Accounting Regulation & the Conceptual

Framework

Chapter 1

Prepared by Kent Wilson

Learning Objectives

1. Identify the key sources of regulation of financial reporting in Australia

2. Identify the key players in financial reporting regulation

3. The IASB

4. Key components of the Conceptual Framework

Learning Objectives

5. Qualitative characteristics of information

6. The elements of financial statements

7. Measurement of the elements of financial statements

8. Concepts of capital

Key Sources of Regulation of Financial Reporting in Australia

The major sources of financial reporting regulation in Australia are:The Corporations ActAustralian Accounting StandardsThe Conceptual FrameworkASX 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 entitiesPublic companiesLarge proprietary companiesRegistered schemes

Australian Accounting Standards

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 AASBAssists with standard consistencyAssists preparers deal with issues not

addressed by a standardAssists auditors in forming an opinion on

complianceAssists users to interpret statements

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

The Role of Key Players in Financial Reporting

Regulation

The Role of Key Players in Financial Reporting

Regulation

AASB Standard Setting Process

The International Accounting Standards Board (IASB)

The Conceptual Framework

The IASB is currently involved in a joint project with FASB to revise the Conceptual Framework

The Australian conceptual framework comprises: The Framework for the Prep. & Presentation of Fin. Statements SAC 1 Definition of the Reporting Entity SAC 2 Objective of General Purpose Financial Reporting

The IASB’s Conceptual 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

Qualitative Characteristics of Useful Information

Fundamental qualitative characteristics:RelevanceFaithful representation

Enhancing qualitative characteristics:ComparabilityVerifiabilityTimelinessUnderstandability

Going Concern Assumption

Financial statements are prepared under the assumption that the entity will continue to operate for the foreseeable future

Implications in accounting:Justification for use of historical costsSystematic allocation of depreciationSupports the use of prepaid expenses (an asset)

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”

Liabilities “ 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”

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

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

Concepts of Capital

Financial capital Capital is synonymous with the net assets (equity) of

the entity Profit exists only after the entity has maintained its

capital, measured as the dollar value (or purchasing power) of equity at the beginning of the period

Physical capital Capital is viewed as the operating capability of the

entity’s assets Profit exists only after the entity has set aside enough

capital to maintain the operating capability of its assets

Reserves

Reserves is the generic term for all equity accounts other than contributed equity

The retained earnings account accumulates the annual profit or loss

AASB 101 para 89 identifies the gains or losses that need to be reported as changes in equity

Retained Earnings

“retained earnings” = “retained profits” = “accumulated profit”

The main movements to this account: Profit or loss for the period Dividends paid or declared Transfers to or from reserves Changes in accounting policy errors

Disclosure

Disclosures in relation to equity are detailed in AAB 101

Specific disclosures Refer Fig. 3.15

Statement of changes in equity

Other Components of Equity

Examples of Reserve Accounts: Asset revaluation surplus Foreign currency translation differences Fair value differences