Chapter 1

Annotations:

•    •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   
• Aimed towards outside parties (showing day-to-day operations of the organisation)  therefore, is heavily regulated. 

1. Management Accounting

   Annotations:

   • Management accounting focuses on providing information for decision making within the organization.
   • usually aimed towards managers therefore, is unregulated.  

1. General Purpose Financial Statements

   Annotations:

   • Meets the needs of users who are not in a position to require and entity to prepare reports tailored to their particular needs. The term "General Purpose Financial Statements" signifies that the financial statements comply with accounting standards and other generally accepted accounting principles, and are released by reporting entities with the aim of satisfying the general information demands of a varied cross-section of users.
   • This often satisfies a broad-section of users
   • Complies with the conceptual framework and accounting standards.
   1. Primary users
      1. potential invesors
      2. Lenders
      3. creditors
   2. Secondary users
      1. Management
      2. Regulators
      3. The public
2. Special purpose financial reports

   Annotations:

   • Financial statements designed to meet the needs of a specific group or to satisfy a specific purpose
   1. Banks

1. Australian Securities and Investment Commission (ASIC)

   Annotations:

   • Responsible for administering corporation legislation in Australia. Outlines the responsibilities of company directors in relation to various activities, including: –the nature of their conduct –financial statement preparation, lodgement and distribution.  
   • Reports directly to an appointed Minister in the Commonwealth Parliament. 
   1. 'True and fair'

      Annotations:

      • 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. 
      • 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. Material

         Annotations:

         • Since their is no definition of 'true and fair' they judge it by what is most material. 
         • Is is material if it influences the economic decisions that users make on the basis of financial statements.
   2. Must apply 'true and fair' financial statements for the year
      1. Balance sheet, Profit and loss statement, Cash flow statement, Changes in equity.
      2. Directors' delceration

         Annotations:

         • Directors must state, in their own opinion, that the financial statements comply with the accounting standards.
         • Directors must also state that the company is able to pay any outstanding debts.
         • If a declaration is made fraudulently, carelessly or recklessly, directors may be liable for outstanding debts of the company.   
         1. CEO and CFO

            Annotations:

            • The CEO (Chief Executive Officer) and CFO (Chief Financial Officer) are required to provide a written declaration to the BOD for companies listed on the ASX.
      3. Directors' report

         Annotations:

         • Directors' report should provide items of information 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  
         • Directors report also include and operating and financial review. This review contains information that shareholders would require to make informed decisions regarding the operations, financial position and future strategies of the organisation.
2. Australian Accounting Standards Board (AASB)

   Annotations:

   • Functions of AASB 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 Act –participating in and contributing to the development of a single set of accounting standards for worldwide use  
   • AASB standards are basically the same as the standards in IASB, adopted in 2005.
   1. Reports to Financial Reporting Council (FRC)

      Annotations:

      • 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 The IASB has one full-time chairperson and the balance are part-time members appointed by the FRC  
   2. Cost-benefit analysis

      Annotations:

      • ASIC requires AASB to carry out a cost-benefit analysis of the impact of a proposed accounting standard before making and formulating that standard.
      1. AASB creates the standered

         Annotations:

         • Equivalent to the standard made by IASB. Standard provides guidance on how classification of items should be identified, measured, presented and disclosed.
         1. Pending Accounting Standards

            Annotations:

            • Before being approved by Parliament, standards released by AASB are referred to as 'pending' accounting standards.
            1. Standard approved by Commonwealth Parliament

               Annotations:

               • Once approved by Parliament, directors are required to ensure that a company's financial statements comply with the standard.
               • Directors must provide a declaration that ensures that the company's financial statements comply with the new standards.
   3. Small proprietary companies

      Annotations:

      • 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. Exempted from complying with accounting standards
         1. Don't have to prepare formal financial statements

            Annotations:

            • Don't have to prepare formal financial statements unless requested by: - ASIC (to be audited) - Shareholders holding at least 5% of voting shares.
            • This is because shareholders in small companies can request information to satisfy their specific needs whereas, shareholders in large companies would rely on external reports (general purpose financial reports).   
   4. Differential reporting

      Annotations:

      • Because so many organisations are required to produce financial reports that complied with accounting standards, this arguably created a reporting burden for some organisations in situations where there were questionable benefits to report users.
      1. Tier 1

         Annotations:

         • General purpose financial statements that comply with all relevant accounting standards.
         1. Tier 2

            Annotations:

            • Comprises the recognition, measurement and presentation requirements of Tier 1 but substantially reduced disclosure requirements. 
            1. For-profit sector entities that have public accountability
            2. not-for-profit private sectors
            3. Australian Government and State, Territory and Local Government
         2. For-profit sector entities that have public accountability
            1. Public accountability

               Annotations:

               •    Means accountability to those existing and potential resource providers and others external to the entity who make economic decisions but not in a position to demand tailored to meet their particular information needs (e.g. shareholders)   
         3. Australian Government and State, Territory and Local Government
3. Financial Securities Exchange (FRC)

   Annotations:

   • Body that overseas the activities of the AASB and the AUASB
4. Australian Securities Exchange (ASX)

   Annotations:

   • ASX is regulated under the corporations act. ASX develops and impose regulations on other companies listed on its exchange however, the ASIC regulates the ASX.
   1. Listing rules

      Annotations:

      • Rules help ensure that information is disseminated in an efficient and timely manner   
      • 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 entity’s securities, the entity must immediately tell the ASX that information   Failure to comply with listing rules leads to removal of the Board.
   2. Corporate Governance Council (CGC)

      Annotations:

      • ASX established a Corporate Governance Council in 2003.
      1. Corporate Governance Principles and Recommendations (CGPR)

         Annotations:

         • The CGC created the Corporate Governance Principle and Recommendations in 2014. Corporate Governance is a framework of rules, relationships, systems and process within and by which authority is exercised and controlled in corporations.
         • Companies are required to provide a statement in their annual report disclosing the extent to which they followed the CGPR in the reporting period.  Companies who have not followed the recommendations must identify the recommendation/s not followed, and give reasons for not following them.

1. International Accounting Standards Board (IASB)

   Annotations:

   • The IASB created the International Accounting Standards (IAS). AASB adopted their standards in 2005, now known as the International Financial Reporting Standards (IFRS).
   • The IASB is simply a standard-setting body. It does not have any enforcement powers therefore, has no power within Australia to enforce its accounting standards. That power resides with ASIC.
   1. 'Single Market Objective'

      Annotations:

      • The European Union wanted all companies within the European union to adopt IASB standards in 2005.
   2. AASB standards

      Annotations:

      • AASB standards are generally applicable to to not-for-profit and local government sectors. Accounting standards always change therefore, must always be familiar with the current standards.
      • Compliance with AASB standards would mean compliance with IASB standards. AASB issues future standards the same time as the standards issued by IASB.
      • AASB might issue standards that don't cover areas addressed by the IASB by developing to cater for issues of a domestic nature. AASB can also advise the IASB of issues that it believes should be covered by the IASB.
2. International Accountin Standards Comittee (IASC)

   Annotations:

   • The IASC was established in 1973 with the aim of bringing together parties from throughout the world to develop accounting standards that apply internationally. In 2001, the IASC was replaced by IASB.

1. Barriers

   Annotations:

   • there are a number of barriers to global standardisation of accounting standards including: - business environment; - Legal systems; - cultures and political environments in different countries.
   1. Accounting cannot be 'Culture free'

      Annotations:

      • Culture: expression of norms, values and customs, which reflect typical behaviour characterisitcs. Culture is a powerful environmental factor affecting the accounting system of their country, therefore, accounting cannot be considered 'culture free'. 

1. 'Free-market' perspective

   Annotations:

   • Accounting information should be treated like other goods. The demand and supply forces should be allowed to freely operate so as to generate an optimal supply of information about the entity.
   1. Pros

      Annotations:

      • In the absence of regulations: - Demand and supply forces should be allowed to operate to generate an optimal supply of information. - There are private economic-based incentives for the organisation to provide credible information to specific external users (this allows parties to monitor the activities within the organisation to reduce risk). - Information would still be produced to reduce conflict between parties with an interest in the organisation. - External parties would demand that financial statements be audited (more risk to invest if reliable information is not available).
      1. Entities would still disclose good and bad information

         Annotations:

         • - Organisations would still be motivated to disclose both good and bad news about the entity's financial position and performance (however, this can create a 'market for lemons'). 
   2. Cons
      1. 'Market for lemons'

         Annotations:

         • Examines how the quality of goods traded in a market can degrade in the presence of information asymmetry between buyers and sellers, leaving only "lemons" behind A ‘lemon market’ for information will be produced by the following: –Asymmetry of information, in which no investors can accurately assess the value of a company through examination before decision is made and the company can more accurately assess the value of its business prior to sale. –An incentive exists for the seller to pass off a low-quality company as a higher-quality one. –Sellers with a great company have no way to disclose this credibly to buyers (because all companies will call themselves the best, leaving no space for differentiation).  –Buyers are sufficiently pessimistic about the seller's quality. –Deficiency of effective public quality assurances (by reputation or regulation and/or of effective guarantees/warranties).  
2. 'Pro-regulation' perspective
   1. Public information

      Annotations:

      • Accounting information is a public good: Once available, people can us it without paying and can pass it to the others - 'free riders'
      1. Market failure

         Annotations:

         • If individuals can receive goods without purchasing, the price system cannot function properly, market failure occurs. Therefore, regulations is argues to be necessary to reduce the impacts of market failure.
   2. Paying for information