Type:
Solution Manual
Resource:
Issues in Financial Accounting
Edition:
16th Edition
Author(s):
Scott Henderson Graham Peirson Kathy Herbohn Tracy Artiach Bryan Howieson
Chapter 1 INSTITUTIONAL ARRANGEMENTS FOR SETTING ACCOUNTING STANDARDS IN AUSTRALIA LEARNING OBJECTIVES After studying this chapter you should be able to: 1
identify the main sources of regulation of financial reporting;
2
identify the major developments in the institutional arrangements for accounting standard-setting;
3
explain the present accounting standard-setting arrangements;
4
explain the process of developing accounting standards and concepts statements in Australia;
5
explain the process of developing interpretations; and
6
explain the process of enforcing accounting standards and interpretations.
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QUESTIONS 1
The three main sources of regulation governing accounting policies and financial reporting practices in Australia are government legislation, the Australian Securities Exchange Ltd (ASX) Listing Rules, and accounting standards and other pronouncements issued by the Australian Accounting Standards Board (AASB). Government Legislation: In the private sector, the most important legislation specifying financial reporting requirements is the Corporations Act 2001. In particular, the Corporations Act specifies general requirements that require the financial report to comply with accounting standards and to present a true and fair view. The form and content of the statement of comprehensive income, statement of financial position, statement of changes in equity and statement of cash flows are considered in accounting standards issued by the Australian Accounting Standards Board (AASB) that are discussed in later chapters of this book. ASX Listing Rules: The listing rules of the ASX apply only to entities whose securities are listed on the ASX. The disclosure requirements of the ASX are contained in Chapter 3 (continuous disclosure), Chapter 4 (periodic disclosure) and Chapter 5 (additional reporting on mining and exploration activities) of the listing rules. The listing rules specify the detailed disclosure of financial information and require the disclosure of some information not required by the Corporations Act (e.g. various disclosures relating to the 20 largest holders of each class of quoted equity securities). If a listed company does not comply with the ASX Listing Rules, it may be delisted. The ASX has also issued Corporate Governance Principles and Recommendations as amended in 2014 through its Corporate Governance Council. There are eight guidelines to which 29 recommendations are attached. The guidelines and associated recommendations are not mandatory. However, the listing rules include two mandatory requirements relating to the corporate governance guidelines. First, ASX Listing Rule 4.10.3 requires listed entities to disclose in their annual reports the extent to which they have followed the guidelines during the reporting period. Second, ASX Listing Rule 12.7 requires that companies included in the S&P/All Ordinaries Index have an audit committee and that companies included in the S&P/ASX 300 Index have an audit committee that is constituted in accordance with the Corporate Governance Principles and Recommendations. Accounting Standards and Other Pronouncements Issued by the AASB: The third source of regulation governing financial reporting is accounting standards and . 2
interpretations prepared by the Australian Accounting Standards Board (AASB). Accounting standards and interpretations are concerned with both accounting measurement and disclosure. Authority is provided to AASB accounting standards by the Corporations Act. The Accounting Professional and Ethical Standards Board (APESB) provides similar authority for Australian accounting standards via APES 205 ‘Conformity with Accounting Standards’ (para. 5). 2
The role of the ASX’s Corporate Governance Principles and Recommendations as amended in 2014 is to provide a voluntary code of best practice corporate governance to guide listed companies. There are eight principles supported by 29 recommendations provided to listed companies. The guidelines and associated recommendations are not mandatory. However, the listing rules include two mandatory requirements relating to the corporate governance guidelines. First, ASX Listing Rule 4.10.3 requires listed entities to disclose in their annual reports the extent to which they have followed the guidelines during the reporting period. Second, ASX Listing Rule 12.7 requires that companies included in the S&P/All Ordinaries Index have an audit committee and that companies included in the S&P/ASX 300 Index have an audit committee that is constituted in accordance with the Corporate Governance Principles and Recommendations. The guidelines are always a ‘work-in-progress’ as their application and relevance need to be monitored as business practices and community expectations change over time.
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The Australian Professional and Ethical Standards Board (APESB) was established as an initiative of CPA Australia and the then ICAA (now CAANZ) primarily to develop and issue appropriate professional and ethical standards for their membership. (The IPA has subsequently become a member.) The APESB has reviewed existing professional and ethical standards such as the old Code of Professional Conduct and Miscellaneous Professional Statements (APS series) and guidance notes (GN series). The subsequent APES series of ethical and professional standards approved by the APESB are mandatory for accountants who are members of CPA Australia, the ICAA and the IPA. The specific professional standard and ethical standard APES 205 ‘Conformity with accounting standards’ requires members to comply with accounting standards as follows: 4.3 Members who are involved in, or are responsible for, the preparation and/or presentation of Financial Statements of a Reporting Entity shall take all reasonable steps to ensure that the Reporting Entity prepares General Purpose Financial Statements. . 3
5.1 Members shall take all reasonable steps to apply Australian Accounting Standards when they prepare and/or present General Purpose Financial Statements that purport to comply with the Australian Financial Reporting Framework. 5.2 Where Members are unable to apply Australian Accounting Standards pursuant to paragraph 5.1, they shall take all reasonable steps to ensure that any departure from Australian Accounting Standards, the reasons for such departure, and its financial effects are properly disclosed and explained in the General Purpose Financial Statements. 5.5 Members in Public Practice shall take all reasonable steps to ensure that Clients have complied with Australian Accounting Standards when they perform an Audit or Review Engagement or a compilation Engagement of General Purpose Financial Statements which purport to comply with the Australian Financial Reporting Framework. Compliance with APES 205 is mandatory for members of the professional accounting bodies, and non-compliance represents a breach of the code of ethics issued by the Accounting Professional and Ethical Standards Board. Failure by members to comply with the requirements of APES 205 could result in disciplinary proceedings being brought against them, which could result in the imposition of a fine or expulsion from the professional body. 4
The present institutional arrangements for accounting standard-setting in Australia are summarised in Figure 1.1 in Chapter 1. Financial Reporting Council: The Financial Reporting Council (FRC) is a statutory body under the Australian Securities and Investments Commission Act 2001. It is the peak body responsible for the broad oversight of the accounting and auditing standard-setting process in Australia. The FRC is also responsible for monitoring the effectiveness of auditor independence requirements in Australia and has an oversight function of the Auditing and Assurance Standards Board (AUASB). In general, the FRC has responsibility for oversight of the AASB and for presenting reports and advice on the Australian accounting standard-setting process to the Minister. The role of the FRC includes: • • •
appointment of the members of the AASB (except for the full-time Chair who is appointed by the Minister); approving and monitoring the AASB’s priorities, business plan, budget and staffing arrangements; determining the AASB’s broad strategic direction; . 4
• •
giving the AASB directions, advice or feedback on matters of general policy and the AASB’s procedures; and monitoring the development of international accounting and auditing standards, working to further the development of a single set of accounting and auditing standards for world-wide use and promoting the adoption of these standards.
Although the FRC has wide-ranging powers, the FRC cannot become involved in the technical deliberations of the AASB. For example, the FRC does not have the power to veto a standard formulated or recommended by the AASB, nor direct the AASB in relation to the development or making of a particular standard. Under section 235A of the Australian Securities and Investments Commission Act 2001, members of the FRC are appointed by the Minister and hold office on terms and conditions determined by the Minister. <www.frc.gov.au>. Australian Accounting Standards Board: The Australian Accounting Standards Board (AASB) began operations in 1991, replacing the Australian Accounting Standards Review Board (ASRB). At this time, the ASRB was Australia’s sole standard-setting body for the private sector and its activities were complimented by the Public Sector Accounting Standards Board (PSASB) which developed accounting standards applicable to all other reporting entities. The passage of CLERP in October 1999 resulted in the activities of the PSASB merging into those of the AASB. The reconstituted AASB is an Australian government agency under the Australian Securities and Investments Commission Act. It has responsibility for making accounting standards applicable not only to entities coming under the jurisdiction of the Corporations Act but also for entities in the public sector and the remainder of the noncorporate sector. The AASB’s major functions are specified in section 227(1) of the Australian Securities and Investments Commission Act as follows: 1) to develop a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating proposed accounting standards and international standards; 2) to make accounting standards under section 334 of the Corporations Act 2001 for the purposes of the national scheme laws; 3) to formulate accounting standards for other purposes; 4) to participate in and contribute to the development of a single set of accounting standards for worldwide use; and 5) to advance and promote the main objectives of Part 12 of the Act as set down in section 224, which include reducing the cost of capital, enabling Australian entities
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to compete effectively overseas and maintaining investor confidence in the Australian economy. The Minister appoints the chair of the AASB, and the chair is subsequently accountable to the Minister regarding the operations of the AASB. The AASB comprises nine parttime members plus the full-time chair. Member appointments to the AASB are made by the FRC from nominations received from a number of bodies including CPA Australia, the ICAA, the Business Council of Australia and the ASX. In addition, the AASB presently has one observer – the member of the International Accounting Standards Board, the Australian representative of the IFRS Interpretations Committee. Meetings of the AASB are open to the public. <www.aasb.com.au>. The Office of the AASB: The Governance Review Implementation (AASB and AUASB) Bill 2008 was passed by Parliament in June 2008. Inter alia, the Bill established the Office of the AASB to support the operations of the AASB through the provision of technical and administrative services, information and advice. The chief executive officer of the Office is the chair of the AASB, who is also responsible to the Minister for the financial management of the Office. The Minister: The Minister is one of three Treasury Ministers from the Federal Government. 5
The AASB will typically issue material for public comment and discussion with stakeholders in the form of: • • • •
Discussion Papers (DP) outlining a wide range of possible accounting policies on a particular topic; Exposure Drafts (ED) of a proposed standard or amendment to a standard; Invitations to Comment (ITC) that seek feedback on broad proposals; or Draft Interpretations of a standard.
At present, constituents’ comments on the materials issued by the AASB are obtained from the following avenues: Focus Groups, Project Advisory Panels, Interpretation Advisory Panels, and the Academic Advisory Panel. Focus Groups: There are currently two Focus Groups – the User Focus Group and the Not-for-Profit Focus Group. In general, these groups serve as a resource to the AASB in formulating standard-setting priorities, advising on specific agenda projects and providing feedback to assist on developing standards. The User Focus Group generally comprises eight to
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