ACCT2542 Week 1 Notes

Transcription

1 ACCT2542 Week 1 Notes Chapter 1: History, Current Regulatory Structures and Processes Australian Standard-Setting Arrangements: There are five main bodies which formulate and/or enforce accounting regulations in Australia: 1. The Financial Reporting Council (FRC) 2. The Australian Accounting Standards Board (AASB) 3. The Australian Securities and Investments Commission (ASIC) 4. The Financial Reporting Panel 5. The Australian Stock Exchange (ASX) Financial Reporting Council The council is a statutory body under the ASIC Act 2001 as amended by the CLERP Act 2004 The Financial Reporting Council is responsible for: - providing broad oversight of the process for setting accounting and auditing standards - monitoring the effectiveness of auditor independence requirements in Australia - giving the minister reports and advise on these matters Australian Accounting Standards Board The main function of the AASB is to develop a conceptual framework for the purpose of evaluating proposed accounting standards and international standards The members of the AASB are appointed by the FRC, while the chair of the AASB is appointed by the treasurer of the Australian Government Key objectives of developing accounting standards include: - to facilitate the development of accounting standards that require the provision of financial information that is relevant, reliable, understandable and facilitates comparability - to facilitate the Australian economy by reducing the cost of capital, thus enabling Australian entities to compete more effectively overseas - maintaining investor confidence in the Australian economy and capital markets Urgent Issues Group and Advisory Panels The UIG was a committee of the AASB, established in 1994 The role of the UIG was to provide timely guidance on urgent financial reporting issues In 2006, with the recognition that IFRIC should be the sole body to interpret international financial reporting standards, the AASB in conjunction with the FRC disbanded the UIG Australian Securities and Investments Commission ASIC is Australia s corporate, market and financial services regulator: the Corporate Watchdog - corporate regulator! responsible for ensuring that company directors and officers carry out their duties honestly, diligently and in the best interests of their company - markets regulator! assess how effectively authorised financial markets are complying with the legal obligations to operate fair, orderly and transparent markets - financial services regulator! ensure that financial services businesses operate honestly and fairly

2 Ensures that Australia s financial markets are fair and transparent, supported by confident and informed investors and consumers ASIC is an independent Commonwealth Government body The ASIC Act 2001 requires ASIC to: - maintain, facilitate and improve the performance of the financial system and entities in it - promote confident and informed participation by investors and consumers in the financial system - enforce and give effect to the law Financial Reporting Panel The main function of the FRP is to resolve disputes between ASIC and companies concerning accounting treatments in their financial reports The purpose for establishing FRP is to remove the need to initiate legal proceedings in Court in order to resolve a financial reporting matter - FRP is designed to provide an efficient and cost effective way of dealing with disputes and the opportunity to be heard by persons with relevant expertise Findings by FRP will not be binding on either ASIC or the company and the dispute may be pursued in Court Australian Stock Exchange The objectives of ASX include: - providing a fair and well-informed market for financial securities - providing an internationally competitive market The ASX administers ASX Listing Rules and requires adherence to rules by all listed companies The ASX released the Principles of Good Governance and Best Practice Recommendations International Accounting Standards Board: The IASB is an independent, privately funded accounting standard setter The IASB develops a single set of global accounting standards (IFRSs), and approves interpretations of IFRSs by IFRIC The board is committed to the development of a single set of high quality, enforceable global accounting standards Adopting International Financial Reporting Standards in Australia: Following the formation of the new AASB and the FRC in 2000, the AASB followed a process of developing accounting standards for Australia and actively pursuing a policy of harmonization with International Accounting Standards Standards issued by the IASB are referred to as International Financial Reporting Standards (IFRS) Australian equivalents to international standards are referred to as A-IFRS standards

3 Chapter 2: The Conceptual Framework of the AASB The Framework describes the basic concepts that underlie financial statements prepared in conformity with Australian Accounting Standards The Framework serves as a guide to the AASB in developing accounting standards and as a guide to resolving accounting issues that are not addressed directly in an Australian accounting standard - however, the Framework is not itself a standard or a principle to be applied. The Framework does not override any specific AASB standard if there appears to be a conflict The Framework: - defines the objective of financial reporting - identifies the qualitative characteristics that make information in financial statements useful - defines the basic elements in financial statements and the concepts for measuring them How Is The Framework Used? The Framework guides the AASB in developing new and revising existing AASB standards and interpretations Ensures internal consistency within the AASB standards Used as a point of reference by financial statement preparers in the absence of a specific appropriate standard Established precise terminology Enhances public confidence in financial statements General Purpose Financial Statements: General Purpose Financial Statements are financial statements that an entity prepares and presents at least annually to meet the common information needs of a wide range of users external to the entity - the objective of such reports is to provide information useful to users for making and evaluating decisions about the allocation of scarce resources Any reports prepared by a reporting entity which is specifically tailored to meet the needs of users are referred to as Special Purpose Financial Reports GPFS = MUST comply with all AASBs SPFR = MAY comply with AASBs The Reporting Entity: SAC 1 defines a reporting entity as one in which it is reasonable to expect the existence of users who depend on general purpose financial statements for information to enable them to make economic decisions SAC 1 contains indicative factors to assist with the determination: - separation of management from economic interest! the greater the spread, the more likely it is that there will be users who depend on GPFS for decision making - economic or political importance/influence! the greater the importance, the more likely that dependent users will exist - financial characteristics! the larger the size/indebtedness/resources of an entity, the more likely that dependent users will exist

4 Judgment is necessary in distinguishing reporting entities from non-reporting entities. Nevertheless, it is expected that reporting entities include most government departments, statutory authorities and board, most public companies, some large proprietary companies and listed investment trusts Non-reporting entities include most sole traders, partnerships and small proprietary companies Reporting entities must prepare GPFS that comply with Chapter 2M of the Corporations Act and all AASB standards Non-reporting entities do not have to prepare GPFS. They may prepare SPFR Objectives Of General Purpose External Financial Reporting: The Framework states the objective of financial reporting is to provide information about the entity s financial position, changes in it, and performance that is useful to users for economic decision making SAC 2 identifies three main user groups: 1. Resource providers! e.g. employees, lenders, creditors, suppliers and investors 2. Recipients or consumers of goods and services! e.g. customers, beneficiaries and taxpayers 3. Parties performing an oversight function! e.g. parliaments, governments, labour unions, employer groups and the media The above SAC 2 list compares to the seven user group identified in the IASB Framework Financial Position One of the objectives of financial statements is to provide information about an entity s financial position: - what assets do the entity own? - what does it owe? - what are the residual equity interests in the entity s net assets? The entity s financial position is affected by the economic resources it controls, its financial structure, its liquidity and solvency and its adaptability (ability to convert assets to cash) The Statement of Financial Position presents this kind of information Performance Performance is the ability of an entity to earn a profit on the resources that have been invested in it. Information about the amount and variability of profits helps in forecasting future cash flows This type of information is presented in a Statement of Comprehensive Income Items included in the Statement of Comprehensive Income include profit/loss for the period and all items reported directly in equity, including: - fair value changes in assets - foreign currency translation adjustments An entity s performance is of particular interest to equity investors (shareholders) and providers of longterm debt capital. They need information about the company s ability to provide a return on their capital investment, which depends on the company s operating performance Changes in Financial Position The Statement of Cash Flows summarizes financial position changes involve cash and cash equivalents flowing through its operations, investments and financing

5 Qualitative Characteristics Of Financial Reporting Information: The current Framework identifies four principal qualitative characteristics of financial statements: - relevant and reliability - comparability and understandability It also identifies two constraints to achieving these: - timeliness and cost Relevance Relevant information influences users decisions by: - helping them form predictions about the outcomes of past, present or future events - confirming or correcting their past evaluations For information to be relevant, its nature and materiality must also be considered. Information is material if its omission or misstatement could influence the economic decisions of users Reliability Information is reliable if it is free from material error and bias, and represents faithfully the transactions or events that it claims to represent If financial information is to be reliable, it is important that the economic substance rather than the legal form of transactions or events is reported Reliability also includes consideration of prudence, which is a desire to exercise care and caution when dealing with uncertainties in the measurement process. The accountant is cautious not to overstate assets and profits, and not to understate liabilities and expenses To be reliable, information must also be decision neutral Comparability Comparability is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena Comparability includes that over time, and across different entities Understandability Understandability does not necessarily imply simplicity. It is assumed that readers of reports have a reasonable knowledge of business/economics/accounting, and that they are willing to study the information with reasonable diligence Constraints on Relevant and Reliable Information Timeliness and cost are the major constraints to achieving relevant and reliability: - timeliness! information may lose its relevance if there is an undue delay in reporting it. Hence, the time taken to gather and report financial information is seen as a constraint on providing relevant information - costs versus benefits! the benefit of providing information should exceeds the costs of doing so

6 Qualitative Characteristics Proposed Under the New Framework The Exposure Draft issued in May 2008 proposes replacing the current qualitative characteristics with the concept of fundamental and enhancing characteristics: - fundamental! relevance and faithful representation - enhancing! comparability, understandability, verifiability and timeliness Elements Of Financial Statements In The Current Framework: An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits - Note: the Economic Draft proposes changes to the definition of assets and liabilities Equity is the residual interest in assets minus liabilities (i.e. equity = assets liabilities) Income is increases in economic benefits from inflows, asset enhancements, or decreased liabilities - revenue represents income which has arisen from the ordinary activities of an entity, whereas gains do not necessarily arise from ordinary activities (e.g. gains on the disposal of non-current assets) Expenses are decreases in economic benefits from outflows, asset depletions and increased liabilities Recognition Of The Elements of Financial Statements: Assets and liabilities are recognized when they are probable, and can be measured reliably Income/expenses are recognized when there is an increase/decrease in economic benefits with a resulting increase/decrease in equity arising from a non-owner transaction Assumptions Underlying Financial Statements: The Framework assumes that all entities apply the following fundamental assumptions: - the accrual basis assumption! the effects of all transactions and other events are recognized in the accounting records when they occur, rather than when cash or its equivalent is received or paid - the going concern assumption! financial statements are prepared under the assumption that the entity will continue to operate in the foreseeable future Measurement: Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the balance sheet and income statement Measurement bases include: - historical cost! an asset is recorded at the amount of cash paid, or the fair value of the consideration given to acquire it at its acquisition date - current cost! for an asset, current cost represents the amount of cash that would be paid if the same asset was acquired currently - realisable or settlement value! for an asset, the realisable value is the amount of cash that could be obtained currently by selling the asset in an orderly disposal, or in the normal course of business - present value! the present value of an asset is the discounted future net cash inflows or net cash savings that are expected to arise in the normal course of business - fair value! market based, rather than entity specific

7 ACCT2542 Week 2 Notes: Presentation of Financial Statements AASB101 applies to all general purpose financial statements prepared in accordance with A-IFRS - however, there are exceptions, including condensed interim financial statements and concise financial reports Statement Of Financial Position (Balance Sheet): The statement of financial position of an entity is the primary source of information about the entity s financial position because it summarises the elements directly related to the measurement of financial position: an entity s assets, liabilities and equity It provides the basic information for evaluating capital structure, liquidity, solvency and financial flexibility, and for computing rates of return However, there are limitations with the SFP (e.g. inconsistencies in the measurement of assets, and the omission of internally generated intangibles), and thus the SFP should be read in conjunction with the notes to the financial statements In the SFP, an entity shall classify assets and liabilities as current or non-current, except when the liquidity format provides more reliable and relevant information The current/non-current classification is ordinarily considered to be more relevant when an entity has a clearly identifiable operating cycle - liquidity presentation is a common format used by banks and financial institutions as such entities do not supply goods or services within a clearly identifiable operating cycle An asset is classified as current if it satisfies any of the following criteria: a) it is realized or is intended for sale or consumption in the entity s normal operating cycle b) it is held primarily for the purpose of being traded c) it is expected to be realized within 12 months after the reporting date d) it is cash/equivalent unless it is restricted from being used to settle a liability for at least 12 months after the reporting date Statement Of Comprehensive Income (Income Statement): AASB 101 requires presentation of all items of income and expense recognized in period. IT can be presented in a single statement, or in two separate statements The SCI summarises all non-owner transactions during the period, including: - profit or loss for the period - gains or losses recognized directly in equity The SCI can be used to assist to predict an entity s future performance and future cash flows As with the SFP, the SCI is not perfect and should be read in conjunction with the notes. Limitations include: - the exclusion of some items from profit and loss - the exclusion of certain gains/losses To enhance understandability of the SCI, AASB 101 requires separate disclosure of the nature and amount of certain material income and expense items including: - inventory and PPE write-downs - cost of restructuring - disposals of PPE and other investments

8 Types of Companies Not-For-Profit Companies: Week 3 Notes Chapter 3: Shareholder s Equity Share Capital and Reserves In Australia, a not-for-profit entity is defined as an entity whose principal objective is not the generation of profit Not-for-profit companies can be divided into government or public sector companies, and private notfor-profit sector entities: - entities may be established by the government to undertake various activities of the government, such as the supply of water or electricity - organisations such as charities may form a company as their preferred organisational structure to limit their liability (can be either limited by guarantee, or a public company) For-Profit Companies: For-profit companies may take a number of forms: - proprietary or closed corporations - public companies or open corporations For-profit companies may be: - listed! their shares are traded on a stock exchange - unlisted! the shares are traded through brokers and financial institutions - limited by guarantee! the members undertake to contribute a guaranteed amount in the event of the company going into liquidation - unlimited! members are liable for all the debts of the company - no liability! members are not required to pay any calls on their shares if they do not wish to continue being shareholders in the company Key Features of the Corporate Structure The Use of Share Capital: Shares represent company ownership rights. This ownership is normally transferable Rights of shareholders include: - the right to vote for directors of the company - the right to share in assets on the liquidation of the company - the right to share in new shares issued Limited Liability: When shares are issued, the maximum amount payable by each shareholder is set. Even if a company incurs losses or goes into liquidation, the company cannot require a shareholder to provide additional capital Different Forms of Capital:

9 DR Share capital 100 ($10 x 10 shares) CR Call 40 ($4 x 10 shares) CR Forfeited Shares Account 60 ($6 x 10 shares) (Forfeiture of 10 shares called to $10 and paid to $6 per share) Depending on the regulations in the country, the balance in the forfeited shares account may be refunded to the shareholders, and the shares cancelled; in this case the account is classified as a liability If the balance in the forfeited shares account is retained by the company, the account could be called Forfeited Shares Reserve and be included in equity Alternatively, the company could decide to reissue the shares. For example, the shares could be reissued as fully paid to $10 per share on payment of $8 per share, with the forfeited shares account being used to fund the difference as well as any costs of reissue Example: Assuming all the shares were reissued, incurring costs of $5, and any balance of the reserve was returned to the former shareholders, the journal entries would be as follows: DR Cash 80 DR Forfeited Shares Account 20 CR Share Capital 100 (Reissue of shares remember that the FSA is used to fund the difference between the cost and reissue cost of the shares, which is the $20 in this example) DR Forfeited Shares Account 40 CR Share Issue Costs Payable 5 CR Payable to Shareholders 35 (Share issue costs and money refundable to shareholders remember that FSA is used to fund the costs of reissue) DR Share Issue Costs Payable 5 DR Payable to Shareholders 35 CR Cash 40 (Payment of amount owing the $40 which was not paid in calls in paid to shareholders, taking into account the $5 issuing costs) Issue of Par Value Shares Shares Issued at a Premium: When shares are issued at a premium, the excess over the par value is credited to an equity account, which may be called share premium, or share capital in excess of par. The share premium is then a component of contributed equity Example: Clarence Ltd issues 5000 shares of $1 par value at a premium of $2 per share. The journal entry is: DR Cash CR Share capital 5000

10 CR Share premium (Issue of shares at a premium) Shares Issued at a Discount: When shares are issued at a discount, the account used in relation to the discount can be the same as that used for a premium, or it can be a separate discount account (e.g. Discount on Shares) Example: Lachlan Ltd issued 5000 shares of $2 par value at a 50c discount. The journal entry is: DR Cash 7500 DR Discount on Shares 2500 CR Share Capital (Issue of shares at a discount) Oversubscriptions: An issue of shares by a company may be so popular that it is oversubscribed: that is, there are more applications for shares than there are shares to be issued. In such cases, the directors of the company may decide to: - reduce the number of shares to be issued to each applicant (on a pro-rata basis) - issue shares only to certain applicants (e.g. on a first-in-first-served basis) In most cases, excess application money is simply refunded to the applicants. When this happens, the appropriate journal entries are: DR Application XXX CR Share Capital XXX (Issue of shares applied for) DR Application XXX DR Cash XXX CR Cash Trust XXX (Transfer from cash trust and refund of excess application money) Depending on the company s constitution or the terms of the prospectus, an entity may retain the excess application money as an advance on future call. In this case the journal entry is: DR Application XXX CR Calls in Advance CR Share Capital (Issue of shares) XXX XXX Example: Goulburn Ltd was incorporated on 1 July The directors offered to the general public ordinary shares for subscription at an issue price of $2. The company received applications for shares. The directors then decided to issue shares, returning the balance of application money to the unsuccessful applicants. The appropriate journal entries are: