Accounting Regulation & the Conceptual Framework

Chapter 1

Prepared by Kent Wilson

and Ann Tarca

Learning Objectives

1. Identify sources of regulation of financial reporting in Australia

2. Identify key bodies involved in financial reporting regulation

3. Describe the structure and operations of the IASB 4. Outline the components of the Conceptual

Framework 5. Identify the qualitative characteristics of

information 6. Discuss the elements of financial statements 7. Understand recognition and measurement of the

elements of financial statements

General purpose financial reports

Useful information for decision making http://www.westpac.com.au/about-

westpac/investor-centre/annual_reports/

1. Key Sources of Regulation of Financial Reporting in Australia

The major sources of financial reporting regulation in Australia are: The Corporations Act Australian Accounting Standards (International Financial

Reporting Standards = IFRS) The Conceptual Framework ASX Listing Rules

The Corporations Act

Australian companies must comply with the requirements of the Corporations Act 2001

The Corporations Act requires the preparation of financial reports for all: Disclosing entities Public companies Large proprietary companies Registered schemes

Australian Accounting Standards

The Corporation Acts requires compliance with accounting standards (AASB/IFRS)

All entities required to prepare financial statements in accordance with the Corporations Act must apply the following standards: AASB 101 - Presentation of Financial Statements AASB 107 - Statement of Cash Flows AASB 108 - Accounting Policies AASB 1048 - Interpretation & Application of Standards

The reporting entity concept is used to determine whether entities are required to present GPFRs Requires professional judgement

The Conceptual Framework

The purpose is to provide a coherent set of principles: Issued by the AASB (IASB) Assists standard setters to produce consistent

standards Assists preparers deal with issues not addressed by a

standard Assists auditors in forming an opinion on compliance Assists users to interpret company accounts

ASX Listing Rules

Companies listing on the ASX need to comply with the ASX Listing Rules

The Listing Rules include requirements for continuous disclosure and periodic reporting

Primary focus on disclosure

Questions

Why do governments regulate companies and markets?

Why do companies comply with regulations? What factors influence the extent to which they

do so?

Theories from economics, finance and accounting

Evidence from academic research

2. Key bodies - AASB Standard Setting Process

3. The International Accounting Standards Board (IASB)

4. The Conceptual Framework

The IASB has been involved in a joint project with FASB to revise the Conceptual Framework. IASB current project, deadline 2015.

The Australian conceptual framework comprises: The IASB Framework for the Prep. & Presentation of Fin. Statements

(the Framework) SAC 1 Definition of the Reporting Entity SAC 2 Objective of General Purpose Financial Reporting

The IASB’s Framework comprises:

Chap 1 - The objective of general purpose financial reporting Chap 2 - The reporting entity Chap 3 - The qualitative characteristics of useful fin. Reporting Chap 4 – the Framework

The Conceptual Framework

Objective of financial reporting (OB2) To provide financial information about the

reporting entity that is useful to present and potential equity

investors, lenders and other creditors in making decisions about providing

resources to the entity

5. Qualitative Characteristics of Useful Information

Fundamental qualitative characteristics: Relevance Faithful representation

Enhancing qualitative characteristics: Comparability Verifiability Timeliness Understandability

Open Safari Case Study

Objective of financial reporting: Useful information for decision making (Framework)

Who are the users and potential users of general purpose financial reports in the Open Safari Case Study?

The Open Safari Case Study can be downloaded from LMS (week 1)

6. Definitions of Elements of Financial Statements

Assets “a resource controlled by the entity as a result of past events

and from which future economic benefits are expected to flow to the entity”

Liabilit ies “ a present obligation of the entity arising from past events,

the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”

Definitions of Elements of Financial Statements

Equity “the residual interest in the assets of the entity after deducting

all its liabilities” Equity is a residual: Equity = Assets – Liabilities Increases as a result of profitable operations Influenced by the measurement system adopted for A & L and

the concepts of capital and capital maintenance

Income

“increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”

Definitions of Elements of Financial Statements

Expenses “are decreases in economic benefits during the accounting

period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants”

Open Safari Case Study

Are the following elements of the financial statements (assets, liabilities, income or expense)?

Freelands staff housing, eco-resort lodge, hot air

balloons and helicopters wild animals and resort staff

Sealands casino licence Plans for beachfront holiday homes

7. Recognition of Elements of Financial Statements

Asset recognition Probability of future economic benefits and reliable measurement

required

Liability recognition Probability of an outflow and reliable measurement required

Income recognition Probability of increase in future economic benefits and reliable

measurement required

Expense recognition Probability of decrease in future economic benefits and reliable

measurement required

Open Safari Case Study

Recognition of assets, liabilities, income and expense Judgements and estimates in interpretation

and application of IFRS

Probable Economic benefit Measure reliably

Open Safari Case Study

Recognition: are recognition criteria met? Classification: which IFRS will apply? Freelands staff housing, eco-resort lodge, hot air

balloons and helicopters wild animals and resort staff

Sealands casino licence Plans of beachfront holiday homes

7. (Cont.) Measurement of the Elements of Financial

Statements

“Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement”

(Conceptual Framework para 4.54)

A number of measurement bases may be used:

Historical cost Current cost Realisable or settlement value Present value

Measurement

Historical cost Land

Historical cost (adjusted) PPE

Current cost Cash paid to acquire asset or settle liability

Realisable or settlement value Sale of asset; settlement of a liability

Measurement

Present value Discounted cash flow

Fair value measurement? IFRS 13 Fair Value Measurement

Open Safari Case Study

Initial and subsequent measurement Freelands staff housing, eco-resort lodge, hot air

balloons and helicopters wild animals and resort staff

Sealands casino licence plans for beachfront holiday homes

Measurement in ACCT 3321

Historical cost (adjusted) Intangible assets AASB 138 Some financial instruments AAB 139

Current cost Revaluation model AASB 116 Market value – agriculture. Bearer assets and

agricultural produce AASB 141 Fair value – some financial instruments AASB

139

Measurement

Present value: calculations used in Leases AASB 117 Provisions AASB 137 Employee entitlements (superannuation)

AASB 119

Conclusion

Welcome to ACCT 3321 Financial Reporting Regulation will underpin

everything we talk about The Conceptual Framework is our theory of

accounting The AASB/IASB will provide the principles and rules

we discuss Understanding Recognition and Measurement in

IFRS will provide many challenges for us ENJOY!