• Accounting is the process of identifying, measuring,

recording and communicating economic information to

permit informed judgements and economic decisions by
What have we users of the information
• General Purpose Financial Report includes
learned so far • income statement -Revenue and Expense
• statement of financial position -Assets, Liabilities, and
Equity
• statement of changes in equity -Equity: share capital,
retained earnings, dividends, etc
• statement of cash flows
ACC701 Conceptual Framework and Reporting
Week 4 Lecture
 Learning objectives​:

After studying this presentation, you should be able to:

• understand the major sources of regulation of financial reporting
Accounting in Australia
• identify the roles of the key bodies involved in financial
regulation and reporting regulation in Australia
• explain the structure, role and processes of the
the conceptual International Accounting Standards Board and the IFRS
Interpretations Committee
framework • explain the key components of the Conceptual Framework
• explain the qualitative characteristics that make information
in financial statements useful
• describe the objective and scope of financial statements prepared
by a reporting entity
• define the basic elements in financial statements — assets,
liabilities, equity, income and expenses
• explain the criteria for recognising and derecognising the elements
of financial statements
After studying this 01 02 03
presentation, you compare alternative
measurement bases
explain the concepts
that underpin how
outline concepts of
capital
should be able to for measuring the
elements of financial
information should
be presented and
statements disclosed
 The major sources of financial
reporting regulation in Australia are:
• the Corporations Act 2001
Key sources of • Australian accounting standards
• The Conceptual Framework for
regulation of Financial Reporting
financial reporting • ASX Listing Rules
in Australia
Key sources of regulation of financial reporting in
Australia

-Requires the preparation of financial reports for

all:
• Disclosing entities
• Public companies
• Large proprietary companies (vs. small proprietary companies)
• Registered schemes
Key sources of
regulation of Australian accounting standards
financial -The following standards apply to the preparation
reporting in of financial statements
Australia
• AASB 101 Presentation of Financial Statements
• AASB 107 Statement of Cash Flows
• AASB 108 Accounting Policies, Changes in
Accounting Estimates and Errors
• AASB 1048 Interpretation of Standards
 • The reporting entity concept is used to
Key sources determine whether entities are required to
present General Purpose Financial Reports
of regulation • requires professional judgement
of financial • The AASB adopted International Financial
Reporting Standards (IFRS) in 2005
reporting in • The AASB issues accounting standards with
Australia requirements that are the same as those of
IFRSs
Key sources of
regulation of A conceptual framework:
financial -The purpose is to provide a coherent set of
reporting in principles
Australia • assists with standard consistency
• assists preparers deal with issues not
addressed by a standard
• assists auditors in forming an opinion on
compliance
• assists users to interpret statements
Key sources of regulation of financial reporting in
Australia
Australian Securities Exchange Listing Rules:

Companies listing on the ASX The Listing Rules include It would be a breach of a law to The information concerns an Primary focus on disclosure
need to comply with the ASX requirements for continuous disclose the information incomplete proposal of
Listing Rules disclosure and periodic negotiation
reporting
Australian accounting
standard-setting
institutional
arrangements

The role of
key players
in financial
reporting
regulation
 Financial • The Financial Reporting Council is a statutory body under
the Australian Securities and Investments Commission Act
Reporting • Responsibility for the processes for setting accounting
Council (FRC) standards
• The FRC does not have power to direct or veto
developments and decisions by the AASB
The role of key players in
financial reporting
regulation
 Australian
• The functions of the AASB include
Accounting • to develop a conceptual framework
Standards • to make accounting standards under s.334 of the
Corporations Act.
Board • It may formulate an accounting standard by issuing the text
of an international accounting standard
• AASB has two focus groups.
 Australian
• Australia’s corporate, markets and financial services
Securities and regulator
• Undertakes financial reporting surveillance
Investments • Aims to improve the quality of financial reporting
Commission • Ensure financial statements comply with
• Australian accounting standards.
• The Corporation Act.
 Functions of ASIC:
The Australian Securities and Investments Commission Act 2001 requires ASIC to:

The role of key • maintain, facilitate and improve the performance of the
financial system and entities in it
players in • promote confident and informed participation by investors
and consumers in the financial system
financial • administer the law effectively and with minimal procedural
reporting requirements
• enforce and give effect to the law
regulation • receive, process and store, efficiently and quickly,
information that
• make information about companies and other bodies
available to the public as soon as practicable
• take whatever action can, and which is necessary, to
enforce and give effect to the law
 Issues examined in ASIC’s review of 30 June 2018 financial reports:
1. Asset values and impairment testing

The role of key • Reasonableness of cash flows and assumptions

players in •Determining the carrying amount of cash generating units

•Use of fair value

financial •Impairment indicators

•Disclosures

reporting 2.Revenue recognition

3.Tax accounting
regulation 4.Consolidation accounting
5.Business combinations
6.Expense deferral
7.Estimates and accounting policy judgements
The role of key Australian Prudential Regulation Authority (APRA)
players in • Prudential regulator of the Australian financial services
financial industry
• Aims
reporting • promote financial stability by requiring institutions to
regulation manage risk prudently
• minimise the likelihood of financial losses
• identify key risks and ensure the risks are adequately
measured, managed and monitored
 Australian Securities Exchange Group (ASX):

The role of key

players
in financial
reporting Oversees compliance with its operating rules
regulation

Promotes standards of corporate governance among Australia’s listed

companies

Helps to educate retail investors

 The role of key
players in financial • The ASX relies on a range of subsidiary
brands
reporting • Australian Securities Exchange
• ASX Clearing Corporation
regulation • ASX Settlement Corporation
• ASX Compliance
 Australia adopted

The standards issued by IASB

on or after 1 January
Independent standard-
setting board

International
Accounting IASB & IFRS
Interpretations
Standards Board Committee appointed
by geographically &
professionally diverse
Develops & approves
International Financial
Reporting Standards
trustees

IFRS Interpretations
Committee issues
interpretations &
guidance for
accounting standards
The components of the
Conceptual Framework
 The IASB’s
conceptual
• Chapter 1: the objective of general-purpose financial
framework for reporting
financial • Chapter 2: the reporting entity
reporting • Chapter 3: the qualitative characteristics of useful financial
reporting
comprises 8
• Chapter 4: the Framework
chapters • Chapter 5: recognition and derecognition
• Chapter 6: measurement
• Chapter 7: presentation and disclosure
• Chapter 8: concepts of capital and capital maintenance
 The Australian conceptual
framework comprises:
The
- the Framework for the Preparation & Presentation of
components of Financial statements.
the Conceptual
Framework
- SAC 1 Definition of the Reporting Entity
The components of the
Conceptual Framework
The Australian
• Improves
conceptual • measurement
framework • financial performance
• presentation and disclosure
comprises • derecognition
• the reporting entity
 The
components
of the • The objective of financial reporting:
Conceptual • Financial statements
• reflect the perspective of the entity
Framework • Not the perspective of the entity’s equity investors
 • The objective of financial reporting:
The
components • The key users of financial statements
• capital providers (existing or potential)
of the • investors
• lenders
Conceptual • other creditors
Framework
 • The objective of financial reporting:
The objective • The basic elements are
• assets
of financial • liabilities
reporting • equity
• income
• expenses
 The reporting entity:
- The Conceptual Framework is reserved for the reporting
entity

The
components of - IASB released an exposure draft proposing a revised
Conceptual Framework for Financial Reporting
the Conceptual
Framework
- It improves coverage of the reporting entity
Qualitative characteristics
of useful information
Fundamental qualitative characteristics:

Relevance

Capable of making a difference in the predictive value

decisions made by the capital providers
 Fundamental qualitative characteristics:

Faithful • Attained when the economic phenomenon

is depicted completely, neutrally and free
representation from material error
 Qualitative
characteristics of useful
information
 • Enhancing qualitative characteristics:

• Quality of information that enables users to identify

similarities in and differences between two sets of
economic phenomena
Comparability
 • Enhancing qualitative characteristics:

• Quality of information that helps assure

users that information faithfully represents
Verifiability the economic phenomena
 • Enhancing qualitative characteristics:
– Timeliness
Having information available to decision makers before it
Qualitative loses its capacity to influence decisions

characteristics
of useful – Understandability
information
It is the quality of information that enables users to
comprehend its meaning
 • Cost constraint on useful financial reporting:
Qualitative
characteristics Provision of Benefits of supplying
information should
information incurs
of useful costs always be greater than
the costs
information
 • Financial statements are prepared under
the assumption that the entity will
continue to operate for the foreseeable
Going concern future.
• Implications in accounting:
assumption • justification for use of historical costs
• systematic allocation of depreciation
• supports the use of prepaid expenses
(an asset)
 Definitions of the
elements of financial
statements
 • ‘a present economic resource controlled by the entity as a
result of past events…An economic resource is a right that
Assets has the potential to produce economic benefits’
 • ‘a present obligation of the entity to transfer an economic
Liabilities resource as a result of past event’
 ‘the residual interest in the assets of the entity after
deducting all its liabilities’

Equity is a residual

• Equity = Assets – Liabilities

Equity
Increases as a result of profitable operations

Influenced by the measurement system adopted for A &

L and the concepts of capital and capital maintenance
 increases in assets

or decreases in liabilities

Income
that result in increases in equity

other than those relating to contributions

from holders of equity claims
 decreases in assets

or increases in liabilities

Expenses
result in decreases in equity

other than those relating to distributions

to holders of equity claims
Recognition of • Asset or liability
elements of
• Recognised only if recognition of that asset
financial or liability and of any resulting income,
statements expenses or changes in equity provides
users with useful information
 • Asset or liability
Recognition of
elements of • Recognition must provide
• relevant information about the asset
financial or liability and about any resulting
income, expenses or changes in equity
statements • a faithful representation of the asset
or liability and of any resulting
income, expenses or changes in equity
Recognition of elements
of financial statements
 Not all information about
recognition of elements of
financial statements
provides ‘relevant’
information
it is uncertain whether an
asset or liability exists, or

Relevance For example, information

may not be relevant if
an asset or liability exists,
but the probability of an
inflow or outflow of
economic benefits is low
 • Faithful representation:
Recognition
of elements Relates to measurement
of financial
statements May rely on reasonable estimates which can be
subject to measurement uncertainty
 An entity must remove all or part of a recognised
asset or liability from an entity’s statement of
financial position when the item no longer meets
Derecognition the definition of an asset or a liability
of elements
of financial Assets: derecognition normally occurs when the
entity loses control of all or part of the recognised
statements asset

Liabilities: derecognition normally occurs when the

entity no longer has a present obligation for all or
part of the recognised liability
 Derecognition of
elements of financial
statements
 - any assets and liabilities retained after
the transaction or other event that led to
Conceptual the derecognition (the control approach)
Framework
stipulates that
derecognition aims
to faithfully
represent both: the change in the entity’s assets and
liabilities as a result of that transaction or
other event (the risks-and-rewards
approach).
Several measurement
bases may be used
Presentation and disclosure
Effective communication of information in financial statements requires:

focusing on presentation and disclosure objectives and principles

rather than focusing on rules;

classifying information in a manner that groups similar items and

separates dissimilar items; and

aggregating information in such a way that it is not obscured either

by unnecessary detail or by excessive aggregation.
Presentation and disclosure
• Classification
- based on shared characteristics such as the nature of the item, its function, and
how it is measured

• Aggregation
- summarises a large volume of information by adding together assets, liabilities, equity,
income or expenses that have shared characteristics and are included in the same classification

- conceals some detail

Summary

A reporting entity in the The key bodies involved in

context of the regulation accounting regulation in IASB and IFRIC
of financial reporting Australia

Going concern assumption

Key components of the Qualitative characteristics
underlying the preparation
Conceptual Framework in financial statements
of financial statements
Summary

The principles for

The basic elements in
recognising the elements
financial statements
of financial statements

Alternative bases for

Presentation and
measuring the elements
disclosure
of financial statements
Questions?