Issues in Financial Accounting, 15th Edition Solution Manual

Preview (16 of 529 Pages)

100%

Purchase to unlock

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e1Chapter1INSTITUTIONAL ARRANGEMENTS FORSETTING ACCOUNTING STANDARDS INAUSTRALIALEARNING OBJECTIVESAfter studying this chapter you should be able to:1identify the main sources of regulation of financial reporting;2identify the major developments in the institutional arrangements for accounting standardsetting;3explain the present accounting standard-setting arrangements;4explain the process of developing accounting standards and concepts statements inAustralia;5explain the process of developing interpretations; and6explain the process of enforcing accounting standards and interpretations.QUESTIONS1The three main sources of regulation governing accounting policies and financialreporting practices in Australia are government legislation, the Australian SecuritiesExchangeLtd(ASX)ListingRules,andaccountingstandardsandotherpronouncements issued by the Australian Accounting Standards Board (AASB).Government Legislation:In the private sector, the most important legislation specifying financial reporting

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e2requirements is theCorporations Act 2001. In particular, the Corporations Act specifiesgeneralrequirements that require the financial report to comply with accountingstandards and to present a true and fair view. The form and content of the statement ofcomprehensive income, statement of financial position, statement of changes in equityand statement of cash flows are considered in accounting standards issued by theAustralian Accounting Standards Board (AASB) that are discussed in later chapters ofthis book.ASX Listing Rules:The listing rules of the ASX apply only to entities whose securities are listed on theASX. The disclosure requirements of the ASX are contained in Chapter 3 (continuousdisclosure), Chapter 4 (periodic disclosure) and Chapter 5 (additional reportingonmining and exploration activities) of the listing rules. The listing rules specify thedetaileddisclosureoffinancialinformationandrequirethedisclosureofsomeinformation not required by the Corporations Act (e.g.various disclosures relating tothe 20 largest holders of each class of quoted equity securities).If a listed companydoes not comply with the ASX Listing Rules, it may be delisted.The ASX has alsoissuedCorporate Governance Principles and Recommendationswith 2010 Amendmentsthrough its Corporate Governance Council. Figure 1.1 inChapter1provides an overview of theeightguidelines to which 28 recommendationsare attached. The guidelines and associated recommendations are not mandatory.However, the listing rules include two mandatory requirements relating to the corporategovernance guidelines. First, ASX Listing Rule 4.10.3 requires listed entities to disclosein their annual reports the extent to which they have followed the guidelines during thereporting period. Second, ASX Listing Rule 12.7 requires that companies included inthe S&P/All Ordinaries Indexhave an audit committee andthat companies included inthe S&P/ASX 300 Indexhave an audit committee that is constituted in accordance withthe guidelines.Accounting Standards and Other Pronouncements Issued by the AASB:The third source of regulation governing financial reporting is accounting standards andinterpretationspreparedbytheAustralianAccountingStandardsBoard(AASB).Accountingstandardsandinterpretationsareconcernedwithbothaccountingmeasurement and disclosure. Authority is provided to AASB accounting standards bythe Corporations Act.The Accounting Professional and EthicalStandards Board(APESB) provides similar authority for Australian accounting standards viaAPES 205‘Conformity with Accounting Standards’ (para. 5).2The role of the ASX’sCorporate Governance Principles and Recommendations with2010 Amendmentsis to provide a voluntary code of best practice corporate governanceto guide listed companies. There areeightprinciples supported by 28 recommendationsprovided to listed companies. The guidelines and associated recommendations are not

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e3mandatory. However, the listing rules include two mandatory requirements relating tothe corporate governance guidelines.First, ASX Listing Rule 4.10.3 requires listedentities to disclose in their annual reports the extent to which they have followed theguidelines during the reporting period. Second, ASX Listing Rule 12.7 requiresthatcompanies included in the S&P/All Ordinaries Indexhave an audit committee andthatcompanies included in the S&P/ASX 300 Indexhave an audit committee that isconstituted in accordance with the guidelines.The guidelines are considered evolutionary by the ASX Corporate GovernanceCouncil. That is, the Council is ‘committed to a continuing review of these principlesand best practice recommendations to ensure that they remain relevant, take account oflocal and international developments, and continue to reflect international best practice’(Corporate Governance Council, 2003, p. 7).3The Australian Professional and Ethical Standards Board (APESB) was established asan initiative of CPA Australia and the ICAA primarily to develop and issue appropriateprofessional and ethical standards for their membership.(The IPA has subsequentlybecome a member.)The APESB has reviewed existing professional and ethical standards such as the oldCode of Professional Conduct and Miscellaneous Professional Statements (APS series)and guidance notes (GN series). The subsequent APES series of ethical and professionalstandards approved by the APESB are mandatory for accountants who are members ofCPA Australia,theICAA andtheIPA.The specific professional standard and ethical standardAPES 205‘Conformity withaccountingstandards’requiresmembers tocomplywithaccounting standardsasfollows:4.3Members who are involved in, or are responsible for, the preparation and/orpresentationofFinancialStatementsofaReportingEntityshalltakeallreasonable steps to ensure that the Reporting Entity prepares General PurposeFinancial Statements.5.1Members shall take all reasonable steps to apply Australian Accounting Standardswhen they prepare and/or present General Purpose Financial Statements thatpurport to comply with the Australian Financial Reporting Framework.5.2Where Members are unable to apply Australian Accounting Standards pursuant toparagraph 5.1, they shall take all reasonable steps to ensure that any departurefrom Australian Accounting Standards, the reasons for such departure, and itsfinancial effects are properly disclosed and explained in the General PurposeFinancial Statements.5.5Members in Public Practice shall take all reasonable steps to ensure that Clientshave complied with Australian Accounting Standards when they perform an AuditorReviewEngagementoracompilationEngagementofGeneralPurposeFinancial Statements which purport to comply with the Australian FinancialReporting Framework.

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e4Compliance withAPES205is mandatory for members of the professional accountingbodies, and non-compliance represents a breach of the code of ethics issued by theAccounting Professional and Ethical Standards Board. Failure by members to complywith the requirements ofAPES205could result in disciplinary proceedings beingbrought against them, which could result in the imposition of a fine or expulsion fromthe professional body.4The present institutional arrangements for accounting standard-setting in Australiaaresummarised in Figure 1.2, p.8in Chapter 1.Financial Reporting Council:The Financial Reporting Council (FRC) is a statutory body under theAustralianSecurities and Investments Commission Act 2001. It is the peak body responsible for thebroad oversight of the accounting and auditing standard-setting process in Australia.The FRC is also responsible for monitoring the effectiveness of auditor independencerequirements in Australia and has an oversight function of the Auditing and AssuranceStandards Board (AUASB).In general, the FRC has responsibility for oversight of the AASB and for presentingreports and advice on the Australian accounting standard-setting process to the Ministerfor Superannuation and Corporate Law. The role of the FRC includes:•appointment of the members of the AASB (except for the full-time Chair who isappointed by the Minister for Superannuation and Corporate Law);•approving and monitoring the AASB’s priorities, business plan, budget andstaffing arrangements;•determining the AASB’s broad strategic direction;•giving the AASB directions, advice or feedback on matters of general policy andthe AASB’s procedures; and•monitoring the development of international accounting standards and furtheringthe harmonisation of Australian accounting standards with those standards, andpromoting a greater role for international accounting standards in Australia.Although the FRC has wide-ranging powers,the FRCcannotbecome involved in thetechnical deliberations of the AASB. For example, the FRC does not have the power toveto a standard formulated or recommended by the AASB, nor direct the AASB inrelation to the development or making of a particular standard.Under section 235A of theAustralian Securities and Investments Commission Act2001, members of the FRC are appointed by the Treasurer and hold office on terms andconditions determined by the Treasurer.<www.frc.gov.au>.Australian Accounting Standards Board:TheAustralianAccountingStandardsBoard(AASB)beganoperationsin1991,replacing the Australian Accounting Standards Review Board (ASRB). At this time, theASRB was Australia’s sole standard-setting body for the private sector and its activities

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e5were complimented by the Public Sector Accounting Standards Board (PSASB) whichdeveloped accounting standards applicable to all other reporting entities.The passage ofCLERP in October 1999 resulted in the activities of the PSASB merging into those ofthe AASB.The reconstituted AASB is an Australian government agency under the AustralianSecuritiesandInvestmentsCommissionAct.Ithasresponsibilityformakingaccounting standards applicable not only to entities coming under the jurisdiction of theCorporations Act but also for entities in the public sector and the remainder of the non-corporate sector. The AASB’s major functions are specified in section 227(1) of theAustralian Securities and Investments Commission Act as follows:1to develop a conceptual framework, not having the force of an accountingstandard,forthepurposeofevaluatingproposedaccountingstandardsandinternational standards;2to make accounting standards under section 334 of theCorporations Act 2001forthe purposes of the national scheme laws;3to formulate accounting standards for other purposes;4to participate in and contribute to the development of a single set of accountingstandards for worldwide use; and5to advance and promote the main objectives of Part 12 of the Act as set down insection 224,which include reducing the cost of capital, enabling Australianentities to compete effectively overseas and maintaining investor confidence in theAustralian economy.The Minister for Superannuation and Corporate Law appoints the chairman of theAASB,andthe chairissubsequentlyaccountabletothe Ministerregardingtheoperations of the AASB. The AASB comprises 12 part-time members plus the full-timechair. Member appointments to the AASB are made by the FRC from nominationsreceived from a number of bodies including CPA Australia, the ICAA, the BusinessCouncil of Australia and the ASX. In addition, the AASB presently has three observers–the Australian and New Zealand member of the International Accounting StandardsBoard, the Australian representative of the International Public Sector AccountingStandards Board of the International Federation of Accountants, and the Australianmember ofthe Standards Advisory Council.Meetings of the AASB are open to thepublic.<www.aasb.com.au>.The Office of the AASB:TheGovernance Review Implementation (AASB and AUASB) Bill 2008was passed byParliament in June 2008.Inter alia, the Bill established the Office of the AASB tosupporttheoperationsoftheAASBthroughtheprovisionoftechnicalandadministrative services, information and advice. The chief executive officer of theOffice is the chairman of the AASB, who is also responsible to the Minister for thefinancial management of the Office.

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e6The Minister for Superannuation and Corporate Law:The Minister for Superannuation and Corporate Law is one of three Treasury Ministersfrom the Federal Government.5The AASB will typically issue material for public comment and discussion withstakeholders in the form of:•Discussion Papers (DP) outlining a wide range of possible accounting policies ona particular topic;•Exposure Drafts (ED) of a proposed standard or amendment to a standard;•Invitations to Comment (ITC) that seek feedback on broad proposals; or•Draft Interpretations of a standard.At present, constituents’ comments on the materials issued by the AASB are obtainedfromthe followingavenues: Focus Groups, Project Advisory Panels and InterpretationAdvisory Panels.Focus Groups:There are currently two Focus Groups–the User Focus Group and the Not-for-ProfitFocus Group. In general, these groups serve as a resource to the AASB in formulatingstandard-setting priorities, advising on specific agenda projects and providing feedbackto assist on developing standards. The User Focus Group generally comprises eight to10 investment and credit professionals and the Not-for-Profit Focus Group compriseseight to 10 professionalswith expertise and involvement in charitable and relatedorganisations.Project Advisory Panels:Input is also received from Project Advisory Panels that work with the AASB staff todevelop agenda material relating to specific standard-setting projects for considerationby the Board. Invitations are issued to experts in a particularfield or topic area to join aProject Advisory Panel.Interpretation Advisory Panels:As part of the process of issuinginterpretations, the AASB decides,on a topic-by-topicbasis,whether to appoint anInterpretation Advisory Panel. The role of the AdvisoryPanel is limited to preparing alternate views on a specific issue and,where relevant,recommendations for consideration by the AASB. An Interpretation Advisory Panelnormally comprises between four and eight members. These members include theAASB Chairman, at least one other AASB member, and other members appointed onthe basis of their professional competence and practical experience in the topic area.Members are typically drawn from a register of potential Interpretation Advisory Panelmembers maintained by the AASB.

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e76(a)The due process used to develop an accounting standard is summarised in Figure1.3inChapter1. The first step isidentification of a technical issueto be added tothe AASB’s work program. This can happen in one of three ways:(1)Inclusion in the AASB’s program of issues on the International AccountingStandardsBoard’s(IASB)andtheInternationalFinancialReportingInterpretations Committee’s (IFRC) work programs;(2)Inclusion in the AASB’s program of issues on the International PublicSector Accounting Board’s (IPSASB) work program; and(3)Inclusion in the AASB’s work program of issues identified by AASB Boardmembers and staff, as well as Australian organisations and individuals.(Issues relating to for-profit entities are normally referred to the IASB orIFRIC for consideration, while issues relating to not-for-profit entities maybe referred to the IPSASB or addressed domestically.)The second step involves the development of aproject proposalby the AASB.This contains an assessment of the potential benefits of the project, the potentialcosts of not undertaking it, resource availability and timing. After reviewing theproposal the AASB makes a decision on whether to place the project on its agenda(and therefore work program).Once an issue is included on the AASB’s agenda, the third step involves thepreparation ofagenda papersby AASB staff. Agenda papers consider the scopeof issues, alternative approaches, and the timing of outputs. They are preparedusing material drawn from the IASB, IPSASB, the New Zealand FinancialReporting Standards Board, and other such organisations.The fourth step involves the exposure of the results of the research conductedin step three to facilitatepublic comment and discussion with stakeholdersin theform of:•Discussion Papers (DP) outlining a wide range of possible accounting policieson a particular topic;•Exposure Drafts (ED) of a proposed standard or amendment to a standard;•Invitations to Comment (ITC) that seek feedback on broad proposals; or•Draft Interpretations of a standard.Feedback from the public and stakeholders may be obtained through round-tablediscussionswithstakeholders,FocusGroups,ProjectAdvisoryPanelsandInterpretation Advisory Panels.The fifth step involves Board discussion of the results of the feedback receivedon an agenda item. There are two possible outcomes from this discussion:(1)A standard is not issued. In this situation, the Board notes its view in theminutes of a meeting or in a formal Board agenda decision.(2)An accounting standard is issued.(b)Students should visit the AASB website <www.aasb.gov.au>. Issues currentlyunder consideration can be found on the AASB homepage under ‘quick links’,

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e8‘open forcomment’and‘latestnews’.Furtherissues can be identified byfollowing the links from the AASB’s homepage to its latest work program.7(a)The due process used by the AASB to develop accounting standards is outlined inthe answer to Question 6(a).(b)Currently, theAASB issues interpretations asa means ofproviding timelyguidance on urgent financial reporting issues. For example,AASB Interpretation13‘Customer Loyalty Programmes’ deals with how to account for customerloyalty programmes whereby an entity will grant a customer award credits thatcan be redeemed for items such as free or discounted goods or services (e.g.Frequent Flyer programs associated with airlines). Several issues had arisen inpractice including whether the award credit transaction should be treatedseparateto the underlying saleand,if so, how to measure the award credit transaction.Interpretation 13 addresses these issues.Thedue process used to develop an interpretation has a much shortertimeframe than the due process necessary to develop an accounting standard. Toillustrate, the AASB will issue an interpretation as follows:•Interpretation Advisory Panelsmay be formed, as required on a topic-by-topicbasis. The role of a panel is to prepare alternative views on the issue and,where appropriate, make recommendations to the AASB.•The due process will include publishing the composition of each panel and itsrecommendation on the AASB’s website for an appropriate period. Where theAASB proposes to issue an interpretation, the proposedinterpretation will befurther exposed on the AASB’s website for an appropriate period before theAASB considers it for formal adoption.8AASB Interpretations are designed to provide timely guidance to preparers of financialstatements on various financial reporting issues. For example, sometimes after anaccounting standard is issued, problems occur in its implementation. In addition,financial reporting problems may arise which do not warrant either amendments to anexisting standard or the preparation of a new standard. In these cases, it may have beenappropriate to resolve the problems by issuing an interpretation to clarify, explain orelaborateupon existing standards. Thus, interpretationshave a much narrower scopethan accounting standards.9An answer to this question should identify the differences betweenaccountingstandardsandaccountinginterpretations as follows:(a)Scope•Accounting standards address much broader issues/topics than interpretations.Accountingstandardsprescribeaccountinganddisclosurerequirementsrelating to a broad area/topic, for example,AASB 117‘Leases’ andAASB 137‘Provisions, Contingent Liabilities and Contingent Assets’.

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e9•Interpretations prescribe accounting and/or disclosure requirements relating toveryspecific/narrowissues,forexample,Interpretation4‘DeterminingWhether an Arrangement Contains a Lease’ and Interpretation 132 ‘IntangibleAssets–Web Site Costs’.(b)Context/Framework•AASBevaluatesproposedaccountingstandardsinthecontextoftheconceptual framework.•Interpretations are prepared in the context of existing accounting standards andthe conceptual framework.(c)Due Process•Accounting standards are developed by the AASB after an extensive dueprocess, including consultation with a broad range of constituents, and thepreparation of discussion papers, exposure drafts and draft standards.•Interpretations are prepared after a much less extensive due process, whichdoesnotinvolvethesameconstituentconsultation,orpreparationofdocuments for public comment.(d)Approval Process/Veto Power•After an accountingstandard is finalised by the AASB, it may be disallowedby Parliament within 15 sitting days of it being tabled in Parliament.•There is no such veto power in relation to interpretations.(e)Authority•AASB Accounting Standards: TheCorporations Act 2001requires reportingentities to comply with AASB Accounting Standards and ASIC enforcescompliance with those standards.•Interpretations: Paragraph 5 ofAPES 205‘Conformity with AccountingStandards’APS1requires members of CPA Australia and the ICAA to complywith accounting standards and UIG and AASB Interpretations. CPA Australiaand the ICAA enforce compliance with Australian Accounting Standards andUIG and AASB Interpretations.•TheCorporations Act 2001does not explicitly require compliance withinterpretations, but ASIChas indicated support for the interpretations byattendingandparticipatinginmeetingsoftheInterpretationsAgendaCommittee as an observer. Effectively, interpretations have the same authorityas accounting standards.10The AASB’s Interpretations model has been effective since 1 January 2008 and itsmajor features are as follows.1Interpretation Advisory Panels may be formed, as required on a topic-by-topic basis.The role ofa panelis toprepare alternative views on the issue and,whereappropriate, make recommendations to the AASB.2A public register of potential Interpretation Advisory Panel members is maintained

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e10on the AASB website and it is from this register that Panel members are drawn.3Interpretations of IASB accounting standards are made by IFRIC. Since AASBaccounting standards are equivalenttoIASBaccounting standards,the IFRICInterpretations will be relevant in Australia. Additionally, if an issue arises thatrelates to the interpretation of an AASB accounting standard that is equivalent to anIASB accounting standard, it will be forwarded to IFRIC for consideration andpossible inclusion in its work program. However, if an issue arises in relation to anAASB accounting standard that does not have an IASB equivalent, the issue will beresolved by the AASB.4The due process will include publishing the composition of each panel and itsrecommendation on the AASB’s website for an appropriate period. Wherethe AASBproposes to issue an interpretation, the proposed interpretation will be furtherexposed on the AASB’s website foran appropriate periodbefore the AASBconsiders it for formal adoption.11In 2006 the Australian Government established a Financial Reporting Panel (FRP)<www.frp.gov.au>toresolvedisputesbetweenASICandcompaniesovertheapplicationofaccountingstandardsintheirfinancialreports.Theobjectiveofestablishing the FRP is to remove the need toinitiate legal proceedings in court in orderto resolve a financial reporting matter, thus providing an efficient and cost-effectiveway of dealing with disputes. Referrals to the FRP may be lodged by either ASIC or thecompany (with the consent of ASIC). Upon receipt of an application, the FRP considerswhethertheapplicationiswithinitsjurisdictionandwhetherproceedingswillcommence. If proceedings commence, the chairperson appoints three members, free ofamaterial conflictof interest,to be the sitting panel. The proceedings take place inprivate unless otherwise requested by the lodging entity. From the date of referral, theFRP has 60 days to review the financial report and provide a copy of its findings to theparties involved and the market operator if the involved party is a listed company orlisted registered scheme. The FRP’s findings are not binding on either ASIC or thecompany, and the dispute may be pursued incourt, although thecourt has the option ofconsidering the FRP’s findings in determining whether the company complied with therelevant accounting standards.It is not clear that ASIC has fully utilised the FRP. For example, at the time of writingonly four cases have been referred by ASIC to the FRP and theyall occurred during the2011/2012financialyear.The discussionpaperonthe‘FutureoftheFinancialReporting Panel’ (2011) prepared by Treasury liststhe following factors that may havecontributed to this situation:•Adoption of IFRS–this was a significant learning experience for many entities,which may have been more inclined to voluntarily change their accountingpractices in response to an accounting-related query from ASIC than to seekresolution through the FRP.•The mere existence of FRP provides a deterrent effect.

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e11•Lack of market recognition–until a large listed company uses the FRP process,the FRP’s profile in the business community as an impartial dispute resolutionorganisation may remain limited.•Economic conditions–during part of the operational period of the FRP, Australiahas had favourable market conditions which may have resulted in less incentivesforcompaniesconsideringcreativeinterpretationsoffinancialreportingrequirements.12There are three groups responsible for enforcing the accounting standards issued by theAASB. They are:the accounting bodies; the Australian Securities and InvestmentsCommission; and governments. The enforcement mechanisms employed by each ofthese groups are considered in turn.Accounting Bodies:The profession’s attitude towardsaccounting standards has changed from regardingthem merely as recommendations during the 1960s to making them mandatory in the1990s.The Australian Professional and Ethical Standards Board (APESB) was established in2006 as an initiative of CPA Australia and the ICAA primarily to develop and issueappropriateprofessionalandethicalstandardsfortheirmembership.Oftheseprofessional standardsand ethical standards,APES 205‘Conformity with accountingstandards’ requires members to comply with accounting standards as follows.4.3Members who are involved in, or are responsible for, the preparation and/orpresentationofFinancialStatementsofaReportingEntityshalltakeallreasonable steps to ensure that the Reporting Entity prepares General PurposeFinancial Statements.5.1Members shall take all reasonable steps to apply Australian Accounting Standardswhen they prepare and/or present General Purpose Financial Statements thatpurport to comply with the Australian Financial Reporting Framework.5.2Where Members are unable to apply Australian Accounting Standards pursuant toparagraph 5.1, they shall take all reasonable steps to ensure that any departurefrom Australian Accounting Standards, the reasons for such departure, and itsfinancial effects are properly disclosed and explained in the General PurposeFinancial Statements.5.5Members in Public Practice shall take all reasonable steps to ensure that Clientshave complied with Australian Accounting Standards when they perform an AuditorReviewEngagementoracompilationEngagementofGeneralPurposeFinancial Statements which purport to comply with the Australian FinancialReporting Framework.Compliance withAPES205is mandatory for members of CPA Australia and the ICAA,and non-compliance represents a breach of theCode of Professional Conductof theaccounting bodies. Failure by members to comply with the requirements ofAPES205

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e12could result in disciplinary proceedings being brought against those members, whichcould result in a fine or expulsion from the professional body.Australian Securities and Investments Commission:Accounting standards issued by the AASB are supported by theCorporations Act 2001.This law applies only to those entities required to report under theCorporations Act2001.Under section 296 of theCorporations Act 2001,the governing board of a company isrequired to comply with AASB accounting standards in preparing financial reports.Failure to comply is an offence under the Corporations Act which could lead toprosecution by ASIC.Governments:A standard-setting board cannot issue accounting standards that are legally binding ongovernments. It is the responsibility of the relevant legislatures to require compliancewith accounting standards. Various pieces of legislation require the use of accountingstandards in the preparation of financial reports by reporting entities in the publicsector. For example, Commonwealth statutory authorities and some Commonwealthdepartmental authorities are required to comply with accounting standards as a result ofguidelines issued pursuant to theAudit Act 1902. Queensland government departmentsand statutory bodies are required to comply with accounting standards by PublicFinance Standards issued pursuant to theFinancial Administration and Audit Act 1977.Tasmania’s state authorities are required to comply with accounting standardspursuanttotheFinancial Management Act 1990.13(a)The Board agreed that accounting costs could be reduced by avoiding compliancewith standards thatapply only to reporting entities …The Board believes that,while listed companies are always reporting entities, other companies can make anaccounting policy choice and elect to be either a reporting entity or a non-reporting entity.(Note: the answer to this question also includes consideration of the reportingentity concept(SAC 1)which is discussed in Chapter 2.)(CA =Corporations Act 2001)Compliance with all AASB accounting standards imposes additional accountingcosts.Therefore, cost savings will result by avoiding the extensive disclosurerequired by accounting standards that apply only to reporting entities.It is true that companies listed on a stock exchange are disclosing entities andreporting entities. Although, Granite Ltd is an unlisted public company it ispossible for an unlisted public company to be classified as an unlisted disclosingentity (CA s111AL(2)).

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e13Conclusion: the Board is incorrect in its belief that reporting entity status is anaccounting policy choice.Reporting entity status depends on meeting criteria in SAC 1Definition of theReporting Entity. Under SAC 1 criteria, reporting entity status is based on theexistence of users of accounting information that depend on published, generalpurposefinancialreports(GPFR)forinformationusefulinmakingeconomic/financial decisions. Since financial reports of all disclosing entities,both listed and unlisted, must comply with all relevant accounting standards (CAs296) it is also necessary to decide whether Granite Ltd is a disclosing entity.Is Granite Ltd a reporting entity?Does Granite Ltd meet the SAC 1 guidelines on whether users dependent onpublished accounting information exist?•Spread of ownership is 3000 shareholders.Yes–dependent users.•Separation of managementand ownership: There aresevendirectors on theBoard and 3000 shareholders so there is substantial separation.Yes–dependent users.•Economic/political importance: There is no information on this point.No–dependent users.•Financial characteristics:Sales, employees and possibly assets may indicate RE status.Some indication of dependent users.There is a significant numbers of employees (5000).Yes–dependent users.Dependent on trade creditors to finance operations.Yes–dependent users.Conclusion: Granite should be classified as a reporting entity and cannot avoidcompliance with AASB standards.Is Granite Ltd a disclosing entity?A company that has‘enhanced disclosure’(ED) securities is classified as adisclosing entity (CA s111AC(1)). Noting that Granite Ltd has 3000 shareholders,it seems probable that the company has, at some past time, issued a prospectus orother disclosure document inviting members of the public to subscribe for a publicissue of shares in Granite. Granite Ltd will be anunlisteddisclosing entity if thefollowing conditions hold (CA s111AF):

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e141.Thecompanyhasissuedsharesunderaprospectusorotherdisclosuredocument to at least 100 shareholders;and2.At least 100 Australian shareholders have held the shares issued under (1)above since the date of that share issue.The Board also agreed that, apart from the effect on its status as a non-reportingentity, listing on the Australian Stock Exchange (ASX) would have no effect on theextent of financial and other information disclosed by Granite Ltd.Since Granite is already a reporting entity, listing on the ASX will have no effectonGranite’sreportingentitystatus.Thestatementthatthe ASXdoesnotinfluence information disclosed by listed entities is not correct because all listedcompanies must comply with ASX listing rules. Listing rules require disclosuresuch as:•Disclosure of an operating and financial review in the Directors’ Report.•Extensive disclosure ofmethods inplace toensure appropriate/effectivecorporate governance.•Continuous disclosure–timely release of information to keepthemarketinformed as to developments that may affect share prices.•Information concerning the distribution of equity securities (including twentylargest shareholdings).(b)The Board of Granite Ltd also concluded that there was no need to comply withinterpretations issued by AASB because compliance is not mandatory underexisting accounting regulations.It is incorrect to say that compliance with accounting interpretations is notmandatory.TheapplicableregulationisAASB1048‘InterpretationandApplication of Standards’.AASB 1048is a service standard that is continuallyupdatedbydeletinginterpretationssubsequentlyincorporatedintoneworamended accounting standards, and adding new interpretations issued by IFRICandadoptedbytheAASB.UIG InterpretationsarelistedinTable2andinterpretations adopted from IFRIC are listed in Table 1 ofAASB 1048.Onedirectorremarked,‘ItisnotonlyInterpretationsthatareirrelevant,essentially, the entire system of regulation can be disregarded because there is nomechanism to enforce compliance with accounting regulations’.The statement that there is no mechanism to enforce compliance with accountingregulations is not accurate.Mechanisms include the following:•Accounting bodies have issued pronouncements that require members tocomply with Australian accounting standards.An example is APES 205Conformity with Accounting Standardswhich defines Australian accounting

Loading page image...

–9781442561175/Henderson/Issues in Financial Accounting/15e15standardsas‘AccountingStandards(includingAustralianAccountingInterpretations) promulgated by the AASB’.•Accounting standards issued by the AASB are supported by theCorporationsAct 2001.Under the Act, company directors are required to comply withAASB Accounting Standards in preparing financial reports.ASIC is the overall corporate regulatory and has a duty to ensure compliancewith theAct. ASIC conducts an annual review of financial reports andidentifies areas of concern.If ASIC considers that a company’s financialreport does not comply with accounting standards, ASIC can refer the matterto the Financial Reporting Panel but must give the company written notice ofelements of the financial report that do not comply and also identify changesthat ASIC requires to ensure compliance.Thechairmandisagreedand said,‘No,that isnotcorrect.The FinancialReporting Council (FRC) was formed for just that purpose.The FRC’s major dutyis toenforce compliance by Australian reporting entities with internationalaccounting standards’.The statement that the FRC was formed to enforce compliance withAASBstandards is not correct.The FRC’s major duties are:•Promoting the adoption of international bestpractice accounting standards andproviding broad oversight of the setting of Australian accounting and auditingstandards.•Monitoring the effectiveness of auditor independence requirements.•Appointing the members of the AASB–other than the Chair.•Giving the AASB and the Office of the AASB advice/feedback on priorities,business plans, budgets and staffing.14There are two issues to be addressed in this question. First is the argument that withoutregulation there would be no incentive for entities to prepare financial reports. There isplenty of evidence which suggests otherwise. For example, companies were preparingfinancial reports long before companies’ legislation required them to prepare suchreports. Second is the argument that financial reporting would be seriously deficientwithout regulation. This would be the case, for example, if there were imperfections inthe market for information. This issue is considered in some detail in Chapter 7.15(a)Continuous disclosure obligations require the Company to keep the market fullyinformed of information which may have a material effect on the price or value of thecompany’s securities and to correct any material mistake or misinformation in themarket. The Company discharges these obligations by releasing information to the

Preview Mode

This document has 529 pages. Sign in to access the full document!

Report

Study Now!

Document Details

Related Documents

Issues in Financial Accounting, 16th Edition Solution Manual

Accounting

Master Managerial Accounting Techniques

Controlling and Reporting of Real Assets

Team A Week 5 Problems

Accounting Audit Final Exam MCQs 2015

Sarbanes Oxley Act, GAAP and IFRS

IFRS or US GAAP Which is the Best Reporting Standard

Midterm Exam on Governmental and Not-for-Profit Accounting

Financial Reporting, Regulations, and Corporate Governance

Company

Explore

Study Tools