the preparation of reports tailored to
satisfy, specifically, all their information needs.

1-4
General- vs special-purpose financial

statements (cont.)
Special-purpose financial statements
Designed to meet the needs of a specific group or to satisfy a
specific purpose.
Example: a bank demanding as part of a loan agreement that the
borrowing entity provide information about projected cash flows

1-5
Users demand for general-purpose

financial statements
General Purpose Financial Reports are primarily directed

at (as per the IASB Conceptual Framework for Financial
Reporting released by the IASB in September 2010):
existing and potential investors
lenders
other creditors

1-6
Users demand for general-purpose

financial statements (cont.)
Could also be other interested parties. As IASB (2010)
states:
Other parties, such as regulators and members of the public

other than investors, lenders and other creditors may also find
general purpose financial reports useful. However these reports
are not primarily directed to these other groups
Interested parties generally lack the power to demand

specific information to meet their needshence the need
for general-purpose financial statements.

1-7
Sources of external financial

reporting regulation
Four main bodies that formulate and/or enforce

accounting regulations in Australia
1. The Australian Securities and Investments Commission (ASIC)
2. The Australian Accounting Standards Board (AASB)
3. The Financial Reporting Council (FRC)
4. The Australian Securities Exchange (ASX)

1-8
Sources of external financial

reporting regulation (cont.)
Responsibilities for developing accounting standards

within Australia now with the Australian Accounting
Standards Board (AASB).
However, AASB now relieswith some limited exceptions
on standards being developed by International
Accounting Standards Board (IASB) owing to a
commitment made in 2003 that Australia would comply
with International Accounting Standards (now
International Financial Reporting Standards) from 1
January 2005.

1-9
Australian Securities and

Investments
Commission
(ASIC)
One important body in relation to financial reporting in

Australia is ASIC.
Responsible for administering corporation legislation.
Independent of state ministers or state parliaments.
Reports to the Commonwealth Parliament and Treasurer.

1-10
ASIC (cont.)
The Corporations Act (enforced by ASIC):
Outlines the responsibilities of company directors in relation to
various activities, including:
the nature of their conduct
financial statement preparation, lodgment and distribution
Requires preparation of true and fair financial statements by

directors of public companies, large proprietary companies,
organisations with securities listed on the ASX, and some small
proprietary companies. But what do financial statements
comprise..?

1-11
ASIC (cont.)
Paragraph 10 of AASB 101 states that a complete set of financial
statements comprises:
a statement of financial position as at the end of the period
a statement of comprehensive income for the period
a statement of changes in equity for the period
a statement of cash flows for the period
notes, comprising a summary of significant accounting policies and
other explanatory notes

1-12
ASIC (cont.)
The true and fair view requirement is a central component of
Australian financial reporting
Requirement to produce true and fair financial statements contained in
s. 297 of Corporations Act:
The financial statements and notes for a financial year must give a true
and fair view of:
the financial position and performance of the company, registered
scheme or disclosing entity; and
if consolidated financial statements are required, the financial
position and performance of the consolidated entity.

1-13
ASIC (cont.)
True and fair view (cont.)
No definition of true and fair provided in the Corporations
Act.
If accounts are to be considered true and fair they
should include all information of a material nature so that
readers of financial statements are not misled but what
is material?

1-14
ASIC (cont.)Materiality
AASB 1031 (para. 9)/ IASBs Conceptual Framework (para QC11),
provides that:
Information is material if its omission, misstatement or nondisclosure has the potential, individually or collectively, to
a) Influence the economic decisions of users taken on the basis
of the financial statement, or
b) Affect the discharge of accountability by the management or
governing body of the entity.
Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances.

1-15
ASIC (cont.)
Pursuant to the Corporations Act, directors of large and
listed companies, as well as some other entities, are
required to attach to financial statements a:
Directors Declaration;
Directors Report; and a
Declaration by chief executive officer and chief
financial officer

1-16
Australian Accounting Standards Board

(AASB)
Began operations in 1991.
Functions (under s. 227 of ASIC Act) include:
developing a conceptual framework
making accounting standards that have force of law under
s. 334 of the Corporations Act
formulating accounting standards for other purposes:
for entities not governed by The Corporations Law
participating in and contributing to the development of a

single set of accounting standards for worldwide use.

1-17
AASB (cont.)
From 2000 AASB standards apply to all types of entities, those

regulated under companies legislation and all other types, i.e.
responsibility for formulating standards for entities not governed by
the Corporations Act.
Majority of standards underwent change in 200304 as Australia

moved towards adopting accounting standards released by the IASB
from 2005.
Reports to the Financial Reporting Council (FRC), which oversees

the operations of the AASB.
Has one full-time chairperson and the balance are part-time

members appointed by the FRC.

1-18
AASB (cont.)
The application of AASB standards:
Section 231 of ASIC Act requires AASB to carry out cost
benefit analysis of impact of proposed standard before making
or formulating it.
Once the AASB makes a standard it is approved by
Commonwealth Parliament.
Once an AASB-developed standard becomes an accounting
standard, company directors are required to ensure that the
companys financial statements comply with that standard (s.
296 of Corporations Act).

1-19
AASB (cont.)
As a result of the FRC decision in 2002 that Australia
would adopt accounting standards developed by the
International
Accounting
Standards
Board,
the
development of accounting standards in Australia is no
longer directly under Australian control, except:
to the extent that a standard relates to domestic issues and
there is no equivalent IFRS.

1-20
AASB and the role of the FRC

The Financial Reporting Council (FRC) which oversees the
activities of the AASB has:
members that are appointed directly by the Federal
Treasurer or the Treasurer may specify an organisation or
body to choose a person to represent them, and
The 18 members are nominated by a number of interest
groups (stakeholders).

1-21
AASB and the FRC (cont.)

Functions and powers of the FRC (s. 225 of ASIC Act)
Provide broad oversight of the process for setting accounting
standards.
Appoint members of the AASB
Approve and monitor the AASBs priorities, business plan, budget
and staffing
Give the AASB directions, advice or feedback on matters of general
policy
No power to direct AASB re-development of particular standards
No power to veto a standard

1-22
Overview of Australian accounting

standard setting structure

1-23
International Financial Reporting

Interpretations Committee (IFRIC)
Whilst we have Interpretation Advisory Panels in
Australia, at the international level we have IFRIC.
IFRIC is part of the IASB.
Provides interpretations of requirements embodied within
IFRSs.
It is of relevance to Australia where there are
uncertainties about particular requirements incorporated
in IFRSs and, therefore, within AASB accounting
standards.

1-24
Small versus large proprietary companies

and its impact on reporting
Small proprietary companies exempted from complying

with accounting standards (under s. 45A(1) of
Corporations Act)
A proprietary company is considered to be small if

it meets two of the following three tests:
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

1-25

(cont.)
Small proprietary companies (cont.)
Small proprietary company does not have to comply with

particular accounting standards (s. 296 of Corporations
Act) if:
a) the report is prepared in response to a shareholder direction
under s. 293 (requiring at least 50% of votes).
b) the direction specifies that the report does not have to comply
with those accounting standards.

1-26

(cont.)
Small proprietary companies (cont.)
Do not have to prepare formal financial statements, apply
accounting standards, or have their financial statements
audited, unless so requested by:
ASIC; or
shareholders holding at least 5% of the voting shares
If a proprietary company is not considered small, it is

classified large and is subject to more stringent disclosure
requirements.

1-27
Australian Securities Exchange (ASX)

Another important source of disclosure regulation is the ASX.
There is one nationally operated securities exchange.
In November 1998 the ASX became a publicly listed company.
One set of listing rules known as the ASX Listing Rules.
Failure to comply may lead to removal from listing.
Rules help ensure that information is disseminated in an
efficient and timely manner.

1-28
Process of Australia adopting IFRSs

This was a VERY SIGNIFICANT (and somewhat controversial)
event in Australian financial reporting history.
In 2002 the Financial Reporting Council decided to commit
Australia effectively to adopting accounting standards issued
by the International Accounting Standards Board (IASB).
The standards released by the IASB are now referred to as
International Financial Reporting Standards (IFRSs)where
previously they were referred to as International Accounting
Standards (IASs).

1-29
Process of Australia adopting IFRSs (cont.)

Catalyst to adopting IFRSs within Australia (a directive of the
FRC) was the decision by European Union that all listed
companies within Union should adopt IASB standards by 1
January 2005 for the purposes of preparing consolidated
financial reports, in order to support the single market
objective.
European Union is to adopt IFRSs directly without modification.
In Australia: IFRSs are converted into Australian (AASB)
accounting standards, each bearing an AASB prefix.

1-30
Requirement for reporting under IFRS equivalents is extremely broad

in Australia it applies to all reporting entities under the Corporations
Act, listed and unlisted as well as private and publicunlike in
Europe where IFRSs are mandatory for listed companies only
AASB standards have general applicability to not-for-profit and local

government sectorsmaterial added by AASB that describes the
scope and applicability to the Australian context.
Refer to Table 1.1, p. 26AASB accounting standards and

equivalent IAS/IFRS accounting standards. Remember, new
standards are continuously being released and existing accounting
standards are frequently revised. All standards can be downloaded
from the AASB website.

1-31

Numbering system to be used for AASB standards
1. AASB standards 199 series
Where a new IFRS is issued its number will be used by the AASB,
e.g. IFRS 1 becomes AASB 1
2. AASB standards 100999 series
Where an equivalent to an existing or improved IAS is issued, e.g.
AASB 101 corresponds to IAS 1
3. AASB standards 1000 + series
Applies to standards on the public or not-for-profit sectors or for
areas of domestic application only. Also applies to AASB standards
that are maintained as part of the post-2005 standards

1-32
All this regulationis it really necessary?
General purpose financial reporting is heavily regulated in Australia

by:
the Corporations Act
accounting standards
ASX
Compliance with all the rules is costly (and when new or revised
standards are released this will create costs).
Opinions on the need for regulation vary and range between the
free-market perspective and the pro-regulation perspective .

1-33

(cont.)
Free-market perspective on regulation:
There is no need for regulation.
Demand and supply forces should be allowed to operate to
generate an optimal supply of information.
Even in the absence of regulation there are private economicsbased incentives to provide information.
Information is produced to reduce conflict between parties with
an interest in the organisation.

1-34

(cont.)
Free-market perspective on regulation (cont.):
Managers argued to be best placed to determine what information
should be produced.
Imposing a one-size-fits-all approach to reporting reduces the
efficiency with which managers can report the financial performance
and position of an entity.
Financial statement audits can also be expected in the absence of
regulation.
Without regulation, entities would still be motivated to disclose both
good and bad news.
Market for lemons perspective

1-35

(cont.)
Pro-regulation perspective:
Arguments in favour of a free market where users are expected to

pay for information break down when we consider consumption of
free or public goods.
Accounting information is a public good

Once available it can be used and passed on without payment
Parties using without incurring costs are known as free-riders
In the presence of free-riders true demand is understated

1-36

(cont.)
Pro-regulation perspective (cont.)
Regulation required to alleviate the effects of market failure.
Arguments that on average the market is efficient ignore the rights of

individual investors who might lose as a result of relying upon
unregulated disclosures.
Ability to obtain information might depend on the individuals control

of scarce resources required by the entity.

1-37

Ch01 - Australian External Reporting Environment

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Chapter 1

Copyright 2012 McGraw-Hill Australia Pty Ltd

Objectives of this lecture

Financial accounting defined

Financial accounting is a process involving the collection and

Financial accounting is more heavily regulated than management

Copyright 2012 McGraw-Hill Australia Pty Ltd

General- vs special-purpose financial

Copyright 2012 McGraw-Hill Australia Pty Ltd

General- vs special-purpose financial

Copyright 2012 McGraw-Hill Australia Pty Ltd

Users demand for general-purpose

General Purpose Financial Reports are primarily directed

Copyright 2012 McGraw-Hill Australia Pty Ltd

Users demand for general-purpose

Other parties, such as regulators and members of the public

Interested parties generally lack the power to demand

Copyright 2012 McGraw-Hill Australia Pty Ltd

Sources of external financial

Four main bodies that formulate and/or enforce

Copyright 2012 McGraw-Hill Australia Pty Ltd

Sources of external financial

Responsibilities for developing accounting standards

Copyright 2012 McGraw-Hill Australia Pty Ltd

Australian Securities and

One important body in relation to financial reporting in

Copyright 2012 McGraw-Hill Australia Pty Ltd

Requires preparation of true and fair financial statements by

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Australian Accounting Standards Board

participating in and contributing to the development of a

Copyright 2012 McGraw-Hill Australia Pty Ltd

From 2000 AASB standards apply to all types of entities, those

Majority of standards underwent change in 200304 as Australia

Reports to the Financial Reporting Council (FRC), which oversees

Has one full-time chairperson and the balance are part-time

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

Copyright 2012 McGraw-Hill Australia Pty Ltd

AASB and the role of the FRC

Copyright 2012 McGraw-Hill Australia Pty Ltd

AASB and the FRC (cont.)

Copyright 2012 McGraw-Hill Australia Pty Ltd

Overview of Australian accounting

Copyright 2012 McGraw-Hill Australia Pty Ltd

International Financial Reporting

Copyright 2012 McGraw-Hill Australia Pty Ltd

Small versus large proprietary companies

Small proprietary companies exempted from complying

A proprietary company is considered to be small if

Copyright 2012 McGraw-Hill Australia Pty Ltd

Small versus large proprietary companies

Small proprietary company does not have to comply with

Copyright 2012 McGraw-Hill Australia Pty Ltd

Small versus large proprietary companies

If a proprietary company is not considered small, it is

Copyright 2012 McGraw-Hill Australia Pty Ltd

Australian Securities Exchange (ASX)