ACCT2011

Reporting on Business Performance

Module 1: Introduction and conceptual

framework for financial reporting

These notes only summarise key points

Textbook and additional reading is essential

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 Introduction – Focus of ACCT 2011
Application + Evaluation
1. Applying specific accounting standards:
– interpreting (reading & understanding)
– technical skills (calculations, journal entries, presentation in financial
statements)
– recognition and disclosure
2. Evaluating specific accounting standards in relation to:
– accounting concepts
– other accounting standards
– accounting theory
– public interest

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 Introduction - Key themes throughout the unit

1. You will build your technical/practical knowledge. You will be

able produce and critique a financial report and also
critically evaluate the standards used within financial
reporting:
– Are the standards consistent?
– Who sets these standards, what are the trade-offs and who
are they written for?
– How do preparers use the standards, whose interests are
considered?
– What may or may not work in the accounting standards?
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 Introduction - Key themes throughout the unit

2. You will discover there are many accounting policy choices

available when using an accounting standard. In this course we
will address the following issues:
– Why are there accounting policy choices?
– Why do preparers of financial statements choose one
method over another?
– What influences financial statement preparers’ decisions in
making accounting policy choice?

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 Introduction - Key themes throughout the unit

3. You will think more about accounting measurement. On

several occasions you will be asked to identify and explain the
implications of:
– Why are different measurement bases used?
– What is the impact of the different measurement bases on
financial reporting?

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 Introduction - Key themes throughout the unit

4. All of this will help you investigate financial reporting to see

how it is useful and the fact that it has limitations.
– What is financial reporting useful for?
– To whom is financial reporting useful?
– What do you think are some of its limitations?
– What processes are in place to improve these? Is this
enough?

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 Introduction - Key themes throughout the unit

5. You will come to understand that accounting standards are

constantly being revised. They are often ambiguous and
imperfect.
– Why are they ambiguous?
– Which accounting standards are most controversial?
– Think about why they are being revised; and
– Consider what can be done to improve them.

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 Introduction - Key themes throughout the unit

6. You will learn financial accounting more than just debit and
credits. Behind all of this, financial statement preparers have
to make many well considered professional judgements.
Throughout this unit of study you will think about:
– Why are financial reporting professional judgments
necessary?
– How do I make a sound financial reporting professional
judgment?

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 Conceptual Framework for Financial Reporting
Textbook Readings
H&P Chapters:
– Ch 1 pp. 3-17 & 18-22; and
– Ch 23 pp. 855-863, 865-867.
Other Readings (See links on Canvas):
– “Financial Accounting” 9th ed, Deegan (2020), pages 64-65
– “Financial Reporting” 2nd ed, Loftus et al. (2018), pages 18-19 & 23-27
– AASB Conceptual Framework
– AASB 1053 Application of Tiers of Australian Accounting Standards
– Zhang Y and Andrew J 2014 Financialisation and the Conceptual
Framework, Critical Perspectives on Accounting (Special Issue on Critical Perspectives
on Financialization), vol.25, Iss.1, pp. 17-26 & Zhang Y and Andrew J 2021
Financialisation and the Conceptual Framework: An update, In Press
– ‘Fundie warns results inflated by support: Earnings’, AFR, 7 August 2020
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Learning objectives
1. Identify the main sources of regulation of financial reporting (H&P LO 1.1, H&P
pages 3-10)
2. Explain the present accounting standard-setting arrangements (H&P LO 1.2, 1.3,1.4
& 1.6, H&P pages 10-22)
3. Describe the convergence and harmonization policy adopted by the AASB, and
IASB's principles-based approach to standard setting (H&P LO 23.5 & 23.8, H&P
pages 861-863 & 865-867)
4. Understand the reasons for developing a conceptual framework (H&P LO 2.2 & 2.3
H&P pages 35-38, Zhang & Andrew (2014), Zhang & Andrew (2021))
5. Describe the objective of the AASB Conceptual Framework and elements of financial
statements (Loftus et al, pages 18-19 & 23-28)
6. Describe the reporting entity concept and the role of general purpose financial
reporting (Deegan, pages 64-65)
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Objective 1

Identify the main sources of regulation of financial reporting in

Australia
(H&P LO 1.1, H&P pages 3-10)

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 Government Regulation

Government Legislation: The Corporations Act 2001

– Proper financial records to be kept
– Financial report to be prepared each half year and at the end of the
financial year
– Financial report consists of financial statements, notes and directors’
declaration
– Financial statements must give a ‘true and fair view’
– Financial report must comply with accounting standards
– If compliance with accounting standards would not give a true and fair view:
additional information needs to be disclosed
– Financial statements must include an auditor’s report
– Corporations Act applies to companies and other of entities, e.g. listed trusts
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 Government Regulation

ASX listing requirements:

– Apply only to firms listing on the exchange

Accounting Standards:
– Prepared by AASB
– Authority provided by the Corporations Act

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Objective 2

Explain the present accounting standard-setting requirements

(H&P LO 1.2, 1.3,1.4 & 1.6, H&P pages 10-22)

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 Present Standard Setting Arrangements

Source:
https://aasb.gov.au/admin
/file/content102/c3/AASB
_Due_Process_Framewo
rk_09-19.pdf
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 The Financial Reporting Council

– Appoint members of AASB

– Approve and monitor AASB’s priorities etc
– Determine AASB broad strategic direction
– Give the AASB advice
– Monitor development of international accounting standards
– Cannot veto a AASB standard or direct the AASB to develop a particular
standard

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 The Australian Accounting Standards Board

Major functions:
– To develop a conceptual framework
– To make accounting standards
– To participate in the development of a single set of worldwide
accounting standards
Four formal avenues for constituent entities and organisations to have input to
the standard-setting process
Direct responsibility for developing interpretations

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Objective 3

Describe the convergence and harmonization policy adopted by

the AASB, and IASB's principles-based approach to standard
setting
(H&P LO 23.5 & 23.8, H&P pages 861-863 & 865-867)

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 International convergence and harmonisation
– Australia adopted international accounting standards from 1 January
2005
– AASB's internationalisation policy (2001):
– International convergence:
– Working with other standard-setting bodies to develop new or
revised accounting standards that will contribute to the development
of a single set of standards for worldwide use
– International harmonisation:
– A process that leads to Australian Accounting standards being made
compatible with the standards of the IASB
– IASB’s accounting standards devised for business sector only; AASB’s
policy is for a single set of standards applicable to all sectors
(business, government, and not-for-profit sectors)
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 Adoption of International Financial Reporting Standards (IFRS)

– Widespread changes to standard setting:

– AASB now adopts the content and wording of IASB standards
– Exceptions are made, eg where words need to be changed to
accommodate Australian legislation;
– AUS paragraphs in standards
– Some AASB accounting standards do not have IASB
equivalents eg: AASB 1039 Concise Financial Reports
– AASB rejected one IASB standard (FRS for Small and Medium
Entities) and issued its own “reduced disclosure requirements” (RDR)

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 IASB’s principles-based approach to accounting standard
setting
– IASB describes standards as “principles-based” rather than “rules-based”
– Principles-based standards are considered flexible and usable in diverse
settings and traditions
– But reliance on principles also means the standards can be ambiguous and
require accounting judgement
– See example of AASB136 Impairment (Ch 23, p.866)
– You will also examine this standard in Modules 3 and 4
– Principles-based systems require professional judgement. Accountants and
auditors require not only technical skills but also a solid knowledge of
business and economics as well as ethics

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Objective 4

Understand the reasons for developing a conceptual

framework
(H&P LO 2.2 & 2.3 H&P pages 35-38, Zhang & Andrew 2014 & Zhang Y
and Andrew J 2021)

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 Conceptual Framework

The development of a conceptual framework for financial reporting

– Collapse of the US share market in 1929
– Early efforts to develop a conceptual framework or theory of
accounting
– Continuing interest in developing a framework to:
• Underpin accounting practice; and
• Form the basis for setting new and revising old accounting standards
Purpose of a conceptual framework:
– To provide users, preparers, auditors of financial statements (and
standard setters) with an explicit set of concepts to use when making
decisions about appropriate accounting policies
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 Conceptual Framework – Potential Benefits
The potential benefits of a conceptual framework are (Policy Statement PS5):
– More consistent and logical accounting standards
– Reduced barriers to international capital flows
– Accounting standard setters more accountable
– Improved communication between standard setters and constituents
– More efficient development of accounting standards

Refer to Zhang & Andrew “Financialisation and the Conceptual

Framework” reading

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Objective 5

Describe the objective of the AASB Conceptual

Framework and elements of financial statements
(Loftus et al, pages 18-19 & 23-28)

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 Objective of the AASB Conceptual Framework
This is what you learnt in ACCT 1006
OBJECTIVE: foundation of the CF defined in para.1.2

To provide financial information about the reporting entity useful to

existing and potential equity investors, lenders and other creditors in
making decisions relating to providing resources to the entity.

Users also want to assess how efficiently and effectively management

has discharged its responsibilities to use the entity’s economic resources
(stewardship)
Building on this - Refer to the following slides and Example 1

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 Objective of the AASB Conceptual Framework

AASB Conceptual Framework

Refer to “Fundie warns results inflated by support: Earnings” reading

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 Objective of the AASB Conceptual Framework
Example 1– Objective of CF

The University of Sydney
Source:
https://www.commbank.com.au/
content/dam/commbank-
assets/about-us/2022-08/2022-
annual-report_spreads.pdf Page 28
 Elements of financial statements

This is what you learnt in ACCT 1006

– The elements of financial statements include:
– assets
– liabilities
– equity
– income
– expenses.
– The Conceptual Framework defines each element and sets out the criteria for
their recognition.

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 Elements of financial statements – Assets
This is what you learnt in ACCT 1006

The CF para. 4.3 - 4.4 defines assets as:

a present economic resource controlled by the entity as a result of past events

An economic resource is defined as:

- a right that has the potential to produce economic benefits

Rights can take many forms, e.g.:

rights to receive cash;
rights to receive goods or services; or
rights over physical objects, such as property, plant and equipment or inventories

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 Elements of financial statements – Liabilities & Equity
This is what you learnt in ACCT 1006
The CF para. 4.26 defines a liability as:
– a present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is defined in the CF as
– a duty or responsibility that the entity has no practical ability to avoid

The CF para. 4.63 defines equity as:

the residual interest in the assets of the entity after deducting all its liabilities

– Cannot be independently defined (residual) as it is directly dependent on the definition of

assets and liabilities.
– From basic accounting equation: Equity = Assets – Liabilities

Building on this - Refer Example 2

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 Elements of financial statements
Example 2 – Assets and liabilities
A entity has been involved with the following transactions:
(a) Acquired land which is contaminated. It is unlikely the land is usable or able to be
sold
Discussion: While the entity has control over the land from a past event, the land does
not have the potential to generate future economic benefits. It is not an asset under the
CF
(b) Given a right to use a river to transport products
Discussion: The right is not an asset under the CF as the entity only has access and not
control over the right
(c) Commitment to pay $3,000,000 in one (1) year’s time for a recently acquired item
of equipment
Discussion: This transaction is a liability under the CF. The entity has a present obligation
it cannot avoid to transfer economic resources to another party in relation to the event
Adapted from “Financial Accounting” 9th ed Deegan (2020), pages 77 and 84
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 Elements of financial statements – Revenue & Expenses

This is what you learnt in ACCT 1006

The CF para. 4.68 defines income as:
increases in assets, or decreases in liabilities, that result in increases in equity,
other than those relating to contributions from holders of equity claims

The CF para. 4.69 defines expenses as:

decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims

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 Elements of financial statements – Recognition
This is what you learnt in ACCT 1006
Recognition is: the process of capturing for inclusion in the financial statements
an item that meets the definition of an asset, a liability, equity, income or
expenses
Recognition criteria CF para 5.7:
Recognition is appropriate if it results in both
– relevant (may be affected by low probability of an inflow/outflow of
economic benefits and existence uncertainty) information about assets,
liabilities, equity, income and expenses and a
– faithful representation of those items (may be affected by measurement
uncertainty)
Building on this - Refer Example 3
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 Elements of financial statements - Recognition

Example 3 – Recognition of liabilities

An entity has acquired an item of machinery at a cost of $3,000,000 and has
committed to pay for the purchase in one (1) year’s time.

Discussion: This transaction satisfies the relevance and faithful representation

recognition criteria. There is no existence uncertainty, high probability of an
outflow of economic resources and has a high degree of measurement
certainty.

Adapted from “Financial Accounting” 9th ed Deegan (2020), page 84

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Objective 6

Describe the reporting entity concept and the role of

general purpose financial reporting

(Deegan, pages 64-65)

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 Reporting Entity Concept
This is what you learnt in ACCT 1006

› REPORTING ENTITY: defined in paragraph 3.10 of CF

› an entity that is required, or chooses, to prepare financial statements. A

reporting entity can be a single entity or a portion of an entity or can
comprise more than one entity. A reporting entity is not necessarily a legal
entity

› Why is this important?

Building on this - Refer following slides and Example 4
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 Reporting Entity Concept

First let’s think about how to read an accounting standard

Accounting standards: Structure - (typically in this order):
– Objective of standard
– Scope
– Definitions
– Requirements
– Usually some option(s)
– Disclosure
– Transitional provisions (if any)
– Effective date
– Appendices
– Australian implementation guidance

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 Reporting Entity Concept

First let’s think about how to read an accounting standard

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 Reporting Entity Concept
– The CF does not describe what constitutes a reporting entity, leaving it to
individual jurisdictions
– AASB 1053 applies Australian Accounting Standards to entities that have
“publicly accountability”, shares or debt are publicly traded or holds assets
in a fiduciary capacity (AASB 1053 paragraph 11 & Appendix A)

– Reporting entities prepare General Purpose Financial Statements

AASB Conceptual Framework Appendix

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 Reporting Entity Concept
Example 4 – Reporting entity
Ocean Grove Ltd is a public company with its shares trading on a
securities market.
Required: Is Ocean Grove a reporting entity under the AASB Conceptual
Framework?
Discussion:
Ocean Grove Ltd is a reporting entity because there would be many
shareholders, lenders and creditors that would be unable to demand and
obtain information to satisfy their own information needs. As its shares are
traded on a securities market, Ocean Grove Ltd would have public
accountability under AASB 1053. Accordingly, Ocean Grove Ltd would
produce GPFS so financial statement users could make decisions about
their resources.
Adapted from “Financial Accounting” 9th ed Deegan (2020), page 65
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 Next – Module 2

We will discuss measurement and

how accounting standards do not
cover all transactions and events.
Accordingly accountants use their
professional judgement when
preparing an entity’s financial
statements via:
1. AASB Conceptual Framework
2. Choice of Accounting Policies;
– why choice exists and
– what influences the
accounting policies chosen
by entities

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