Comprehension questions

Solutions Manual

to accompany

Understanding Australian Accounting Standards

Janice Loftus, Ken Leo, Ruth Picker, Victoria Wise, Kerry Clark

By Janice Loftus

(For Complete File Download Link at the end of this File) 1 / 4

Chapter 1: Accounting regulation and the Conceptual Framework

© John Wiley and Sons Australia, Ltd 2013 1.1 Chapter 1 – Accounting regulation and the Conceptual Framework

Comprehension questions

• What are they key sources of regulation in Australia for a listed

company?

The key sources of regulation for a listed company in Australia are:

 The Corporations Act, which is administered by the Australian Securities and Investments Commission  Australian Accounting Standards and the Conceptual Framework, issued by the Australian Accounting Standards Board  Australian Securities Exchange Listing Rules.

• Describe the standard-setting process of the AASB.

Technical issues may be identified sources within Australia, such as members or staff of the Australian Accounting Standards Board or other stakeholders, or by international sources, such as the International Accounting Standards Board. If an item is added to the Board’s agenda, it may research the issue, consider solutions, and consult with stakeholders. Then the AASB may proceed with the issue of exposure drafts, invitations to comment, draft interpretations and discussion papers. For standards intended for profit-seeking entities, the exposure drafts issued by the AASB typically incorporate exposure drafts issued by the IASB, along with Australian- specific matters for comment as applicable. The consultation process may involve focus groups and roundtable discussions with stakeholders and responses to exposure drafts. The AASB may also draw on project advisory panels and interpretation advisory panels.

• Distinguish between the roles of the FRC and the AASB.

Both the FRC and the AASB are involved in standard setting. The AASB is responsible for developing a conceptual framework and issuing accounting standards.Another function of the AASB is to participate in and contribute to the development of a global set of accounting standards. The FRC’s role in standard setting is essentially a broad oversight function; it oversees the processes for setting accounting standards. The FRC’s oversight function also extends to the auditing standard setting process, including monitoring the effectiveness of auditor independence requirements in Australia.The FRC appoints members of the AASB and approves its priorities, business plans, budgets and staffing arrangements. The FRC determines the AASB’s broad strategic direction (e.g., the FRC directed the AASB to adopt International Financial Reporting Standards, such that compliance with Australian Accounting Standards by profit seeking entities results in compliance with IFRS. The FRC advises the AASB and provides feedback on policy matters.

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Solution Manual to accompany Understanding Australian Accounting Standards © John Wiley and Sons Australia, Ltd 2013 1.2

• How does the IASB influence financial reporting in Australia?

One of the functions of the AASB is to participate in and contribute to the development of a global set of accounting standards, effectively, IFRS. The AASB may formulate an accounting standard by issuing the text of an international accounting standard (s. 227(4)). In fact the issue of an accounting standard by the IASB would result in a corresponding and consistent standard being issued by the AASB. The text of the international accounting standard may be modified to the extent necessary to take account of the Australian legal or institutional environment and, in particular, to ensure that any disclosure and transparency provisions in the standard are appropriate to the Australian legal or institutional environment. This is often reflected in modifications to standards for application by not-for-profit entities in Australia.

• Explain the potential benefits and problems that can result from the

adoption of IFRSs in Australia.

The adoption of Australian Accounting Standards that are equivalent of IFRSs may be viewed as implementing development of a global set of accounting standards. It also reflects the view that doing so is, on the whole, in the best interests of the Australian economy. These benefits may manifest in reduce cost of capital and reduced reporting costs for Australian companies that seek finance in global capital markets. It also may make listing in Australian more attractive to multinational corporations because Australian investors’ will have greater understanding of financial statements prepared in accordance with IFRSs, to the extent that multinationals report under IFRSs, which is increasing a requirement or option in securities exchanges around the world.The problem that can result from the adoption of IFRSs in Australia is the ‘one size fits all’ approach. IFRSs were initially drafted to be used solely by large, for-profit entities. In Australia, however, they have been applied across the board to all entities, including small and medium-sized entities, not-for-profits and governments. The AASB has now recognised this issue and has implemented a differential system — reduced disclosure regime — whereby certain entities may not have to abide by the full requirements of Australian equivalents to IFRSs.

• What is the difference between Australian Accounting Standards and

IFRSs?

While IFRSs are developed for application by profit-seeking entities, Australian Accounting Standards are also applied by not-for-profit entities in the public and private sectors. Accordingly Australian Accounting Standards may include additional or different requirements or exemptions for not-for-profit entities. Australian Accounting Standards also cover additional matters, such as disclosure requirements (typically in a separate standard) on matters not covered by IFRSs.

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Chapter 1: Accounting regulation and the Conceptual Framework

© John Wiley and Sons Australia, Ltd 2013 1.3

• Specify the objectives of general purpose financial reporting, the nature

of users, and the information to be provided to users to achieve the objectives as provided in the Conceptual Framework.

SAC 2 and the Conceptual Framework specify the objectives of general purpose financial reporting as being financial reports which are intended to meet the information needs common to a range of users who are unable to command the preparation of reports tailored to satisfy their own particular needs.According to SAC 2, the main objective of general purpose financial reporting is to provide information useful to users for making and evaluating decisions on the allocation of scarce resources. A second objective is that the reports should be presented by management and governing bodies in such a manner as to discharge their accountability for the resources entrusted to them. The current Conceptual Framework refers to this objective as one of reporting on the results of ‘stewardship’.In so doing, general purpose financial reports should disclose adequate information relevant to assessing the entity’s performance, financial position, cash flows from financing and investing activities, and compliance with statutory regulations and rules.The IASB and FASB joint project to change the conceptual framework has proposed, in the IASB ED of May 2008, to amend the objectives of general purpose financial reporting in the conceptual framework. The ED of May 2008 argues that the objective of general purpose financial reporting is ‘to provide financial information about the reporting entity that is useful to present and potential investors, lenders and other creditors in making decisions in their capacity as capital providers’.The Boards propose to adopt the ‘entity perspective’; that is, it is the entity, not its owners and others having an interest in it, which is the object of general purpose financial reporting. In other words, the focus is placed on reporting the entity’s resources (assets), the claims to the entity’s resources (liabilities and equity) and the changes in them. Shareholders are seen not so much as owners of the entity but merely as providers of resources to the entity, in much the same way as liabilities.Both present and potential equity investors, lenders and other creditors are seen as constituting a single primary user group. This group makes decisions about the allocation of resources as well as decisions relating to protecting or enhancing their claim on the entity’s resources. Other potential user groups; for example, government and other regulatory bodies, customers, employees and their representatives, are not the focus of the objective.Hence, it seems that the proposed objective for the revised conceptual framework is going to be more narrowly focussed on the needs of the primary user group than is the objective contained in SAC 2 and the current Conceptual Framework. Furthermore, the existing objective of accountability and/or stewardship, contained in SAC 2 and the current Conceptual Framework and the IASB’s Discussion Paper issued in July 2006, appears to be deemphasized in the IASB ED of May 2008.It also appears odd that in times when environmental and social issues are of great importance to society, and the desire for triple-bottom line reporting is growing, that these issues are ignored in the revised conceptual framework.

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