BA606 FINANCIAL ACCOUNTING

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BA606 FINANCIAL ACCOUNTING

• Professor Garry Carnegie
• Lectures 1 2

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Lecture 1 Standard setting in Australia

• Introduction
• Accounting standard setting institutional
  arrangements in Australia
• The preparation and enforcement of accounting
  standards and UIG interpretations
• Accounting standard setting in future

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Introduction

• Definition of accounting standards
• a principle that governs current accounting
  practice and that is used as a reference to
  determine the appropriate treatment of complex
  transactions (The Free Dictionary)
• principle a rule or standard of good
  behaviour

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Introduction

• Main sources of regulation
• Government legislation
• Australian Securities Exchange (ASX) Listing
  Rules
• Accounting Standards

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Introduction

• Government legislation
• The Corporations Act 2001 requires the
  preparation of financial reports by all
  disclosing entities, all public companies, all
  large proprietary companies and all registered
  schemes (sec 292)
• These financial reports are to comply with
  accounting standards and present a true and fair
  view (sec 296 and sec 297)

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Introduction

• ASX Listing Rules
• Publicly listed companies are required to comply
  with the ASX Listing Rules
• The Listing Rules specify detailed financial
  disclosure requirements such as relating to
  continuous disclosure, periodic disclosure and
  additional reporting requirements for mining
  companies and others

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Introduction

• Accounting Standards
• The Australian Accounting Standards Board (AASB)
  has the power to make accounting standards (sec
  334)
• Authority is provided to AASB accounting
  standards under the Corporations Act 2001 (sec
  296)

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Accounting standard setting

• Early developments in institutional arrangements
• Establishment of the Accounting Standards Review
  Board (ASRB)
• Establishment of the AASB
• Present standard setting arrangements

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Accounting standard setting

• Early developments
• Accounting methods were the responsibility of the
  accounting profession
• Formation of Australian Accounting Research
  Foundation (AARF) in 1966
• Formation of the Public Sector Accounting
  Standards Board (PSASB) in 1983
• Attempts to adopt a common set of accounting
  standards in public and private sectors

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Accounting standard setting

• Establishment of ASRB
• Created in 1984
• Response to the inability of professional
  accounting bodies to enforce accounting standards
• Applicable approved accounting standards were
  accounting standards that had been approved by
  the ASRB

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Accounting standard setting

• Establishment of AASB
• Commenced operations on 1 January 1991 and
  replaced the ASRB
• Responsible for making accounting standards
  that have the force of the law
• During the 1990s there were two accounting
  standard setting boards AASB and PSASB and two
  sets of accounting standards (AASB and AAS
  series)

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Accounting standard-setting
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Accounting standard setting

• Present standard setting arrangements
• Financial Reporting Council (FRC)
• http//www.frc.gov.au
• AASB
• http//www.aasb.com.au

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Accounting standard-setting
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Preparation and enforcement

• Development of accounting standards and concepts
  statements
• Due process
• Issue of discussion paper or accounting theory
  monograph
• Exposure drafts of proposed pronouncements
• Public hearings from time to time

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Preparation and enforcement

• International Financial Reporting Standards
  (IFRS)
• In July 2002, the FRC announced its decision to
  adopt Australian equivalents of the International
  Accounting Standards (IAS) of the International
  Accounting Standards Board (IASB) from 1 January
  2005
• IFRS, while adopted in Australia with little
  modification, were issued using the AASB prefix
  and are commonly referred to AIFRS

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Preparation and enforcement

• Other accounting pronouncements
• Accounting Guidance Releases (Accounting
  Interpretations) (all issued before 1 January
  2005)
• Urgent Issues Group (UIG) Interpretations
• Accounting Bulletins (effectively superseded from
  1 January 2005)

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Preparation and enforcement

• Authority and enforcement of accounting standards
  and UIG interpretations
• Accounting bodies (Miscellaneous Professional
  Statement APS 1)
• Australian Securities and Investments Commission
  (ASIC)
• Governments

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Future accounting standard-setting

• At a public lecture held in Melbourne in the
  second half of 2007, Sir David Tweedie, Chairman
  of the IASB, provided directions for
  international accounting standard-setting,
  stating that standards should
• - be based on core principles rather than be
  rule-based
• - contain no exceptions
• - exhibit no inconsistencies
• - require interpretation through the application
  of professional judgement (as the hallmark of a
  member of a profession)
• - provide minimum guidance (i.e. interpretations)

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Future accounting standard-setting

• By 2011 is it estimated that 150 countries will
  be applying IAS and that US accounting standards
  i.e. standards of the Financial Accounting
  Standards Board (FASB) will be converged with
  international standards
• By 2006, 75 countries had mandated (i.e.
  required) the adoption of IAS

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Lecture 2 Conceptual framework for financial
reporting

• Introduction
• Development of accounting thought
• Australian conceptual framework
• Scope of financial reporting
• Subject of financial reporting
• Objective of financial reporting

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Introduction

• Double entry bookkeeping dates back to Italy in
  the 13th and 14th centuries
• Accounting thought is just as important as
  accounting practice
• Present day transactions reflect a modern,
  globalising world
• Complex transactions exist and readily emerge
• A clear understanding of the nature, purpose and
  methods of financial reporting are required

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Development of accounting thought

• Accounting as a University discipline
• US Stock market crash in 1929 exposed accounting
  as a contributor
• The US accounting profession responded by seeking
  to codify accounting principles
• The accounting profession in other parts of the
  world also issued statements of accounting
  principles

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Development of accounting thought

• Official or formal conceptual frameworks for
  financial reporting emerged from the mid 1980s
• What is a conceptual framework?
• A conceptual framework is a set of interrelated
  concepts that define the nature, purpose and
  broad content of general purpose financial
  reporting.
• It is the explicit rendition of the thinking of
  the standard-setting body as it lays down the
  requirements for general purpose financial
  reporting (McGregor, 1990, p. 48 as found in
  Charter, December).

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Australian conceptual framework

• The following statements of accounting concepts
  (SAC) were issued under the former Australian
  conceptual framework
• SAC1 Definition of the Reporting Entity
• SAC2 Objective of General Purpose Financial
  Reporting
• SAC3 Qualitative Characteristics of Financial
  Information
• SAC4 Definition and Recognition of the Elements
  of Financial Statements.

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Australian conceptual framework
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Australian conceptual framework

• Structure of the present Australian conceptual
  framework
• SAC1
• SAC2
• Framework for the Preparation and Presentation
  of Financial Statements (as the IASB conceptual
  framework for financial reporting as modified)

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Scope of financial reporting

• General purpose financial reporting is otherwise
  known as external reporting
• Such reports are intended to provide information
  to meet the common needs of a diverse range of
  users who do not have the authority to command
  the information that they may require from an
  organisation
• Users should be financially literate

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Scope of financial reporting

• The scope of general purpose financial reporting
  encompasses
• Financial statements
• Notes to the financial statements
• Supplementary information
• Voluntary information

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Subject of financial reporting

• The conceptual framework is concerned with
  defining and explaining the concept of the
  reporting entity
• The concept of the reporting entity adopted in
  SAC1 requires that individual reporting entities
  be identified by reference to the existence of
  external users who are dependent on general
  purpose financial reports for information for
  making and evaluating resource allocation
  decisions (para. 12)

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Objective of financial reporting

• People have objectives not objects
• The conceptual framework is an innate object
• Nevertheless, SAC2 states that the objective of
  general purpose financial reporting is to provide
  information to users that is useful for making
  and evaluating decisions about the allocation of
  scarce resources (para. 26)

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Objective of financial reporting

• What financial information do users need?
• SAC2 proposes that users of financial reports
  need information about the following facets
• Performance
• Financial position
• Financing and investing, and
• Compliance