ACC601 TQ - 1

Tutorial Questions

Define ‘relevance’ and ‘reliability’. Is there a trade-off between the two?


According to the Accounting Framework in Fiji, an item of information is relevant if it is likely to influence users’ resource allocation decisions. An item of information is reliable if it faithfully represents, without bias, a particular transaction


There is normally considered to be a trade-off between relevance and reliability. For example, historical cost information may be particularly reliable, but for many decisions it may not be particularly relevant. Current market value data may be particularly relevant for particular decisions (for example, in relation to a decision about selling an asset), but what management thinks the item is currently worth will not ultimately be known until disposal. That is, the reliability of the information may not be clear. This may be the case particularly for the market valuations attributed to unique and thinly traded assets.




Further, financial statement data is typically audited prior to distribution. This may take many weeks. The data becomes more reliable as a result of the audit but, being less timely, it becomes less relevant for current investment decisions.




With all the regulations that companies must follow, fulfilling the requirement for corporate reporting is an additional reporting activity. What are the some possible arguments for and against these regulations?


This question may be answered in terms of a ‘free market’ versus a ‘regulated’ argument about the provision of accounting information.


Many academics argue in favour of a free-market approach. By this, we mean that the market forces of supply and demand should be allowed to operate freely to determine the equilibrium amount of accounting information to be provided. This argument holds that if the users of accounting reports demand information, but it is not being supplied, this will be priced into the amount they will charge the firm for the factors of production they supply to the firm (for example, equity capital). If an individual is able to obtain the demanded information this may lead them to reduce the risk they attribute to the investment, which may translate into a lower required return on their investment. In a sense, the price they pay for the information is the reduction in required return they demand as a result of being provided with the information (which reduced their risk). The firm is predicted to supply information to the point where the benefits of providing the information (perhaps in terms of lower cost of capital) equals the costs of providing the information—which, of course, assumes that the managers of an organization have quite a sophisticated grasp of market economics. It has also been argued by proponents of the free-market argument that because there will often be conflict between the various parties associated with an organization (for example, owners and managers), accounting reports will be produced that are designed to minimize the conflict and the associated costs of the conflict. It has also been argued that managers are best placed to select accounting methods that best reflect the financial performance and position of their particular organization, and so it is inappropriate and inefficient to impose regulation upon them that restricts the accounting methods they might choose to use.


The argument is also made that in the absence of regulation, organisations would still be inclined to disclose information in case various external parties take their silence to mean that the entity has something to hide (the ‘market for lemons’ argument).


Advocates of a regulated approach would argue that a free-market approach is flawed for a number of reasons. First, the producers of the information cannot typically control its dissemination. Parties such as competitors, analysts and the like will obtain the information, but will not directly pay for it (they are deemed to be ‘free riders’). The free-rider problem may, in an unregulated environment, lead to a reduction in the supply of information owing to an understatement of demand. Further, although in the long run market forces may operate, it may be that organizations have created significant social costs in the mean time. For example, the disclosure of environmental information—that is, pollution emissions, clean-up costs, etc.—are not currently required in New Zealand. Research evidence suggests, however, that there are many accounting report users who may be interested in such information (for example, to assess the appropriate risk rates). It may be that sooner or later the market will punish those firms that do not provide information (in the absence of information the market may assume that there is bad news to report); however, significant costs may have been imposed on society by this time.


The free-market approach to financial reporting also ignores issues associated with stakeholders’ right to know about certain aspects of an entity’s operations. Stakeholders without financial resources (and perhaps the power to demand financial information) may simply be ignored in the information dissemination process, yet they may nevertheless be impacted on by the operations of the organization. Introducing regulation might also have the effect of increasing confidence in the capital markets, which might be construed as being in the public interest.




Define Generally Accepted Accounting Practice.


Generally Accepted Accounting Practices (GAAPs) are those rules and practices that have changed and developed over time and are accepted at a point of time by the majority of accountants. Across time, Generally Accepted Accounting Practices become incorporated within Accounting Standards, with Accounting Standards being developed through a consultative process in which many parties from Australia and elsewhere give their viewpoints through formal submissions and other avenues. Accounting Standards constitute a subset of GAAPs.




What is the role of the independent auditor, and why would the manager or the users of financial
statements be prepared to pay for the auditor’s service?


The auditor acts as an independent reviewer of the financial accounts presented by a reporting entity. Being independent, the auditor is expected to provide an objective assessment of whether, in the auditor’s opinion, the accounts have been prepared in conformity with the various accounting and other reporting rules applicable to the reporting entity. The auditor, in a sense, gives greater credibility to the financial statements and allows financial statement users to rely upon the statements with greater confidence. With greater confidence, the financial statement users may attribute lower risk to a reporting entity, and this in turn may lead to the reporting entity being able to attract funds at a lower cost than may otherwise be possible. So although the reporting organization will have to pay for the audit, the benefits of attracting greater funds at a lower cost (because of a perception that the information about the organization is more reliable or credible) could more than outweigh the costs associated with the audit. In this regard it should be noted that prior to the introduction of legislation that required certain forms of organizations to have their financial reports audited, many organizations chose to have their financial reports audited because of the perceived benefits. Where there are perceived conflicts of interest between different parties within the organization (for example, between owners and managers) the auditor can act to arbitrate on the reasonableness of the accounting rules and assumptions adopted by the managers.


With this said, it should also be emphasized that an unqualified auditor’s report does not give assurance that all transactions have been correctly accounted for, or that the entity is assured of being viable in the future. Also, it is conceivable that the credibility of all audit firms will not be deemed to be the same, so that if financial statement users consider that an auditor is of low ‘quality’, an audit report produced by such an auditor may be of limited value. Lastly, it should be stressed that the preparation of the financial reports is the responsibility of management and the auditor will not make any changes to those reports: the auditor’s role is to give an opinion on the reports (for example, that they are true and fair and comply with applicable Accounting Standards).

CH04 - Accounting For Income Tax

Accounting For Income Tax

What Does Accounting Profit Mean?
A company's total earnings, calculated according to Generally Accepted Accounting Principles (GAAP), and includes the explicit costs of doing business, such as depreciation, interest and taxes.

Accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs.

For example, if you invest $100,000 to start a business and earned $120,000 in profit, your accounting profit would be $20,000. Economic profit would add implicit costs, such as the opportunity cost of $50,000 should you have been employed instead during that period. As such, you would have an economic loss of $30,000 ($120,000 - $100,000 - $50,000).

Accounting profit vs taxable profit

Taxable temporary differences (TTDs)

1. 

Deductible temporary differences (DTDs)

The tax consequences of transactions that occur for accounting purposes during a period should be recognised as income or expense during the current period, regardless of when the tax effects will occur

This requires identifying the current and future tax consequences of items recognised in the balance sheet

Two separate calculations are performed each year:

1.current tax liability
2.movements in deferred tax balances

Calculation of current tax

1. Accounting profit/(loss)
2. Less Accounting revenue not assessable for tax
3. Add Accounting Expense not assessable for tax
4. Add/Minus Difference between Accounting revenue and Taxable Income(TI)
5. Add/Minus Difference between Accounting Expense and Taxable Deductions(TDs)

Which is Equal to Taxable Profit. Multiply by Tax Rate % = Current Tax Liability (CTL) 

Example:

Continued (Example)

This is recorded on General Journal as:

A Temporary Difference is the difference between the tax basis of an asset or liability and its reported (carrying or book) amount in the financial statements that will result in taxable amounts or deductible amounts in future years.

Arise when the period in which revenue and expenses are recognised for accounting is different from the period in which items are recognised for tax

Arise principally due to the accruals vs cash basis of recognising transactions. Differences either result in:

1.The company paying more tax in the future

Taxable temporary differences (TTDs)

Result in deferred tax liabilities (DTLs)

2.The company paying less tax in the future

Deductible temporary differences (DTDs)

Result in deferred tax assets

1.The company paying more tax in the future 

Taxable temporary differences (TTDs)

Result in deferred tax liabilities (DTLs)

2.The company paying less tax in the future

Deductible temporary differences (DTDs)

Result in deferred tax assets

1.The company paying more tax in the future

Taxable temporary differences (TTDs)

Result in deferred tax liabilities (DTLs)

2.The company paying less tax in the future

Deductible temporary differences (DTDs)

Result in deferred tax assets (DTAs)

Certain temporary difference are excluded from being recognized.

Standard board prohibits temporary differences from being recognized in relation to:

• Goodwill 
• The initial recognition of assets and liabilities that do not arise from a business combination. 

Providing certain recognition criteria are met, deductible temporary differences arising from tax losses can lead to the recognition of DTAs

Recognition of DTLs and DTAs

Deferred tax liabilities

Deferred tax liabilities must be recognised in full

Deferred tax assets

Deferred tax assets relating to temporary differences and tax losses are recognised only if:

• there are sufficient taxable temporary differences for the entity to use against the deductible temporary differences; OR
• if it is probable that the entity will have sufficient future taxable profit (against which the tax benefit can be offset).

Calculation of deferred tax

The existence of temporary differences results in the carrying amounts of an entity’s assets and liabilities being different from the amounts that would arise if a balance sheet was prepared for tax authorities

Carrying Amount (CA) 

asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.

Tax Base(TB) 

asset and liability balances that would appear in a “tax balance sheet"

Temporary differences are calculated as CA – TB = TTD/(DTD)

Calculating the tax base - examples

Notes to worksheet:

1. Prepayments- deductible when paid for tax purposes- therefore no balance would appear as an asset in the “tax” balance sheet.
2. Interest receivable- assessable when received- therefore no balance would appear as a receivable asset in the “tax” balance sheet.
3. Plant- WDV for tax purposes = $10,000 - $6,500 = $3,500.
4. Trade receivables- bad debts not deductible for tax until physically written off- therefore the gross trade receivables amount would appear in the “tax” balance sheet.
5. Trade payables- no differences in the treatment of trade payables for tax and accounting purposes- therefore CA = TB.
6. Annual leave liability - deductible when paid for tax purposes- therefore no balance would appear as a liability in the “tax” balance sheet

Deferred tax assets and liabilities

The tax rate % is that which is expected to apply when the asset will be realised or the liability settled.

This is recorded as:

This becomes a balancing Item.

The balances in the deferred tax asset and liability accounts are the carried forward closing balances from the prior year

Accumulated depreciation of plant for tax purposes is $360

               

Required:

Complete the deferred tax worksheet on the following page and prepare the journal to record deferred tax movements for the 30 June 2008 year.

Notes to worksheet:

1. Items where the CA = TB have been omitted from worksheet (eg cash, payables, loan)
2. AASB 112 does not permit the recognition of a DTL relating to goodwill.  The TTD arising is referred to as an “excluded”  temporary difference
3. Negative figures in the adjustment section would denote decreases in the DTA/DTL balances during the year.

Offsetting tax assets and liabilities

Both current and deferred tax assets and liabilities are to be offset against each other and a net figure shown in the balance sheet position for:

• Current tax
• Deferred tax

Change in tax rates

When a new tax rate is enacted, that new rate should be applied:

1. when calculating current tax liability
2. when calculating adjustments to deferred tax accounts
3. to carried forward deferred tax balances from previous years

Tax Losses

Tax losses are created when allowable deductions exceed assessable income

The tax act allows losses to be carried forward and used as a deduction against future taxable income

Tax losses provide future deductions and (subject to recognition criteria) create deferred tax assets

Exempt income cannot contribute to carry forward losses
If prima facie tax loss is $(10 000) but there is exempt income of $2 000 the allowable carry forward loss would be $(8000)

Recoupment occurs as soon as the company earns a taxable income 

Tax loss recouped is recorded in the determination of taxable income and a journal entry raised to reverse the DTA 

If a prior year’s loss carried forward is being recouped and there is exempt income in the year of recoupment, the exempt income must first be offset against the loss

Disclosure

Tax assets & liabilities must be classified as current or non-current on the face of the statement of financial position 

Current and deferred tax assets and liabilities can be offset in most cases 

Tax expense on the statement of comprehensive income

Payment of income tax

Company income tax is paid under the PAYG (pay as you go) system in quarterly instalments 

Companies must lodge quarterly business activity statements (BAS) and pay tax calculated as: 

Instalment income x instalment rate (supplied annually by the taxation department) 

Current tax liability represents the last quarterly payment and any adjustments necessary to reflect the fact that annual taxable income may differ from the sum of the quarterly returns

CH03 -Company Formations Part 2

Oversubscription

 What Does Oversubscribed Mean?
 A situation in which the demand for an initial public offering of securities exceeds the number of shares   issued.

The goal of a public offering usually is to price the security issue at the exact price at which all the issued shares can be sold to investors, so there will be neither a shortage nor a surplus of securities. If there is more demand for a public offering than there is supply (shortage), it means a higher price could have been charged and the issuer could have raised more capital.

The number of shares applied for may exceed the number of shares that the company has available for issue.
In such cases the directors of the company may decide to:

• Reduce the number of share to be issued to each applicant (on a pro-rata basis) 
• To issue shares only to certain applicants (eg on a first-in-first-served basis) 

The treatment of excess application monies depends on the terms of a company’s constitution. Options include:

• Refunding excess application monies to unsuccessful applicants; or 
• Retaining the excess application money as an —advance on future calls

The calls in advance account is treated as contributed equity even though it is legally a liability

Oversubscription (Example 4)

• ABC issued a prospectus for 100,000 $5 shares on 1 January 2008. 
• The prospectus required payment of $3 on application and $2 in one years time. 
• The company received applications for a total of 125,000 shares – these applications were received throughout the month of January. 
• On 31 January 2008 ABC issued 100,000 shares. 

Required:  Prepare the journal entries to account for the issue of shares assuming the excess money was offset against the call due in one years time.

Solution

Forfeiture of shares

What Does Forfeited Share Mean?
A share in a company that the owner loses (forfeits) by failing to meet the purchase requirements. Requirements may include paying any allotment or call money owed, or avoiding selling or transferring shares during a restricted period. When a share is forfeited, the shareholder no longer owes any remaining balance, surrenders any potential capital gain on the shares and the shares become the property of the issuing company. The issuing company can re-issue forfeited shares at par, a premium or a discount as determined by the board of directors.

In certain cases, companies allow executives and employees to receive a portion of their cash compensation to purchase shares in the company at a discount. This is commonly referred to as an employee stock purchase plan. Typically, there will be restrictions on the purchase (i.e. stock cannot be sold or transferred within a set period of time after the initial purchase).  If an employee remains with the company and meets the qualifications, he or she becomes fully vested in those shares on the stated date. If the employee leaves the company and/or violates the terms of the initial purchase he or she will most likely forfeit those shares. 

Directors may be given the power under the company’s constitution to forfeit (cancel) shares in respect of which calls are not made. Possible actions that can be taken in such circumstances are: 

1. The balance of paid monies may be retained by the company. –In this case the balance is retained in an equity account(Forfeited Shares Reserve)
2. The amount paid may be refunded back to the forfeiting shareholder. –In this case the balance is recorded in a liability account (Forfeited Shares Account). –Prior to refunding the balance the company could reissue the shares as fully paid shares to new shareholders with the new shareholders paying less than the fully paid value of the share. The difference, as well as any costs of reissue are deducted from the amount to be refunded back to the forfeiting shareholders. –This option is only available if the company’s constitution states this fact. Where the constitution is silent, the company is entitled to keep any excess (option 1 above).

Forfeiture of shares (Example 5)

• This example continues on from example 3. 
• On 1 July 2008 the directors of ABC decided to forfeit the 10,000 shares in respect of which the call of $1.25 was not made. 
• The shares were cancelled and reissued as fully paid to $5 per share on payment of $4 per share. 
• Costs of $500 were incurred to reissue the shares. 

Required:

Prepare the journal entries to account for the forfeiture and re issue of the 10,000 shares.

Solution;

• 

Share issue and formation costs

Underwriting costs:

• Arranging for the issue to be underwritten will avoid having to refund monies due to under-subscription 
• Underwriter agrees to purchase all excess shares in return for an upfront payment of an underwriting commission 
• Treated as a reduction against contributed equity 

Other share issue costs:

• Includes costs such as stamp duty, legal fees etc 
• Treated as a reduction against contributed equity 

Formation costs:

• Treated as an expense 

Subsequent issues of shares

Issued to raise funds to support expansion

1. 1  RIGHTS ISSUE 

• Offer of shares to existing shareholders 
• Rights dependent on the number of shares held 
• Rights may be renounceable or non-renounceable 

1. 2 PRIVATE PLACEMENTS 

• Offer of shares to one entity only 
• Usually issued to institutional investors Accounting for these types of issues is similar to public issues but does not use application/cash trust accounts.

Entry required is:

1. 3 Bonus Issue

• Shares granted only to existing shareholders
• Issued at no cost in lieu of cash dividend 
• Number based on shareholding at date of declaration 
• No change in the net equity of the company.

Entry required is:

Subsequent movements in share capital - options (Example 6)

Required:

Prepare the journal entries to account for the issue and exercising of the options assuming:

a) The options are issued for no consideration. On 1 May 2008, when the share price is $3.10, the CEO exercises the options.

b) The options are issued for no consideration. The options are not exercised by the CEO and lapse on 30 June 2008.
c) The options are issued for $1 each. By 30 June 2008, 9,000 of the options have been exercised.

Solution;

Redeemable preference shares

Such shares either:

• Give the holder the right to be repaid his/her capital 

Or

• Give the company the right to repay the capital 

Main issue is the classification of such shares

• Are they equity or liabilities?

Redeemable preference shares - equity

1.Proceeds of a fresh issue of shares

Or

2. Retained earnings 

• Additionally, the constitution may specify payment of a redemption premium which is paid from profit
• On redemption the shares are cancelled and cannot be reissued

Redeemable preference shares - liabilities 

Redeemable preference shares with the following characteristics are more in the nature of liabilities:

• Redeemable in cash on a certain date or at the option of the holder 
• Cumulative as to the payment of dividends 
• Non-participating in further dividends distributions 
• Priority capital return rights 

Accounting process required when accounting for redeemable preference shares that are classified as liabilities depends on whether the redemption is:

1. From a fresh issue of shares 
2. From profits at a premium 

Conversion of shares

A company may change its issued capital by:

Consolidation

• Involves grouping issued shares into larger parcels 

Eg; 2 x $1.00 consolidated into 1 x $2.00 share

Split

• Involves splitting issued shares into smaller parcels 

Eg; 1 x $2.00 share split into 2 x $1.00 shares

Conversion

• Involves converting an ordinary share to a preference share or vice versa.
• Governed by the Constitution.

Share buy-backs

WHY BUY BACK SHARES?

Change debt/equity ratio

Defence against takeover

Clear odd lots or employee share schemes




LEGAL REQUIREMENTS
Covered by Corporations Act
Allowed only if not prejudicial to creditors
Limited types of buy-backs allowed

ACCOUNTING FOR BUY-BACKS
Shares must be cancelled
Buy-back may generate a premium or a discount
These are adjusted against either reserves, retained profits or both (UIG Abstract 22)
Each company must adopt an accounting policy
in respect of premiums or discount on buy-backs

Accounting for debentures

Issuing debentures

• May be issued at par/premium/discount
• Issue preceded by disclosure document
• Application monies held in trust until allotment
• Can be listed on the stock exchange

Redemption of debentures

• May be redeemable at company’s option before maturity
• Redeemable on a set date or after a set period of time
• Debentures may be redeemed at par/premium/discount
• Premiums and discounts are treated as expenses and revenues
• Funds to redeem debentures may come from:

1. Proceeds of new share issue or borrowing
2. Proceeds of asset sale
3. Assets currently held

• May be convertible into shares

Redemption of debentures

Convertible notes

• Debt convertible to equity on maturity 
• Initial classification as liability or equity depends on characteristics. 
• Some may be partly debt, partly equity 
• Accounting for redemption depends on initial classification

CH02 -Company Formations Part 1

Nature of a company

Company - A form of business structure incorporated to operate as a business entity.
A company  is a legal person

• Incorporated via registration by Companies Decree 2011 

A company:

• has limited liability (Note1) 
• has rights, powers and responsibilities 
• has its own separate legal existence 
• need never die 
• has financing advantages 
• is subject to greater public scrutiny and regulation

Note 1: Limited liability refers to the fact that the shareholders of the company are liable only to the extent of any amounts unpaid on their shares in the event of the winding up of the company. Contrast this to a partnership, where the partners are jointly and severally liable for all partnership debts.




Types of companies


Proprietary (Pty) companies

• Minimum of 1 member, maximum of 50 
• Minimum of 1 director 
• Cannot raise funds from the public 
• Classified as large or small  

Public companies (Note 1)

• Can invite public to subscribe for securities 
• Can list on Pacific Stock Exchange 
• Minimum 1 member, no maximum 
• Minimum of 3 directors 
• Must prepare published financial statements and be audited

Note 1: A public company is not required to have chare capital and my be limited by guarantee. This means that members agree/guarantee to contribute a certain amount in the event of liquidation




Large vs small proprietary companies
Small proprietary companies must satisfy at least two of the following criteria:

• Annual gross operating revenue 
• Value of gross assets at year end 
• Number of employees 

Entities that do not satisfy the criteria for classification as a small proprietary company are classified as large  Note 1:
Small proprietary companies are not required to prepare formal financial statements or have them audited, must maintain sufficient records to allow financial statements to be prepared and audited if required. Large proprietary companies must prepare formal financial statements, have them audited and provide a copy to shareholders and ASIC




Other types of companies


Listed corporations
◦Public companies listed on the Pacific Stock Exchange, ASX, NZX etc.
Disclosing entities
◦An entity with enhanced disclosure (ED) securities (Note 1)
Foreign companies
◦Incorporated outside of Australia or in an external territory of Australia
No-liability company
◦Shareholders are not liable for debts of the company. Sole object of the company must be mining.

Note 1: An entity which has its shares listed on the ASX, is issuing securities pursuant to a disclosure document, or is a borrower who has issued debentures.


Forming a company


To register a company, a person lodges the prescribed application form with ASIC
On registration, the company legally comes into existence
A certificate of registration and an Australian Company Number (ACN) are issued


Management of the company is governed by replaceable rules or constitution.
Replaceable rules

• Deals with issues relating to directors and members, inspection of companies books and records, shares and share transfers 

Constitution

• Necessary if a company wants different rules 
• Public company must lodge constitution with ASIC—Constitution/replaceable rules represent a contract with shareholders

Administration of a company


Directors manage on behalf of the members
Certain registers and records must be maintained

• Minute books – records actions/decisions in meetings 
• Financial records – to enable statements to be audited 
• Registers of members, debenture holders and charges 
• Required to be kept at the company’s registered office

Funding a company


A public company can raise funds by issuing securities:

• Shares (equity) 
• Debentures (debt) 
• Options (equity) 

Shares represent ‘ownership’ and can be issued to the public or privately ‘placed’ with new investors or current shareholders
Debentures represent a claim on the assets of the company and may be secured by a fixed or floating charge of the company’s assets.

Background to the Corporations Act



The Corporations Act has arisen from significant amendments resulting from CLERP.
CLERP = Corporate Law Economic Reform Program
Federal Government program, commenced in 1997 and still running
Wide ranging reforms. Major changes to date include:
◦Recent “Companies Decree 2011”


Issue of shares


A company can issue shares on any terms or conditions it determines
Share capital may include different classes:

• Ordinary - a class of share that has no prefernece relative to other classes.
• Preference - Shares which receives prefenetial treatment over ordinary shares such as a preference in dividend distribution, and/or a preference in asset distribution if the company wound up.

To issue preference shares a constitution setting out the rights is necessary
Shares can be issued at any price, payable in full or
by instalment
Key features of share capital



Shares may have different rights in respect of voting, sharing in profits or return of capital

Rights of shareholders include:

• The right to vote for directors of the company 
• The right to share in assets on the winding-up/liquidation of the company 
• The right to share in new share issues (for the same class of shares) 

Ordinary shareholders have no specific right to dividends.

Accounting for share issues

Most of the following examples assume that shares are issued via an Intial Public Offering (IPO) /prospectus process. Such processes involve the shareholders applying for a number of shares in response to a prospectus issued by the company. The company will then issue the shares to new shareholders based on the applications it has received.

Such share issues are accompanied by disclosure documents. Commonly the disclosure documents specify a minimum number of applications which must be received in order for the share issue to proceed.

The Corporations Act requires

• That the minimum subscription be achieved within 4 months of the issue of the disclosure document; and
• shares be allotted within 13 months of the issue of the disclosure document.
• On issuing new shares the company may require the full amount owing on the shares to be paid at the time of application. Alternatively it may require a portion to be paid on application, with the balance being due at some time in the future (on allotment and/or at call).
• There are a number of different account used to facilitate this application, allotment and call process.

Issue of shares –
Payable in full on application (Example 1)

• ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008. 
• The prospectus specified that the $5 was payable in full on application. 
• The company received applications for a total of 100,000 shares – these applications were received throughout the month of January. 
• On 31 January 2008 ABC issued 100,000 shares. 
• Share issue costs of $1,500 were incurred by ABC. 

Required:

Prepare the journal entries to account for the issue of shares by ABC.

  Solution:

Step 1

Step 2

Issue of shares – Deposit on application, balance on allotment (Example 2)

• ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008. 
• The prospectus specified that $3 was payable on application, with the balance payable on allotment. 
• The company received applications for a total of 120,000 shares – these applications were received throughout the month of January. 
• The Directors decided to issue 5 shares for every 6 applied for, refunding the money in relation to unsuccessful applications. 
• On 31 January 2008 ABC issued 100,000 shares. 

Required:

Prepare the journal entries to account for the issue of shares and the subsequent receipt of allotment monies.

Solution:

Issue of shares – Deposit on application, instalment on allotment, balance on call (Example 3)

• ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008. 
• The prospectus specified that $2.50 was payable on application, a further $1.25 was payable on allotment and the final $1.25 was payable at call. 
• On 31 January 2008 ABC issued 100,000 shares. 
• On 31 May 2008, the company made the call for the outstanding balance of $1.25 per share. The call was payable by 30 June 2007. 
• At 30 June 2008, the call on 10,000 shares remained unpaid. 

Required:

Prepare the journal entries to account for the issue of shares and the subsequent receipt of allotment monies.

Solution:

CH01 - Influences of Corporate Accounting Practices and User of Financial Reports

Financial Accounting : the part of accounting which provides information to external users to help the assess the entity's financial performance, financial position, financing and investing activities and solvency.

Simple definition of Financial accounting: —‘a process involving collecting and processing financial information
to meet decision-making needs of external parties’ Financial accounting can be contrasted with Management Accounting (MA). MA focuses on providing information for decision making by parties within the organisation.

Users Demand for general purpose financial statements

What is general purpose financial statement(GPFS)?

Financial statement that comply with the conceptual framework requirements and accounting standards and meet the information needs common to users who are unable to command the preparations of reports tailored specifically to satisfy all their information needs. It represent financial statements and supporting notes included within an annual report presented to shareholders at a company’s annual general meeting.
GPFRs allow management and governing bodies to discharge their accountability. 

All reporting entities must prepare GPFRs and must comply with all accounting standards

Public companies and large proprietary companies are deemed to be reporting entities

What is Specific purpose financial statement?

A report designed to meet the needs of a specific group or to satisfy purpose. Can be contrasted with GPFS which is intended to meet the information needs commonly users who are unable to command the preparations of reports.
example: Bank demanding as part of a loan agreement that the borrowing entity provide information about projected cash flows


The Users of GPRS are defined.

• Present and potential investors
• Employees
• Lenders
• Suppliers and other trade Creditors
• Customers 
• Government and its Agencies
• and the General Public

Sources of external financial reporting regulation

External financial reporting is regulated by:

• legislation
• accounting standards
• Securities Commission
• Stock Exchange.

Impact of adopting IFRS

Significant changes have occurred:

• Intangible assets (research, brand names, mastheads) now expensed and not capitalised.
• Revaluation of intangible assets has been greatly restricted.
• Amortisation of goodwill abolished—replaced by impairment testing.
• Revaluation of PPE is done on asset-by-asset basis and not by class of assets for companies.
• Retrospective changes now need to be made when there is voluntary changes in accounting policy .
• Items previously classified as equity, now defined as liabilities.
• IAS 12 ‘Income Tax’ had some fundamental changes to how tax is accounted for.

International Accounting Standards Board (IASB)

• IASB comprises 16 individuals:
• Each IASB member has one vote on technical and other matters.
• Publication of standard, exposure draft or final SIC interpretation requires approval by at least eight board members.
• Other decisions require a simple majority.
• Board has full control over technical agenda.
• IASB publicly explains how conclusions were reached, what background information was used, and what the dissenting opinions were.

International Cultural Differences and the Harmonisation of Accounting Standards

• Values inherent in accounting subculture influenced by society-wide values.
• Accounting systems are not ‘culture free’.
• Should different countries with varying cultural values adopt internationally uniform accounting practices?

Use and role of audit reports

• An independent opinion of the financial information regarding:
• true and fair view
• Companies Decree 2011
• compliance with accounting standards.
• Helps establish credibility of the financial information.
• Auditor not responsible for preparation of financial information.

All this regulation—is it really necessary?

 Opinions range from the ‘free-market’ perspective to the ‘pro-regulation’ perspective.

Free-market perspective
Beliefs:

• Demand and supply forces generate an optimal supply of information.
• Even in the absence of regulation there are private economics-based incentives to provide information.
• Information is produced to reduce conflict between parties with an interest in the organisation.
• Managers are best placed to determine what information should be produced.
• Financial statement audits can also be expected in the absence of regulation.
• Without regulation, entities would still be motivated to disclose both good and bad news.

Pro-regulation perspective

Beliefs:

• Accounting information is a public good:
• Once available it can be used and passed on without payment
• Parties using without incurring costs are known as ‘free-riders’
• In the presence of free-riders true demand is understated.
• Regulation is required to alleviate the effects of market failure:
• Arguments that ‘on average’ the market is efficient ignore the rights of individual investors who might lose as a result of relying upon unregulated disclosures
• Ability to obtain information might depend on the individual’s control of scarce resources required by the entity.

Background to the Corporations Act



The Corporations Act has arisen from significant amendments resulting from CLERP.
CLERP = Corporate Law Economic Reform Program
Federal Government program, commenced in 1997 and still running
Wide ranging reforms. Major changes to date include:
changes to the development and application of accounting standards in Australia.
establishment of the FRC and FRP
reformed auditing practices

Need for accounting regulation

Separation of ownership from control – especially via the corporate structure. Different stakeholders have different interests. 

• Need for reporting by agents to owners 
• Need for protection of owners’ and creditors’ investments 
• Increasing complexity of financial transactions and size of organisations 
• Regulation achieved via legislation or professional pronouncements including: 
• Corporations Act (recently, Companies Decree 2011) 
• Accounting Standards 

Setting AASB Standards (For example Only)

Accounting regulation

Financial Reporting Council (FRC) 

Oversees AASB


Australian Accounting Standards Board (AASB)
Responsible for:
•development of the conceptual framework
•formulating accounting standards in accordance with the Corporations Act
•formulating accounting standards for other purposes (eg public and not-for-profit sectors)

Key objectives of developing accounting standards include:

1.To facilitate the development of accounting standards that require the provision of financial information that is relevant, reliable, understandable and facilitates comparability
2.To facilitate the Australian economy by reducing the cost of capital, thus enabling Australian entities to compete effectively overseas
3.Maintaining investor confidence in the Australian economy and capital markets

International Accounting Standards Board (IASB)


Independent, privately funded accounting standard setter

Committed to the development of a single set of high quality, enforceable global accounting standards— 

 Financial Accounting Standards Board (FASB)


US Accounting Standards body
Currently involved in a joint project with the IASB working towards converged US and international standards

International Financial Reporting Interpretations Committee (IFRIC)
Sub-committee of the IASB
Considers issues of widespread importance not covered in IFRS standards
IFRIC interpretations are adapted by the AASB to suit the Australian environment



Urgent Issues Group (UIG)
Now disbanded
Previously issued UIG consensus views still applicable
AASB 1048 Interpretations and Applications of Standards requires adherence

Reporting entity concept

A reporting entity is an entity in respect of which it is reasonable to expect the existence of users dependent on general-purpose financial reports for information useful for making and evaluating decisions about the allocation of scarce resources
Defined in SAC1 Definition of the Reporting Entity

Classes of users are set out in The Framework

Due to recent release of an Exposure Draft (ED) on Small and Medium-sized entities (SMEs) the AASB is proposing a move away from the reporting/non-reporting entity concept.
The ED on SMEs proposed a move towards a size and public accountability test.
However, IASB/FASB joint project includes the reporting entity concept in its conceptual framework.



•There are a variety of legislative influences on Fiji accounting.
•Auditors act as a check on accounting practice.
•Reporting changes are frequent, requiring accountants to keep up to date.

• •The amount of regulation required for fair outcomes is debated.