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BA606 FINANCIAL ACCOUNTING

BA606 FINANCIAL ACCOUNTING. Professor Garry Carnegie Lectures 1 & 2. Lecture 1: Standard setting in Australia. Introduction Accounting standard setting institutional arrangements in Australia The preparation and enforcement of accounting standards and UIG interpretations

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BA606 FINANCIAL ACCOUNTING

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  1. BA606 FINANCIAL ACCOUNTING Professor Garry Carnegie Lectures 1 & 2

  2. Lecture 1: Standard setting in Australia • Introduction • Accounting standard setting institutional arrangements in Australia • The preparation and enforcement of accounting standards and UIG interpretations • Accounting standard setting in future

  3. Introduction • Definition of “accounting standards” • “… a principle that governs current accounting practice and that is used as a reference to determine the appropriate treatment of complex transactions” (The Free Dictionary) • “principle”: “a rule or standard of good behaviour”

  4. Introduction • Main sources of regulation: • Government legislation • Australian Securities Exchange (ASX) Listing Rules • Accounting Standards

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

  6. Introduction • ASX Listing Rules • Publicly listed companies are required to comply with the ASX Listing Rules • The Listing Rules specify detailed financial disclosure requirements such as relating to continuous disclosure, periodic disclosure and additional reporting requirements for mining companies and others

  7. Introduction • Accounting Standards • The Australian Accounting Standards Board (AASB) has the power to make accounting standards (sec 334) • Authority is provided to AASB accounting standards under the Corporations Act 2001 (sec 296)

  8. Accounting standard setting • Early developments in institutional arrangements • Establishment of the Accounting Standards Review Board (ASRB) • Establishment of the AASB • Present standard setting arrangements

  9. Accounting standard setting • Early developments • Accounting methods were the responsibility of the accounting profession • Formation of Australian Accounting Research Foundation (AARF) in 1966 • Formation of the Public Sector Accounting Standards Board (PSASB) in 1983 • Attempts to adopt a common set of accounting standards in public and private sectors

  10. Accounting standard setting • Establishment of ASRB • Created in 1984 • Response to the inability of professional accounting bodies to enforce accounting standards • “Applicable approved accounting standards” were accounting standards that had been approved by the ASRB

  11. Accounting standard setting • Establishment of AASB • Commenced operations on 1 January 1991 and replaced the ASRB • Responsible for “making” accounting standards that have the force of the law • During the 1990s there were two accounting standard setting boards: AASB and PSASB and two sets of accounting standards (AASB and AAS series)

  12. Accounting standard-setting

  13. Accounting standard setting • Present standard setting arrangements • Financial Reporting Council (FRC) • http://www.frc.gov.au • AASB • http://www.aasb.com.au

  14. Accounting standard-setting

  15. Preparation and enforcement • Development of accounting standards and concepts statements • “Due process” • Issue of discussion paper or accounting theory monograph • Exposure drafts of proposed pronouncements • Public hearings from time to time

  16. Preparation and enforcement • International Financial Reporting Standards (IFRS) • In July 2002, the FRC announced its decision to adopt Australian equivalents of the International Accounting Standards (IAS) of the International Accounting Standards Board (IASB) from 1 January 2005 • IFRS, while adopted in Australia with little modification, were issued using the AASB prefix and are commonly referred to AIFRS

  17. Preparation and enforcement • Other accounting pronouncements • Accounting Guidance Releases (Accounting Interpretations) (all issued before 1 January 2005) • Urgent Issues Group (UIG) Interpretations • Accounting Bulletins (effectively superseded from 1 January 2005)

  18. Preparation and enforcement • Authority and enforcement of accounting standards and UIG interpretations • Accounting bodies (Miscellaneous Professional Statement APS 1) • Australian Securities and Investments Commission (ASIC) • Governments

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

  20. Future accounting standard-setting • By 2011 is it estimated that 150 countries will be applying IAS and that US accounting standards [i.e. standards of the Financial Accounting Standards Board (FASB)] will be converged with international standards • By 2006, 75 countries had mandated (i.e. required) the adoption of IAS

  21. Lecture 2: Conceptual framework for financial reporting • Introduction • Development of accounting thought • Australian conceptual framework • Scope of financial reporting • Subject of financial reporting • Objective of financial reporting

  22. Introduction • Double entry bookkeeping dates back to Italy in the 13th and 14th centuries • Accounting thought is just as important as accounting practice • Present day transactions reflect a modern, globalising world • Complex transactions exist and readily emerge • A clear understanding of the nature, purpose and methods of financial reporting are required

  23. Development of accounting thought • Accounting as a University discipline • US Stock market crash in 1929 exposed accounting as a contributor • The US accounting profession responded by seeking to codify accounting principles • The accounting profession in other parts of the world also issued statements of accounting principles

  24. Development of accounting thought • “Official” or “formal” conceptual frameworks for financial reporting emerged from the mid 1980s • What is a “conceptual framework? • “A conceptual framework is a set of interrelated concepts that define the nature, purpose and broad content of general purpose financial reporting”. • “It is the explicit rendition of the thinking of the standard-setting body as it lays down the requirements for general purpose financial reporting” (McGregor, 1990, p. 48 as found in Charter, December).

  25. Australian conceptual framework • The following statements of accounting concepts (SAC) were issued under the former Australian conceptual framework: • SAC1 “Definition of the Reporting Entity” • SAC2 “Objective of General Purpose Financial Reporting” • SAC3 “Qualitative Characteristics of Financial Information” • SAC4 “Definition and Recognition of the Elements of Financial Statements”.

  26. Australian conceptual framework

  27. Australian conceptual framework • Structure of the present Australian conceptual framework: • SAC1 • SAC2 • “Framework for the Preparation and Presentation of Financial Statements” (as the IASB conceptual framework for financial reporting as modified)

  28. Scope of financial reporting • General purpose financial reporting is otherwise known as external reporting • Such reports are intended to provide information to meet the common needs of a diverse range of users who do not have the authority to command the information that they may require from an organisation • Users should be “financially literate”

  29. Scope of financial reporting • The scope of general purpose financial reporting encompasses: • Financial statements • Notes to the financial statements • Supplementary information • Voluntary information

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

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

  32. Objective of financial reporting • What financial information do users need? • SAC2 proposes that users of financial reports need information about the following facets: • Performance • Financial position • Financing and investing, and • Compliance

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