An Overview of The Australian External Reporting Environment

Chapter 1
An overview of the
Australian external
reporting environment
Copyright 2010 McGraw-Hill Australia Pty Ltd

PPTs to accompany Deegan, Australian Financial Accounting 6e
1-1
Objectives of this lecture

Understand the scope of regulation relating to Australian
external financial reporting
Understand the sources of accounting regulation within
Australia
Be able to explain the general functions of the Australian
Securities and Investments Commission, the Australian
Accounting Standards Board, the Financial Reporting
Council and the Australian Stock Exchange
Be able to explain the general functions of the
International Accounting Standards Board and its direct
relevance to Australian accounting standard setting
Understand the role of an accounting standard and the
process through which it is developed

1-2
Objectives (cont.)
Understand the magnitude of the changes that occurred
in 2003 and 2004 in Australian Accounting Standards as a
result of the Financial Reporting Councils strategic
decision that Australia would produce financial reports
that comply with standards being issued by the
International Accounting Standards Board
Understand that the practice of financial accounting is
quite heavily regulated within Australia, and be aware of
some arguments for and against the regulation of
financial accounting

1-3
Financial accounting defined

Financial accounting is a process involving the
collection and processing of financial information to
meet the decision-making needs of parties external
to the organisation
Financial accounting may be contrasted with
management accounting, which:
focuses on providing information for decision making by
parties within the organisation
is largely unregulated
Financial accounting is heavily regulated, and a great

deal of regulation changes each year

1-4
Users demand for general-purpose

financial statements
Users include (as per the Framework for the Preparation and
Presentation of Financial Statements (the AASB Framework)
released by the Australian Accounting Standards Board in July
2004):
present and potential investors
employees
lenders
suppliers and other trade creditors
customers
government and its agencies
the public
Users generally lack the power to demand specific information to
meet their needshence the need for general-purpose financial
statements

1-5
General- vs special-purpose financial

statements
General-purpose financial statements
Comply with the AASB Framework and accounting standards

Meet the information needs common to users who are
unable to command the preparation of reports tailored to
satisfy, specifically, all their information needs
Represent financial statements and supporting notes
included within an annual report presented to shareholders at
a companys annual general meeting
Special-purpose financial statements

Designed to meet the needs of a specific group or to satisfy a
specific purpose
Example: a bank demanding as part of a loan agreement that
the borrowing entity provide information about projected cash
flows

1-6
Sources of external financial reporting

regulation
Four main bodies that formulate and/or enforce
accounting regulations in Australia
1.The Australian Securities and Investments
Commission (ASIC)
2.The Australian Accounting Standards Board (AASB)
3.The Financial Reporting Council (FRC)
4.The Australian Securities Exchange (ASX)

1-7

regulation (cont.)
Recent changes in development of reporting regulation
Over the last 10 to 15 years the development of
accounting standards more in hands of government
than accounting professionreducing ability of
accounting profession to self-regulate
New accounting standard-setting arrangements were
passed by Parliament in October 1999 and came
into force 1 January 2000 (see next slide)

1-8

regulation (cont.)
Recent changes in the development of reporting
regulation (cont.)
Public Sector Accounting Standards Board (which was
under the control of the accounting profession) was
disbanded at beginning of 2000all responsibilities for
developing accounting standards within Australia now
with the AASB
However, AASB now relies on standards being
developed by International Accounting Standards Board
(IASB) owing to commitment that Australia would
comply with International Accounting Standards (now
International Financial Reporting Standards) from 1
January 2005
.

1-9

regulation (cont.)
Financial Reporting Council (FRC)
Broad membership base
Oversees activities of AASB
Responsible for decision that Australian reporting entities
would adopt accounting standards issued by IASBmajor
implications for Australian reporting practices
Now also oversees Auditing and Assurance Standards
Board (AUASB)
Auditing standards made by AUASB require

legislative backing (not the case prior to 2004)

1-10
Australian Securities and Investments

Commission (ASIC)
Formerly the Australian Securities Commission
(ASC)
Name changed in July 1998 to reflect increased
responsibility for regulating investment products
Responsible for administering corporation legislation
Independent of state ministers or state parliaments
Reports to the Commonwealth Parliament and
Treasurer

1-11
ASIC (cont.)
The Corporations Act (enforced by ASIC)
Outlines the responsibilities of company directors in
relation to various activities, including:
the nature of their conduct
financial statement preparation, lodgment and distribution
Requires preparation of true and fair financial

statements by directors of public companies, large
proprietary companies, organisations with securities
listed on the ASX, and some small proprietary
companies. But what do financial statements
comprise..?

1-12
ASIC (cont.)
Financial statements are defined in the Corporations
Act (s. 295(2)) as:
The financial statements for the year are:
(a) The financial statements in relation to the entity reported
on that are required by the accounting standards; and
(b) If required by the accounting standardsthe financial
statements in relation to the consolidated entity that are
required by the accounting standards.

1-13
ASIC (cont.)
Financial statements defined (cont.)
Reference must therefore be made to the accounting
standards
Paragraph 10 of AASB 101 states that a complete set of financial
statements comprises:
a statement of financial position as at the end of the period
(previously referred to as the balance sheet)
a statement of comprehensive income for the period
a statement of changes in equity for the period
a statement cash flows for the period
notes, comprising a summary of significant accounting policies
and other explanatory notes

1-14
ASIC (cont.)
The true and fair view requirement is a central component of
Australian financial reporting
Requirement to produce true and fair financial statements
contained in s. 297 of Corporations Act
The financial statements and notes for a financial year
must give a true and fair view of:
the financial position and performance of the company,
registered scheme or disclosing entity; and
if consolidated financial statements are required, the
financial position and performance of the consolidated
entity.

1-15
ASIC (cont.)
True and fair view (cont.)
No definition of true and fair provided in the
Corporations Act
If accounts are to be considered true and fair they
should include all information of a material nature
but what is material?

1-16
ASIC (cont.)Materiality
AASB 1031, paragraph 9, provides that:
Information is material if its omission, misstatement
or non-disclosure has the potential, individually or
collectively, to
a) Influence the economic decisions of users
taken on the basis of the financial statement,
or
b) Affect the discharge of accountability by the
management or governing body of the entity
Contents of AASB 1031 consistent with concept of
materiality as per the AASB Framework (pars 29
and 30)

1-17
ASIC (cont.)Materiality (cont.)
Unless there are specific requirements that require

the disclosure of particular items regardless of
amount (as there are for payments made to key
management personnel), then separate disclosure
will be dependent upon whether the item is deemed
to be materialthat is, whether, for example, it is
considered likely to affect economic decisions of
financial statement readers.
Materiality is an IMPORTANT factor in financial
reporting

1-18
ASIC (cont.)
Pursuant to the Corporations Act, directors of large and
listed companies, as well as some other entities, are
required to attach to financial statements:
a Directors Declaration; and a
Directors Report

1-19
ASIC (cont.)
Directors Declaration
Directors required (s. 295(4) of the Corporations Act)
to:
state whether, in their opinion, the financial statements are
true and fair and whether they comply with the relevant
accounting standards
give details of any significant after-reporting-date events
state whether or not, in their opinion, there are any grounds
to believe that the company will be unable to pay its debts
as and when they fall due
If a declaration is made fraudulently, carelessly or

recklessly, directors may be liable for outstanding
debts of the company
.

1-20
ASIC (cont.)
Directors Report (ss. 298300A of Corporations Act) is
to provide information relating to various issues, such
as:
names of directors
details of directors emoluments
principal activities of the company
review of operations during the year
significant changes in the state of affairs of the company
likely future developments
significant post-reporting-date events
compliance with environmental laws

1-21
ASIC (cont.)
Directors Report (cont.)
From July 2004 the Directors Report must include
an operating and financial review
A review contains information that shareholders of the
company would reasonably require to make informed
decisions regarding the operations, financial position, and
future strategies of the organisation

1-22
Declaration by chief executive officer

and chief financial officer
For entities listed on the ASX
Reinforces the responsibility of the CEO and CFO in
relation to the entitys financial statements

1-23
ASIC (cont.)
Also of relevance to the functioning of ASIC is the
establishment of the Financial Reporting Panel in
2006
Its purpose is to resolve disputes on a non-binding basis
between ASIC and companies in respect of whether
financial statements have been prepared in accordance with
accounting standards and whether financial statements
present a true and fair view
ASIC also releases policy statements and guidelines

on various issues, including financial reporting

1-24
Australian Accounting Standards

Board (AASB)
Began operations in 1991
Functions (under s. 227 of ASIC Act) include:
developing a conceptual framework
making accounting standards that have force of law
under s. 334 of the Corporations Act
formulating accounting standards for other purposes:
for entities not governed by The Corporations Law
participating in and contributing to the development of

a single set of accounting standards for worldwide use

1-25
AASB (cont.)
From 2000 AASB standards apply to all types of
entities, those regulated under companies legislation
and all other types, i.e. responsibility for formulating
standards for entities not governed by Corporations
Act
PSASB now disbanded
Majority of standards underwent change in 200304

Reports to the Financial Reporting Council (FRC),
which oversees the operations of the AASB
Has one full-time chairperson and the balance are
part-time members appointed by the FRC
.

1-26
AASB and the role of the FRC

The Financial Reporting Council (FRC)
Members are appointed directly by the Federal
Treasurer or the Treasurer may specify an
organisation or body to choose a person to represent
them
18 members are nominated by a number of interest
groups (stakeholders)

1-27
AASB and the FRC (cont.)

Functions and powers of the FRC (s. 225 of ASIC Act)
Provide broad oversight of the process for setting accounting
standards
Appoint members of the AASB
Approve and monitor the AASBs priorities, business plan,
budget and staffing
Give the AASB directions, advice or feedback on matters of
general policy
No power to direct AASB re-development of particular
standards
No power to veto a standard
Powers expanded in 2003 to include overseeing the activities of
AUASBAUASB moved from the AARF to AASB in 2004

1-28
AASB (cont.)
Application of AASB standards
Section 231 of ASIC Act requires AASB to carry out
costbenefit analysis of impact of proposed standard
before making or formulating it
Once the AASB makes a standard it is approved by
Commonwealth Parliament
Once an AASB-developed standard becomes an
accounting standard, company directors are required
to ensure that the companys financial statements
comply with that standard (s. 296 of Corporations
Act)

1-29
AASB (cont.)
Small proprietary companies
Such companies exempted from complying with
accounting standards (under s. 45A(1) of
Corporations Act)
A proprietary company is considered to be small if
it meets two of the following three tests:
1. Its gross operating revenue is less than $25 million
2. Its gross assets are less than $12.5 million
3. It has fewer than 50 employees

1-30
AASB (cont.)
Small proprietary companies (cont.)
Small proprietary company does not have to comply
with particular accounting standards (s. 296 of
Corporations Act) if:
a) the report is prepared in response to a shareholder
direction under s. 293 (requiring at least 50% of votes)
b) the direction specifies that the report does not have to
comply with those accounting standards

1-31
AASB (cont.)
Small proprietary companies (cont.)
Do not have to prepare formal financial statements,
apply accounting standards, or have their financial
statements audited, unless so requested by:
ASIC; or
shareholders holding at least 5% of the voting shares
If a proprietary company is not considered small, it is

classified large and is subject to more stringent
disclosure requirements

1-32
AASB (cont.)
Public and large proprietary companies have to:
prepare financial statements that comply with
have their financial statements audited
have statements sent to shareholders if so requested
by:
ASIC; or
shareholders holding at least 5% of the voting shares

1-33
AASB (cont.)
Disclosing entities
Pursuant to s. 285(2) of Corporations Act AASB
standards may apply to some entities not of a
corporate formall disclosing entities need to
comply with majority of AASB standards
Disclosing entities include:
entities with securities quoted on the ASX
entities with securities issued pursuant to a prospectus
entities with securities issued pursuant to a takeover
scheme
entities with securities issued pursuant to a par. 5.1
compromise arrangement
borrowing corporations

1-34
AASB (cont.)
As a result of the FRC decision in 2002 that Australia
would adopt accounting standards developed by the
International Accounting Standards Board, the
development of accounting standards in Australia is
no longer directly under Australian control, except:
to the extent that a standard relates to domestic issues
and there is no equivalent IFRS

1-35
Interpretations
Interpretations are issued by the AASB to provide
requirements concerning urgent financial reporting
issues
The AASB will, from time to time, establish
Interpretation Advisory Panels to address urgent
issues. These panels will be comprised of experts in
the relevant area of financial reporting
Interpretations are not accounting standards but
nevertheless are required to be followed pursuant to
AASB 1048

1-36
International Financial Reporting

Interpretations Committee (IFRIC)
Provides interpretations of requirements embodied
within IFRSs
Of relevance to Australia where there are
uncertainties about particular requirements
incorporated in IFRSs and, therefore, within AASB

1-37
Australian Securities Exchange (ASX)

One nationally operated securities exchange
In November 1998 the ASX became a publicly listed
company:
The Australian Stock Exchange Limited
One set of listing rules for all trading floors in each

capital city
Main Board Rules apply to nationally listed securities
Failure to comply may lead to removal from the
Board
Rules help ensure that information is disseminated in
an efficient and timely manner
.

1-38
ASX (cont.)
ASX Listing Rules divided into 20 chapterskey
chapters are Chapter 3 (continuous disclosure) and
Chapter 4 (periodic disclosure)
Listing Rule 3.1
Once an entity is or becomes aware of any information
concerning it that a reasonable person would expect to
have a material effect on the price or value of the entitys
securities, the entity must immediately tell the ASX that
information

1-39
ASX (cont.)
Establishment of ASX Corporate Governance Council
ASX has released its Corporate Governance
Principles and Recommendations
This proposes eight essential principles of corporate
governance
as stated under Recommendations (p. 5), pursuant to ASX
Listing Ruling 4.10, companies are required to provide a
statement in their annual report disclosing the extent to
which they have not followed the best practice corporate
governance recommendations in the reporting period

1-40
ASX (cont.)
Where companies have not followed all of the
recommendations:
they must identity the recommendations that have not been
followed; and
give reasons for not following them
Refer to Exhibit 1.4 on page 23Essential corporate

governance principles identified by the ASX

1-41
Process of Australia adopting IFRSs

In 2002 Financial Reporting Council decided to
commit Australia effectively to adopting accounting
standards issued by the International Accounting
Standards Board (IASB)
The standards released by the IASB are now
referred to as International Financial Reporting
Standards (IFRSs)where previously they were
referred to as International Accounting Standards
(IASs)

1-42

(cont.)
Catalyst to adopting IFRSs within Australia (a
directive of the FRC) was the decision by European
Union that all listed companies within Union should
adopt IASB standards by 1 January 2005 for the
purposes of preparing consolidated financial reports,
in order to support the single market objective
European Union is to adopt IFRSs directly without
modification

1-43

(cont.)
In Australia: IFRSs are converted into Australian (AASB)
accounting standards, each bearing an AASB prefix
Requirement for reporting under IFRS equivalents is extremely
broadin Australia it applies to all reporting entities under the
Corporations Act, listed and unlisted as well as private and
publicunlike in Europe where IFRSs are mandatory for listed
companies only
AASB standards have general applicability to not-for-profit and
local government sectorsmaterial added by AASB that
describes the scope and applicability to the Australian context
Refer to Table 1.1, p. 24AASB accounting standards and
equivalent IAS/IFRS accounting standards. Remember, new
standards are continuously being released and existing
accounting standards are frequently revised. All standards can
be downloaded from the AASB website

1-44

(cont.)
In Australia a number of options under IFRSs are
more restrictedbut compliance with AASB
standard means compliance with IFRS
Additional disclosures required
AASB issuing standards to match IFRSs, and to
cover areas not addressed by IASB

1-45

(cont.)
The adoption of IFRSs has meant significant changes post-2005 in
some standards and minor changes in others. Significant changes
include:
Intangible assetsresearch, brand names, mastheadsnow
expensed and not capitalised
Revaluation of intangible assets greatly restricted, only if there is
an active market for assets and associated prices are publicly
available
Amortisation of goodwill abolishedreplaced by requirement that
annual test be undertaken to determine whether value of goodwill
is impaired (impairment testing)
Revaluation of property, plant and equipment to be done on
asset-by-asset basis and not by class of assets for companies

1-46

(cont.)
Post-2005 changes (cont.)
Classification of revenues restricted to inflows that
relate to ordinary activities of organisation, e.g. sales
of assets other than inventory to be classified as
gains or losses in income statement
Prior period errorsfinancial statements to be
adjusted as if error had not occurred, i.e. opening
balances amended retrospectively
Tests of classifying items as equity vs liability more
stringent, i.e. items previously classified equity might
now be disclosed as liabilities
.

1-47

(cont.)
Numbering system to be used for AASB standards
1. AASB standards 199 series
Where a new IFRS is issued its number will be used
by the AASB, e.g. IFRS 1 becomes AASB 1
2. AASB standards 100999 series
Where an equivalent to an existing or improved IAS
is issued, e.g. AASB 101 corresponds to IAS 1
3. AASB standards 1000 + series
Applies to standards on the public or not-for-profit
sectors or for areas of domestic application only.
Also applies to AASB standards that are maintained
as part of the post-2005 standards

1-48
More changes ahead as IFRSs are

converged with standards issued by the
FASB?
The US has not adopted IFRSs (as yet)

Currently a projectConvergence Projectis being
jointly undertaken by the IASB and FASB to
converge IFRS and FASB released accounting
standards
We can expect many changes in accounting
standards over the next few years as a result of the
convergence projectand some of these changes
will be significant!

1-49
Structure of the International

Accounting Standards Board
Given the direct relevance of the IASB to Australia, Australian
accountants should know of its structure
IASB comprises 14 individuals: 12 full time, 2 part time (although
this is expected to increase in coming years)
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 nine board members if there are
fewer than 16 members, or by 10 members if there are 16
members
Other decisions, e.g. the issue of Draft Statements of Principles
or Discussion Papers and agenda decisions, require a simple
majority of Board members present at a meeting attended by 50%
or more
The IASC Foundation oversees the activities of the IASB

1-50
Structure of the IASB (cont.)

Board has full control over technical agenda
On publication of a standard, also publishes a Basis
for Conclusions to explain publicly how conclusions
were reached, background information to assist
application, and dissenting opinions. These are
available on the AASB website
IASB has an International Financial Reporting
Interpretations Committee
The official interpretative arm of the IASB
Provides guidance on issues not covered in IFRSs
Provides interpretations of existing requirements within
IFRSs
Interpretations have the force of law

1-51
International cultural differences and the

harmonisation of accounting standards
Values inherent in accounting subculture influenced
by society-wide values
Accounting systems cannot be considered to be
culture free
Should different countries with varying cultural
values adopt internationally uniform accounting
practices?

1-52
Use and role of audit report

Provides an independent opinion of the financial
information regarding:
true and fair view
compliance with the Corporations Act
compliance with accounting standards
Helps establish credibility of the financial information

Auditor not responsible for preparation of financial
information
Note: Auditing standards have legal backing in the
same way that accounting standards have legal
backing
.

1-53
All this regulationis it really

necessary?
Accounting is fairly heavily regulated in Australia by:
the Corporations Act
ASX
Opinions on the need for regulation vary and range

between the free-market perspective and the proregulation perspective

1-54

necessary? (cont.)
Free-market perspective on regulation
There is no need for regulation
Demand and supply forces should be allowed to
operate to 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

1-55

necessary? (cont.)
Free-market perspective on regulation (cont.)
Managers argued to be 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
Market for lemons perspective

1-56

necessary? (cont.)
Pro-regulation perspective
Arguments in favour of a free market where users
are expected to pay for information break down
when we consider consumption of free or public
goods
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 freeriders
In the presence of free-riders true demand is understated

1-57

necessary? (cont.)
Pro-regulation perspective (cont.)
Regulation 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
individuals control of scarce resources required by
the entity

1-58

An Overview of The Australian External Reporting Environment

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Chapter 1

Copyright 2010 McGraw-Hill Australia Pty Ltd

Objectives of this lecture

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Financial accounting defined

Financial accounting is heavily regulated, and a great

Copyright 2010 McGraw-Hill Australia Pty Ltd

Users demand for general-purpose

Copyright 2010 McGraw-Hill Australia Pty Ltd

General- vs special-purpose financial

Comply with the AASB Framework and accounting standards

Special-purpose financial statements

Copyright 2010 McGraw-Hill Australia Pty Ltd

Sources of external financial reporting

Copyright 2010 McGraw-Hill Australia Pty Ltd

Sources of external financial reporting

Copyright 2010 McGraw-Hill Australia Pty Ltd

Sources of external financial reporting

Copyright 2010 McGraw-Hill Australia Pty Ltd

Sources of external financial reporting

Auditing standards made by AUASB require

Copyright 2010 McGraw-Hill Australia Pty Ltd

Australian Securities and Investments

Copyright 2010 McGraw-Hill Australia Pty Ltd

Requires preparation of true and fair financial

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

ASIC (cont.)Materiality (cont.)

Unless there are specific requirements that require

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

If a declaration is made fraudulently, carelessly or

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Declaration by chief executive officer

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ASIC also releases policy statements and guidelines

Copyright 2010 McGraw-Hill Australia Pty Ltd

Australian Accounting Standards

participating in and contributing to the development of

Copyright 2010 McGraw-Hill Australia Pty Ltd

Majority of standards underwent change in 200304

Copyright 2010 McGraw-Hill Australia Pty Ltd

AASB and the role of the FRC

Copyright 2010 McGraw-Hill Australia Pty Ltd

AASB and the FRC (cont.)

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

If a proprietary company is not considered small, it is

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

Copyright 2010 McGraw-Hill Australia Pty Ltd

International Financial Reporting