acc100 introduction to accounting · constraints on relevant and reliable information • costs -...
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ACC100 Introduction to
Accounting
2© Study Group Australia Pty Limited, SGA1286-F2/10/12
Week 3 – Accounting Regulation
Chapter 10 - Regulation and the Conceptual
Framework
Learning Outcomes
On completion of this session, you should be able to:
• outlining the qualitative characteristics of external financial reports which
enable them to be more useful in decision making
• explain the ‘reporting entity’ concept
• explain and being able to apply the definitions of the accounting elements –
assets, liabilities, equity, income and expenses
• explain how to apply the recognition criteria to each accounting element
• identify the main world-wide and Australian regulatory bodies for financial
information.
3© Study Group Australia Pty Limited, SGA1286-F2/10/12
Accounting Principles
Financial reporting for external users of accounting information is
regulated by a series of standards.
Consistency between standards has been at least partially achieved by
applying agreed accounting concepts.
These accounting concepts or theories are collectively referred to as
the Conceptual Framework.
Accounting Regulation
1. Australian Accounting Standards Board (AASB)
2. Australian Securities and Investment Commission (ASIC)
3. Australian Securities Exchange (ASX)
4. International Accounting Standards Board (IASB)
5. The IFRS Interpretations Committee (IFRIC)
6. Financial Accounting Standards Board (FASB)
7. The Asian-Oceanic Standard-setters Group (AOSSG)
Regulation And Development Of Accounting
Standards
History of regulation
• GAAP ( generally accepted accounting principles). Rules, practices
and procedures generally accepted by accounting profession and
business community.
• Separation of ownership and control
• Different levels of management arise from increasing complexity
• Introduction of legislation to protect shareholders ( need for more rigid,
compulsory accounting standards rather than GAAP)
• International Accounting Standards
Financial Reporting Council (FRC)
• Overseer and advisory body to AASB ( established by the Australian
government)
• Requires AASB to adopt IFRSs ( International Financial Reporting
Standards) issued by IASB
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Regulation And Development Of Accounting
Standards
Australian Accounting Standards Board
• Issues accounting standards ( developed within the context of IFRSs)
• Legislative backing to standards - Corporations Law
Australian Securities & Investment Commission (ASIC)
• Established by Australian government in 1989.
• Administers company law throughout Australia.
• Ensures that companies comply with AASB’s – corporate watchdog.
• Maintain, facilitate and improve the performance of the financial system
and entities in it
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Regulation And Development Of
Accounting Standards
Australian Stock Exchange (ASX)• Concerned with improving disclosure in financial reports of companies listed
on the ASX. Listing Rules must be followed to trade on the ASX – these
include disclosure requirements.
International Accounting Standards Board (IASB)
The IFRS Interpretations Committee (IFRIC)
Financial Accounting Standards Board (FASB)
• Responsible for issuing accounting standards in USA. ( Working on
converging standards with IASB since 2002)
The Asian-Oceanic Standard-Setters Group (AOSSG)
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The Conceptual Framework
Accounting information must be consistent and meet needs of users and
preparers.
For information to be useful it must be :
• relevant for economic decision making
• comparable with prior periods
• understandable
Accountants need a framework or theory to guide in developing accounting
standards.
Conceptual framework intended to:
• Develop logical, consistent standards
• Provide guidance where no standard exists
• Enhance understanding of users
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Background To The Conceptual Framework
1. Set boundaries of financial reporting ( ie only general purpose
financial reporting).
2. Define reporting entity ( to determine which entities should prepare
GPFRs).
3. Establish objective for financial reporting ( identify users, information
needs and reports needed).
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BACKGROUND TO THE CONCEPTUAL
FRAMEWORK
4. Develop qualitative characteristics. Determine:
• characteristics of relevance and reliability,
• elements of reporting process ie assets, liabilities, equity, income,
expense,
• when to recognise and how to measure the elements.
In the 1990s Australia produced SACs 1 – 4.
SACs 3 & 4 replaced by The Conceptual Framework for Financial
Reporting ( the Conceptual Framework).
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The Reporting Entity
Entity in which it is reasonable to expect existence of users who depend on
general-purpose financial reports.
Indicators of their existence
• Separation of management from economic interest
• Economic or political importance/influence
• Financial characteristics.
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The Reporting Entity
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Objectives Of General-purpose Financial
Reporting
Provide information useful to users.
Discharge of accountability by preparers.
Adequate disclosure
• Performance
• Financial position
• Compliance.
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Qualitative Characteristics Of Financial
Information
Fundamental Characteristics
Relevance
• Will make a difference in a decision of an economic nature made by users
• It will help users form predictions about the outcome of events
• It will confirm or change their previous evaluations
• It is material.
Faithful Representation (Reliability)
• It is complete, neutral and free from material error.
• Economic substance over form.
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Qualitative Characteristics Of Financial
Information
Enhancing Qualitative Characteristics
• Comparability - Users can identify similarities in and differences
between two sets of economic data
• Verifiability
• Timeliness
• Understandability-
• Expect a reasonable knowledge of business and economic activity and
financial accounting.
• Study the information with reasonable diligence.
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Qualitative characteristics
Materiality
• The extent to which omission or misstatement would be misleading.
Constraints on relevant and reliable information
• Costs - Benefits of providing information must justify cost.
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Assumptions of Accounting Information
Accounting Entity Assumption
• Need to identify clearly boundaries of entity being accounted for
Accrual Basis Assumption
• Effects of transactions and events recognised when they occur
Going Concern Assumption
• Entity will continue to operate into the future
Period Assumption
• Profit is determined for particular periods of time in order to be comparable
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Definition Of Elements In Financial Statements
• Assets
• Liabilities
• Equity
• Income
• Expenses
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Definition Of A Liability
Current
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.
Proposed
A present economic obligation for which the entity is the obligor.
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Definition Of An Asset
Current
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.
Proposed
A present economic resource to which the entity has a right or other access
that others do not have.
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Definition Of Equity
Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
Equity = Assets - Liabilities
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Definition Of Income
Income is 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
Income is made up of Revenue and Gains
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Definition Of Expenses
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.
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Recognition Of The Elements
Assets and liabilities are recognised when the associated flow is
• Probable
- More likely than less likely (p=>0.5)
• Reliably Measurable
- Estimates are acceptable
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Recognition Of The Elements
Income recognition
Income is recognised in the income statement when an increase in future
economic benefits relating to an increase in an asset or decrease in a liability
can be measured reliably.
Specific recognition criteria for:
• Revenue from sale of goods
• Revenue from rendering services
• Revenue from interest, royalties and dividends.
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Recognition Of The Elements
Expense recognition
Expenses are recognised in the income statement when a decrease in future
economic benefits relating to a decrease in an asset or increase in a liability
can be measured reliably.
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Measurement
Alternatives:
• Historical cost
• Current cost
• Realisable or settlement value
• Present value
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Measurement cont’d
Emphasis is placed on measuring assets and liabilities.
• assets should not be overstated
• liabilities should not be understated.
Measurement basis most commonly adopted is historical cost (at least
initially).
Specific rules apply over time.
e.g. Inventory - measured initially at cost and then over time at the lower of cost and
net realisable value (therefore does not overstate the value of the asset).
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Concepts Of Capital
Financial capital
• Net assets or equity of an entity
Physical capital
• Operating capability of the assets
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Introduction to Perdisco
Discussion of Perdisco requirements and set up.
To be covered in more detail during tutorial
31
Summary
On completion of this session, you should now be able to:
• Outlining the qualitative characteristics of external financial reports which
enable them to be more useful in decision making
• Understand the ‘reporting entity’ concept
• Understand and being able to apply the definitions of the accounting
elements – assets, liabilities, equity, income and expenses
• Understand how to apply the recognition criteria to each accounting element
• Identify the main world-wide and Australian regulatory bodies for financial
information.
32© Study Group Australia Pty Limited, SGA1286-F2/10/12