1 copyright 2010 2007 mcgraw-hill australia pty ltd ppts t/a accounting: what the numbers mean 2e...

Copyright 2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

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CHAPTER 9

Governance and Other Information


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• Discuss the significance of corporate governance.• Discuss different types of corporate governance issues.• Explain the meaning and content of the Independent

auditor’s report.• Explain the different types of reporting requirements.• Describe how the explanatory notes are an integral part of

the financial statements.• Describe the nature and content of disclosures relating to

accounting changes and events subsequent to the balance sheet date.

• Describe what is included in the five-year summary of financial information,

Learning Objectives


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• What is Corporate governance?• What was the HIH Royal Commission about?• What are the ASX principles of good corporate

governance?• What is CLERP and what changes has it

introduced?

Overview


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Corporate GovernanceAbility of a company to:

Self-control Self-regulate

Fully disclose information to the market place and to investors.

The strategies, behaviours and actions of a company, its directors, its managers and its

employees that affect the success or otherwise of a business.


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Corporate Governance

Recent focus on corporate governance due to high level of corporate collapses in the

late 1980s, 1990s and again in the early 2000s.

Recent corporatecollapses in Australia:• HIH• Harris Scarfe• One.Tel• Ansett Airlines


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Corporate GovernanceFailure of corporate governance in recent years has led to a series of government and non- government reports and legislation.

HIH Royal Commission

CLERP

ASX Principles of Good Corporate

Governance

In USSarbanes-Oxley Act

(SOX)


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• Focus on behavioural issues relating to the management of the organisation and boardroom culture,

• Did not recommend legislative changes (imposition of governance systems or structures is fraught with danger).



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• After a lengthy inquiry, report released in April 2003.

• The collapse of HIH was not only due to a series of corporate mistakes and errors of judgement but also due to the overall mismanagement by HIH directors which exposed an unsound management culture.

• Report focused on the role of boards and organisational culture.



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• ASX took a proactive stance and issued guidelines in January 2003 for publicly listed companies for best practice in governance and stewardship.

• More regulated and focused on disclosure of actual governance against a framework of governance practices.

• Compliance not mandatory but top 500 companies must report on the extent of their compliance with the recommendations and must show the reasons for not adopting any particular recommendation.

ASX Principles of Good Corporate Governance


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1. Lay solid foundations for management and oversight.

2. Structure the board to add value.

3. Promote ethical and responsible decision-making.

4. Safeguard integrity in financial reporting.

5. Make timely and balanced disclosure of all material matters.



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6. Respect the rights of shareholders.

7. Recognise and manage risk.

8. Encourage enhanced performance.

9. Remunerate fairly and responsibly.

10. Recognise the legitimate interests of stakeholders.



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Corporate GovernanceCorporate Law Economic Reform Program

Legislative changes were not significant.

CLERP 9 gives ASIC (Australian Securities and Investments Commission) the power to penalise and fine companies (to $100,000) for breaches of the disclosure rules.

CLERP


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Financial Reporting MisstatementsWhat is going on?Seven financial shenanigans- H Schilit:

1. Recording revenue too soon or with questionable quality.

2. Recording bogus (not real) revenue.

3. Boosting income with one-time gains.

4. Shifting current expenses to a later or earlier period.

5. Failing to record or improperly reducing liabilities.

6. Shifting current revenue to a later period.

7. Shifting future expenses to the current period as a special charge.

Behaviours contrary to

GAAPS


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Other Information- for Financial Assurance

To provide full disclosure about companies

• Independent auditor’s report.

• Explanatory notes to the financial statements.

• Management discussion and analysis.

• Five-year summary of financial data.


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Independent Auditor’s Report

• Addressed to members of the company.

• Confirms fair presentation of the financial statements.

• One component that can be relied upon to provide unbiased information to shareholders.

• Three elements:


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1. Identity of reports being audited:• Income statement• Balance sheet• The cash flow statement• Annual report explanatory notes• Director’s declaration• Remuneration disclosure in the

director’s report.


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Independent Auditor’s Report2. Scope: nature and extent of auditor’s work.• Audit Report must specifically state that the auditor is independent.• Reasonable assurance on whether the financial statements are free from material misstatements.

• No guarantee (responsibility of management) that they are free from fraudulent transactions or from the affects of errors.

• Audit work involves tests (sampling).


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3. Opinion:

That the financial statements are presented fairly and are in accordance with accounting standards and other mandatory professional reporting and statutory requirements.


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Reporting Requirements

The requirement to prepare financial reports and disclose information through the content of financial

reports is determined by the classification of the company.

PROPRIETARY COMPANY

Large Pty Company

Small Pty Company

PUBLIC COMPANY

(Mostly) listed on the stock exchange


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Small Pty CompanyA proprietary company is small if it satisfies at least two of the following criteria:

1. Consolidated gross revenue for the financial year is less than $10 million.

2. Consolidated gross assets at the end of the financial year are less than $5 million.

3. The consolidated group has fewer than the equivalent of 50 full-time employees at the end of the financial year.


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Small Pty CompanyDraft legislation before parliament in 2007 proposes some changes to these limits:

1. Consolidated gross revenue for the financial year is less than $25 million.

2. Consolidated gross assets at the end of the financial year are less than $12.5 million.


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Small Pty Company

Fewer reporting requirements:

Does not have to prepare an annual financial report or have it audited in accordance with the Corporations Act 2001.

If the proprietary company is not a small company then it will be classified as large.


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Reporting RequirementsPublic CompanyLarge Pty Company

• Must prepare an annual financial report, have itaudited, and lodge it with the Australian Securities and Investments Commission (ASIC).

• Other documents must be lodged with ASIC.

• The complete financial report, a full financial report and a concise report,

• The directors’ report, and

• The auditor’s report on the financial report.

and

• must also comply with reporting requirements of the ASX.


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Annual report


Full financial report

• An income statement• A balance sheet • A statement of cash flows • The director’s report • A statement by the auditor• A statement that the

report is a concise report.

Concise financial report

must contain:

sometimes called:


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Explanatory Notes to the Financial Statements

• Important for a better understanding and interpretation of the financial statements• Disclose details of specific financial statement items• Presented in the same sequence as in the financial statements.


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Explanatory Notes

Significant accounting policies:

• Disclosure of the specific practices being followed by the firm.

• To ensure information is comparable and understandable.

• Reference to accounting standards or other pronouncements.


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Explanatory Notes

Share options and share purchase plans:

• Plans whereby officers and key employees are given an option to buy shares in the company at some time in the future, at a price equal to the market price of the shares when the option is granted.

• Provides incentives to these officers and key employees to increase the profitability of the firm so that the share price will rise.

• Details must now be disclosed in notes.


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Explanatory Notes

Changes to accounting principles:

• Changes that have a material affect on the comparability of the current period financial statements with those of prior periods.

• From 1 January 2005 all companies had to comply with International Financial Reporting Standards (IFRS). For some companies this was a significant change and for all reporting entities it required a restatement of comparative figures.


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Explanatory Notes

Business combinations:

• Mergers, acquisitions, dispositions or de-mergers.

• Description of transaction and affect on financial statements.


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Explanatory Notes

Contingencies and commitments:

• Most of these will have a negative impact on the financial statements if they materialise.

• Results not known and so firm is not definitively committed yet.

• Full disclosure required in notes in some cases (e.g. pending legal action, firm acts as a guarantor of the indebtedness of another entity or where firm has made commitments to purchase a significant amount of plant).


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Explanatory NotesEvents subsequent to balance sheet date:• If subsequent to the balance sheet date, a

significant event occurs that will have a material impact on the balance sheet or income statement, an explanation must be provided in the notes (e.g. sale of a significant part of the company’s assets).


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Explanatory Notes

Segment information:

• Segments may reflect different lines of business or different geographical areas.

• Disclosure of business segments and related information permits judgements about the impact of factors that might influence specific sectors or geographic areas.


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Management Discussion and Analysis

Many annual reports include Many annual reports include a narrative section by a narrative section by

management.management.• Description of the firm’s activities for the

year.

• Comments about the firm’s financial condition and results of operations.

• Not included in the scope of the independent auditor’s report.


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Five-year Summary of Financial Data

Provided for at least 5 most recent years:• Key income statement data.• Significant ratios.• Earnings and dividends per share.• Average number of shares outstanding.• Other operating statistics.• Year end data from balance sheet.• Year end market price of ordinary shares.

This summary is not included in the scope of the independent auditor’s report.

1 copyright 2010 2007 mcgraw-hill australia pty ltd ppts t/a accounting: what the numbers mean 2e...

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