Chapter 1

Accounting Regulation & the Conceptual Fram ew ork

Prepared by Kent Wilson and Ann Tarca

Learning Objectives
1. Identify sources of regulation of financial reporting in Australia 2. Identify key bodies involved in financial reporting regulation 3. Describe the structure and operations of the IASB 4. Outline the components of the Conceptual

Framework

5. Identify the qualitative characteristics of information 6. Discuss the elements of financial statements 7. Understand recognition and measurement of the elements of financial statements

General purpose financial reports

Useful information for decision making http://www.westpac.com.au/aboutwestpac/investor-centre/annual_reports/

1. Key Sources of Regulation of Financial Reporting in Australia

The major sources of financial reporting regulation in Australia are:

The Corporations Act Australian Accounting Standards (International Financial Reporting Standards = IFRS) The Conceptual Framework ASX Listing Rules

The Corporations Act

Australian companies must comply with the requirements of the Corporations Act 2001 The Corporations Act requires the preparation of financial reports for all:
Disclosing entities Public companies Large proprietary companies Registered schemes

Australian Accounting Standards

The Corporation Acts requires compliance with accounting standards (AASB/IFRS) All entities required to prepare financial statements in accordance with the Corporations Act must apply the following standards:
AASB AASB AASB AASB 101 - Presentation of Financial Statements 107 - Statement of Cash Flows 108 - Accounting Policies 1048 - Interpretation & Application of Standards

The reporting entity concept is used to determine whether entities are required to present GPFRs
Requires professional judgement

The Conceptual Fram ew ork

The purpose is to provide a coherent set of

principles:

Issued by the AASB (IASB) Assists standard setters to produce consistent standards Assists preparers deal with issues not addressed by a standard Assists auditors in forming an opinion on compliance Assists users to interpret company accounts

ASX Listing Rules

Companies listing on the ASX need to comply with the ASX Listing Rules The Listing Rules include requirements for continuous disclosure and periodic reporting P rim ary focus on disclosure

Questions
Why do governments regulate companies and markets? Why do companies comply with regulations? What factors influence the extent to which they do so? Theories from economics, finance and accounting Evidence from academic research

2. Key bodies - AASB Standard Setting Process

3. The International Accounting Standards Board (IASB)

4. The Conceptual Fram ew ork

The IASB has been involved in a joint project with FASB to revise the Conceptual Framework. IASB current project, deadline 2015. The Australian conceptual framework comprises:
(the Framework) SAC 1 Definition of the Reporting Entity

The IASB Framework for the Prep. & Presentation of Fin. Statements SAC 2 Objective of General Purpose Financial Reporting

The IASBs Framework comprises:

Chap Chap Chap Chap 1 2 3 4

- The objective of general purpose financial reporting - The reporting entity - The qualitative characteristics of useful fin. Reporting the Framework

The Conceptual Fram ew ork

Objective of financial reporting (OB2) To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions about providing resources to the entity

5. Qualitative Characteristics of Useful Information

Fundam ental qualitative characteristics:
Relevance Faithful representation

Enhancing qualitative characteristics:

Comparability Verifiability Timeliness Understandability

Open Safari Case Study

Objective of financial reporting: Useful information for decision making (Framework) Who are the users and potential users of general purpose financial reports in the Open Safari Case Study? The Open Safari Case Study can be downloaded from LMS (week 1)

6. Definitions of Elements of Financial Statements

Assets
a resource controlled by the entity as a result of past events and from which future econom ic benefits are expected to flow to the entity

Liabilities
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 em bodying econom ic benefits

Definitions of Elements of Financial Statements

Equity
the residual interest in the assets of the entity after deducting all its liabilities Equity is a residual: Equity = Assets Liabilities Increases as a result of profitable operations Influenced by the measurement system adopted for A & L and the concepts of capital and capital maintenance

I ncom e
increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

Definitions of Elements of Financial Statements

Ex penses
are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity , other than those relating to distributions to equity participants

Open Safari Case Study

Are the following elements of the financial statements (assets, liabilities, income or expense)? Freelands staff housing, eco-resort lodge, hot air balloons and helicopters wild animals and resort staff Sealands casino licence Plans for beachfront holiday homes

7. Recognition of Elements of Financial Statements

Asset recognition
Probability of future economic benefits and reliable measurement required

Liability recognition
Probability of an outflow and reliable measurement required

I ncom e recognition
Probability of increase in future economic benefits and reliable measurement required

Ex pense recognition
Probability of decrease in future economic benefits and reliable measurement required

Open Safari Case Study

Recognition of assets, liabilities, income and expense Judgements and estimates in interpretation and application of IFRS Probable Economic benefit Measure reliably

Open Safari Case Study

Recognition: are recognition criteria met? Classification: which IFRS will apply? Freelands staff housing, eco-resort lodge, hot air balloons and helicopters wild animals and resort staff Sealands casino licence Plans of beachfront holiday homes

7. (Cont.) Measurement of the Elements of Financial Statements

Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement
(Conceptual Fram ew ork para 4.54)

A num ber of m easurem ent bases m ay be used:

Historical cost Current cost Realisable or settlement value Present value

Measurement
Historical cost Land Historical cost (adjusted) PPE Current cost Cash paid to acquire asset or settle liability Realisable or settlement value Sale of asset; settlement of a liability

Measurement
Present value Discounted cash flow Fair value measurement? IFRS 13 Fair Value Measurement

Open Safari Case Study

Initial and subsequent measurement Freelands staff housing, eco-resort lodge, hot air balloons and helicopters wild animals and resort staff Sealands casino licence plans for beachfront holiday homes

Measurement in ACCT 3321

Historical cost (adjusted) Intangible assets AASB 138 Some financial instruments AAB 139 Current cost Revaluation model AASB 116 Market value agriculture. Bearer assets and agricultural produce AASB 141 Fair value some financial instruments AASB 139

Measurement
Present value: calculations used in Leases AASB 117 Provisions AASB 137 Employee entitlements (superannuation) AASB 119

Conclusion
Welcome to ACCT 3321 Financial Reporting Regulation will underpin everything we talk about The Conceptual Framework is our theory of accounting The AASB/IASB will provide the principles and rules we discuss Understanding Recognition and Measurement in IFRS will provide many challenges for us ENJOY!