Accounting Theory & Current Issues
hi6025-t12021-week-01-lecture-wurednq2.pdf HI6025 ACCOUNTING THEORY AND CURRENT ISSUES An overview of the Australian external reporting environment & The Conceptual Framework for financial reporting Applied Business Statistics for Managers Holmes Institute Objectives of this lecture Understand the meaning of ‘financial accounting’ and its relationship to the broader areas of accounting and accountability Be able to explain who is likely to be a user of general purpose financial statements Understand the scope of regulation relating to Australian external financial reporting Understand the sources of accounting regulation within Australia Understand the extent to which accounting standards change over time Be able to explain the idea of ‘differential reporting’ Understand the role of the auditor, and of the auditor’s report Be able to explain the central requirement that financial statements be ‘true and fair’ Applied Business Statistics for Managers Holmes Institute Objectives (cont.) 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 Be aware of some research which suggests that international standardisation of accounting ignores international differences in culture Understand that the practice of financial accounting is quite heavily regulated within Australia and be aware of some of the arguments for and against the regulation of financial accounting Be aware that managers will often highlight measures of financial performance that do not comply with accounting standards Applied Business Statistics for Managers Holmes Institute Accounting and accountability How does ‘financial accounting’ relate to the broader areas of ‘accounting’ and ‘accountability’? ‘Accounting’ can be defined as: the provision of information about aspects of the performance of an entity to a particular group of people with an interest, or stake, in the organisation—we can call these parties stakeholders ‘Accountability’ can be considered to be: an obligation or duty to provide an account of the actions for which it is considered the organisation is responsible The broader our perspectives of corporate responsibilities, the broader our perspective of the ‘accountability’ of organisations Applied Business Statistics for Managers Holmes Institute Accounting and accountability (cont.) If we are to believe that an organisation has broad responsibilities to different stakeholders in relation to the social, environmental and economic consequences of corporate activities then we will expect organisations to provide various social, environmental and financial ‘accounts’ So ‘accounting’ can be a very rich activity and the ‘accounts’ we provide will reflect our opinions about the actions for which we are responsible In this course we will tend to focus our attention on only a subset of accounting—this being financial accounting BUT REMEMBER there is also social accounting, environmental accounting, sustainability accounting… Applied Business Statistics for Managers Holmes Institute Therefore: Applied Business Statistics for Managers Holmes Institute Question: An organisation outsources its production of clothing to factories in developing countries… Does the organisation have a responsibility to the factory workers? Should it provide an ‘account’ of what it is doing to ensure the workers are working in a safe and healthy environment? Applied Business Statistics for Managers Holmes Institute 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 and who have an interest in the financial performance of 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 heavily regulated, and a great deal of regulation changes each year. It is ever evolving and changing Applied Business Statistics for Managers Holmes Institute General vs special purpose financial statements In this course we concentrate on general purpose financial statements General-purpose financial statements Comply with the Conceptual 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 and supporting notes included within an annual report presented to shareholders at a company’s annual general meeting Special-purpose financial statements Are designed to meet the needs of a specific group or to satisfy a specific purpose (e.g. a bank demands as part of a loan agreement that the borrowing entity provides information about projected cash flows) Applied Business Statistics for Managers Holmes Institute Main users of general-purpose financial statements General – purpose FS Lenders Other creditors Potential investors Existing investors Applied Business Statistics for Managers Holmes Institute Sources of external financial reporting regulation Four main bodies 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) Applied Business Statistics for Managers Holmes Institute 1- Australian Securities and Investments Commission (ASIC) Responsible for administering corporation legislation 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? Applied Business Statistics for Managers Holmes Institute ASIC (cont.) Financial statements are defined in the Corporations Act (s. 295(2)) as: The financial statements for the year are: (a) The financial statements in relation to the entity reported on that are required by the accounting standards; and (b) If required by the accounting standards—the financial statements in relation to the consolidated entity that are required by the accounting standards. Applied Business Statistics for Managers Holmes Institute ASIC (cont.) Financial statements defined (cont.) • Reference must therefore be made to ‘the accounting standards’ • 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 (previously referred to as the balance sheet) • a statement of profit or loss and other 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 Applied Business Statistics for Managers Holmes Institute ASIC (cont.) The ‘true and fair view’ requirement is a central component of Australian financial reporting The requirement to produce true and fair financial statements contained in s. 297 of the Corporations Act states: 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. Applied Business Statistics for Managers Holmes Institute True and fair view (cont.) No definition of ‘true and fair’ is 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’? If something is not deemed to be ‘material’ then disclosure is not essential Materiality is an IMPORTANT consideration in financial reporting ASIC (cont.) Applied Business Statistics for Managers Holmes Institute 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 and a • Directors’ Report ASIC (cont.) Applied Business Statistics for Managers Holmes Institute Directors’ Declaration Directors are required (s. 295(4) of the Corporations Act) to: state whether, in their opinion, the financial statements are true and fair and whether they comply with the relevant accounting standards state whether or not, in their opinion, there are any grounds to believe that the company will be unable to pay its debts as and when they fall due If a declaration is made fraudulently, carelessly or recklessly, directors may be liable for outstanding debts of the company ASIC (cont.) Applied Business Statistics for Managers Holmes Institute Directors’ Report (ss. 298–300A of Corporations Act) is to provide information relating to various issues, such as: names of directors details of directors’ emoluments principal activities of the company review of operations during the year significant changes in the state of affairs of the company likely future developments significant post-reporting-date events compliance with environmental laws The Directors’ Report must include an ‘operating and financial review’ A review contains information that shareholders of the company would reasonably require to make informed decisions regarding the operations, financial position and future strategies of the organisation ASIC (cont.) Applied Business Statistics for Managers Holmes Institute Declaration by chief executive officer and chief financial officer For entities listed on the ASX Reinforces the responsibility of the CEO and CFO in relation to the entity’s financial statements Applied Business Statistics for Managers Holmes Institute 2- Australian Accounting Standards Board (AASB) Within Australia, accounting standards issued by the AASB have ‘power’ by virtue of the Corporations Act Functions of the AASB (pursuant to s. 227 of the ASIC Act) include: 1. developing a conceptual framework 2. making accounting standards that have force of law under s. 334 of the Corporations Act 3. formulating accounting standards for other purposes: 1. for entities not governed by the Corporations Act 4. participating in and contributing to the development of a single set of accounting standards for worldwide use Applied Business Statistics for Managers Holmes Institute 2- Australian Accounting Standards Board (AASB) The AASB reports to the Financial Reporting Council (FRC), which oversees the operations of the AASB. The FRC appoints members of the AASB approves and monitors the AASB’s priorities, business plan, budget and staffing gives the AASB directions, advice or feedback on matters of general policy Applied Business Statistics for Managers Holmes Institute Small proprietary companies Such companies are exempted from complying with accounting standards (under s. 45A(1) of the 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 $50 million 2. Its gross assets are less than $25 million 3. It has fewer than 100 employees AASB (cont.) Applied Business Statistics for Managers Holmes Institute AASB (cont.) Small proprietary companies 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 per cent of the voting shares If a proprietary company is