ACCT 3102 - Tutorial 1 Solution Semester 1 / 2016

TOPIC 1: ACCOUNTING REGULATION AND CONCEPTUAL FRAMEWORK

LLPWC CHAPTER 1: ACCOUNTING REGULATION AND THE CONCEPTUAL FRAMEWORK

Comprehension Questions

1. What are the 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.

2. Describe the standard-setting process of the AASB.

Technical issues may be identified by 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.

4. 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.

5. 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

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manifest in reduced 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.

Exercise 1.5 NEED FOR THE CONCEPTUAL FRAMEWORK VS. INTERPRETATIONS

Applying the Conceptual Framework is subjective and requires judgement. Would the AASB be
better off to abandon the Conceptual Framework entirely and, instead, rely on a very active
interpretations committee that develops detailed guidance in response to requests from
constituents?

(a) No. The fact that the Conceptual Framework involves judgement does not mean that it should
be abandoned.
(b) The guidance developed by the interpretations committee would be ad hoc – that is, developed
case by case without the foundation of the framework to look to. The standards themselves
would suffer from the same problem if there were no framework.
(c) The Conceptual Framework provides guidance and direction to the standard setters, and
therefore will lead to consistency among the standards.
(d) But it is a set of concepts. It provides a boundary for the exercise of judgement by the standard
setter and the interpretive body.

Additional question

What is meant by differential reporting? What are the current implications of Tier 1 and Tier 2
reporting in Australia?

Differential reporting refers to a financial accounting regime that allows some entities to be
excused from compliance with accounting standards. Australia currently has such a regime by
virtue of the requirements of Corporations Law and the reporting entity concept. For example,
entities required to comply with the reporting requirements of the Corporations Act 2001 include:
o All disclosing entities (as defined in the Corporations Act)
 Disclosing entity has ‘enhanced disclosure’ securities (i.e. disclosure document has
been issued (e.g. prospectus), and securities issued pursuant to this document; and
100 or more persons hold that class of securities; and securities in that class are
held by 100 or more persons at all time since issue)

o All public companies

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o All large proprietary companies; and

o All registered schemes (eg: managed investments).

Thus, all other entities not caught within these requirements (e.g. small proprietary companies) are
not required to report using Australian accounting standards (i.e. AIFRS –Australian-Equivalents
IFRS). Note however, that the Australian accounting profession has also developed the ‘reporting
entity’ concept to identify entities required to prepare financial statements (i.e. another basis for
differential reporting). In particular, a Reporting Entity is an entity for which it is reasonable to
expect the existence of users dependent on general purpose financial reports for information which
will be useful to them for making and evaluating decisions about the allocation of scarce resources
(Statement of Accounting Concepts SAC1 ‘Definition of the Reporting Entity’). Thus, it is possible
that a firm not caught by Corporations Law may be caught under the reporting entity concept. This
concept is enforceable against members of CPA Australia and the Institute by Professional
accountants by APS1 Miscellaneous Professional Statement APS1 which require members to
comply with standards and SACs.
In summary, Australia has a differential reporting regime in place. However, the situation
requires some revision (i.e. one uniform means of identifying entities required to prepare financial
statements in accordance with AIFRS). This seems likely with the AASB releasing an Invitation to
Comment (ITC) No. 12 ‘Request for comment on a proposed revised differential reporting regime
for Australia and IASB Exposure Draft of a Proposed IFRS for Small and Medium-Sized Entities’.

LLPWC CHAPTER 4: FAIR VALUE MEASUREMENT

Comprehension Questions

1. Name three current accounting standards that permit or require the use of fair values.

AASB 3 Business combinations para 32

AASB 9 Financial instruments para 4.1
AASB 116 Property, plant and equipment, para 31
AASB 138 Intangibles para 33, 75
AASB 140 Investment property para 30
AASB 141 Agriculture para 13
(see also the lecture slides for a more extensive list)

3. What are the key elements of the definition of ‘fair value’?

There are four elements to the definition of fair value

 current exit price: to sell an asset or paid to transfer a liability
 in an orderly transaction
 between market participants
 at the measurement date

4. How does entry price differ from exit price?

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An entry price is one that would be paid to buy an asset or received to incur a liability (See AASB 13;
Appendix A).
An exit price is one that would be received to sell an asset or paid to transfer a liability (See AASB
13; Appendix A).

They are expected to be the same IF they relate to the same asset or liability on the same date in
the same form in the same market. This is probably only true in an active market.

The information may include entity-specific data.

Application Questions – Billabong International Ltd (Download the 2015 Annual Report from the
company website).

1. What are Billabong’s reporting requirements?

Billabong is a public company registered in Australia. It is a disclosing entity because its shares are
listed on the Australian Securities Exchange. In accordance with s. 292 of the Corporations Act,
Billabong International Ltd prepares an annual financial report and a directors’ report

2. Do the financial statements comply with AASB and IFRS?

Yes. See compliance statement in Note 1(a)

3. Review the company’s adoption of upcoming new accounting standards and

interpretations.

Note 1(a) indicates the group has elected not to early apply accounting standards that are not
applicable to the accounting period ended 30 June 2015. Note 1 (ff) provides an assessment of the
impact of these new standards and interpretations. These include changes arising from AASB 9 and
related amendments and AASB 15. No early adoption.

(Tutors, if time permits may be a good opportunity to use the financial statements from Billabong to
highlight future course content.)