Chapter 1

Nature and regulation of

companies
Prepared by
Mark Vallely

Learning objectives
1. Summarise the nature and attributes of a company (p. 2)
2. Discuss the different types of companies which may be formed under the Corporations Act 2001
(p. 3)
3. Describe the necessary documentation for forming a company (p. 7)
4. Describe the types of records needed to manage a company (p. 9)
5. Compare and contrast shares and debentures, and discuss the reasons for issuing disclosure
documents (p. 9)
6. Discuss the background and purpose of the Corporations Act 2001 by which companies are formed,
administered and dissolved (p. 12)
7. Evaluate the reasons for the development of accounting standards and describe the current
arrangements for establishing accounting standards in Australia, subject to global influences in the
standard-setting process (p. 14)
8. Discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the
Australian Securities Exchange Limited (ASX) (p. 25)
9. Analyse the concepts of general purpose financial reporting and the reporting entity (p. 26)
10. Describe the current differential reporting requirements (p. 28).

LO1

Nature of a company

A company is a legal entity

Incorporated via registration by Australian Securities and
Investments Commission (ASIC)
Subject to requirements of Corporations Act 2001

A company has:

the advantage of limited liability (Note1)

separate legal existence from its members
the legal powers of a natural person
financing advantages
the right to own assets and enter contracts
the right to sue and be sued

2 million
companies in
Australia
(ASIC 2012)

LO2

Proprietary companies

Most common type of company Proprietary

company (Note1)
Limited by Shares (Pty Ltd)
Unlimited with a share capital (Pty)

Proprietary companies
Must have a share capital (limited by shares or
unlimited)
Minimum of 1 member, maximum of 50
Minimum of 1 director
Cannot raise funds from the public
Classified as large or small (see next slide for further discussion)

LO2

Large / small test

Proprietary companies classify as large or small for

reporting purposes
Small proprietary companies must satisfy at least two of the
following criteria:
Annual gross operating revenue: < $25 million
Gross assets: < $12.5 million
Number of employees: < 50

Entities that do not satisfy the criteria for classification as a

small proprietary company are classified as large (Note 1)

Public companies

LO2

A public company is one that is not a proprietary company

(Note 1)

Limited by Shares
Unlimited with a share capital
Limited by guarantee
No Liability (see next slide)

A public company:

Can invite public to subscribe for securities

Can list on Australian Securities Exchange (ASX)
Minimum 1 member, no maximum
Minimum of 3 directors
Must prepare / publish audited financial statements (Note 2)

LO2

Other titles for companies

Listed corporations
Public companies listed on the ASX

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 companies
XYZ NL
Sole object of the company must be mining
Shareholders are not liable for calls on shares or debts of the
company

LO3

Forming a company

To register a company, a person lodges the prescribed

application form with ASIC
On acceptance of the application ASIC will:
Allocate an ACN (Australian Company Number)
Register the company
Issue a certificate of registration
A company legally comes into existence on the date recorded
on this certificate

LO3

Forming a company

Management of the company is governed either by replaceable rules or

constitution
Replaceable rules
Pro-forma rules contained within Corporations Act
Rules deal with (Note 1 )
Constitution
Necessary if a company wants rules different to the pro-forma rules
in the replaceable rules
Public company must lodge constitution with ASIC

LO4

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 (Share register)
Register of option holders
Register of debenture holders

Required to be kept at the companys registered office

10

LO5

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
companys assets

11

LO5

Funding disclosure documents

Most public issues of shares, debentures or
options require a disclosure document to be
issued:

Written notice inviting subscription

Content regulated by Corporations Act
Contains issue price, terms and conditions
Copy of the disclosure document must be lodged
with ASIC

A prospectus is an example of a disclosure

document

12

Background to the Corporations Act

(2001)
The Corporations Act (2001) arose from Corporate Law
Economic Reform Program (CLERP)
Federal Government program, commenced in 1997
Nine discussion papers: CLERP 1 CLERP 9

Resulted in wide ranging reforms including:

Ease of access to capital / enhanced shareholder rights

Greater commercial / international focus for accounting standards
Establishment of the FRC / reformed auditing practices
Regulation of financial services and continuous disclosures
Most recently, changes to dividend rules and remuneration
disclosures

13

LO7

Accounting regulation of companies

Brief history of accounting regulation in Australia

Pre 1984; AARF & the professional bodies

1984 ASRB (Australia Standards Review Board)
1988 ASRB empowered to develop standards
1991 AASB (Australian Accounting Standards Board)
The 90s The conceptual framework
1999 AASB disbanded / replaced by new AASB
Since 2000 new AASB supervised by the Financial Reporting Council
(FRC)

14

LO7

Current standard-setting
arrangements

15

Financial Reporting Council (FRC)

Role of the FRC includes:
Oversee / give advice standard setting processes AASB & AUASB
Determine broad strategic directions, monitor priorities and appoint
members
Monitor development of international accounting standards
Assess continued relevance and effectiveness of accounting and
auditing standards
Ensure AASB standards are at least in harmony with international
standards

The FRC cannot direct the AASB or AUASB in relation to a

particular standard and cannot veto a standard

16

Australian Accounting Standards Board

(AASB)
Under ASIC Act 2001 s.227(1), AASB is
required to:
develop a conceptual framework
make accounting standards for purposes of the
Corporations Act
formulate accounting standards for other
purposes
(e.g. non-companies, the public sector and the not-forprofit sector)

participate in the development of a single set of

accounting standards for worldwide use
promote the main objectives of developing
accounting standards

17

AASB Accounting Standards

The ASIC Act 2001 specifies three objectives of developing
accounting standards:
1. Financial information objective

Users & Directors

Qualitative characteristics

2. Facilitate the Australian economy objective

Reduce cost of capital

Enhance the international competiveness of Australian entities
Standard will be clearly stated and easily understood

3. Maintain investor confidence objective

In the economy and in capital markets

18

AASB Accounting Standards

2002 FRC announced AASB would adopt IASB standards

for all financial statements for years starting 1 Jan 2005
Initially AASB harmonisation process:

restricted some options allowed by international standards but

such disparities have now been eliminated
required more detailed disclosures, but these have now been
removed

Differences are made obvious in AASB standards

Additional paragraphs for public and not-for-profit sector entities

(clearly labelled by AUS prefix)
Additional paragraphs related to Reduced Disclosure Requirements

19

AASB standards and interpretations

AASB now deals directly with interpretations issued by IFRS
Interpretations Committee (IFRIC)
Advisory Panels are formed as required (UIG now defunct)

In summary, AASB
1. Adopts IASB standards & interpretations
2. Public and not-for-profit sectors

Inserts AUS paragraphs

Provides local standards & interpretations

3. Is a member of ASAF of the IASB

Accounting Standards Advisory Forum

20

Source of AASB Standards

As a result of adopting international standards there are

three sources of AASB standards

AASB 1-99
equivalent to IFRS standards issued by the IASB
have same number as equivalent IASB standard
IFRS 2 = AASB 2 Share-Based Payment

AASB 101-199
equivalent to IAS standards issued by the IASC (predecessor to the IASB)
have same number (+100) as the IAS standards on which they are based
IAS 16 = AASB 116 Property, Plant & Equipment

21

Source of AASB Standards

AASB 1001-1099
Australian standards with no international equivalents
Have same number as in previous AASB standard
AASB 1048 Interpretation and Application of Standards
AASB 1049 Whole of Government and General Government Sector Financial
Reporting
AASB 1054 Australian Additional Disclosures

22

International Accounting Standards

Board (IASB)
1973 IASC (International Accounting Standards Committee)
Membership professional accounting bodies

2001 IASB formed to replace IASC

Membership representatives of accounting standards boards
Independent, privately funded accounting standard setter
Overseen by the IFRS Foundation

Committed to the development of a single set of

high quality, understandable, enforceable and
globally accepted accounting standards

23

Financial Accounting Standards

Board (FASB)
2005 MOU RE convergence of US GAAP and IFRS
Joint projects have been undertaken ever since

2008 G20 urged FASB and IASB to complete convergence

Roadmap developed by SEC , with SEC to decide in 2011 for
application from 2014

2010 FASB and IASB recommit to 2011 timeline

2011 no decision by SEC
2012 a further work plan developed
Considerable opposition in US outcome is still uncertain

24

IFRS Interpretations Committee

Sub-committee of the IASB
Task is to deal with issues of widespread importance on a
timely basis
Reporting issues not covered in IFRS standards
Issues of unsatisfactory or conflicting interpretations

IFRS Interpretations
are adopted by the AASB
with additional AUS paragraphs added for public and not-for-profit
sectors

25

AOSSG and EFRAG

Asian-Oceanian Standard-Setters Group
Established 2009, initiated by China, Japan and Korea
Now has 25 member countries
Lobby group to IASB representing views of developing countries

European Financial Reporting Advisory Group - 2001

Provides assistance to European Commission regarding endorsement
and implementation of IFRS standards and interpretations
Participates in IASB due process
European listed companies have applied international standards in
consolidated accounts since 2005

26

Australian Securities and

Investments Commission
ASIC
Independent government body that administers and enforces
Corporations Act (investigate and prosecute breaches)
Financial services laws to protect consumers, investors and creditors

ASIC Act 2001 requirements of ASIC include

Maintain/ improve financial system

Promote confident / informed participation by investors and consumers
Administer laws with minimal red tape
Monitor / promote market integrity and consumer protection

Since 2010 ASIC is responsible for supervision of securities markets

Supervise real-time trading and prosecute misconduct

27

Australian Securities Exchange

ASX
A public company that operates
Australias share markets
Prior to 2010 it had a supervisory
role
Improves information disclosure via
its Listing Rules
Played a major role in influencing
the move towards the AASBs
adoption of IASB standards

28

LO9

General purpose financial reports

GPFRs defined in SAC1 Definition of the Reporting Entity
A financial report intended to meet the information needs common
to users who are unable to command the preparation of reports
tailored so as to satisfy, specifically, all of their information needs
i.e. a report for dependent users

SAC1 GPFRs should apply all AASB accounting standards

If not a GPFR, it is a Special Purpose Financial report (SPFR)
Over
28 000 companies
in Australia provide
financial reports
(ASIC 2012)

Not all of these companies comply with

accounting standards should they?

29

LO9

The reporting entity concept

SAC1 (para. 40) a reporting entity is an entity for which

it is reasonable to expect the existence of users

who rely on general-purpose financial reports
for information useful for making and evaluating decisions
about the allocation of scarce resources

Who are the users?

SAC 2 (now withdrawn) identified many users (Note 1)

IASB / FASB CF Project Phase A narrows the users identified

Existing and potential investors
Lenders and other creditors
i.e. providers of financial resources

30

LO10

Differential reporting
IASB approach all General Purpose Financial Statements will
Apply all international accounting standards
Provide required disclosures and any other requirements

This is very costly approach for SMEs

IASB produced a new standard IFRS for SMEs (Note 1)

Extensively reduced disclosure requirements

Reduced accounting choices
Simplified accounting methods
Less frequent changes to rules

31

LO10

Public accountability test

Under the IFRS for SMEs standard
A public accountability test applies (Note 1)

An entity has public accountability if:

Its debt or equity instruments are traded in a public market,
It is in the process of issuing such instruments for such trading, or
It holds assets in a fiduciary capacity

32

LO10

Differential reporting in Aust.

In Australia reporting entities under Chapter 2M are required
to comply with all accounting standard requirements

(Note 1)

Differential reporting
Currently limited to the size test in the Corporations Act

AASB has not adopted the omnibus standard from IASB

Differential reporting introduced in a two stage process
Stage 1: Introduce the Reduced Disclosure Regime (Note 2)
Australian SMEs must still apply all recognition and measurement
rules

33

Reduced disclosure regime (RDR)

AASB 1053 Application of Tiers of Australian Accounting
Standards applies for years commencing 1 JULY 2013 (Note 1)
Introduces two tiers of reporting:
Tier 1 comply fully with disclosure requirements of AASB
accounting standards
Tier 2 can adopt a Reduced Disclosure Regime
Tier 2 entities have substantially reduced disclosures
However, they have the same recognition, measurement and presentation
requirements

AASB have also included Public and NFP sectors in the RDR

34

LO10

Reduced disclosure regime (RDR)

35

Stage 2 Differential reporting

Stage 2: Shift from reporting entity concept to GPFRs
IFRSs adopted in Aust. apply to GPFRs rather than reporting entities
International focus is on boundaries of the reporting entity (Note 1)

AASB released ED 193 in 2010

Conceptual Framework for Financial Reporting: The Reporting Entity

A circumscribed area of economic activities

Whose financial information has potential to be useful
To existing and potential investors, lenders and other creditors
Who cannot directly obtain the information required
For decisions about providing resources and to assess whether management /
the board have made efficient use of resources provided

36