AF314

Chapter 1

Nature and regulation of companies

Presenter

Associate Professor Parmod Chand

Macquarie University, Sydney, Australia

 Nature of a company
• A company is a legal entity
– Subject to requirements of Companies Act in Fiji

• A company has:
– the advantage of limited liability (Note1) 2 million companies
– separate legal existence from its members in Australia
– the legal powers of a natural person
– financing advantages
– the right to own assets and enter contracts
– the right to sue and be sued
 Types of companies

• Proprietary (Pty) companies

– Cannot raise funds from the public
– Classified as large or small (see reduced disclosure requirements later)

• Public companies
– Can invite public to subscribe for securities
– Can list on South Pacific Stock Exchange (SPSE)
– Must prepare published financial statements and be audited
 Administration of a company

• Directors manage on behalf of the members

• Certain registers and records must be maintained
– Minute books – records actions/decisions in meetings
– Financial records – to enable statements to be audited
– Registers of members (Share register)
– Register of option holders
– Register of debenture holders
• Required to be kept at the company’s registered
office
 Funding a company
• A public company can raise funds by issuing securities:
– Shares (equity)
– Debentures (debt)
– Options (equity)
• Shares represent ‘ownership’ and can be issued to the
public or privately ‘placed’ with new investors or
current shareholders
• Debentures represent a claim on the assets of the
company and may be secured by a fixed or floating
charge of the company’s assets
Funding – disclosure documents
• Most public issues of shares, debentures or options
require a disclosure document to be issued:
– Written notice inviting subscription
– Content regulated by Corporations Act
– Contains issue price, terms and conditions

• A prospectus is an example of a disclosure document

 Accounting regulation of companies

• 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)
 The Regulatory Framework in Fiji

Question 1
Describe the standard setting framework in Fiji.
International Accounting Standards Board
(IASB)
• 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
 IFRS Interpretations Committee

• Sub-committee of the IASB

• Considers issues of widespread importance not covered in IFRS
standards
• IFRS Interpretations are adapted by the FIA to suit the Fijian
environment

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 The International Federation of Accountants (IFAC)

– Responsible for issuing International Auditing, Public

sector accounting (government and non-profit
organisations), Education, and Ethics standards.
– Represents accountants employed in public practice,
industry and commerce, government, and academe
worldwide.
– IFAC has 157 member bodies in 123 countries,
representing 2.5 million accountants.
– Advocacy Group that works with IASB. Helps to develop
the profession globally.

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 GPFRs and the reporting entity concept

• 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
(FIA) accounting standards

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 GPFRs and the reporting entity concept

• 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 Conceptual Framework

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 Reduced disclosure regime (RDR)

• The Fiji Institute of Accountants (FIA) designated

a number of categories of reporting entities as
‘large’ and subject to regulation under the full
range of IFRS adopted by Fiji in 2007. These
categories are:
a) Public companies, as defined by the Companies Act;
b) Government majority-owned companies;
c) Banking and financial institutions;
d) Superannuation, insurance and insurance broking
entities;

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 RDR cont…

e) Government entities established under their own statute with an

annual turnover of at least $5 million;
f) Entities with an annual group turnover of at least $20 million or with
assets exceeding $20 million;
g) Entities that are publically accountable (which have debt or equity
instruments on public issue or have coercive power to tax, rate, or levy to
obtain public funds) with an annual turnover of at least $5 million;
h) Entities with an annual turnover of at least $5 million;
i) Entities over which any of the above listed entities have significant
influence, because equity accounting would be applicable for the investor
company reporting.

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 Chapter 4
Disclosure: legal
requirements and accounting
policies
 Annual Reporting Requirements

1. Financial Statements:
– Statement of financial position as at the end of the year
– Statement of comprehensive income
– Statement of changes in equity
– A statement of cash flows for the year
– If required consolidated accounts

2. The notes to the financial statements

- The notes must contain all information necessary to ensure that the
financial report provides a true and fair view of the financial position
and performance of the company/consolidated entity.

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 Annual Reporting Requirements

3. The directors’ declaration about the statements and notes

– This declaration must state whether, in the directors’ opinion:
• there are reasonable grounds to believe that the
company is solvent — that is, able to pay its debts
as and when they become due and payable;
• the financial statements and notes are in
accordance with the Corporations Act; and
• a statement of compliance with IFRSs in the notes
to the financial statements (where the entity has
in fact complied with such requirements)

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 Annual Reporting Requirements

4. Compliance with accounting standards

 Corporations Act requires a “true & fair view” to be shown

 Corporations Act requires compliance with AASB (FIA) accounting standards (some
exceptions for small proprietary companies)

 Compliance with AASBs (IASs) is presumed to result in fair representation

 Non-compliance is allowed if management concludes that compliance does not provide a

“true & fair view”

 AASB 101 (IAS 1) requires detailed additional disclosures in such circumstances outlining the
reasons etc for the departure.

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 Annual Reporting Requirements

5. The true and fair view of financial position and performance

• What is the meaning ‘true and fair’, ‘financial position’ and
‘financial performance’?
• Not defined in the Act or in IAS 1
• Financial position and performance are discussed in the Framework
• IAS 1 – adopts the ‘present fairly’ approach
• Is this the same thing as ‘true and fair view’?
6. Comparative information
• IAS 1 (para. 38) requires in financial statements and notes
– Comparative information from previous financial year shall be presented
alongside the current year information

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 Annual Director’s Report

• Annual financial report must be accompanied by a Director’s Report

• Two main parts:
General management discussion including:
• Review of operations and results thereof
• Details of significant changes during the year
or after reporting date
• Likely future developments
• Entity’s performance in environmental regulations
Specific information:
• Information about dividends, directors, options and indemnities,
unissued shares

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 Annual Auditor’s Report

The auditor must form an opinion as to whether the:

• financial report is in accordance with Corporations Act and AASB (FIA)

accounting standards
• Financial report gives a true and fair view
• auditor has been given all necessary information and explanations
• company has kept financial records to enable a financial report to be
prepared and audited
• company has kept registers and records required by the Corporations
Act

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 Accounting policies

• Accounting policies are the principles, bases or rules adopted by a

company in preparing and presenting its financial reports
• AASB 108 (IAS 8) Accounting Policies, changes in Accounting estimates
and error is the accounting standard which deals with:
– Setting accounting policies
– Changing accounting policies
– Disclosures in the financial statements concerning accounting
policies

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 Disclosure of accounting policies

1. A statement that the financial statements are GPFS; in addition, the note
discloses
– Identification of the statutory basis or other reporting framework that underpins
their preparation
– Whether the entity is for-profit or not-for-profit
– A statement that the statements are prepared in accordance with:
• accounting standards
• interpretations of accounting standards
2. The measurement basis or bases used in preparing the financial
statements.

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 Disclosure of accounting policies

3. A description of accounting policies.

– AASB 101 (IAS 1) states that the information provided should
allow users to understand how transactions and other events
are reflected in the reported financial performance and
position.
– In many cases other accounting standards prescribe the
information to be disclosed about accounting policies.
– Eg. AASB 102 (IAS 2) Inventories requires disclosure of the
accounting policies adopted in measuring inventories including
the cost formula used.
– Otherwise management judgement is required.

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 Disclosure of accounting policies

4. Significant judgements
• Judgements,
– apart from those involving estimations,
– that management has made in the process of applying the entity’s
accounting policies
– that have the most significant effect on the amounts recognised in the
financial statements
• For example: AASB 12 (IFRS 12) Disclosure of Interests in Other
Entities
– Disclose the judgments and assumptions made in determining
– that the entity does not control another entity
– even though it holds greater than half the voting rights in that entity

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 Disclosure of accounting policies

5. Critical assumptions and estimations

• Information about assumptions made concerning the future
• Major sources of estimation uncertainty
– that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year
• Examples of difficult, subjective or complex judgements:
– Provisions subject to the future outcome of litigation in progress
– Long-term employee benefits such as superannuation obligations
– Recoverable amount of specialised classes of property, plant and equipment

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Disclosures of changes in accounting policies

Adoption of a new or revised standard

• If a change in policy is made, resulting from new or revised
standards, AASB 108 (IAS 8) requires disclosure of:
– The title of the standard
– Whether the change is in accordance with transitional provisions, the
nature of those provisions and their effect on future periods
– The nature of the change in accounting policy
– To the extent practicable, the amount of the adjustment for the current and
previous periods to each financial statement line item affected
– Whether comparative values have been restated or not (if not, why not)

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Disclosures of changes in accounting policies

Voluntary changes in accounting policies

• If a policy change was voluntary, AASB 108 (IAS 8) requires
disclosure of:
– the nature of the change
– the reasons that applying the new policy provides more reliable
and relevant information
– to the extent practicable, the amount of the adjustment for the
current and previous periods to each financial statement line
item affected
– the amount of any adjustment to periods prior to those
presented to the extent practicable

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 Changing accounting estimates

• Accounting estimates often change as new information arises

• Such changes require prospective application
• Disclosure of the nature and amount of the change that affected financial
position or performance is required
Example
• Part way through its useful life, a depreciable PPE asset is reassessed due
to technological developments
– Shorter useful life and lower residual value
• Depreciation expense
– Recognised in prior periods is not changed
– The remaining depreciable amount of the asset is written off over its remaining
(shorter) useful life
• Disclosures are provided regarding the impact of the changes

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 Errors

• Prior period errors are omissions from or misstatements in one more

prior periods, that are discovered in the current period
• Errors include
– Mathematical mistakes, oversight or misinterpretation of facts, mistakes in
applying accounting policies and fraud
• Discovered material errors must be corrected retrospectively
– Errors discovered in the previous period
– restate the comparative amounts reported in the current financial statements
– Errors discovered in earlier periods (before the previous period) – restate the
opening balances of the assets, liabilities and equity included in the comparative
figures

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 Impracticability in retrospective
adjustments

• Impracticable refers to the inability of a company to apply a

requirement of AASB 108 (IAS 8) after making every reasonable effort
to do so.
• For example
– Data may not have been collected in prior periods to adjust comparative
information in a way that allows retrospective application of a new accounting
policy.

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 Materiality

• Information is material if its omission, misstatement or

non-disclosure could adversely affect users’ decisions or
management’s discharge of its accountability

• Materiality assessments require judgement and apply to

both the nature and amounts of misstatements.

• In Australia, AASB 1031, provides guidelines to help

determine whether the amount of an item is material

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 Materiality Guidelines

Process:
1. Select appropriate base amount
2. Calculate error/omission amount as a percentage of the base
3. If error/omission > than 10% of base = material
If error/omission < than 5% of base = immaterial
If between 5 and 10% – apply judgement

• Remember these are ‘guidelines’ only and are no substitute for

professional judgement
• Some items are material regardless of their amount, but are material due
to their nature – eg related party transactions

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 Events occurring after the end
of the reporting date

• Events can occur after the end of the reporting period that help to
identify or clarify conditions that existed at the end of the reporting
period
• AASB 110 (IAS 10) defines an event after reporting date as ‘…those
events, both favourable and unfavourable, that occur between…’
– The date the directors’ declaration is signed is the day the financial statements
are authorised for use
• If an event affects the going concern basis, the accounts will need to
be redrafted
• Such events are classified into two types:
– Adjusting events
– Non-adjusting events

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 Events occurring after the end
of the reporting date
Adjusting events
• Those that provide evidence of conditions that existed at the end
of the reporting period
• Examples:
– Settlement of a law suit which had been in process at reporting date
– Bankruptcy of a major customer
• AASB 110 (IAS 10) requires
– An adjustment to the financial statements before their publication for the
financial effect of the event
– This could involve recognising an amount, adjusting a balance,
reclassification of an item or a change in a disclosure

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 Events occurring after the end
of the reporting date
Non-adjusting event
• Those that are indicative of events that arose after the end of the
reporting period
• Examples:
– An uninsured flood that destroys the company’s manufacturing plant
– A major business combination
• Generally such events relate to future operations / results
• AASB 110 (IAS 10) requires:
– Note disclosures regarding the nature of the event and an estimate of its
financial effect (if possible)
– Para. 21 applies a materiality test for non-adjusting events

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 Question 2

• Practice Question 4.4 (Leo 11e)

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Q2 Solution…

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 Tute Questions

Leo 11e Chapters 1 & 4

Chapter 1
1. Review Question 1
2. Review Question 11
3. Review Question 12

Chapter 4
4. Review Question 4
5. Practice Question 4.6
6. Practice Question 4.7