ACCT2011 NOTES
INSTITUTIONAL AND CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
IDENTIFYING THE MAIN SOURCES OF REGULATION OF FINANCIAL REPO RTING IN
AUSTRALIA
• Government Regulation: The Corporations Act 2001 require that
o Proper financial records kept
o Financial report prepared each half year and end of financial year
o Financial report consists of financial statements, notes and directors’ declaration
o Financial statements must give a ‘true and fair view’ of financial position and performance
o Financial report must comply with accounting standards
o If compliance with accounting standards would not give true and fair view
▪ Additional info needs to be disclosed
o Financial statements must include auditor’s report
o Corporations Act applies to companies and other types of entities
▪ E.g. listed trust
• ASX Listing Rules
o Apply only to firms listing on exchange
o Designed to ensure capital markets receive timely and relevant info
o Released Corporate Governance Principles and Recommendations
▪ To promote investor confidence and assist companies to meet investors’ expectations
o 2 mandatory requirements
▪ Disclose annual reports
▪ Companies gave audit committee
• Accounting Standards
o Prepared by AASB
o Authority provided by Corporations Act
o Concerned with definition, recognition, measurement and disclosure
IDENTIFY THE MAJOR DEVELOPMENTS IN THE INSTITUTIONAL ARRANGEMENTS FOR
ACCOUNTING STANDARD SETTING
• No guidance on choice of accounting methods prior to 1960
• Criticism of accounting and accountants increased
• Formation of AASC in 1973: composition and work was criticised
• Formation of ACSB in 1978 and PSASB in 1983
• Establishment of the ASRB
o Concern over ability of professional accounting bodies to enforce accounting standards
• AASB: began operations in 1991
• During 1990s- 2 accounting standard setting boards
o AASB
o PSASB
1
,EXPLAIN THE PRESENT ACCOUNTING STANDARD-SETTING ARRANGEMENTS
THE FINANCIAL REPORTING COUNCIL
• Appoint members of AASB
• Approve and monitor AASB’s priorities, etc
• Determine AASB broad strategic direction
• Give the AASB advice
• Monitor development of international accounting
standards
• Cannot veto a AASB standard or direct the AASB to
develop a particular standard
• Monitors effectiveness of auditor independence
requirements in Australia
THE AUSTRALIAN ACCOUNTING STANDAR DS BOARD
• Major functions
o To develop a conceptual framework
o To make accounting standards
o To formulate accounting standards for other functions
o To participate in the development of a single set of worldwide accounting standards
o To advance and promote main objective of Part 12 of act
• The office of AASB was established to support AASB
• Four formal avenues for constituent entities and organisations to have input to the standard-setting process
o Focus groups
o Project advisory panels
o Interpretation advisory panels
o Academic advisory panel
• Direct responsibility for developing interpretations
UNDERSTAND THE PURPOSE OF A CONCEPTUAL FRAMEWORK
• Development of conceptual framework for financial reporting
o Collapse of US share market in 1929
o Early efforts to develop a conceptual framework or theory of accounting
o Continuing interest in developing a framework to:
▪ Underpin accounting practice
▪ Form basis for setting new and revising old accounting standards
• Purpose of conceptual framework
o To provide users, preparers, auditors of financial statements (and standard setters) with an explicit set of
concepts to use when making decisions about appropriate accounting policies
• Potential benefits
o More consistent and logical accounting standards
o Reduced barriers to international capital flows
o Accounting standard setters more accountable
o Improved communication between standard setters and constituents
o More efficient development of accounting standards
DESCRIBE THE STRUCTURE OF THE AUSTRALIAN CONCEPTUAL FRAMEWORK
• Australian conceptual framework comprises
o SAC1 ‘Definition of the Reporting Entity’
o SAC2 ‘Objective of General Purpose Financial Reporting’
2
, o The ‘Framework for the Preparation and Presentation of Financial Statements’
▪ Qualitative characteristics of financial statements
❖ Fundamental characteristics
o Relevance
o Faithful Representation
❖ Enhancing characteristics
o Comparability
o Verifiability
o Timeliness
o Understandability
▪ The elements of financial statements
▪ Recognition of the elements of financial statements
▪ Measurement of the elements of financial statements
• The IASB’s Conceptual Framework 2014
o Two fundamental qualitative characteristics
▪ Relevance
▪ Reliability
o Enhancing qualitative characteristics
▪ Comparability
▪ Verifiability
▪ Timeliness
▪ Understandability
IDENTIFY THE ELEMENTS OF F INANCIAL STATEMENTS IN THE AUSTRALIAN
CONCEPTUAL FRAMEWORK
• Elements confined to
o Assets
o Liabilities
o Equity
o Income
o Expenses
• Framework distinguishes between
o Definition
▪ Characteristics a transaction/event must
have to be considered a member of that
class element
o Recognition
▪ Action/process of recording
transaction/event in accounting records
DISTINGUISH BETWEEN THE DEFINITION, RECOGNITION AND MEASUREMENT OF THE
ELEMENTS OF FINANCIAL STATEMENTS
DEFINITION OF ASSETS
• Resources controlled by entity as a result of past events and from which future economic benefits are expected to flow to
the entity
• Essential characteristics according to Framework
o Future eco benefits
o Control by entity
o Result of past event
3
, RECOGNITION OF ASSETS
• Asset is recognised in balance sheet when
o Probable future eco benefits will flow to entity
o Asset has a cost/value that can be measured reliably
• Contingent assets
o Arise in the future only as a result of the occurrence/non-occurrence of a particular event
o Are not recognised in the statement of financial position
o Should be disclosed in a note where an inflow of economic benefits is probable
MEASUREMENT OF ASSETS
• Generally, assets measured at their cost of acquisition
o i.e. historical cost
• Other proposed measurement bases are:
o E.g. fair value
o Current (replacement) cost
o Market (realisable) value
o Deprival value/value to owner
DEFINITION OF LIABILITIES
• Present obligation of entity arising from past events, the settlements of which is expected to result in an outflow from the
entity of resources embodying eco benefits
• Essential characteristics according to Framework
o Present obligation to another entity
o Future sacrifice of eco benefits
o Past event
RECOGNITION OF LIABI LITIES
• Liability should be recognised in balance sheet when
o Probable that outflow of resources embodying eco benefits will result from settlement of present obligation
o Amount at which settlement will take place can be measured reliably
• Contingent liability
o Obligation that will arises in future only as a result of occurrence or non-occurrence of particular event
o Aren’t recognised in statement of financial position
o Should be disclosed in a note where probability of future sacrifice of eco benefits is higher than remote
MEASUREMENT OF LIABILITIES
• Measured in a way compatible with assets
• Ultimate choice of measurement determined by reference to
o Objective of general purpose financial reporting
o Qualitative characteristics of financial information
DEFINITION, RECOGNITION AND MEAS UREMENT OF EQUITY
• Residual interest in assets of entity after deducting all liabilities
• Recognition criteria for assets and liabilities also criteria for equity
• Measurement of equity also depends on measurement basis for assets and liabilities
4
INSTITUTIONAL AND CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
IDENTIFYING THE MAIN SOURCES OF REGULATION OF FINANCIAL REPO RTING IN
AUSTRALIA
• Government Regulation: The Corporations Act 2001 require that
o Proper financial records kept
o Financial report prepared each half year and end of financial year
o Financial report consists of financial statements, notes and directors’ declaration
o Financial statements must give a ‘true and fair view’ of financial position and performance
o Financial report must comply with accounting standards
o If compliance with accounting standards would not give true and fair view
▪ Additional info needs to be disclosed
o Financial statements must include auditor’s report
o Corporations Act applies to companies and other types of entities
▪ E.g. listed trust
• ASX Listing Rules
o Apply only to firms listing on exchange
o Designed to ensure capital markets receive timely and relevant info
o Released Corporate Governance Principles and Recommendations
▪ To promote investor confidence and assist companies to meet investors’ expectations
o 2 mandatory requirements
▪ Disclose annual reports
▪ Companies gave audit committee
• Accounting Standards
o Prepared by AASB
o Authority provided by Corporations Act
o Concerned with definition, recognition, measurement and disclosure
IDENTIFY THE MAJOR DEVELOPMENTS IN THE INSTITUTIONAL ARRANGEMENTS FOR
ACCOUNTING STANDARD SETTING
• No guidance on choice of accounting methods prior to 1960
• Criticism of accounting and accountants increased
• Formation of AASC in 1973: composition and work was criticised
• Formation of ACSB in 1978 and PSASB in 1983
• Establishment of the ASRB
o Concern over ability of professional accounting bodies to enforce accounting standards
• AASB: began operations in 1991
• During 1990s- 2 accounting standard setting boards
o AASB
o PSASB
1
,EXPLAIN THE PRESENT ACCOUNTING STANDARD-SETTING ARRANGEMENTS
THE FINANCIAL REPORTING COUNCIL
• Appoint members of AASB
• Approve and monitor AASB’s priorities, etc
• Determine AASB broad strategic direction
• Give the AASB advice
• Monitor development of international accounting
standards
• Cannot veto a AASB standard or direct the AASB to
develop a particular standard
• Monitors effectiveness of auditor independence
requirements in Australia
THE AUSTRALIAN ACCOUNTING STANDAR DS BOARD
• Major functions
o To develop a conceptual framework
o To make accounting standards
o To formulate accounting standards for other functions
o To participate in the development of a single set of worldwide accounting standards
o To advance and promote main objective of Part 12 of act
• The office of AASB was established to support AASB
• Four formal avenues for constituent entities and organisations to have input to the standard-setting process
o Focus groups
o Project advisory panels
o Interpretation advisory panels
o Academic advisory panel
• Direct responsibility for developing interpretations
UNDERSTAND THE PURPOSE OF A CONCEPTUAL FRAMEWORK
• Development of conceptual framework for financial reporting
o Collapse of US share market in 1929
o Early efforts to develop a conceptual framework or theory of accounting
o Continuing interest in developing a framework to:
▪ Underpin accounting practice
▪ Form basis for setting new and revising old accounting standards
• Purpose of conceptual framework
o To provide users, preparers, auditors of financial statements (and standard setters) with an explicit set of
concepts to use when making decisions about appropriate accounting policies
• Potential benefits
o More consistent and logical accounting standards
o Reduced barriers to international capital flows
o Accounting standard setters more accountable
o Improved communication between standard setters and constituents
o More efficient development of accounting standards
DESCRIBE THE STRUCTURE OF THE AUSTRALIAN CONCEPTUAL FRAMEWORK
• Australian conceptual framework comprises
o SAC1 ‘Definition of the Reporting Entity’
o SAC2 ‘Objective of General Purpose Financial Reporting’
2
, o The ‘Framework for the Preparation and Presentation of Financial Statements’
▪ Qualitative characteristics of financial statements
❖ Fundamental characteristics
o Relevance
o Faithful Representation
❖ Enhancing characteristics
o Comparability
o Verifiability
o Timeliness
o Understandability
▪ The elements of financial statements
▪ Recognition of the elements of financial statements
▪ Measurement of the elements of financial statements
• The IASB’s Conceptual Framework 2014
o Two fundamental qualitative characteristics
▪ Relevance
▪ Reliability
o Enhancing qualitative characteristics
▪ Comparability
▪ Verifiability
▪ Timeliness
▪ Understandability
IDENTIFY THE ELEMENTS OF F INANCIAL STATEMENTS IN THE AUSTRALIAN
CONCEPTUAL FRAMEWORK
• Elements confined to
o Assets
o Liabilities
o Equity
o Income
o Expenses
• Framework distinguishes between
o Definition
▪ Characteristics a transaction/event must
have to be considered a member of that
class element
o Recognition
▪ Action/process of recording
transaction/event in accounting records
DISTINGUISH BETWEEN THE DEFINITION, RECOGNITION AND MEASUREMENT OF THE
ELEMENTS OF FINANCIAL STATEMENTS
DEFINITION OF ASSETS
• Resources controlled by entity as a result of past events and from which future economic benefits are expected to flow to
the entity
• Essential characteristics according to Framework
o Future eco benefits
o Control by entity
o Result of past event
3
, RECOGNITION OF ASSETS
• Asset is recognised in balance sheet when
o Probable future eco benefits will flow to entity
o Asset has a cost/value that can be measured reliably
• Contingent assets
o Arise in the future only as a result of the occurrence/non-occurrence of a particular event
o Are not recognised in the statement of financial position
o Should be disclosed in a note where an inflow of economic benefits is probable
MEASUREMENT OF ASSETS
• Generally, assets measured at their cost of acquisition
o i.e. historical cost
• Other proposed measurement bases are:
o E.g. fair value
o Current (replacement) cost
o Market (realisable) value
o Deprival value/value to owner
DEFINITION OF LIABILITIES
• Present obligation of entity arising from past events, the settlements of which is expected to result in an outflow from the
entity of resources embodying eco benefits
• Essential characteristics according to Framework
o Present obligation to another entity
o Future sacrifice of eco benefits
o Past event
RECOGNITION OF LIABI LITIES
• Liability should be recognised in balance sheet when
o Probable that outflow of resources embodying eco benefits will result from settlement of present obligation
o Amount at which settlement will take place can be measured reliably
• Contingent liability
o Obligation that will arises in future only as a result of occurrence or non-occurrence of particular event
o Aren’t recognised in statement of financial position
o Should be disclosed in a note where probability of future sacrifice of eco benefits is higher than remote
MEASUREMENT OF LIABILITIES
• Measured in a way compatible with assets
• Ultimate choice of measurement determined by reference to
o Objective of general purpose financial reporting
o Qualitative characteristics of financial information
DEFINITION, RECOGNITION AND MEAS UREMENT OF EQUITY
• Residual interest in assets of entity after deducting all liabilities
• Recognition criteria for assets and liabilities also criteria for equity
• Measurement of equity also depends on measurement basis for assets and liabilities
4
