ACC514Topic 1

Learning Objective

Topic 1:

Introduction to the regulatory environment for

financial reporting and the Conceptual Framework
Slides by Miranda Dyason, adapted from Understanding Australian Accounting
Standards instructor resources prepared by Kent Wilson

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Learning Objective

Learning Objectives
A

Identify the key sources of financial reporting regulation in Australia and explain the
roles played by the various regulatory bodies;

Explain the key components of the Conceptual Framework;

Explain the qualitative characteristics of useful financial information, and key

elements of financial statements; and

Interpret and apply the principles for recognising and measuring the elements of
financial statements.

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ACC514Topic 1

Learning Objective

Learning Objectives
A

Identify the key sources of financial reporting regulation in Australia and explain the
roles played by the various regulatory bodies;

Explain the key components of the Conceptual Framework;

Explain the qualitative characteristics of useful financial information, and key

elements of financial statements; and

Interpret and apply the principles for recognising and measuring the elements of
financial statements.

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ACC514Topic 1

Learning Objective

Learning Objectives
A

Identify the key sources of financial reporting regulation in Australia and explain the
roles played by the various regulatory bodies;

Explain the key components of the Conceptual Framework;

Explain the qualitative characteristics of useful financial information, and key

elements of financial statements; and

Interpret and apply the principles for recognising and measuring the elements of
financial statements.

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ACC514Topic 1

Learning Objective

Learning Objectives
A

Identify the key sources of financial reporting regulation in Australia and explain the
roles played by the various regulatory bodies;

Explain the key components of the Conceptual Framework;

Explain the qualitative characteristics of useful financial information, and key

elements of financial statements; and

Interpret and apply the principles for recognising and measuring the elements of
financial statements.

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Learning Objective

Sources of financial reporting regulation

The major sources of financial reporting regulation in Australia are:
The Corporations Act;
Australian Accounting Standards;
The Conceptual Framework;
ASX Listing Rules.

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Learning Objective

The Corporations Act

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Learning Objective

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 (well look at this on the next slide);
Registered schemes.

Small proprietary companies are not required to prepare annual financial

reports in accordance with Chapter 2M of the Corporations Act unless
directed by ASIC or shareholders with at least 5% of the voting rights.
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Learning Objective

The Corporations Act

Large or small proprietary company?
Section 45A of the Act further classifies proprietary companies as small or large,
as follows:
Small proprietary company: A small proprietary company is a proprietary
company that satisfies at least two of the following criteria, specified in s.
45A(2).
(a)The consolidated revenue for the financial year of the company and the entities it
controls is less than $25 million.
(b)The value of the consolidated gross assets at the end of the financial year of the
company and the entities it controls is less than $12.5 million.
(c) The company and the entities it controls have fewer than 50 employees at the end
of the financial year.

Large proprietary company: A proprietary company is a large proprietary

company if it does not satisfy the definition of a small proprietary company.

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Example

Learning Objective

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Learning Objective

Accounting standards

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Learning Objective

Australian Accounting Standards

All entities that are required to prepare financial statements in accordance
with the Corporations Act must apply the following standards:

AASB 101 Presentation of Financial Statements;

AASB 107 Statement of Cash Flows;
AASB 108 Accounting Policies;
AASB 1048 Interpretation & Application of Standards.

The reporting entity concept is used to determine whether entities are

required to present GPFRs. (Well look at the concept a little later)

Requires professional judgement.

If the entity is a reporting entity, the entity is required to prepare general
purpose financial reports in accordance with all of the Accounting Standards.
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Learning Objective

The Conceptual Framework

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Learning Objective

The Conceptual Framework

The purpose of the conceptual framework is to provide a coherent set of
principles.

Issued by the AASB.

Assists with standard consistency.
Assists preparers deal with issues not addressed by a standard.
Assists auditors in forming an opinion on compliance.
Assists users to interpret financial statements.

We will look at the Conceptual Framework in more detail shortly.

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Learning Objective

ASX Listing Rules

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Learning Objective

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.
Primary focus is on disclosure.

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Learning Objective

Key players in financial reporting regulation

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Learning Objective

Key Players in Financial Reporting Regulation

Financial Reporting Council (FRC).
Australian Accounting Standards Board (AASB).
Australian Securities and Investments Commission (ASIC).
Australian Prudential Regulation Authority (APRA).
Australian Securities Exchange Group (ASX).

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Learning Objective

Financial Reporting Council (FRC)

Oversees activities of AASB,
Responsible for decision that Australian reporting entities
would adopt accounting standards issued by IASBmajor
implications for Australian reporting practices,
Now also oversees Auditing and Assurance Standards Board
(AUASB).

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Learning Objective

FRC (contd)
Specific 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,
The FRC has:
No power to direct AASB re-development of particular standards,
No power to veto a standard.
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Learning Objective

Australian Accounting Standards Board (AASB)

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,
formulating accounting standards for other purposes:
Eg. for entities not governed by The Corporations Law.
participating in and contributing to the development of a single set of
accounting standards for worldwide use,
Advancing and promoting the main objects of the financial reporting
system part of the ASIC Act.
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Learning Objective

Australian Accounting Standard-setting institutional arrangements

Financial Reporting Council
(Oversight body including key stakeholders from
the business community, the professional
accounting bodies, the investing community,
governments and regulatory agencies)

Australian Accounting
Standards Board
Australian Accounting
Standards and Board
Staf

Secretariat
(provided by
Australian
Treasury)

Auditing and Assurance

Standards Board

Auditing and Assurance

Standards Board Staf

Table recreated from FRC located at http://www.frc.gov.au/reports/2007_2008/frc_ar_2007-08-01.asp

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Learning Objective

Australian Securities and Investments Commission (ASIC)

Corporate, market and financial services regulator.
Responsible for administering corporation legislation.
Primary role to promoting confidence in the financial system by
maintaining, improving and facilitating the performance of the financial
system.
Reports to the Commonwealth Parliament and Treasurer.

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Learning Objective

Australian Prudential Regulation Authority (APRA)

Regulates the Australian financial services industry. It oversees:

Banks,
Credit unions,
Building societies,
General insurance and reinsurance companies,
Life insurance,
Friendly societies, and
Most members of the superannuation industry.

Primary role to promoting financial stability by requiring these institutions

to manage risk prudently so as to minimise losses to depositors, policy
holders and superannuation fund members.
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Learning Objective

Australian Securities Exchange Group

(ASX)

Operates the securities exchange.

Administers
Listing
Rules
and
adherence to rules by all listed entities.

requires

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Learning Objective

International Accounting Standards Board

(IASB)

An independent standard-setting board that develops and approves

International Financial Reporting Standards (IFRSs).

Committed to the development of a single set of high quality,

enforceable global accounting standards.

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Learning Objective

Adoption of IFRS

Australia adopted accounting standards issued by the International

Accounting Standards Board commencing on or after 1 January 2005.
When the AASB adopts IFRSs in Australia, the international accounting
standards may be modified to the extent necessary to take into account
the Australian legal or institutional environment (eg. For not-for-profit
entities).
Note: the AASB may also issue new accounting standards that are not
equivalent to an international standard.

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Learning Objective

Adoption of IFRS (contd)

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.
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Learning Objective

The Conceptual Framework

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Learning Objective

Why do we need a conceptual framework?

Conceptual frameworks prescribe the nature,
function and limits of financial accounting and
reporting.
Central goal in establishing a conceptual framework is
general consensus on:
scope and objectives of financial reporting,
qualitative characteristics that financial information should possess,
elements of financial reporting.
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Learning Objective

Benefits of having conceptual framework

Accounting standards would be more consistent and logical
because they are developed from a clearly developed set of
concepts.
Increased international comparability of financial information.
Should result in the Boards (e.g. IASB, AASB) being more
accountable for their standard-setting decisions.
Enhanced process of communication between the Boards and
constituents.
More economical accounting standard development.
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Learning Objective

Conceptual framework v standards

Conceptual framework:
A group of ideas or principles used to plan or decide something.
prescribes the basic principles that are to be followed in preparing
financial statements.
A coherent system of concepts, which are guidelines to the
accounting standards.
Designed to provide guidance and apply to a wide range of decisions.

Accounting standards:
Specific requirements for a particular area (such as intangible assets).
May go beyond the framework.
Are mandatory.
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Learning Objective

Which conceptual framework?

1989 IASB issued the Framework for the Preparation and
Presentation of Financial Statements issued by the IASB [IASB
1989 framework].
2005 Australia adopted the above framework upon decision to
adopt international financial reporting standards [referred to as:
AASB framework].
2010 - the Conceptual Framework for Financial Reporting issued
by the IASB as part of the IASB-FASB convergence project [IASB
2010 framework].
2013 AASB framework is revised to reflect the IASB 2010
framework.
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Which conceptual framework?

Learning Objective

The Australian conceptual framework comprises:

The Framework for the Preparation & Presentation of Financial Statements [originally
adopted from IASB 1989 framework], now supplemented with AASB CF 2013-1,
SAC 1 Definition of the Reporting Entity,
SAC 2 Objective of General Purpose Financial Reporting [superseded after AASB
CF 2013-1 came into effect from December 2013].

The IASBs Conceptual Framework comprises:

Chap 1 - The objective of general purpose financial reporting,

Chap 2 - The reporting entity [not completed],
Chap 3 - The qualitative characteristics of useful financial information,
Chap 4 - The Framework [contains parts from the IASB 1989 framework that are not
covered in above chapters].
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Learning Objective

The objective of general purpose financial reporting

(AASB CF 2013-1 Appendix Chapter 1)

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Learning Objective

Objective of GPFRs
The conceptual framework states that it is concerned with
general purpose financial reports.
The objective of GPFRs is to provide financial information about the
reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing
resources to the entity. These decisions involve buying, selling or
holding equity and debt instruments, and providing or settling loans
and other forms of credit.

Key users include:

Existing and potential investors.
Lenders.
Other creditors.

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Learning Objective

The Reporting Entity concept

(SAC 1)

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Learning Objective

Reporting entity concept

SAC1Definition of the Reporting Entity:

Defines reporting entities as (paragraph 40):
All entities in respect of which it is reasonable to expect the
existence of users dependent on general purpose financial reports
for information which will be useful to them for making and
evaluating decisions about the allocation of scarce resources.

GPFSs to be produced by entities who have users who cannot

command the preparation of specific information:
Such entities are deemed to be reporting entities.
If an entity is not deemed to be a reporting entity it will not be required
to produce GPFRsand not necessarily be required to comply with all
accounting standards.

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Reporting entity concept

Learning Objective

Factors that may indicate that an entity is a reporting entity include:

separation of management from those with an economic interest in
the entity,
economic or political importance/influence,
Financial characteristics of an entity:

amount of sales,
value of assets,
extent of indebtedness,
number of customers,
number of employees.
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Reporting entity concept

Learning Objective

Small proprietary companies are frequently not considered to be

reporting entitiesit is assumed that most people who require
financial information about the entity will be in a position to
specifically demand it.
We must understand the implications of being deemed to be a
reporting entityif an entity is deemed to be a reporting entity then
it is expected to provide financial statements in accordance with
accounting standards.
AASB 1053: Tier 1 & Tier 2 reporting entities.

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Example

Learning Objective

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Learning Objective

Underlying assumptions
(AASB Framework paragraphs 22-23)

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Learning Objective

Going Concern Assumption

Financial statements are prepared under the assumption that the entity
will continue to operate for the foreseeable future.

GPFRs are prepared on an accruals basis

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Learning Objective

Self-review exercise Loftus 1.8

What measurement principles might be most appropriate for a company that

has ceased to be a going concern (eg. creditors have appointed a receiver who
is seeking buyers for the companys assets)?
If management intends to liquidate the entitys operations, the going concern
assumption is set aside and financial statements are prepared on the basis of
expected liquidation (forced sale) values (or net realisable values).
Net realisable value is an assets selling price or a liabilitys settlement amount
less disposal or settlement costs. If a company ceases to be a going concern, that
means it is either being wound up or sold.
Using net realisable values would provide financial statement users with the most
relevant information.
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Learning Objective

Qualitative characteristics of useful financial information

(AASB CF 2013-1 Appendix Chapter 3)

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Learning Objective

Qualitative characteristics of useful

information
Fundamental qualitative characteristics:

Relevance;
Faithful representation.

Enhancing qualitative characteristics:

Comparability;
Verifiability;
Timeliness;
Understandability.
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Learning Objective

The elements of financial statements

(AASB Framework paragraphs 47-98)

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Learning Objective

Key elements of financial statements

Five elements of accounting are defined in the AASB
Framework:
1. Assets,
2. Liabilities,
3. Equity,
4. Expenses,
5. Income.
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Learning Objective

Definitions of financial statement elements

Assets:

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.

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
embodying economic benefits.

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Learning Objective

Definitions of financial statement elements

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 assets & liabilities and
the concepts of capital and capital maintenance.

Income:

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.
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Learning Objective

Definitions of financial statement elements

Expenses:

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.

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Learning Objective

Recognition of financial statement elements

Asset recognition:
Probability of future economic benefits and reliable measurement required.

Liability recognition:
Probability of an outflow and reliable measurement required.

Income recognition:
Probability of increase in future economic benefits and reliable measurement
required.

Expense recognition:
Probability of decrease in future economic benefits and reliable measurement
required.
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Loftus et al Exercise 1.14

Learning Objective

Glam Cosmetics has spent $220 000 this year on a

project to develop a new range of chemical-free
cosmetics. As yet it is too early for Glam Cosmetics
management to be able to predict whether this project
will prove to be commercially successful.
Explain whether Glam Cosmetics should recognise this
expenditure as an asset, justifying your answer by
reference to the Conceptual Framework asset definition
and recognition criteria.
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Solution:

Learning Objective

The expenditure of developing a new line of chemical-free cosmetics

meets the definition of an asset as: (1) it represents future economic
benefits via sale of the new line of cosmetics; (2) the benefits are
controlled, as the company will enjoy the economic benefits flowing from
the new line; and (3) there is a past event, as the company has already
spent the $220,000.
Under the Conceptual Framework, an asset is recognised only when it is
probable that the future economic benefits will flow to the entity and the
asset has a cost or value that can be reliably measured.
The expenditure fails the probability criterion, as it is not yet possible to
predict whether the project will prove to be commercially viable.
Accordingly, the company cannot (yet) recognise the expenditure as an
asset.
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Example

Learning Objective

ABC Ltd receives a donation of $100,000. Explain how

ABC Ltd should account for this, with reference to the
definitions and recognition criteria in the Conceptual
Framework. What ledger accounts should be debited and
credited?

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Solution

ACC514Topic 1

Learning Objective

The asset definition (para. 49(a)) is met as all 3 characteristics are present.
Past event: The receipt of the donation.
Flow of future economic benefits: The donation represents an inflow of
$100 000 cash into ABC Ltd.
Control over the future economic benefits: ABC Ltd will benefit from this
$100 000 cash inflow and can deny or regulate the access of others to this
cash inflow.
The asset recognition criteria (para. 89) are met, as it is probable
(actually, it is certain) that an inflow of economic benefits (cash) will flow to
the entity, and the amount ($100 000) can be reliably measured as it is
known.
Therefore, an asset of $100 000 must be recognised (DR Cash/Bank)
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Solution

ACC514Topic 1

Learning Objective

The income definition (para. 70(a)) is met as all 3 characteristics are present.
Increase in economic benefits during the period: The inflow of $100 000
cash represents an increase in economic benefits, and ABC Ltd received the
donation during this period.
In the form of an asset increase: See above asset discussion ABC Ltd
now has additional cash of $100 000.
Results in an increase in equity: If assets increase and liabilities remain
unchanged, equity increases.
The income recognition criteria (para. 92) are met, as the increase in
economic benefits has arisen (as ABC Ltd now has additional cash), and the
amount ($100 000) is known.
Therefore, income of $100 000 must also be recognised (CR Income)
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Learning Objective

Measurement of the elements of financial statements

(AASB Framework paragraphs 99-101)

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Learning Objective

Measurement of financial statement elements

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 Framework paragraph 99)

A number of measurement bases may be used:

Historical cost.
Current cost.
Realisable or settlement value.
Present value.
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