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.