28/07/2021

ACCT10001
Accounting Reports and Analysis

Lecture 1 Supplement:
Business Structures

Presenter: Noel Boys

Reading reference
Chapter 3 – Business structures
• LO 1 to 8, 11 & 12

Learning objective (also listed in the main lecture slides)

• By the end of this session you should be able to:
• Compare and contrast the different types of business / corporate structures

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Management Internal External Financial

Accounting Accounting Reports Accounting
Budgets Statement of profit or loss
Costing & Pricing Statement of financial position
Contribution Margin Statement of cash flows
Performance reporting Statement of changes in equity
Internal External
Stakeholders/ Decisions about what to Agency Stakeholders/
Decision Makers Report/disclose and in what form Issues Decision Makers
Qualitative
Characteristics:
The Accounting System
Relevance Assets (A) ‐ Liabilities (L) = Equities (E)
Faithful Rep.
Comparability
∆E = Income – Expenses ± Transfer to/from owners Analysis
Analysis
Verifiabilty
Decision & Timeliness
Decision &
Decisions about what (Events) Agency
Action Understandability
to record and at what value (Attributes) Action
Issues

The Economic Reality

(Events & Attributes)
of the Reporting Entity
(Sole Trader, Partnership, Company)

Time
past, present, future

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Business Structures
Amongst over 2 million active businesses in Australia the most common
structures are:
• Individual (sole trader)
• Partnership
• Company Our focus in ARA
• Trust

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Features of different types of structures

Sole trader Partnership Company
Set up & Relatively straight
Straight forward Complex
administration forward
Limited to life or
Limited to life or
Life of entity desire of individual Indefinite
desire of owner
partners
Reporting status Separate reporting Separate reporting Separate reporting
relative to owner(s) entity entity entity
Legal status relative Not a separate legal Not a separate legal
A separate legal entity
to owner(s) entity entity
Extent of owner’s / Limited liability
Unlimited Unlimited
owners’ liability (some exceptions)
Partner declares Entity taxed on profit,
Owner declares
Tax implications share of profit as shareholders declare
profit as income
income dividends as income

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Companies
Characterised by owners holding shares (shareholders)
• Shares typically come with rights to vote at GM’s and share in profit
distributions (dividends)
• Appoint directors to run the company (creates a principal‐agent relationship)
Corporations Act (CA 2001)
• Public companies
• Proprietary (or private) companies

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Public Companies
A company that is not a proprietary company
Minimum one shareholder, no maximum
Mostly Limited companies “Limited” or “Ltd” in its name, PLC – public limited company
• Liability limited to unpaid amounts on issued shares
No restrictions on raising capital from public
• Must be accompanied by a disclosure document
• May be listed on a local securities exchange (e.g. ASX)
No restrictions on transfer of ownership
• If listed, then shares are traded via the ASX

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Other types of public companies

Limited by guarantee
• Liability extends to an amount guaranteed by members
• Usually relates to not‐for‐profits such as clubs and charities
No‐liability companies
• No liability even if unpaid amounts on shares
• Concession afforded to mining companies in Australia
Unlimited company
• Liability can extend to personal assets
• Generally restricted to investment companies

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Proprietary / Private Companies

One that is registered as a proprietary company “Pty Ltd” in its name
Has less than 51 shareholders
• Once > 50 automatically becomes public
Restrictions on raising capital from public and transfer of ownership
Large or small according to three thresholds
• large if ≥ two or more thresholds, small if < two or more:
– Revenue of $25m for the financial year (FY)
– Gross assets of $12.5m at end of FY
– 50 EFT employees at end of FY

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Companies
Why the distinction between listed and non‐listed public, large proprietaries and
small proprietaries?
CA 2001 imposes annual reporting obligations according to the type of entity
• Public and large proprietary companies must prepare a full financial report
and get the report audited
• Listed public companies (Disclosing Entities) must also prepare half‐year
financial reports
• Small proprietary companies generally have significantly reduced reporting
requirements (differential reporting or reduced disclosure requirements)

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Groups of Companies and Consolidated

Financial Statements

GROUP

Company A
Prepares FS as a
(Parent entity)
single entity

Parent Entity prepares

Owns 90% of shares in Entity B Consolidated FS of the
Entity A CONTROLS Entity B group as if it were a
single entity
Company B
Prepares FS as a
(Subsidiary)
single entity Consolidates 100% of the
assets, liabilities, income
and expenses
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Why have a subsidiary as a separate company?

Think back to advantage of a company

• Separate Legal Entity: setting up separate parts of a business as separate
companies can help limit losses across the whole company
– if one entity goes bankrupt, losses are limited to that entity; the parent
entity is not directly liable

Why Consolidated Reports?

• Entity concept: the parent and all its subsidiaries report as if they were a single
entity
Lecture continues from Slide 17

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