lectures 1

BA606 FINANCIAL BA606 FINANCIAL ACCOUNTINGACCOUNTING

Professor Garry CarnegieProfessor Garry Carnegie

Lectures 1 & 2Lectures 1 & 2

Lecture 1: Standard setting in Lecture 1: Standard setting in AustraliaAustralia

IntroductionIntroduction

Accounting standard setting institutional Accounting standard setting institutional arrangements in Australiaarrangements in Australia

The preparation and enforcement of The preparation and enforcement of accounting standards and UIG accounting standards and UIG interpretationsinterpretations

Accounting standard setting in futureAccounting standard setting in future


Definition of “accounting standards”Definition of “accounting standards”

“… “… a principle that governs current a principle that governs current accounting practice and that is used as a accounting practice and that is used as a reference to determine the appropriate reference to determine the appropriate treatment of complex transactions” (The treatment of complex transactions” (The Free Dictionary)Free Dictionary)

““principle”: “a rule or standard of good principle”: “a rule or standard of good behaviour”behaviour”


Main sources of regulation:Main sources of regulation:– Government legislationGovernment legislation– Australian Securities Exchange (ASX) Listing Australian Securities Exchange (ASX) Listing

RulesRules– Accounting StandardsAccounting Standards


Government legislationGovernment legislationThe Corporations Act 2001 requires the The Corporations Act 2001 requires the preparation of financial reports by all preparation of financial reports by all disclosing entities, all public companies, all disclosing entities, all public companies, all large proprietary companies and all large proprietary companies and all registered schemes (sec 292)registered schemes (sec 292)These financial reports are to comply with These financial reports are to comply with accounting standards and present a true accounting standards and present a true and fair view (sec 296 and sec 297)and fair view (sec 296 and sec 297)


ASX Listing RulesASX Listing RulesPublicly listed companies are required to Publicly listed companies are required to comply with the ASX Listing Rulescomply with the ASX Listing RulesThe Listing Rules specify detailed financial The Listing Rules specify detailed financial disclosure requirements such as relating disclosure requirements such as relating to continuous disclosure, periodic to continuous disclosure, periodic disclosure and additional reporting disclosure and additional reporting requirements for mining companies and requirements for mining companies and othersothers


Accounting StandardsAccounting Standards

The Australian Accounting Standards The Australian Accounting Standards Board (AASB) has the power to make Board (AASB) has the power to make accounting standards (sec 334)accounting standards (sec 334)

Authority is provided to AASB accounting Authority is provided to AASB accounting standards under the Corporations Act standards under the Corporations Act 2001 (sec 296)2001 (sec 296)

Accounting standard settingAccounting standard setting

Early developments in institutional Early developments in institutional arrangementsarrangements

Establishment of the Accounting Establishment of the Accounting Standards Review Board (ASRB)Standards Review Board (ASRB)

Establishment of the AASBEstablishment of the AASB

Present standard setting arrangementsPresent standard setting arrangements


Early developmentsEarly developments– Accounting methods were the responsibility of Accounting methods were the responsibility of

the accounting professionthe accounting profession– Formation of Australian Accounting Research Formation of Australian Accounting Research

Foundation (AARF) in 1966Foundation (AARF) in 1966– Formation of the Public Sector Accounting Formation of the Public Sector Accounting

Standards Board (PSASB) in 1983Standards Board (PSASB) in 1983– Attempts to adopt a common set of Attempts to adopt a common set of

accounting standards in public and private accounting standards in public and private sectorssectors


Establishment of ASRBEstablishment of ASRB– Created in 1984Created in 1984– Response to the inability of professional Response to the inability of professional

accounting bodies to enforce accounting accounting bodies to enforce accounting standardsstandards

– ““Applicable approved accounting standards” Applicable approved accounting standards” were accounting standards that had been were accounting standards that had been approved by the ASRBapproved by the ASRB


Establishment of AASBEstablishment of AASB– Commenced operations on 1 January 1991 Commenced operations on 1 January 1991

and replaced the ASRBand replaced the ASRB– Responsible for “making” accounting Responsible for “making” accounting

standards that have the force of the lawstandards that have the force of the law– During the 1990s there were two accounting During the 1990s there were two accounting

standard setting boards: AASB and PSASB standard setting boards: AASB and PSASB and two sets of accounting standards (AASB and two sets of accounting standards (AASB and AAS series)and AAS series)

Accounting standard-settingAccounting standard-setting


Present standard setting arrangementsPresent standard setting arrangements– Financial Reporting Council (FRC)Financial Reporting Council (FRC)– http://www.frc.gov.auhttp://www.frc.gov.au– AASBAASB– http://www.aasb.com.auhttp://www.aasb.com.au

Accounting standard-settingAccounting standard-setting

Preparation and enforcementPreparation and enforcement

Development of accounting standards and Development of accounting standards and concepts statementsconcepts statements– ““Due process”Due process”– Issue of discussion paper or accounting Issue of discussion paper or accounting

theory monographtheory monograph– Exposure drafts of proposed pronouncementsExposure drafts of proposed pronouncements– Public hearings from time to timePublic hearings from time to time


International Financial Reporting International Financial Reporting Standards (IFRS)Standards (IFRS)– In July 2002, the FRC announced its decision In July 2002, the FRC announced its decision

to adopt Australian equivalents of the to adopt Australian equivalents of the International Accounting Standards (IAS) of International Accounting Standards (IAS) of the International Accounting Standards Board the International Accounting Standards Board (IASB) from 1 January 2005(IASB) from 1 January 2005

– IFRS, while adopted in Australia with little IFRS, while adopted in Australia with little modification, were issued using the AASB modification, were issued using the AASB prefix and are commonly referred to AIFRSprefix and are commonly referred to AIFRS


Other accounting pronouncementsOther accounting pronouncements– Accounting Guidance Releases (Accounting Accounting Guidance Releases (Accounting

Interpretations) (all issued before 1 January Interpretations) (all issued before 1 January 2005)2005)

– Urgent Issues Group (UIG) InterpretationsUrgent Issues Group (UIG) Interpretations– Accounting Bulletins (effectively superseded Accounting Bulletins (effectively superseded

from 1 January 2005) from 1 January 2005)


Authority and enforcement of accounting Authority and enforcement of accounting standards and UIG interpretationsstandards and UIG interpretations– Accounting bodies (Accounting bodies (Miscellaneous Miscellaneous

Professional Statement APS 1Professional Statement APS 1))– Australian Securities and Investments Australian Securities and Investments

Commission (ASIC)Commission (ASIC)– GovernmentsGovernments

Future accounting standard-settingFuture accounting standard-setting

At a public lecture held in Melbourne in the second half At a public lecture held in Melbourne in the second half of 2007, Sir David Tweedie, Chairman of the IASB, of 2007, Sir David Tweedie, Chairman of the IASB, provided directions for international accounting standard-provided directions for international accounting standard-setting, stating that standards should:setting, stating that standards should:- be based on core principles rather than be rule-based- be based on core principles rather than be rule-based- contain no exceptions- contain no exceptions- exhibit no inconsistencies- exhibit no inconsistencies- require interpretation through the application of - require interpretation through the application of professional judgement (as the hallmark of a member of professional judgement (as the hallmark of a member of a profession)a profession)- provide minimum guidance (i.e. interpretations)- provide minimum guidance (i.e. interpretations)

Future accounting standard-settingFuture accounting standard-setting

By 2011 is it estimated that 150 countries By 2011 is it estimated that 150 countries will be applying IAS and that US will be applying IAS and that US accounting standards [i.e. standards of the accounting standards [i.e. standards of the Financial Accounting Standards Board Financial Accounting Standards Board (FASB)] will be converged with (FASB)] will be converged with international standardsinternational standards

By 2006, 75 countries had mandated (i.e. By 2006, 75 countries had mandated (i.e. required) the adoption of IASrequired) the adoption of IAS

Lecture 2: Conceptual framework Lecture 2: Conceptual framework for financial reportingfor financial reporting


Development of accounting thoughtDevelopment of accounting thought

Australian conceptual frameworkAustralian conceptual framework

Scope of financial reportingScope of financial reporting

Subject of financial reportingSubject of financial reporting

Objective of financial reportingObjective of financial reporting


Double entry bookkeeping dates back to Italy in Double entry bookkeeping dates back to Italy in the 13the 13thth and 14 and 14thth centuries centuries

Accounting thought is just as important as Accounting thought is just as important as accounting practiceaccounting practice

Present day transactions reflect a modern, Present day transactions reflect a modern, globalising worldglobalising world

Complex transactions exist and readily emergeComplex transactions exist and readily emerge

A clear understanding of the nature, purpose A clear understanding of the nature, purpose and methods of financial reporting are requiredand methods of financial reporting are required


Accounting as a University disciplineAccounting as a University discipline

US Stock market crash in 1929 exposed US Stock market crash in 1929 exposed accounting as a contributoraccounting as a contributor

The US accounting profession responded The US accounting profession responded by seeking to codify accounting principlesby seeking to codify accounting principles

The accounting profession in other parts of The accounting profession in other parts of the world also issued statements of the world also issued statements of accounting principlesaccounting principles


““Official” or “formal” conceptual frameworks for Official” or “formal” conceptual frameworks for financial reporting emerged from the mid 1980sfinancial reporting emerged from the mid 1980s

What is a “conceptual framework?What is a “conceptual framework?– ““A conceptual framework is a set of interrelated A conceptual framework is a set of interrelated

concepts that define the nature, purpose and broad concepts that define the nature, purpose and broad content of general purpose financial reporting”.content of general purpose financial reporting”.

– ““It is the explicit rendition of the thinking of the It is the explicit rendition of the thinking of the standard-setting body as it lays down the standard-setting body as it lays down the requirements for general purpose financial reporting” requirements for general purpose financial reporting” (McGregor, 1990, p. 48 as found in (McGregor, 1990, p. 48 as found in CharterCharter, , December).December).


The following statements of accounting The following statements of accounting concepts (SAC) were issued under the concepts (SAC) were issued under the former Australian conceptual framework:former Australian conceptual framework:– SAC1 “Definition of the Reporting Entity”SAC1 “Definition of the Reporting Entity”– SAC2 “Objective of General Purpose SAC2 “Objective of General Purpose

Financial Reporting”Financial Reporting”– SAC3 “Qualitative Characteristics of Financial SAC3 “Qualitative Characteristics of Financial

Information”Information”– SAC4 “Definition and Recognition of the SAC4 “Definition and Recognition of the

Elements of Financial Statements”.Elements of Financial Statements”.


Structure of the present Australian Structure of the present Australian conceptual framework:conceptual framework:– SAC1SAC1– SAC2SAC2– ““Framework for the Preparation and Framework for the Preparation and

Presentation of Financial Statements” (as the Presentation of Financial Statements” (as the IASB conceptual framework for financial IASB conceptual framework for financial reporting as modified)reporting as modified)


General purpose financial reporting is General purpose financial reporting is otherwise known as external reportingotherwise known as external reporting

Such reports are intended to provide Such reports are intended to provide information to meet the common needs of information to meet the common needs of a diverse range of users who do not have a diverse range of users who do not have the authority to command the information the authority to command the information that they may require from an organisationthat they may require from an organisation

Users should be “financially literate”Users should be “financially literate”


The scope of general purpose financial The scope of general purpose financial reporting encompasses:reporting encompasses:– Financial statementsFinancial statements– Notes to the financial statementsNotes to the financial statements– Supplementary informationSupplementary information– Voluntary informationVoluntary information

Subject of financial reportingSubject of financial reporting

The conceptual framework is concerned with The conceptual framework is concerned with defining and explaining the concept of the defining and explaining the concept of the “reporting entity”“reporting entity”

The concept of the reporting entity adopted in The concept of the reporting entity adopted in SAC1 requires that “individual reporting entities SAC1 requires that “individual reporting entities be identified by reference to the existence of be identified by reference to the existence of external users who are dependent on general external users who are dependent on general purpose financial reports for information for purpose financial reports for information for making and evaluating resource allocation making and evaluating resource allocation decisions” (para. 12)decisions” (para. 12)


People have objectives not objectsPeople have objectives not objectsThe conceptual framework is an innate The conceptual framework is an innate objectobjectNevertheless, SAC2 states that “the Nevertheless, SAC2 states that “the objective of general purpose financial objective of general purpose financial reporting is to provide information to users reporting is to provide information to users that is useful for making and evaluating that is useful for making and evaluating decisions about the allocation of scarce decisions about the allocation of scarce resources” (para. 26)resources” (para. 26)


What financial information do users need?What financial information do users need?

SAC2 proposes that users of financial SAC2 proposes that users of financial reports need information about the reports need information about the following facets:following facets:– PerformancePerformance– Financial positionFinancial position– Financing and investing, andFinancing and investing, and– ComplianceCompliance

lectures 1

Documents

aasb accounting standards

accounting standards

us accounting standards

future accounting standard

current accounting practice

international standards

standard of good behaviour

establishment of aasb