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Australian

School of
Business

ACCT 2542: Corporate Financial


Reporting and Analysis
Semester 2, 2014

Dr. Sarowar Hossain


Office: QUAD 3083
Ph: 9385 6352
E-mail: s.hossain@unsw.edu.au

Topic 1: Nature, regulations and


operations of companies

Australian
School of
Business

Introduction
Teaching staff
Position

Name

Email

Location

Lecturer-in-charge
(LIC)
Lecturer

Jeffrey Knapp

j.knapp@unsw.edu.au

QUAD 3103

Dr. Sarowar Hossain

s.hossain@unsw.edu.au

QUAD 3083

Lecturer

A/P Richard Morris

richard.morris@unsw.edu.au

QUAD 3064

11/29/16

Australian
School of
Business

Required Texts
Prescribed Textbook

Title: Company Accounting 9th Edition 2012 + WileyPLUS


Access Code
Authors: Ken J. Leo, John Hoggett, John Sweeting
ISBN: 9780730304326
Publisher: John Wiley & Sons Australia
Course Website:
http://moodle.telt.unsw.edu.au/course/view.php?id=10792

11/29/16

Aim of the course

Australian
School of
Business

This course has three high-level aims.


1. The first aim is to provide students with the concepts and
experiences necessary for them to understand the
preparation and use of company financial
statements in their future careers whether as financial
accountants, company executives, taxation officers,
auditors, financial analysts, actuaries, legal advisors or
academics.
2. The second aim is to instil in students a way of thinking
and a way of doing in company accounting. It is expected
that students will develop their technical financial
accounting knowledge through course training and
individual practice.
3. The third aim is to challenge students to think
critically about corporate financial reporting by
fostering an appreciation of both the rationale of financial
accounting techniques and the issues that arise in their
practical application.

Course Assessment
Assessment Task

Weighting

Length

Australian
School of
Business
Date/Location

In-Lecture Quizzes (3)

5%

5-10 mins

Weeks 2-12 chosen at


random

Tutorial Engagement

5%

50 mins per week


Show homework

Weeks 2-13 in the


registered class only

Group Presentation (1)

10%

5-10 minutes duration


(available for 50 mins)

Weeks 2-13 in registered


class only

Tutorial Test (1)

10%

15-20 minutes duration

Week 4

On-line Quizzes (3)

10%

No official time limit

Weeks 5, 9, 13

Final examination

60%

2 hours plus 10 minutes


reading time

To be announced

TOTAL

11/29/16

100%

Assessment Details
4.3 In-Lecture Quizzes (5%)

Australian
School of
Business

there will be three short multiple choice quizzes administered of


around 5-10 minutes duration each. The timing of these quizzes will
be at random. The quizzes will be based on matters that have been
discussed or illustrated during the lectures. If you have been paying
attention, the quizzes will be easy! There is no special consideration
for missing any of the in-lecture quizzes. Make sure you bring a 2B
pencil to lectures.
4.4 Tutorial Engagement (5%)
Tutorial engagement means attendance at tutorials and showing
evidence that homework questions have been attempted before the
tutorial begins. Students are usually required to prepare written work
for one review question and one practice question for each tutorial.
Students must stand ready to confirm that they have done written
work for each tutorial and to produce the evidence as and when
required by their tutor.

Assessment Details (contd.)

Australian
School of
Business

4.5 Group Presentation (10%)


Each tutorial will be divided into 12 subgroups of two students. Each
subgroup is required to prepare and present their answer to the
nominated presentation question for the tutorial. The group
presentations should be delivered within 5 to 6 minutes at the
beginning of the tutorial. Each member should present or have
something to say during the presentation. Each member will receive
the same mark provided they actively contribute. Your tutor will then
expect the members of the subgroup to assist with the remainder of
the tutorial as and when required.
4.6 In-Tutorial test (10%)
In week 4, a test will be administered in tutorials on the topic of
accounting for income tax. The test will be of 15-20 minutes
duration and the test question will be similar to one of the problems
that are covered in tutorial classes during week 3.
There is no special consideration for missing the in-tutorial test.

Assessment Details (contd.)

Australian
School of
Business

4.7 On-Line Tests (10%)


Three on-line tests will be conducted during the semester. Each online test will be open for approximately five days and must be
completed by the deadline or the marks for that test are
forfeited (for detail, see the course outline).
4.8 Final Exam (60%)
The final exam will potentially cover material from all course topics.
Students should pay particular attention to the following:
Learning Objectives by Week at section 7 of the course outline
Homework questions covered in tutorials.
Questions on the topic of consolidation accounting will account
for the majority of the marks in the final exam.

Australian
School of
Business

Lecture Topic 1
Nature and regulation of companies chapter 1
Financing company operations chapter 2
&
Company operations chapter 3

Nature of a company

Australian
School of
Business

A company is a legal entity

Incorporated via registration by Australian Securities and


Investments Commission (ASIC)
Subject to requirements of Corporations Act 2001

A company:
has limited liability
has its own separate legal existence
has the legal powers of a natural person
has financing advantages
has the right to own assets and enter contracts
has the right to sue and be sued

10

Australian
School of
Business

Types of companies

Proprietary (Pty) companies


Must have share capital
Minimum of 1 member, maximum of 50
Minimum of 1 director
Cannot raise funds from the public
Classified as large or small (see next slide for further discussion)
Public companies
Can invite public to subscribe for securities
Can list on Australian Securities Exchange (ASX)
Minimum 1 member, no maximum
Minimum of 3 directors
Must prepare published financial statements and be
audited
11

Types of companies

Australian
School of
Business

Large vs small proprietary companies


Small proprietary companies must satisfy at least two of the following
criteria:

Annual gross operating revenue: < $25 million


Gross assets: < $12.5 million
Number of employees: < 50
Entities that do not satisfy the criteria for classification as a small proprietary
company are classified as large

12

Other types of companies

Australian
School of
Business

Listed corporations

Public companies listed on the ASX

Disclosing entities

An entity with enhanced disclosure (ED) securities

Foreign companies

Incorporated outside of Australia or in an external territory


of Australia

No-liability companies

Shareholders are not liable for debts of the company.


Sole object of the company must be mining

13

Background to the Corporations Act


(2001)

Australian
School of
Business

The Corporations Act (2001) arose from Corporate Law


Economic Reform Program (CLERP)
Federal Government program, commenced in 1997
Nine discussion papers: CLERP 1 CLERP 9
Resulted in wide ranging reforms including:
changes to the development and application of
accounting standards in Australia.
establishment of the FRC and FRP
reformed auditing practices

14

History of accounting regulation

Australian
School of
Business

Australian Accounting Standards Board (AASB)


established in 1991
Initially the AASB was an independent body
responsible for development of accounting
standards
Since 2000 the AASB has reported to the
Financial Reporting Council (FRC)

15

Australian
School of
Business

Accounting regulation

16

Financial Reporting Council (FRC)

Australian
School of
Business

Role of the FRC includes:

Overseer and advisory body to AASB and AUASB


Determining broad strategic directions, monitors
priorities and appoints members
Monitoring audit independence in Australia
Monitoring development of international accounting
standards
Assessing continued relevance and effectiveness of
accounting and auditing standards
Ensuring AASB standards are at least in harmony
with international standards
The FRC cannot direct the AASB or AUASB in relation to a particular
standard and cannot veto a standard
17

Australian Accounting Standards BoardAustralian


School of
(AASB)
Business
The AASB is responsible for:

development of a conceptual framework


formulating accounting standards for the purpose of
the Corporations Act
formulating accounting standards for other purposes
(eg public and not-for-profit sectors)
participating in the development of a single set of
accounting standards for worldwide use
promoting the main objectives of developing
accounting standards

18

Australian
School of
Business

AASB Accounting Standards


Objectives of developing accounting standards are:

allows users to make decisions about the allocation


of scarce resources
helps directors discharge their financial reporting
obligations
is relevant to assessing performance, financial
position, financing and investment
is relevant and reliable, facilitates comparability and
is readily understandable
19

Current standard-setting arrangements - AASB Australian


School of
Accounting Standards
Business

AASB 1-99
equivalent to IFRS standards issued by the IASB
have same number as equivalent IASB standard
e.g. IFRS 2 > AASB 2 Share-Based Payment
AASB101-199
equivalent to IAS standards issued by the IASC
(predecessor to the IASB) before 2001
have same number (+100) as the IAS standards on
which they are based
e.g. IAS 16 > AASB 116 Property, Plant & Equipment
21

Australian
School of
Business

AASB Accounting Standards


AASB1001-1099

Australian standards with no international equivalents


Have same number as in previous AASB standard
e.g. AASB 1031 Materiality

22

International Accounting Standards Board, IASB Australian


School of

Board (IASB)

Business

Independent, privately funded accounting standard


setter
Overseen by the IFRS Foundation
Established in 2001, replacing the International
Accounting Standards Committee (IASC)
Committed to the development of a single set of high
quality, enforceable global accounting standards

23

Financial Accounting Standards BoardAustralian


School of
Business
(FASB)
US Accounting Standards body
Currently involved in a joint project with the IASB
working towards a single set of compatible global
accounting standards
Project commenced in 2002 and the commitment
reaffirmed in 2010
Long term project as there are many differences
between US and international accounting standards

24

Australian
School of
Business

IFRS Interpretations Committee


Sub-committee of the IASB
Considers issues of widespread importance not
covered in IFRS standards

IFRS Interpretations are adapted by the AASB to suit


the Australian environment

25

Corporate regulators

Australian
School of
Business

Australian Securities and Investments Commission (ASIC)


Established in 1989 by Australian Government
Enforce and Administers Corporations Act
Monitors implementation of the Act and investigates
and prosecutes for breaches of the Act
Promotes confidence with the financial system
Australian Securities Exchange (ASX)
Administers Listing Rules
Played a major role in influencing the move towards
the AASBs adoption of IASB standards

GPFRs and the reporting entity concept

Australian
School of
Business

General Purpose Financial Reports (GPFRs) are defined in


SAC1 Definition of the Reporting Entity
A financial report intended to meet the information needs
common to users who are unable to command the preparation
of reports tailored so as to satisfy, specifically, all of their
information needs i.e. dependent users
GPFRs are prepared in accordance with all AASB accounting
standards
A report that is not a GPFR is referred to as a Special
Purpose Financial report (SPFR)
27

GPFRs and the reporting entity concept

Australian
School of
Business

Reporting Entity:
a reporting entity is an entity in respect of which it is
reasonable to expect the existence of users dependent on
general-purpose financial reports for information useful for
making and evaluating decisions about the allocation of
scarce resources
All reporting entities must prepare GPFRs
Public companies and large proprietary companies
are deemed to be reporting entities
Non-reporting entities are not required to prepare GPFRs
Classes of users are set out in The Framework
28

GPFRs and the reporting entity concept

Australian
School of
Business

Currently Australia is unique in its application of the


GPFR/reporting entity concept
IASB/FASB issued a joint Exposure Draft on the topic
in 2008 proposing the introduction of a very similar
concept

29

Reduced disclosure regime (RDR)

Australian
School of
Business

In 2010 AASB 1053 Application of Tiers of Australian


Accounting Standards was issued.
Introduces two tiers of reporting:
Tier 1 publicly accountable entities; and
Tier 2 all other preparers of GPFRs
Introduces a reduce disclosure regime for Tier 2 entities.
Tier 2 entities will be required to apply recognition,
measurement and presentation requirements with
substantially reduced disclosures.
30

Reduced disclosure regime (RDR)

Australian
School of
Business

Application date is for financial reporting periods


commencing on or after 1 July 2013, although early
adoption is permitted.

Non reporting entities will continue to be excluded from


the requirements to prepare a GPFR, but may still need
to prepare a SPFR.

Tiers 1 and 2 different reporting


requirements
For-profit private
Not-for-profit
private
Tier 1
Full IFRSs as
adopted in Australia

Publicly accountable

Tier 2
Non-publicly
Reduced
accountable
Disclosure Regime
(RDR) (entities may
choose to apply Tier
1, that is, full IFRSs
as adopted in
Australia)

All not-for-profit
private sector
entities have a
choice of applying
Tier 1 or Tier 2
requirements
unless the relevant
regulator requires
application of Tier 1

Australian
School of
Business
For-profit and notfor-profit public
Federal, state and
territory
government, local
governments
Entities other than
Tier 1 entities noted
above, unless the
relevant regulator
required application
of Tier 1

Chapter 2: Financing company


operations
Issue of shares

Australian
School of
Business

A company can issue shares on any terms or conditions


it determines
Share capital may include different classes:
Ordinary
Preference
To issue preference shares a constitution setting
out the rights is necessary (s254A(2))
Shares can be issued at any price, payable in full or by
instalment

Key features of share capital

Australian
School of
Business

Shares may have different rights in respect of voting,


sharing in profits or return of capital
Rights of shareholders include:
The right to vote for directors of the company
The right to share in assets on the windingup/liquidation of the company
The right to share in new share issues (for the same
class of shares)
Ordinary shareholders have no specific right to
dividends.

Issue of shares
Australian
School of
Payable in full on application (Example 1)
Business
ABC issued a prospectus for the issue of 100,000 $5
shares on 1 January 2012.
The prospectus specified that the $5 was payable in
full on application.
The company received applications for a total of
100,000 shares these applications were received
throughout the month of January.
On 31 January 2012 ABC issued 100,000 shares.
Required:
Prepare the journal entries to account for the issue
of shares by ABC.

Issue of shares
Payable in full on application

Australian
School of
Business

(Example 1)

1-30 January 2012


Dr

Cash trust

500,000

(100,000
(100,000shares
sharesxx$5)
$5)

Cash
Cashaccount
accounttrust
trustisisused
usedto
torecord
recordcash
cashprior
priorto
tothe
theshares
sharesbeing
beingissued
issued
- -the
cash
is
held
in
a
trust
account
on
behalf
of
the
applicants
the cash is held in a trust account on behalf of the applicants

Cr Application

500,000

Represents
Representsaaliability
liabilityof
ofthe
thecompany
companyprior
priorto
tothe
theshares
sharesbeing
beingissued
issued

To record receipt of application monies prior to


issuing the shares

Issue of shares
Payable in full on application

(Example

Australian
School of
Business

1)

31 January 2012
Dr

Application
500,000
Cr Share capital
500,000
Issue of shares applied for

Dr

Cash
500,000
Cr Cash trust
500,000
Transfer from cash trust on issue of shares

TIP:
TIP:T-accounts
T-accountsare
arehelpful
helpfulto
toensure
ensurethat
thattemporary
temporaryaccounts
accountsare
arecleared
clearedout
outcorrectly
correctly

Issue of shares Deposit on application,


balance on allotment (Example 2)

Australian
School of
Business

ABC issued a prospectus for the issue of 100,000 $5 shares


on 1 January 2012.
The prospectus specified that $3 was payable on
application, with the balance payable on allotment.
The company received applications for a total of 120,000
shares throughout the month of January.
The Directors refunded the money in relation to
unsuccessful applications.
On 31 January 2012 ABC issued 100,000 shares.
Required:
Prepare the journal entries to account for the issue of
shares by ABC.

Issue of shares Deposit on application,


balance on allotment (Example 2)

Australian
School of
Business

1 January 2012
(120,000
(120,000shares
sharesxx$3)
$3)

Dr

Cash trust
360,000
Cr Application
360,000
To record receipt of application monies prior to
issuing the shares

31 January 2012
Dr
Dr

Application
300,000
Allotment
200,000
The
Theallotment
allotmentaccount
accountisisaatemporary
temporaryaccount
accountused
usedwhen
whenfurther
furtheramounts
amounts
are
owing
when
shares
are
issued

represents
a
receivable
of
the
are owing when shares are issued represents a receivable of thecompany
company

Cr Share capital
500,000
Issue of shares applied for

(100,000
(100,000shares
sharesxx$5)
$5)

Issue of shares Deposit on application,


balance on allotment (Example 2)

Australian
School of
Business

31 January 2012
Dr

Application
60,000
Cr Cash trust
60,000
Refund of application monies to unsuccessful
(20,000shares
sharesxx$3)
$3)
applicants (20,000

Dr

Cash
300,000
(100,000 shares x $3)
(100,000 shares x $3)
Cr Cash trust
300,000
Transfer from cash trust on issue of shares

Dr

Cash
200,000
Cr Allotment
200,000
Cash received on allotment (100,000 shares x $2)

(100,000 shares x $2)

Issue of shares Deposit on application, instalment on


allotment, balance on call (Example 3)

Australian
School of
Business

ABC issued a prospectus for the issue of 100,000 $5 shares


on 1 January 2012.

The prospectus specified that $2.50 was payable on


application, a further $1.25 was payable on allotment and
the final $1.25 was payable at call.
On 31 January 2012 ABC issued 100,000 shares.
On 31 May 2012, the company made the call for the
outstanding balance of $1.25 per share. The call was
payable by 30 June 2012.
At 30 June 2012, the call on 10,000 shares remained unpaid.
Required:
Prepare the journal entries to account for the issue of
shares for ABC.

Issue of shares Deposit on application, instalment on


allotment, balance on call (Example 3)

Australian
School of
Business

1 January 2012
Dr

(100,000
(100,000shares
sharesxx$2.50)
$2.50)
Cash trust
250,000
Cr Application
250,000
To record receipt of application monies prior to issuing the
shares

31 January 2012
Dr
Dr

Application
250,000
Allotment
125,000
Cr Share capital
375,000
Issue of shares applied for

Dr

Cash
250,000
Cr Cash trust
250,000
Transfer from cash trust on issue of shares

(100,000
(100,000shares
sharesxx$3.75)
$3.75)

Issue of shares Deposit on application, instalment on


allotment, balance on call (Example 3)

Australian
School of
Business

31 January 2012
Dr

Cash
125,000
Cr Allotment
125,000
Cash received on allotment

31 May 2012
Dr

Call

125,000

The
Thecall
callaccount
accountisisaatemporary
temporaryaccount
accountused
usedwhen
whenfurther
furtheramounts
amounts
are
owing
when
a
call
is
made

represents
a
receivable
of
the
are owing when a call is made represents a receivable of thecompany
company

Cr Share capital
125,000
Call of $1.25 per share on 100,000 shares issued
Balance
Balanceof
ofshare
sharecapital
capitala/c
a/cnow
now$500,000
$500,000

Australian
Issue of shares Deposit on application,
School of
instalment on allotment, balance on call (Example Business

3)

30 June 2012
Dr

Cash
112,500
Cr Call
112,500
Cash received on allotment
(100,000 10,000 = 90,000 shares x $1.25)

(100,000 10,000 = 90,000 shares x $1.25)

The balance in the call account is $12,500, being


$1.25 x 10,000 shares.
Unpaid calls are referred to as calls in arrears and
are shown as a reduction of share capital in the
companys financial statements.
The balance in the share capital account at 30
June is as follows:
Share capital (100,000 ordinary shares @ $5)
500,000
Less: Calls in arrears (10,000 shares @ $1.25)
(12,500)
TOTAL SHARE CAPITAL
487,500

Under/Oversubscription

Australian
School of
Business

The number of shares applied for may exceed the number of


shares available for issue.
In such cases the directors of the company may:
Reduce the number of share to be issued to each applicant (on a
pro-rata basis)
Issue shares only to certain applicants (eg on a first-in-first-served
basis)

The treatment of excess application monies depends on the


terms of a companys constitution. Options include:
Refunding excess application monies to unsuccessful applicants;
or
Retaining the excess application money as an advance on future
The
Thecalls
callsininadvance
advanceaccount
accountisistreated
treatedas
as
calls
contributed
equity
even
though
it
is
legally
contributed equity even though it is legallyaaliability
liability

Oversubscription

(Example 4)

Australian
School of
Business

ABC issued a prospectus for 100,000 $5 shares on 1


January 2012.
The prospectus required payment of $3 on application and
$2 in one years time.
The company received applications for a total of 125,000
shares these applications were received throughout the
month of January.
On 31 January 2012 ABC issued 100,000 shares.
Required:
Prepare the journal entries to account for the issue of
shares assuming the excess money was offset against
the call due in one years time.

Oversubscription

Australian
School of
Business

(Example 4)

1-30 January 2012


Dr

(125,000
(125,000xx$3)
$3)

Cash trust
375,000
Cr Application
375,000
Receipt of application monies prior to issuing the
shares

31 January 2012
Dr

Application
375,000
(25,000
(25,000xx$3)
$3)
Cr Calls in advance
75,000
Cr Share capital
300,000
Issue of shares applied for and transfer of excess to
calls in advance account

Dr

Cash
375,000
Cr Cash trust
375,000
Transfer from cash trust on issue of shares

Forfeiture of shares

Australian
School of
Business

Directors may be given the power under the


companys constitution to forfeit (cancel) shares in
respect of which calls are not made. Possible actions
that can be taken in such circumstances are:
1. The balance of paid monies may be retained by
the company >In this case the balance is retained
in an equity account (Forfeited Shares Reserve)
2. The amount paid may be refunded back to the
forfeiting shareholder > In this case the balance is
recorded in a liability account (Forfeited Shares
Liability).

Forfeiture of shares

Australian
School of
Business

Prior to refunding the balance the company could


reissue the shares as fully paid shares to new
shareholders with the new shareholders paying
less than the fully paid value of the share.
The difference, as well as any costs of reissue are
deducted from the amount to be refunded back to
the forfeiting shareholders.
This option is only available if the companys
constitution states this fact. Where the constitution
is silent, the company is entitled to keep any
excess (option 1).

Forfeiture of shares (Example 5)

Australian
School of
Business

This example continues on from example 3.


On 1 July 2012 the directors of ABC decided to
forfeit the 10,000 shares in respect of which the
call of $1.25 was not made.
The shares were cancelled and reissued as fully
paid to $5 per share on payment of $4 per share.
Costs of $500 were incurred to reissue the shares.
Required:
Prepare the journal entries to account for the
forfeiture and re issue of the 10,000 shares.

Forfeiture of shares

Australian
School of
Business

(Example 5)

1 July 2012
Dr
Share capital
50,000
Cr Call
12,500
Cr Forfeited shares liability
Cancel of forfeited shares

(10,000
(10,000xx$5)
$5)

37,500

(10,000
(10,000xx$1.25)
$1.25)
(10,000
(10,000xx$3.75)
$3.75)

Dr
Dr

Cash
40,000
Discount
Forfeited shares liability 10,000
Discountofof$1/share
$1/share
Cr Share capital
50,000
(10,000
(10,000xx
Re-issue of forfeited shares for $4 per share $5$5

Dr

Forfeited shares liability


500
Cr Cash
500
Costs incurred to reissue shares

Dr

Forfeited shares liability


27,000
Cr Cash
27,000
Refund of balance to forfeiting shareholders

- -fully
fullypaid)
paid)

37
37500
50010,000
10,000- -500
500

Share issue and formation costs

Australian
School of
Business

Underwriting costs:
Arranging for the issue to be underwritten will avoid
having to refund monies due to under-subscription
Underwriter agrees to purchase all excess shares in
return for an upfront payment of an underwriting
commission
Treated as a reduction against contributed equity
Dr Share Issue costs [or Share Capital]
Cr Cash

Other share issue costs:


Includes costs such as stamp duty, legal fees etc.
Treated as a reduction against contributed equity
Formation costs:
Treated as an expense

Dr Formation costs
Cr Cash

Share capital - summary


The share capital equity total shown on the Balance
Sheet is the net of:
$
Share Capital
x
Less Calls in Arrears
(x)
Add Calls in Advance
x
Less Underwriting commission (x)
Less Share issue costs
(x)
Total share capital
x

Australian
School of
Business

Share buy-backs
WHY BUY BACK SHARES?
Change debt/equity ratio
Defence against takeover
Clear odd lots or employee share schemes

Australian
School of
Business

LEGAL REQUIREMENTS
Covered by Section 257A of Corporations Act
Allowed only if not prejudicial to creditors
Limited types of buy-backs allowed
ACCOUNTING FOR BUY-BACKS
Shares must be cancelled
Buy-back may generate a premium or a discount
These are adjusted against either reserves, retained
profits or both (UIG Abstract 22)
Each company must adopt an accounting policy in
respect of premiums or discount on buy-backs

Share buy-backs

Australian
School of
Business

1. At a premium:
120 000 shares initially issued at $1.20 were bought
back for $1.50 each
Dr
Dr

Share Capital 144,000


Retained earnings 36,000
Cr Cash
180,000

2. At a discount:
120 000 shares initially issued at $1.20 were bought
back for $1.00 each. The company had a general
reserve of $20 000 at the time of the buy-back.
Dr

Share Capital 144,000


Balance
Balance
Cr Reserves
20,000
Cr Retained earnings
4,000
Cr Cash
120,000

Chapter 3

Elements of financial statements

Australian
School of
Business

The Conceptual Framework contains the definition


and recognition criteria for the five main elements in
the financial statements
Five main elements are
Assets
Liabilities
Equity
Income
Expenses

IASB/FASB joint project proposes changes to the


definitions of assets, equity as well as the introduction
of a verifiability test into the recognition criteria.
56

Australian
School of
Business

Assets current definition

A resource controlled by the entity as a result of past


transactions or events from which future economic
benefits are expected to flow to the entity.
Three essential characteristics:
1.

Future economic benefits > refers to the potential to


contribute, directly or indirectly to the flow of cash (and
cash equivalents) to the entity. Physical form is not a
prerequisite

2.

Control > does not imply ownership therefore leased


items may be assets

3.

Past events > a past event or transaction must have


occurred. Anticipated purchases are not assets
57

Australian
Liabilities current definition
School of
Business

Future sacrifices of economic benefits that the entity


is presently obliged to make to other entities as a
result of past transactions or other past events.
Three essential characteristics:
1.

Present obligation > a mere intention is not


sufficient. Present obligation may be legal or
constructive

2.

Future sacrifices > must involve a sacrifice,


involving the settlement of resources in the
future

3.

Past events > a past event or transaction


must have occurred. Anticipated purchases
are not assets
58

Equity current definition


The residual interest in the assets of the entity
after deduction of its liabilities.
Assets liabilities = equity
Therefore, cannot be defined independently of
the other elements
Main components comprise:
- Contributions by shareholders
- Reserves
- Retained earnings

59

Australian
School of
Business

Income - definition

Australian
School of
Business

Inflows or other enhancements, or savings in


outflows, of future economic benefits in the form of
increases in assets or reductions in liabilities other
than those relating to contributions from owners, that
result in an increase in equity during the reporting
period.
Income arises due to changes in assets and liabilities
balance sheet emphasis
Income does not depend on an earnings process
Income encompasses revenue and gains
Revenue is a subset of income
Revenue > gross inflows relating to an entitys ordinary
activities implies an earnings process
Gains > income from outside an entitys ordinary
activities
60

Income - definition

Australian
School of
Business

AASB101 Presentation of Financial


Statements requires the disclosure of
Total comprehensive income
Represents the change in equity [net
assets] during a period resulting from
non owner related transactions and
other events.

Expenses - definition

Australian
School of
Business

Consumptions or losses of future economic benefits


in the form of reductions in assets or increases in
liabilities of the entity, other than those relating to
distributions to owners, that result in a decrease in
equity during the reporting period.
The opposite of income
Also depends on changes in assets and liabilities
Expenses encompasses losses as well as expenses
arising in the ordinary course of business
Classification of transactions as assets or expenses is
a challenging area for accounting professionals
Key to correct classification lies in determining whether
the entity has control over expected economic benefits
62

Recognition criteria - general

Australian
School of
Business

The same recognition criteria are applied to all five elements of


the financial statements
1. It is probable that future economic benefits associated
with the item will flow to/(from) the entity;
and

Probable
Probable==more
morelikely
likelythan
thanless
lesslikely;
likely;>50%
>50%chance
chance

2. The item has a cost or other value that can be


measured reliably
Information is considered to be reliable when it is free from
material errors and can be depended upon by users to
represent faithfully the economic substance of the
transactions and events that have occurred.
63

Recognition criteria - revenue

Australian
School of
Business

AASB 118 Revenue provides additional recognition


criteria in relation to revenue to that included within
the Conceptual Framework
Separate recognition criteria are provided for revenue
from:
The sale of goods
The provision of services
Interest, royalties and dividends

64

Recognition criteria expenses


Under the Conceptual Framework expense

Australian
School of
Business

recognition is not tied to the matching process


Emphasis in the Conceptual Framework is on a
balance sheet approach
The Conceptual Framework accepts the use of the
matching process, but requires that it be discarded
if it creates dubious assets and liabilities
E.g.
E.g.provisions
provisionswhere
wherethere
thereisisno
nopresent
presentobligation
obligation

As adherence to the Conceptual Framework is not


mandatory the matching process still has influence
in practice
No overall AASB for expenses (unlike AASB 118 for
revenue). Individual AASBs for specific types of
transactions must be referred to
Fewer regulations in relation to recognition of
expenses
65

Recognition criteria provisions

Australian
School of
Business

Additional recognition criteria for provisions


contained within AASB 137 Provisions,
Contingent Liabilities and Contingent Assets
The amount recognised should be the best
estimate of the expenditure required to settle
the present obligation at the reporting date

66

Recognition criteria
contingent liabilities and
contingent
assets
Such amount are not recognised in financial
statements

Disclosed by way of note


Note that the IASB proposes removal of these
terms

67

Australian
School of
Business

Australian
School of
Business

Measurement

Measurement involves the process of determining the monetary


amounts at which the elements are to be recognised and carried in the
financial statements.

Requires the determination of the value of an item:


on initial recognition
and
subsequently

Most common measurement bases used:


Historical cost
Current cost
Realisable value
Present value
68

Australian
School of
Business

Measurement and
classification - assets

Initially measured at cost. Cost is defined as:


Cash or cash equivalents paid of the fair value of their consideration
given to acquire an asset

Subsequently measured in accordance with relevant accounting


standards. For example
Per AASB 102 Inventories, inventory is recorded at lower of cost or
net realisable value
Per AASB 116 Property, Plant & Equipment, plant & equipment is
recorded at either cost or fair value

AASB 101 Presentation of Financial Statements requires that assets be


classified in the statement of financial position:
by nature (e.g. inventories, receivable, intangibles)
sub-classified as current or non-current
69

Measurement and
classification - liabilities

Australian
School of
Business

Most liabilities are valued at nominal or face value


Some recorded at discounted present value. For example
Per AASB 119 Employee Benefits, liabilities for longterm employee benefits such as long service leave are
recorded at discounted present value
Per AASB 117 Leases, finance lease liabilities are
values using present value techniques
AASB 101 Presentation of Financial Statements requires
that liabilities be classified in the statement of financial
position:
by nature
sub-classified as current or non-current
70

Measurement and
classification - equity

Australian
School of
Business

A residual, so no separate measurement methods


AASB 101 Presentation of Financial Statements requires
that equity be classified in the statement of financial
position by source (contributed or earned)
Major components are:
Contributed equity
Reserves
Retained earnings

71

Measurement and
classification - income

Australian
School of
Business

Under AASB 118 Revenues, revenue is measured at


the fair value of consideration received
AASB 118 requires that revenue be classified by
nature
Major components are:
Revenues from sale of goods
Revenues from services rendered
Interest, royalties and dividends

72

Measurement and
classification - expenses

Australian
School of
Business

Most expenses are measured based on the cost of


consumption or loss of economic benefits in the
current period
AASB 101 Presentation of Financial Statements
requires that expenses be classified in the
Statement of Comprehensive Income by nature or
function
Nature
Naturevs
vsfunction
functionclassification
classificationdiscussed
discussedininmore
moredetail
detailininch
ch13
13

73

Dividends

Australian
School of
Business

Represent a distribution of profits to shareholders


Dividends can only be paid once the company satisfies a
test of solvency
Power to declare dividends at any time rests with directors
(s254U)
Dividends may be in the form of cash, bonus shares or
assets
Constitution usually provides for the declaration of two
types of dividends:
Interim (declared and paid during the year)
Final (declared this year, paid next)
Commonly expressed as a certain amount of cents per
share
74

Dividends

Australian
School of
Business

When does a legal debt arise for dividends?


If constitution states that once declared a dividend is not
subject to further approval
a legal debt arises on declaration
dividend payable recorded at date of declaration
If constitution requires approval by shareholders at a
meeting of shareholders
a legal debt arises on the approval by shareholders
dividend payable recorded once approval obtained
If there is no constitution/constitution is silent
a legal debt arises on the nominated payment date
no dividend payable recorded
75

Dividends

Australian
School of
Business

INTERIM DIVIDEND PAID


Dr

Retained earnings $x
Cr Cash
$x

FINAL DIVIDEND DECLARED


Dr

Retained earnings $x
Cr Dividend payable
$x

Dividend paid/declared accounts are often used in the


above entries and closed to retained earnings as part of
the annual closing process
Final dividends that are declared after year end or require
the approval of shareholders are not recorded in the
financial statements, but are referred to by way of note
disclosure.
76

Preference dividends

Australian
School of
Business

Preference dividends are normally paid before


dividends to ordinary shareholders
Rate of dividend normally set at time of issue
and may be quoted as % or cents per share
Dividends may be cumulative, that is,
undeclared dividends accumulate and must be
paid before dividends are paid to ordinary
shareholders
Preference shareholders may also get an
additional participating dividend

77

Bonus share issues

Australian
School of
Business

Involves the issue of additional shares to existing


shareholders
Shares are issued at no cost in lieu of cash dividend
Can be paid from profits or reserves
The entry required is:
Dr Retained earnings OR reserve
$xx
Cr Share capital
$xx

78

Reserves

Australian
School of
Business

Not defined in The Conceptual Framework, Accounting


Standards or Corporations Act

Reserves arise as a result of:


1. Requirements of Accounting Standards
Asset revaluation surplus
Discussed
Discussedininlater
laterchapters
chapters
Foreign currency translation reserve
2. Appropriations of profits
General reserve
Contingencies reserve
3. Application of the Corporations Act
Forfeited shares reserve
Discussed
Discussedininchapter
chapter22
Lapsed options reserve
79

Reserves

Australian
School of
Business

APPROPRIATION OF PROFITS
Such transfers do not involve cash transfers or
creation of secret cash balances
The transfer can signal to shareholders that these
profits will not be distributed as dividends
Creation/increase in reserves:
Dr Retained earnings (tfr to reserve) xx
Cr Reserve
xx

A transfer to/from reserve account is often used in

the above entries and closed to retained earnings as


part of the annual closing process

80

Retained earnings

Australian
School of
Business

Retained earnings (opening balance)


+ current year profit/loss
+ transfers from reserves
dividends paid and provided
transfers to reserves
= Retained earnings (closing balance)
Movements in retained earnings are disclosed in the
Statement of Changes in Equity or in the notes to
the financial statements

81

Australian
School of
Business

Next Lecture

Chapter 6: Accounting for


Company Income Tax

Thank you!

82