CHAPTER 1: INTRODUCTION TO ACCOUNTING The Accounting Process - Accounting information is used to guide decision about allocating money among different projects - A business transaction is an event that affects an entity's financial position (payment of wages, expenses, interest, taxes) - Throughout the accounting period, individual assets, liabilities, income etc. will be grouped together (plant and equipment) - Money - "the scarce resource" - The process of accounting has four stages; - Identifying - transactions that affect the entity's financial position - Measuring - analysis, recording and classifying of business transactions - Communicating - the use of various reports (balance sheet, cash flow etc.) - Decision Making - info is used for a range of decision by external and internal users - Bookkeeping is recording and summarising financial transactions whereas accounting is interpreting these transactions and make decision based on the Financial and Management Accounting Differences Between FA and MA; FA Regulations - Bound by GAAP, Corporations Act, Listing requirements of ASX Timeliness - Statements preset a historical picture (often outdated) Level of Detail - Quantitative nature. Represent the entity as a whole Main Users - Management, suppliers, consumers, employees, banks, govt regulatory bodies, investors MA Regulations - Less formal without prescribed rules Timeliness - Historical record and projection (budget) Level of Detail - much more detailed and tailored. Quantitative and qualitative nature Main users - managers of the entity Globalisation of Accounting - Entities are becoming more diversified and multinational - 120 countries use the International Financial Reporting Standards (IFRSs) Sources of Regulation - In the late 1990s, Australia experienced much large scale corporation collapse, fraud, insider trading - Recent changes to the Corporations Act are in the areas of; auditor responsibilities, disclosure requirements of directors, requirements of annual reports, accounting standard-setting program - Role of company regulation is to protect stakeholders and promote strength in the economy - Regulation monitors the preparation, presentation and distribution of financial statements Australian Securities and Investments Commission (ASIC) - Role is to uphold the law, promote participation in financial system by investors and consumers, make company info available, improve financial system performance. - Administers the Corporations Act: Legislation dealing with regulation of companies and the securities and futures industries in Australia Australian Securities Exchange (ASX) - Formed in 1987 - Market rules - governing operations and behaviour of participating entities of the ASX and affiliates - Listing Rules - governing procedures and behaviour of all ASX listed companies Australian Competition and Consumer Commission (ACCC) - Administers the Competition and Consumer Act 2010 (Cwlth) - Act covers anti-competitive behaviour and unfair market practices - Aims to protect the consumer Reserve Bank of Australia (RBA)

- Responsible for the stability of the financial system (monetary policy) Australian Prudential Regulation Authority (APRA) - Oversees financial institutions - Promotes the safety of life and general insurance companies\ Australian Taxation Office (ATO) - Collects taxes and oversees all self-managed superannuation funds Australian and International Accounting Standards - Since 2005, Australian entities have complied with IFRSs - Australian Accounting Standards Board (AASB) provides input to the IASB, influences IFRSs, issues AASBs and promotes globally consistent accounting practices - For non-disclosing entities, preparers and auditors or GPFSs have the obligation to apply accounting standards Financial Reporting Council (FRC) - Statutory body established under the ASIC Act 2001 (Cwlth) - Responsible for overseeing accounting and auditing standard setting process for public and private entities Development of Accounting Standards - Due process of an accounting standard includes identifying a technical issue, developing a project proposal, researching, issuing a draft - Outcome of due process could be an accounting standard, an interpretation or a conceptual framework document Role of Professional Associations - Australia - Certified Practicing Accountant (CPA), Institute of Chartered Accountants in Australia (ICAA), Institute of Public Accountants (IPA) - Members of these bodies are required to ensure their entities comply with accounting standards - CPA - provides education, guidance and support to students, accountants and businesses - ICAA - provides education to its members and input to debates affecting accounting - IPA - consults with business, govt and public bodies to address issues affecting accounting Conceptual Framework - In 2005, the IASB's Framework for the Preparation and Presentation of Financial Statements - In 2010, the IASB issued a revised document; Conceptual Framework for Financial Reporting (not in Aus yet) - Conceptual Framework applies to entities that are required to prepare GPFSs - GPFSs contrast to SPFSs (specialised...) Qualitative Characteristics of Financial Reports - Relevance - information should have predictive and confirmatory value - Faithful representation - information will be complete, neutral and free from error - Comparability - information is able to be compared at one time and over time - Verifiability - information faithfully represents what it suggests - Timeliness - information is available to stakeholders in time for decision making purposes - Understandability - making the information understandable without compromising relevance or reliability - Cost constraint on financial information - benefits should outweigh the costs Definition and Recognition of the Elements of Financial Statements - Assets - a resource controlled by the entity - Liabilities - a present obligation of the entity - Equity - residual interest in the assets of the entity after deducting its liabilities - Income - increases in economic benefits in the form of inflows or enhancements to assets - Expenses - decreases in economic benefits in the form of outflows or depletion of assets Limitations of Accounting Information - Time lag - delay between end of financial year and the time info reaches users (usually 3 months)

- Historical information - information in reports is based on past transactions - Subjectivity of information - there is some choice as to what is included in in reports (outside GAAP) Potential Costs of Providing Accounting Information Information costs - implementation of accounting software. Costs for gathering, summarising and producing info Release of competitive info - some info can be used by competitors to strengthen their own market position Corporate Governance and Ethics - Ethics is a system of moral principles, by which human actions and proposals may be judged good or bad - Corporate governance within an entity specifies he distribution of rights and responsibilities - Auditing ensures ethical accounting practices CHAPTER 2: BUSINESS SUSTAINABILITY Business Sustainability - Entities need to account for all resources used (labour, material, energy, forests, water, air etc.) and all outputs produced (products, waste, carbon emissions) - Business Sustainability is development that meeds current needs without compromising the ability of future generations to meet their own needs - Key drivers for sustainability are; - Competition for resources - population is increasing, placing strain on natural resources - Climate change - extreme weather conditions are occurring due to greenhouse gases - Economic globalisation - businesses that operate internationally often compromise the environment in countries with less regulations - Connectivity and communication - the internet particularly has resulted in "radical transparency" - The 9 principles of business sustainability performance are; - Ethics - maintain ethical standards - Governance - manages resources conscientiously - Transparency - provides timely disclosure - Business Relationships - maintaining fair trading practices - Financial Return - compensates providers of capital with a competitive return on investment - Economic Development - fosters a relationship between company and community - Value of Products and Services - respects needs, desires and rights of customers - Employment Practices - promotes professional employee development, diversity and empowerment - Protection of the Environment - protect and promote sustainable development Theories of Business Sustainability - Expectation that corporations will be socially responsible - Theories include, corporate social responsibility, shareholder value, stakeholder theory and stewardship theory Corporate Social Responsibility; - The responsibility of an entity to its stakeholders (incl. society and the environment) in which it operates - Being socially responsible can create positive brand image and increase profits through price or volume increases - Sometimes it is merely ethical. The managers and owners just want to do the right thing - Does an entity have the responsibility to consider all of their stakeholders equally? Shareholder Value; - The Corporations Act and an entity's constitution acknowledge the owners as the primary focus - Shareholders choose directors to act on their behalf and managers to run the business (Agency theory) - Shareholder value is the view that the purpose of the company is to increase shareholder wealth Stakeholder Theory;

- This theory says that the purpose of the entity is to work for the good of all stakeholder groups not just shareholder wealth - Employees, governments, customers and communities all have an interest in the affairs of an entity Stewardship Theory; - This theory says that managers will act as responsible stewards of the assets they control if left on their own - Sometimes, key suppliers or debt providers may take a place on the board to protect their interests - Stewardship is that all the directors and managers are stewards of some greater good, just not shareholder wealth Reporting and Disclosure - Reporting is integral to business sustainability - Business sustainability reports are voluntary unlike annual reports - The Global Reporting Initiative (GRI) provides a framework for these reports. The framework consists of; - Sustainability reporting guidelines - Technical protocol - Sector supplements - Standard disclosures of a business sustainability report include; - Strategy and profile - overview of risks and opportunities facing the entity - Management approach - approach adopted to manage sustainability topics - Performance indicators - economic, environmental and social Triple Bottom Line (TBL) - The economic, environmental and social performance indicators that are part of the GRI framework, make up the triple bottom line (see page 44 for diagram) - The TBL expands a business's reporting from solely financial to financial, social and environmental reporting - Economic performance is the economic value created by the entity over a period of time (profit minus cost of capital) - Environmental performance refers to an entity's activities using natural capital (critical or renewable) and whether these activities are sustainable - Social performance refers to both human capital (employee/community health, skills and education) and society's wealth creation potential - The acceptance of ethical norms enables business to be done more efficiently, gathering greater positive social relationships - Examples of social capital are; paying fair wages, not exploiting suppliers, providing safe working conditions and ensuring the good or service is safe for the consumer Corporate Governance - Refers to the direction, control and management of an entity (includes rules, procedure and structure) - The quality of decisions made determines the success of the entity in meeting its objectives - According to the Organisation for Economic Cooperation and Development (OECD), corporate governance deals with the rights and responsibilities of a company's management - Commonwealth legislation pertaining to corporate governance includes; - Corporations Act 2001 - Australian Securities and Investments Commission Act 2001 - Financial Services Reform Act 2001 - Insurance Contracts Act 1984 - Superannuation Industry Act 1993 - Corporate governance extends beyond the law to include best practice and business ethics - Rights and responsibilities of corporations are ever-changing as financial markets become more global - Directors owe the following legal duties to their company; - to act in good faith - to act with care and diligence - to avoid improper use of information