HI 5025 Accounting

Standards & Theory

Lecture 1
The Australian External
Reporting Environment
 Introduction

Welcome to HI5025 Accounting Standards &

Theory.
Included will be the Accounting Standards
Framework and Conceptual Framework,
consideration and analysis of a range of current
accounting issues as well as interpreting and
applying selected accounting standards in
respect of preparation of accounting records and
financial statements.

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 Introduction

Assessments
In-class quiz (20%) due week 5. Closed book
test covering topics from week 1-4 (1 hour)
Group Presentation (20%) held week 9-11. A
marking Rubric will be provided to students.
Final exam (60%). Closed book exam (3 hour
plus 10 minutes reading time)

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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

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Demand for general-purpose financial reports

Users include (the Framework for the Preparation

and Presentation of Financial Statements (the
AASB Framework) released by Australian
Accounting Standards Board July 2004):
present and potential investors
employees
lenders
suppliers and other trade creditors
customers
government and its agencies
the public

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 General vs special-purpose reports
General-purpose financial reports (GPFR)
comply with the AASB Framework and accounting standards
meet the information needs common to users who are unable to
command the preparation of reports tailored to satisfy,
specifically, all their information needs
represent financial statements (4) and supporting notes included
within an annual report (called notes to and forming.)
presented to shareholders at a companys annual general
meeting

Special-purpose financial reports

designed to meet the needs of a specific group or to satisfy a
specific purpose
example: Bank demanding as part of a loan agreement that
the borrowing entity provide information about projected cash
flows

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 Sources of external reporting regulation

Five 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 Interpretations Agenda Committee
4. The Financial Reporting Council (FRC)
5. The Australian Securities Exchange (ASX)

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 Sources of external reporting regulation
Recent changes in development of reporting regulation:
Over the last 10 to 15 years the development of
accounting standards more in hands of government
than accounting profession
reducing ability of accounting profession to self-regulate

All responsibilities for developing accounting standards

within Australia now with the AASB
AASB now relies on standards being developed by
International Accounting Standards Board (IASB) from 1
January 2005

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 Sources of external reporting regulation

Financial Reporting Council (FRC)

broad membership base
oversees activities of AASB
responsible for decision that Australian reporting
entities would adopt accounting standards issued by
IASBmajor implications for Australian reporting
practices
now oversees Auditing and Assurance Standards
Board (AUASB)
Reports directly to Minister (Federal Government)

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 Australian Securities and Investments Commission (ASIC)

Formerly the Australian Securities Commission (ASC)

Name changed in July 1998 to reflect increased

responsibility for regulating investment products

Responsible for administering corporation legislation

Independent of state ministers or state parliaments

Reports to the Commonwealth Parliament and Treasurer

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 ASIC

Its role is to administer and ensure compliance with the

Corporations Act 2001

Parliament has the final authority to approve accounting

standards under the Corporations Act

Under s296 of the Corporations Act 2001, a companys

governing board must comply with AASB accounting
standards in preparing financial reports.

Non-compliance could lead to prosecution by ASIC

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 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

But what do financial statements comprise of..?

(Paragraph 8 of AASB 101)
balance sheet
income statement
statement of changes in equity
cash flow statement
Notes to and forming.

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 ASIC (cont.)
The true and fair view :
Requirement 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/consolidated entity.

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 but what is
material?
The old notion of a true and accurate view was abondoned
in the 1960s-70s.

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 ASIC (cont.) - Materiality
AASB 1031, par. 4.1, provides that
Information is material if its omission, misstatement or non-
disclosure has the potential, individually or collectively, to
a) Influence the economic decisions of users taken on the
basis of the financial report, or
b) Affect the discharge of accountability by the management
or governing body of the entity

Whenever there are specific requirements that require the

disclosure, then separate disclosure will be dependent upon
whether the item is deemed to be material
Is it considered likely to effect economic decisions of financial
statement readers?

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 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
formulate accounting standards for other purposes:
for entities not governed by The Corporations Law
participate in and contribute to the development of a single set of
accounting standards for worldwide use

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AASB (cont.)
From 2000 AASB standards apply to all types of
entities, those regulated under companies
legislation and all other types,
Majority of standards underwent change in 2003
04 shifted toward the International Accounting
Standards IFRS
Reports to the Financial Reporting Council (FRC)
oversight function regarding AASB
Has one full-time chairperson and nine part-time
members appointed by the FRC

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 Australian Securities Exchange (ASX)

Has seen a number of changes.

The Australian Stock Exchange Limited was
formed in 1987 after the Australian Parliament
drafted legislation that enabled the
amalgamation of six independent state-based
stock exchanges. Each of those exchanges
brought with it a history of share trading dating
back to the 19th century.

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 ASX (cont.)

In 2006 The Australian Stock Exchange merged

with the Sydney Futures Exchange and originally
operated under the name Australian Securities
Exchange.
Later, however, ASX launched a new group
structure to better position it in the contemporary
financial market environment. From 1 August
2010 the Australian Securities Exchange has
been known as the ASX Group.

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 ASX (cont.)

Apply only to entities whose securities are listed

on the ASX
Specify the detailed disclosure of financial
information
Requires disclosure of some information not
required by the Corporation Act.
If a listed company does not comply with Listing
Rules, it may be delisted.
Rules help ensure that information is disseminated
in an efficient and timely manner

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 ASX (cont.)

Introduced (2003), 10 Core Principles of

Corporate Governance.
Revised in 2007 (to eight) and again in late
2010.
Listed companies are required to include
their Corporate Governance principles
(which may differ from ASX) in their annual
report.

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 Process of Australia adopting IFRSs
In 2002 Financial Reporting Council decided to commit
Australia effectively to adopting accounting standards
issued by the International Accounting Standards Board
(IASB)

Process:
1. IASB may establish an Advisory Committee
2. IASB may develop and publish Discussion Documents for
public comment
3. After considering comments received, an Exposure Draft is
developed and published for public comment
4. After considering the comments, IASB would issue an
International Financial Reporting Standards (IFRS).

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 Harmonisation of accounting standards

Values inherent in accounting subculture

influenced by society-wide values
Accounting systems cannot be considered to be
culture free
Should different countries with varying cultural
values adopt internationally uniform accounting
practices?
The question faced is Standardisation (US
GAAP) or Harmonisation (IFRS), Convergence
or Divergence.

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 Approaches to harmonisation policy

Benefits of harmonisation:
Allow investors in international capital market to make
more reliable comparisons
Barriers to international capital flows would be
reduced.
Reduction in financial reporting costs for multinational
companies

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 Approaches to harmonisation policy

Global harmonisation:
Adoption of a single set of accounting standards throughout the
world.

Harmonisation of Australian accounting standards

Australia adopting accounting standards developed outside
Australia (Jan. 2005) But only in part, with SAC1 & 2 remaining,
SAC3 & 4 replaced by IASB Framework.

Internationalisation
Australia developing local accounting standards based on an
examination of accounting standards and practices adopted
outside Australia.

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 Use and role of audit report
Provides an independent opinion of the financial
information regarding:
true and fair view
compliance with the Corporations Act
compliance with accounting standards
Helps establish credibility of the financial information
Auditor not responsible for preparation of financial
information
Note: auditing standards have legal backing in the same
way that accounting standards have legal backing

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 All this regulationis it really necessary?

Accounting is fairly heavily regulated in Australia by:

the Corporations Act
accounting standards

Opinions on the need for regulation vary and range

between the free-market perspective and the pro-
regulation perspective

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 All this regulationis it really necessary?

Free-market perspective on 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

economics-based incentives to provide information

Information is produced to reduce conflict between

parties with an interest in the organisation

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 All this regulationis it really necessary?

Free-market perspective on regulation (cont.)

Managers argued to be best placed to determine what
information should be produced

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

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 All this regulationis it really necessary?

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

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 All this regulationis it really necessary?

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

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 Session 1

This completes the first session.

Tutorial: Discussion
1) What is the difference between GPFR and
SPFRs?
2) Why do you think that ASX introduced the
Core Principles of Corporate Governance when
they did and what is the purpose?
3) Do you think we need as much regulation.
Why/why not?
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