Learning objectives
1.
Accounting regulation in Australia
2.
Conceptual framework
i.
Define a reporting entity
ii.
Explain the objective s of general purpose
financial reporting
iii.
Explain qualitative characteristics of useful
financial information
iv.
Define assets, liabilities, equity, income and
expenses and apply recognition criteria.
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Sources of regulations
Sources of regulations
Generally accepted accounting principles
Generally accepted accounting principles (GAAP)(GAAP)
•
•Accounting concepts/principles [Accounting concepts/principles [e.ge.gmonetary monetary principle, cost principle, accounting entity concept, principle, cost principle, accounting entity concept, etc.etc.]]
•
•Accounting standardsAccounting standards
•
•Conceptual frameworkConceptual framework
Company law
Company law
•
•Corporations Act Corporations Act (2001).(2001).
Others
Others: : e.ge.glisting rules, etc. listing rules, etc. 4
Who are involved in regulating
Who are involved in regulating accounting?accounting?
•
•Australian Accounting Standards Board Australian Accounting Standards Board (AASB)(AASB)
•
•Financial Reporting Council Financial Reporting Council (FRC) (FRC)
•
•Australian Securities & Investment Commission Australian Securities & Investment Commission (ASIC)(ASIC)
•
•Australian Securities Exchange Australian Securities Exchange (ASX) (ASX)
•
•International Accounting Standards Board International Accounting Standards Board (IASB)(IASB)
•
•International Financial Reporting Standards Interpretations International Financial Reporting Standards Interpretations Committee Committee ((IFRSIC)IFRSIC)
•
•Professional bodiesProfessional bodies
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Simplified Accounting Standard and Other
Simplified Accounting Standard and Other Regulations Setting in AustraliaRegulations Setting in Australia
FRC
FRC
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Australian Accounting Standards Board
Australian Accounting Standards Board (AASB)(AASB)
The AASB is responsible for:
The AASB is responsible for:
•
•Developing accounting standardsDeveloping accounting standards
•
•Participating in the development of a single set of Participating in the development of a single set of accounting standards for worldwide useaccounting standards for worldwide use
•
•Formulating accounting standards for other purposes Formulating accounting standards for other purposes (e.g., Public and not(e.g., Public and not–forfor–profit sectors)profit sectors)
•
•Development of a conceptual framework.Development of a conceptual framework.
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Financial Reporting Council (FRC)
Financial Reporting Council (FRC)
Roles of the FRC include:
Roles of the FRC include:
•
•Overseeing and advising AASB and the Auditing and Assurance Overseeing and advising AASB and the Auditing and Assurance Standards Board (AUASB)Standards Board (AUASB)
•
•Determining broad strategic directions, monitoring priorities and Determining broad strategic directions, monitoring priorities and appointing membersappointing members
•
•Monitoring development of international accounting standardsMonitoring development of international accounting standards
•
•Ensuring AASB standards are at least in harmony with international Ensuring AASB standards are at least in harmony with international standardsstandards
•
•Assessing continued relevance and effectiveness of accounting and Assessing continued relevance and effectiveness of accounting and auditing standardsauditing standards
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ASIC and ASX
ASIC and ASX
Australian
AustralianSecuritiesSecuritiesandandInvestmentsInvestmentsCommissionCommission(ASIC)(ASIC)
•
•AdministersAdministersCorporationsCorporationsActAct
•
•MonitorsMonitorsimplementationimplementationofofthetheActActandandinvestigatesinvestigatesandandprosecutesprosecutescompaniescompaniesforforbreachesbreachesofofthetheActAct
•
•PromotesPromotesconfidenceconfidenceininthethefinancialfinancialsystemsystem
Australian
AustralianSecuritiesSecuritiesExchangeExchange(ASX)(ASX)
•
•AdministersAdministersListingListingRulesRules
•
•PlayedPlayedaamajormajorroleroleinininfluencinginfluencingthethemovemovetowardstowardsthetheAASB’sAASB’sadoptionadoptionofofIASBIASBstandardsstandards
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International Accounting Standards Board
International Accounting Standards Board (IASB)(IASB)
•
•Established in 2001, replacing the International Established in 2001, replacing the International Accounting Standards Committee (IASC)Accounting Standards Committee (IASC)
•
•Committed to the development of a single set of high Committed to the development of a single set of high quality, quality, enforceableenforceableglobal accounting standardsglobal accounting standards
•
•Independent, privately funded accounting standard setterIndependent, privately funded accounting standard setter
•
•Overseen by the IFRS FoundationOverseen by the IFRS Foundation
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IFRS Interpretations Committee
IFRS Interpretations Committee (IFRSIC)(IFRSIC)
•
•SubSub–committeecommitteeofofthetheIASBIASB
•
•ConsidersConsidersfinancialfinancialreportingreportingissuesissuesofofwidespreadwidespreadimportanceimportancenotnotcoveredcoveredininIFRSIFRSstandardsstandards
•
•IFRSIFRSInterpretationsInterpretationsareareadaptedadaptedbybythetheAASBAASBtotosuitsuitthetheAustralianAustralianenvironmentenvironment
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Before 2005
Before 2005
AASB develops its standards
AASB develops its standards
From 2005
From 2005
AASB adopts IFRS
AASB adopts IFRS
AASB also develops standards for other purposes
AASB also develops standards for other purposes
- Which of the following is NOT developed by
- Which of the following is NOT developed by AASB?AASB?
a.
a.Accounting standardsAccounting standards
b.
b.Listing rulesListing rules
c.
c.InterpretationsInterpretations
d.
d.Conceptual frameworkConceptual framework
Answer:
Answer:
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In
In–class Quizclass Quiz
What is the Conceptual Framework of Financial
What is the Conceptual Framework of Financial Reporting? Reporting?
•
•“A“Aconceptualconceptualframeworkframeworkconsistsconsistsofofaasetsetofofconceptsconceptsdefiningdefiningthethenaturenature,,purposepurposeandandcontentcontentofofgeneralgeneralpurposepurposefinancialfinancialreportingreportingtotobebefollowedfollowedbybypreparerspreparersofofgeneralgeneralpurposepurposefinancialfinancialreportsreportsandandstandardstandardsetterssetters””
Role of the conceptual framework
Role of the conceptual framework
•
•Provides guidance to prepares of financial reports, Provides guidance to prepares of financial reports, especially where no standard exists.especially where no standard exists.
•
•Assists standard setters Assists standard setters ––improving the standard setting improving the standard setting process and consistency in accounting practice.process and consistency in accounting practice. 14
CONCEPTUAL FRAMEWORK
CONCEPTUAL FRAMEWORK
CONCEPTUAL FRAMEWORK
CONCEPTUAL FRAMEWORK
HISTORICAL DEVELOPMENT
HISTORICAL DEVELOPMENT
•
•FASB developed its conceptual framework in 1978FASB developed its conceptual framework in 1978
•
•In 1990s, AASB developed In 1990s, AASB developed fourfourStatements of Statements of
Accounting Concepts (SACs)
Accounting Concepts (SACs)
•
•In 2005, adoption of the IASB’s Conceptual Framework for Financial In 2005, adoption of the IASB’s Conceptual Framework for Financial Reporting (the Conceptual Framework)Reporting (the Conceptual Framework)
•
•SAC1 (Definition of the reporting entity) and SAC2 (Objective of SAC1 (Definition of the reporting entity) and SAC2 (Objective of general purpose financial reporting) are still in use. general purpose financial reporting) are still in use.
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CONTENT OF THE CONCEPTUAL
CONTENT OF THE CONCEPTUAL FRAMEWORKFRAMEWORK
•
•DefinitionDefinitionofofthethereportingreportingentityentity(SAC(SAC11))
•
•ObjectiveObjectiveofofgeneralgeneralpurposepurposefinancialfinancialreportingreporting(SAC(SAC22))
•
•QualitativeQualitativecharacteristicscharacteristicsofofusefulusefulfinancialfinancialinformationinformation
•
•DefinitionDefinition,,recognitionrecognitionandandmeasurementmeasurementofofthetheelementselementsfromfromwhichwhichfinancialfinancialstatementsstatementsareareconstructedconstructed
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SAC1: DEFINITION OF THE REPORTING ENTITY
SAC1: DEFINITION OF THE REPORTING ENTITY
“It is an entity in which it is reasonable to expect
“It is an entity in which it is reasonable to expect the existence of usersthe existence of userswho depend on who depend on general general purpose financial reports purpose financial reports for information to enable them to make and evaluate economic for information to enable them to make and evaluate economic decisions.”decisions.”
A
AreportingreportingentityentitymustmustprovideprovidefinancialfinancialreportsreportsforforusersusersthatthatcomplycomplywithwithaccountingaccountingstandardsstandardsissuedissuedandandadoptedadoptedbybythetheAASBAASB..
What are the indicators that would determine whether an entity should be
What are the indicators that would determine whether an entity should be classified as a reporting entityclassified as a reporting entity
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1.
1.Separation of management from the ownership Separation of management from the ownership
2.
2.Economic or political influenceEconomic or political influence
3.
3.Financial Characteristics.Financial Characteristics.
SAC2: OBJECTIVES OF GENERAL PURPOSE
SAC2: OBJECTIVES OF GENERAL PURPOSE FINANCIAL REPORTINGFINANCIAL REPORTING
General
Generalpurposepurposefinancialfinancialreportsreportsarearethosethoseintendedintendedtotomeetmeetthetheinformationinformationneedsneedscommoncommontotoaarangerangeofofusersuserswhowhoareareunableunabletotocommandcommandthethepreparationpreparationofofreportsreportstailoredtailoredtotomeetmeettheirtheirownownparticularparticularneedsneeds..
•
•TheTheConceptualConceptualFrameworkFrameworkprimaryprimaryusersusersareareresourceresourceprovidersproviders..
•
•OtherOtherusersusersarearegovernmentgovernmentagenciesagencies;;membersmembersofofthethepublicpublic;;andandsuppliers,suppliers,customerscustomersandandemployeesemployees(when(whennotnotresourcesresourcesproviders)providers).. 18
SAC2: OBJECTIVES OF GENERAL PURPOSE
SAC2: OBJECTIVES OF GENERAL PURPOSE FINANCIAL REPORTINGFINANCIAL REPORTING
Decision
Decision–usefulness objective:usefulness objective:
•
•The objective of generalThe objective of general–purpose is to provide information to users that purpose is to provide information to users that is useful for making and evaluating decisions about allocation of is useful for making and evaluating decisions about allocation of scarce resources (perspective of Australian CF SAC 2).scarce resources (perspective of Australian CF SAC 2).
Stewardship and accountability objectives:
Stewardship and accountability objectives:
•
•For entities where there is a separation of ownership from control, generalFor entities where there is a separation of ownership from control, general–purpose financial reports can support stewardship/accountability function.purpose financial reports can support stewardship/accountability function.
•
•Managers use reports to show owners they are fulfilling their stewardship Managers use reports to show owners they are fulfilling their stewardship function and managing resources effectively.function and managing resources effectively.
•
•Shareholders use reports to check on managers and make them accountable.Shareholders use reports to check on managers and make them accountable.
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QUALITATIVE CHARACTERISTICS OF
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATIONFINANCIAL INFORMATION
Fundamental
Fundamentalqualitative characteristics:qualitative characteristics:
Relevance
Relevance::MustMusthavehaveaaqualityqualitythatthatinfluencesinfluencesusers’users’decisionsdecisionsofofananeconomiceconomicnaturenature..
•
•MustMusthavehavepredictivepredictivevaluevalueand/orand/orconfirmatoryconfirmatoryvaluevalue
•
•ExampleExample––revenuerevenueinformationinformationforfor20122012cancanbebeusedusedtotopredictpredictthethecompany’scompany’sperformanceperformanceinin20132013..
Faithful
Faithfulrepresentationrepresentation::InformationInformationmustmustbebecomplete,complete,neutralneutralandandfreefreefromfrommaterialmaterialerrorerror..
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Enhancing
Enhancingqualitativequalitativecharacteristicscharacteristics::
Comparability
Comparability::UsersUserscancancomparecompareaspectsaspectsofofananentityentityoverovertimetimeandandbetweenbetweenentitiesentities..
Verifiability
Verifiability::DifferentDifferentknowledgeableknowledgeableandandindependentindependentobserversobserverscouldcouldreachreachconsensusconsensusthatthataaparticularparticularpiecepieceofofinformationinformationisisaafaithfulfaithfulrepresentationrepresentationofofthetheeconomiceconomicphenomenaphenomena..
Timeliness
Timeliness::HavingHavinginformationinformationavailableavailabletotodecisiondecisionmakersmakersonontimetime..
Understandability
Understandability::UsersUsersshouldshouldbebeableabletotocomprehendcomprehendthethemeaningmeaningofofthethereportsreports..
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QUALITATIVE CHARACTERISTICS OF FINANCIAL
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATIONINFORMATION
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ENHANCING QUALITATIVE CHARACTERISTICS OF
ENHANCING QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION FINANCIAL INFORMATION ––A Quick SummaryA Quick Summary
Constraint
Constraint on financial reportingon financial reporting::
Costs versus benefits:
Costs versus benefits:
COSTS OF PREPARING FINANCIAL REPORTS
COSTS OF PREPARING FINANCIAL REPORTS SHOULD NOT EXCEED THE BENEFITS TO BE SHOULD NOT EXCEED THE BENEFITS TO BE DERIVED FROM THE REPORTS.DERIVED FROM THE REPORTS.
HOWEVER, T
HOWEVER, THE COSTS AND THE BENEFITS OF HE COSTS AND THE BENEFITS OF FINANCIAL INFORMATION ARE DIFFICULT TO FINANCIAL INFORMATION ARE DIFFICULT TO MEASUREMEASURE
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QUALITATIVE CHARACTERISTICS OF FINANCIAL
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATIONINFORMATION
Definition, recognition and measurement of
Definition, recognition and measurement of elements in financial reportselements in financial reports
The elements of financial statements include:
The elements of financial statements include:
•
•assetsassets
•
•liabilitiesliabilities
•
•equityequity
•
•incomeincome
•
•expensesexpenses
The
TheConceptual FrameworkConceptual Frameworkdefines each element and sets defines each element and sets out the criteria for their recognition.out the criteria for their recognition.
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Example 1.
Example 1.
ACCG1001 bought computer today (4/5/2020) at the cost of $1,000.
ACCG1001 bought computer today (4/5/2020) at the cost of $1,000.
Example 2
Example 2
Mr Jay’s weekly salaries is $1,000 and is due for sabbatical leave on 4/5/2030.
Mr Jay’s weekly salaries is $1,000 and is due for sabbatical leave on 4/5/2030.
DEFINITION OF FIVE ACCOUNTING ELEMENTS
DEFINITION OF FIVE ACCOUNTING ELEMENTS
Assets
Assets::resourcesresourcescontrolledcontrolledbybythetheentityentity;;resultresultofofpastpasteventsevents;;withwithfuturefutureeconomiceconomicbenefitsbenefits
Liabilities
Liabilities::presentpresentobligationobligation;;arisingarisingfromfrompastpasteventsevents;;expectedexpectedoutflowoutflowofofresourcesresourcesembodyingembodyingeconomiceconomicbenefitsbenefits
Equity
Equity::residualresidualinterestinterestininthetheassetsassetsafterafterdeductingdeductingallallliabilitiesliabilities
Income
Income::increasesincreasesinineconomiceconomicbenefitsbenefitsininthetheformformofofinflowsinflowsofofassetsassetsorordecreasesdecreasesininliabilitiesliabilitiesthatthatresultresultininincreasesincreasesininequityequity
Expenses
Expenses::decreasesdecreasesinineconomiceconomicbenefitsbenefitsininthetheformformofofoutflowsoutflowsofofassetsassetsororincreaseincreaseininliabilitiesliabilitiesthatthatresultresultinindecreasesdecreasesininequityequity 25
RECOGNITION CRITERIA
RECOGNITION CRITERIA
Asset
Asset::probableprobablethatthatthetheeconomiceconomicbenefitbenefitwillwillflowflowtotothetheentityentity;;costcostororotherothervaluevaluecancanbebemeasuredmeasuredreliablyreliably
Liability
Liability::probableprobablethatthatananoutflowoutflowofofresourcesresourcesembodyingembodyingeconomiceconomicbenefitsbenefitswillwillresultresultfromfromsettlingsettlingthethepresentpresentobligationobligation;;amountamountcancanbebemeasuredmeasuredreliablyreliably
Income
Income::increaseincreaseininfuturefutureeconomiceconomicbenefitsbenefitsisisprobableprobableandandcancanbebemeasuredmeasuredreliablyreliably
Expense
Expense::decreasedecreaseininfuturefutureeconomiceconomicbenefitsbenefitsisisprobableprobableandandcancanbebemeasuredmeasuredreliablyreliably
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MEASUREMENT PRINCPLES AND
MEASUREMENT PRINCPLES AND CONCEPTSCONCEPTS
•
•Historical costHistorical cost
•
•Current costCurrent cost
•
•Realisable valueRealisable value
•
•Present valuePresent value - Which of the following businesses is likely
- Which of the following businesses is likely to be a reporting entity?to be a reporting entity?
a.
a.A corner shop.A corner shop.
b.
b.A listed company.A listed company.
c.
c.A local coffee shop.A local coffee shop.
d.
d.A fish & chips shop.A fish & chips shop.
Answer:
Answer:
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In
In–class Quizclass Quiz - Which is not a quality of faithful
- Which is not a quality of faithful representation in the Conceptual Framework?representation in the Conceptual Framework?
a.
a.Completeness.Completeness.
b.
b.Prudence.Prudence.
c.
c.Neutrality.Neutrality.
d.
d.Free from material error.Free from material error.
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In
In–class Quizclass Quiz
Answer:
Answer:
Summary of the lecture
Summary of the lecture
•
•AccountingAccountingregulationregulationininAustraliaAustralia
•
•TheTheConceptualConceptualFrameworkFramework
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