Está en la página 1de 54

Chapter 1

An overview of the
Australian external
reporting environment

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-1


Objectives
Understand the scope of regulation relating to Australian external
financial reporting
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 Stock Exchange
Be able to explain the general functions of the International
Accounting Standards Board and its direct relevance to
Australian accounting standard setting
Understand the role of an accounting standard and the process
through which it is developed

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-2


Objectives (cont.)
Understand the magnitude of the changes that
occurred in 2003 and 2004 in Australian Accounting
Standards as a result of the Financial Reporting
Councils strategic decision that Australia would
produce financial reports that comply with standards
being issued by the International Accounting
Standards Board
Understand that the practice of financial accounting is
quite heavily regulated within Australia, and be aware
of some arguments for and against the regulation of
financial accounting

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-3


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 heavily regulated, and a great
deal of regulation changes each year

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-4


User 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
Users lack the power to demand specific information to
meet their needs hence the need for general purpose
financial reports

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-5


General vs special-purpose reports
General-purpose financial reports
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 and supporting notes included
within an annual report 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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-6


Sources of external financial
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 Stock Exchange (ASX)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-7


Sources of external financial
reporting regulation (cont.)
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 professionreducing ability of
accounting profession to self-regulate
New accounting standard-setting arrangements were
passed by Parliament in October 1999 and came into
force 1 January 2000 (see next slide)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-8


Sources of external financial
reporting regulation (cont.)
Recent changes in the development of reporting
regulation (cont.)
Public Sector Accounting Standards Board (which was
under the control of the accounting profession) was
disbanded at beginning of 2000all responsibilities for
developing accounting standards within Australia now
with the AASB
However, AASB now relies on standards being
developed by International Accounting Standards
Board (IASB) owing to commitment that Australia
would comply with International Accounting Standards
(now International Financial Reporting Standards)
from 1 January 2005

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-9


Sources of external financial
reporting regulation (cont.)
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)
Auditing standards made by AUASB require legislative
backing (not the case prior to 2004)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-10


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-11


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
of..?

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-12


ASIC (cont.)
Financial statements 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.

Reference must therefore be made to the accounting standards


Paragraph 8 of AASB 101 states that a financial report comprises:
balance sheet
income statement
statement of changes in equity
cash flow statement
notes, comprising a summary of significant accounting policies and
other explanatory notes

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-13


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.
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?

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-14


ASIC (continued) - 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
Contents of AASB 1031 consistent with concept of materiality as
per the AASB Framework (pars 29 and 30)
Unless there are specific requirements that require the
disclosure of particular items of expense regardless of amount
(as there are for payments made to key management
personnel), then separate disclosure will be dependent upon
whether the item is deemed to be material that is, whether, for
example, it is considered likely to effect economic decisions of
financial statement readers.
Materiality is an IMPORTANT factor in financial reporting

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-15


ASIC (cont.)
Pursuant to Corporations Act, directors of large and listed
companies, as well as some other entities, are
required to attach to financial statements:
Directors Declaration
Directors Report

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-16


ASIC (cont.)
Directors Declaration
Directors required (s. 295(4) of the Corporations Act)
to
state whether, in their opinion, the accounts are true and fair
give details of any significant after-balance-date events
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 declaration is made fraudulently, carelessly or
recklessly they may be liable for outstanding debts of
the company

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-17


ASIC (cont.)
Directors Report (ss. 298300A of Corporations Act) is to
provide information concerning
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-balance-date events
compliance with environmental laws

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-18


ASIC (cont.)
Directors Report (cont.)
From July 2004 the Directors Report must include an
operating and financial review
information that shareholders of the company would
reasonably require to make informed decisions regarding the
operations, financial position, and future strategies of the
organisation

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-19


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 entitys financial statements

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-20


ASIC (cont.)
Also of relevance to the functioning of ASIC is the
establishment of Financial Reporting Panel in 2004
its purpose is to resolve disputes on a non-binding basis
between ASIC and companies in respect of whether financial
statements have been prepared in accordance with
accounting standards and whether financial statements
present a true and fair view

ASIC also releases policy statements and guidelines


on various issues, including financial reporting

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-21


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-22


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 Corporations
Act
PSASB now disbanded
Majority of standards underwent change in 200304
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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-23


AASB and the role of the FRC
The Financial Reporting Council (FRC)
Members are appointed directly by the Federal
Treasurer or the Treasurer may specify an
organisation or body to choose a person to represent
them
14 members are nominated by a number of interest
groups (stakeholders)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-24


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
Powers expanded in 2003 to include overseeing the activities of
AUASBAUASB moved from the AARF to AASB in 2004

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-25


AASB (cont.)
Application of AASB standards
Section 231 of ASIC Act requires AASB to carry out
costbenefit 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)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-26


AASB (cont.)
Small proprietary companies
Such 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 less than 50 employees

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-27


AASB (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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-28


The AASB (cont.)
Small proprietary companies (cont.)
Do not have to prepare formal accounts, apply
accounting standards, or have their accounts 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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-29


The AASB (cont.)
Public and large proprietary companies have to
prepare financial statements that comply with
accounting standards
have their financial statements audited
have statements sent to shareholders if
so requested by ASIC; or
so requested by shareholders holding at least 5% of the
voting shares.
If a proprietary company is not considered small, it is
classified large and subject to more stringent
disclosure requirements

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-30


AASB (cont.)
Disclosing entities
Pursuant to s. 285(2) of Corporations Act AASB
standards may apply to some entities not of a
corporate formall disclosing entities need to comply
with majority of AASB standards
Disclosing entities include
entities with securities quoted on the ASX
entities with securities issued pursuant to a prospectus
entities with securities issued pursuant to a takeover scheme
entities with securities issued pursuant to a par. 5.1
compromise arrangement
borrowing corporations

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-31


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-32


Interpretations Agenda Committee
Identifies and assesses issues for inclusion in the
AASBs work program

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-33


International Financial Reporting
Interpretations Committee (IFRIC)
Provides interpretations of requirements embodied
within IFRSs
Of relevance to Australia where there are uncertainties
about particular requirements incorporated in IFRSs,
and therefore, within AASB accounting standards

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-34


Australian Stock Exchange (ASX)
One nationally operated stock exchange
In November 1998 the ASX became a publicly listed
company:
The Australian Stock Exchange Limited
One set of listing rules for all trading floors in each
capital city
Main Board Rules apply to nationally listed securities
Failure to comply may lead to removal from the Board
Rules help ensure that information is disseminated in
an efficient and timely manner

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-35


ASX (cont.)
ASX Listing Rules divided into 20 chapterskey
chapters are Chapter 3 (continuous disclosure) and
Chapter 4 (periodic disclosure)
Listing Rule 3.1
once an entity is or becomes aware of any information
concerning it that a reasonable person would expect to have
a material effect on the price or value of the entitys securities,
the entity must immediately inform the ASX of that information

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-36


ASX (cont.)
Establishment of ASX Corporate Governance Council
ASX has released its Principles of Good Corporate
Governance and Best Practice Recommendations
This proposes 10 essential principles of corporate
governance
as stated under Recommendations (p. 5), pursuant to ASX
Listing Ruling 4.10, companies are required to provide a
statement in their annual report disclosing the extent to which
they have not followed the best practice corporate
governance recommendations in the reporting period

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-37


ASX (cont.)
Where companies have not followed all of the
recommendations:
they must identity the recommendations that have not been
followed; and
give reasons for not following them

Refer to Exhibit 1.3 on page 25Essential corporate


governance principles identified in the ASX

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-38


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)
The standards released by the IASB are referred to as
International Financial Reporting Standards (IFRSs)
where previously they were referred to as International
Accounting Standards (IASs)

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-39


Process of Australia adopting
IFRSs (cont.)
Catalyst to adopt IFRS 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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-40


Process of Australia adopting
IFRSs (cont.)
In Australia: IFRSs turned into Australian (AASB) accounting
standards, each bearing an AASB prefix
Requirement for reporting under IFRS equivalents is extremely
broadin Australia it applies to all reporting entities under the
Corporations Act, listed and unlisted as well as private and public
unlike in Europe where IFRS 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, pp. 27AASB accounting standards and


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-41


Process of Australia adopting
IFRSs (cont.)
In Australia a number of options under IFRSs are more
restrictedbut compliance with AASB standard means
compliance with IFRS
Additional disclosures required
AASB issuing standards to match IFRSs, and to cover
areas not addressed by IASB

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-42


Process of Australia adopting
IFRSs (cont.)
The adoption of IFRSs has meant significant changes post-2005 in
some standards and minor changes in others. Significant
changes include
Intangible assetsresearch, brand names, mastheadsnow
expensed and not capitalised
Revaluation of intangible assets greatly restricted, only if there is
an active market for assets and associated prices are publicly
available
Amortisation of goodwill abolishedreplaced by requirement that
annual test be undertaken to determine whether value of goodwill
is impaired (impairment testing)
Revaluation of property, plant and equipment to be done on
asset-by-asset basis and not by class of assets for companies

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-43


Process of Australia adopting
IFRSs (cont.)
Classification of revenues restricted to inflows that
relate to ordinary activities of organisation, e.g. sales
of assets other than inventory to be classified as
gains or losses in income statement
Prior period errorsfinancial statements to be
adjusted as if error had not occurred, i.e. opening
balances amended retrospectively
Tests of classifying items as equity vs liability more
stringent, i.e. items previously classified equity might
now be disclosed as liabilities

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-44


Process of Australia adopting
IFRSs (cont.)
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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-45


Structure of the International
Accounting Standards Board
Given the direct relevance of the IASB to Australia, Australian
accountants should know of its structure
IASB comprises 14 individuals: 12 full time, 2 part time
Each IASB member has one vote on technical and other matters
Publication of standard, exposure draft or final SIC interpretation
requires approval by at least eight board members
Other decisions, e.g. the issue of Draft Statements of Principles
or Discussion Papers and agenda decisions, require a simple
majority of Board members present at a meeting attended by
50% or more

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-46


Structure of the IASB (cont.)
Board has full control over technical agenda
On publication of a standard, also publishes a Basis
for Conclusions to explain publicly how conclusions
were reached, background information to assist
application, and dissenting opinions. These are
available on the AASB website
IASB has an International Financial Reporting
Interpretations Committee

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-47


International cultural differences and
the harmonisation of accounting
Values inherent in accounting subculture influenced by
standards
society-wide values
Accounting systems cannot be considered to be
culture free
Should different countries with varying cultural values
adopt internationally uniform accounting practices?

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-48


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-49


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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-50


All this regulationis it really
necessary? (cont.)
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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-51


All this regulationis it really
necessary? (cont.)
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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-52


All this regulationis it really
necessary? (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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-53


All this regulationis it really
necessary? (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

Copyright 2007 McGraw-Hill Australia Pty Ltd 1-54