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1The University of Sydney To physically attend classes, you must be fully vaccinated against COVID-19 or have a negative PCR test within 3 days prior or a negative rapid antigen test on the day you attend class If you are feeling unwell or you have had a positive COVID result you must not come to campus. Please attend class remotely where possible and make alternative arrangements with your class instructor (to be continued next slide) “Thanks for helping to make our teaching spaces as safe as we can” Keeping our community safe The University of Sydney Page 2 Wear masks inside all University of Sydney buildings Maintain physical distancing (keep 1.5 m away from others) Wash your hands regularly Practice cough etiquette (cough or sneeze into your elbow or a tissue) “Thanks for helping to make our teaching spaces as safe as we can” Keeping our community safe 1 2 2The University of Sydney Page 3 Keeping our community safe – The University is following advice from the government and related public health authorities. – For the latest information, see the advice on the University website. – In some classes, especially those involving use of shared equipment, please follow additional advice from your coordinators. – Please take care of each other and yourselves and if you need support reach out to your unit coordinator or the health and wellbeing area of the Current Students website. The University of Sydney Page 4 ACCT2011 Financial Accounting A Topic 1: Introduction and conceptual framework for financial reporting These notes only summarise key points Textbook and other reading is essential 3 4 3The University of Sydney Page 5 Introduction – Resources Reading materials – Textbook “Issues in Financial Accounting” 16th ed., 2017 (Referred to as “H&P”) ( See Starting ACCT 2011 Checklist for ebook and online purchase information) – AASB Conceptual Framework 2019 and all relevant accounting standards as indicated in Canvas for each topic can be downloaded from the AASB website – Other readings and support materials may be provided through library website or available on Canvas All topic readings and support materials are examinable The University of Sydney Page 6 5 6 4The University of Sydney Page 7 Introduction – How will you learn As a general rule you should plan to spend no less than 9 hours for each topic on studying in this unit. Below is a suggested approach. Complete all items on the Starting ACCT 2011 Checklist (Refer Canvas) Before your tutorial: – Become familiar with the topic’s learning objectives – View all parts of the topic’s lecture recording – Read and view the topic learning materials (lecture slides, H&P textbook, parts of accounting standards and other resources) – Make a note of points you do not understand – Attempt the topic’s tutorial questions Refer to ACCT2011 Canvas Site – Topic 1 Module Please check Canvas regularly for updates and announcements The University of Sydney Page 8 Introduction – How will you learn After your tutorial: – Re-read, re attempt and review the topic materials, resources and tutorial questions – Do the self study and post work review (MCQ) practice questions. Check your answers against the suggested solutions and feedback – Make your own notes and summaries. The lecture slides provide a summary only – Attend a weekly Q&A drop in session to ask questions or listen to questions asked by other students – Seek, consider and implement feedback on your work Note: All learning objectives for each topic may not be extensively covered in class time but they are examinable 7 8 5The University of Sydney Page 9 Introduction – How will you learn This semester the ACCT 2011 staff will support your learning with: – ACCT 2011 pre-test, provides feedback on the level of accounting knowledge you currently have (Part of the Starting ACCT 2011checklist in Canvas) – Lecture recording – Tutorial discussion – Discussion forums on Canvas – Q&A Drop-In Sessions – Practice self-study questions The University of Sydney Page 10 Online and On-Campus Peer-Assisted Study Sessions You learn from our VERY best students in PASS, top-achieving, experienced students help you- these students are most often our TOP BUSINESS SCHOOL students Have the option of online classes The online environment in PASS is relaxed and friendly You decide what goes on in PASS bring the questions you have about your coursework & the group will work together to solve the problems In PASS, you talk about the material and solve problems interactively PASS is confidential what happens in PASS stays in PASS We are an International Award-Winning Program REGISTRATIONS OPEN IN WEEK 1 https://sydney.edu.au/students/pass/eligibility-registration.html Get in quick before places run out! 9 10 6The University of Sydney Page 11 Introduction – Focus of ACCT 2011 Application + Evaluation 1. Applying specific accounting standards: – interpreting (reading & understanding) – technical skills (calculations, journal entries, presentation in financial statements) – recognition and disclosure 2. Evaluating specific accounting standards in relation to: – accounting concepts – other accounting standards – accounting theory – public interest As an indicator – approximately 60% application, 40% evaluation The University of Sydney Page 12 Introduction – Key themes throughout the unit 1. You will build your technical/practical knowledge. You will be able produce and critique a financial report and also critically evaluate the standards used within financial reporting: – Are the standards consistent – Who sets these standards, what are the trade-offs and who are they written for – How do preparers use the standards, whose interests are considered – What may or may not work in the accounting standards 11 12 7The University of Sydney Page 13 Introduction – Key themes throughout the unit 2. You will discover there are many accounting policy choices available when using an accounting standard. In this course we will address the following issues: – Why are there accounting policy choices – Why do preparers of financial statements choose one method over another – What influences financial statement preparers’ decisions in making accounting policy choice The University of Sydney Page 14 Introduction – Key themes throughout the unit 3. You will think more about accounting measurement. On several occasions you will be asked to identify and explain the implications of: – Why are different measurement bases used – What is the impact of the different measurement bases on financial reporting 13 14 8The University of Sydney Page 15 Introduction – Key themes throughout the unit 4. All of this will help you investigate financial reporting to see how it is useful and the fact that it has limitations. – What is financial reporting useful for – To whom is financial reporting useful – What do you think are some of its limitations – What processes are in place to improve these Is this enough The University of Sydney Page 16 Introduction – Key themes throughout the unit 5. You will come to understand that accounting standards are constantly being revised. They are often ambiguous and imperfect. – Why are they ambiguous – Which accounting standards are most controversial – Think about why they are being revised; and – Consider what can be done to improve them. 15 16 9The University of Sydney Page 17 Introduction – Key themes throughout the unit 6. You will learn financial accounting more than just debit and credits. Behind all of this, financial statement preparers have to make many well considered professional judgments. Throughout this unit of study you will think about: – Why are financial reporting professional judgments necessary – How do I make a sound financial reporting professional judgment The University of Sydney Page 18 Conceptual Framework for Financial Reporting Textbook Readings: H&P Chapters: – Ch 1 pp. 3-17 & 18-22; and – Ch 23 pp. 855-863, 865-867. Other Readings (See links on Canvas): – “Financial Accounting” 9th ed, Deegan (2020), pages 64-65 – “Financial Reporting” 2nd ed, Loftus et al. (2018), pages 18-19 & 23-27 – AASB Conceptual Framework 2019 – AASB 1053: Application of Tiers of Australian Accounting Standards – Zhang Y and Andrew J 2014 ‘Financialisation and the Conceptual Framework’, Critical Perspectives on Accounting (Special Issue on Critical Perspectives on Financialization), vol.25, Iss.1, pp. 17-26. – Zhang Y and Andrew J 2021 ’Financialisation and the Conceptual Framework: An Update, Critical Perspectives on Accounting, In Press. – “Fundie warns results inflated by support: Earnings”, AFR, 7 August 2020 17 18 10 The University of Sydney Page 19 Learning objectives 1. Identify the main sources of regulation of financial reporting (H&P LO 1.1, H&P pages 3-10) 2. Explain the present accounting standard-setting arrangements (H&P LO 1.2, 1.3,1.4 & 1.6, H&P pages 10-22) 3. Describe the convergence and harmonization policy adopted by the AASB, and IASB’s principles-based approach to standard setting (H&P LO 23.5 & 23.8, H&P pages 861-863 & 865-867) 4. Understand the reasons for developing a conceptual framework (H&P LO 2.2 & 2.3 H&P pages 35-38, Zhang & Andrew (2014)) 5. Describe the objective of the AASB 2019 Conceptual Framework and elements of financial statements (Loftus et al, pages 18-19 & 23-28) 6. Describe the reporting entity concept and the role of general purpose financial reporting (Deegan, pages 64-65) The University of Sydney Page 20 Objective 1 Identify the main sources of regulation of financial reporting in Australia (H&P LO 1.1, H&P pages 3-10) 19 20 11 The University of Sydney Page 21 Government Regulation Government Legislation: The Corporations Act 2001 – Proper financial records to be kept – Financial report to be prepared each half year and at the end of the financial year – Financial report consists of financial statements, notes and directors’ declaration – Financial statements must give a ‘true and fair view’ – Financial report must comply with accounting standards – If compliance with accounting standards would not give a true and fair view: additional information needs to be disclosed – Financial statements must include an auditor’s report – Corporations Act applies to companies and other of entities, e.g. listed trusts The University of Sydney Page 22 Government Regulation ASX listing requirements: – Apply only to firms listing on the exchange Accounting Standards: – Prepared by AASB – Authority provided by the Corporations Act 21 22 12 The University of Sydney Page 23 Objective 2 Explain the present accounting standard-setting requirements (H&P LO 1.2, 1.3,1.4 & 1.6, H&P pages 10-22) The University of Sydney Page 24 Present Standard Setting Arrangements: AASB Due Process Framework for Setting Standards (2021, p.4) https://www.aasb.gov.au/admin/file/content102/c3/AASB_Due_Process_Framework_09-19.pdf 23 24 13 The University of Sydney Page 25 The Financial Reporting Council – Appoint members of AASB – Approve and monitor AASB’s priorities etc – Determine AASB broad strategic direction – Give the AASB advice – Monitor development of international accounting standards – Cannot veto a AASB standard or direct the AASB to develop a particular standard The University of Sydney Page 26 The Australian Accounting Standards Board Major functions: – To develop a conceptual framework – To make accounting standards – To participate in the development of a single set of worldwide accounting standards Four formal avenues for constituent entities and organisations to have input to the standard-setting process Direct responsibility for developing interpretations 25 26 14 The University of Sydney Page 27 Objective 3 Describe the convergence and harmonization policy adopted by the AASB, and IASB’s principles-based approach to standard setting (H&P LO 23.5 & 23.8, H&P pages 861-863 & 865-867) The University of Sydney Page 28 International convergence and harmonisation – Australia adopted international accounting standards from 1 January 2005 – AASB’s internationalisation policy (2001): – International convergence: – Working with other standard-setting bodies to develop new or revised accounting standards that will contribute to the development of a single set of standards for worldwide use – International harmonisation: – A process that leads to Australian Accounting standards being made compatible with the standards of the IASB – IASB’s accounting standards devised for business sector only; AASB’s policy is for a single set of standards applicable to all sectors (business, government, and not-for-profit sectors) 27 28 15 The University of Sydney Page 29 Adoption of International Financial Reporting Standards (IFRS) – Widespread changes to standard setting: – AASB now adopts the content and wording of IASB standards – Exceptions are made, eg where words need to be changed to accommodate Australian legislation; – AUS paragraphs in standards – Some AASB accounting standards do not have IASB equivalents eg: AASB 1039 Concise Financial Reports – AASB rejected one IASB standard (FRS for Small and Medium Entities) and issued its own “reduced disclosure requirements” (RDR) The University of Sydney Page 30 IASB’s principles-based approach to accounting standard setting – IASB describes standards as “principles-based” rather than “rules-based” – Principles-based standards are considered flexible and usable in diverse settings and traditions – But reliance on principles also means the standards can be ambiguous and require accounting judgement – See example of AASB136 Impairment (Ch 23, p.866) – You will also examine this standard in Topics 3 and 4 – Principles-based systems require professional judgement. Accountants and auditors require not only technical skills but also a solid knowledge of business and economics as well as ethics 29 30 16 The University of Sydney Page 31 Objective 4 Understand the reasons for developing a conceptual framework (H&P LO 2.2 & 2.3 H&P pages 35-38, Zhang & Andrew 2014) The University of Sydney Page 32 Conceptual Framework The development of a conceptual framework for financial reporting – Collapse of the US share market in 1929 – Early efforts to develop a conceptual framework or theory of accounting – Continuing interest in developing a framework to: Underpin accounting practice; and Form the basis for setting new and revising old accounting standards Purpose of a conceptual framework: – To provide users, preparers, auditors of financial statements (and standard setters) with an explicit set of concepts to use when making decisions about appropriate accounting policies 31 32 17 The University of Sydney Page 33 Conceptual Framework – Potential Benefits The potential benefits of a conceptual framework are (Policy Statement PS5): – More consistent and logical accounting standards – Reduced barriers to international capital flows – Accounting standard setters more accountable – Improved communication between standard setters and constituents – More efficient development of accounting standards Refer to Zhang & Andrew (2014, 2021) “Financialisation and the Conceptual Framework” reading The University of Sydney Page 34 Objective 5 Describe the objective of the AASB 2019 Conceptual Framework and elements of financial statements (Loftus et al, pages 18-19 & 23-28) 33 34 18 The University of Sydney Page 35 Objective of the AASB 2019 Conceptual Framework OBJECTIVE: foundation of the CF 2019 defined in para.1.2 To provide financial information about the reporting entity useful to existing and potential equity investors, lenders and other creditors in making decisions relating to providing resources to the entity. Users also want to assess how efficiently and effectively management has discharged its responsibilities to use the entity’s economic resources (stewardship) Building on this – Refer to the following slides and Example 1 This is what you learnt in ACCT 1006 The University of Sydney Page 36 Objective of the AASB 2019 Conceptual Framework AASB Conceptual Framework 2019 Refer to “Fundie warns results inflated by support: Earnings” reading 35 36 19 The University of Sydney Page 37 Objective of the AASB 2019 Conceptual Framework Example 1– Objective of CF Source: https://www.commbank.com.au/content/dam/commbank-assets/about-us/2019-09/cba-annual-report-2019-spreads.pdf The University of Sydney Page 38 Elements of financial statements – The elements of financial statements include: – assets – liabilities – equity – income – expenses. – The Conceptual Framework 2019 defines each element and sets out the criteria for their recognition. This is what you learnt in ACCT 1006 37 38 20 The University of Sydney Page 39 Elements of financial statements – Assets The CF 2019 para. 4.3 – 4.4 defines assets as: a present economic resource controlled by the entity as a result of past events An economic resource is defined as: – a right that has the potential to produce economic benefits Rights can take many forms, e.g.: rights to receive cash; rights to receive goods or services; or rights over physical objects, such as property, plant and equipment or inventories This is what you learnt in ACCT 1006 The University of Sydney Page 40 The CF 2019 para. 4.26 defines a liability as: – a present obligation of the entity to transfer an economic resource as a result of past events. An obligation is defined in the CF as – a duty or responsibility that the entity has no practical ability to avoid The CF 2019 para. 4.63 defines equity as: the residual interest in the assets of the entity after deducting all its liabilities – Cannot be independently defined (residual) as it is directly dependent on the definition of assets and liabilities. – From basic accounting equation: Equity = Assets – Liabilities Building on this – Refer Example 2 Elements of financial statements – Liabilities & Equity This is what you learnt in ACCT 1006 39 40 21 The University of Sydney Page 41 Elements of financial statements Example 2 – Assets and liabilities A entity has been involved with the following transactions: (a) Acquired land which is contaminated. It is unlikely the land is usable or able to be sold Discussion: While the entity has control over the land from a past event, the land does not have the potential to generate future economic benefits. It is not an asset under the CF (b) Given a right to use a river to transport products Discussion: The right is not an asset under the CF as the entity only has access and not control over the right (c) Commitment to pay $3,000,000 in one (1) year’s time for a recently acquired item of equipment Discussion: This transaction is a liability under the CF. The entity has a present obligation it cannot avoid to transfer economic resources to another party in relation to the event Adapted from “Financial Accounting” 9th ed Deegan (2020), pages 77 and 84 The University of Sydney Page 42 Elements of financial statements – Revenue & Expenses The CF 2019 para. 4.68 defines income as: increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims The CF 2019 para. 4.69 defines expenses as: decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims This is what you learnt in ACCT 1006 41 42 22 The University of Sydney Page 43 Elements of financial statements – Recognition Recognition is: the process of capturing for inclusion in the financial statements an item that meets the definition of an asset, a liability, equity, income or expenses Recognition criteria CF para 5.7: Recognition is appropriate if it results in both – relevant (may be affected by low probability of an inflow/outflow of economic benefits and existence uncertainty) information about assets, liabilities, equity, income and expenses and a – faithful representation of those items (may be affected by measurement uncertainty) Building on this – Refer Example 3 This is what you learnt in ACCT 1006 The University of Sydney Page 44 Elements of financial statements – Recognition Example 3 – Recognition of liabilities An entity has acquired an item of machinery at a cost of $3,000,000 and has committed to pay for the purchase in one (1) year’s time. Discussion: This transaction satisfies the relevance and faithful representation recognition criteria. There is no existence uncertainty, high probability of an outflow of economic resources and has a high degree of measurement certainty. Adapted from “Financial Accounting” 9th ed Deegan (2020), page 84 43 44 23 The University of Sydney Page 45 Objective 6 Describe the reporting entity concept and the role of general purpose financial reporting (Deegan, pages 64-65) The University of Sydney Page 46 Reporting Entity Concept REPORTING ENTITY: defined in paragraph 3.10 of 2019 CF an entity that is required, or chooses, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity Why is this important Building on this – Refer following slides and Example 4 This is what you learnt in ACCT 1006 45 46 24 The University of Sydney Page 47 Reporting Entity Concept First let’s think about how to read an accounting standard Accounting standards: Structure – (typically in this order): – Objective of standard – Scope – Definitions – Requirements – Usually some option(s) – Disclosure – Transitional provisions (if any) – Effective date – Appendices – Australian implementation guidance The University of Sydney Page 48 Reporting Entity Concept First let’s think about how to read an accounting standard 47 48 25 The University of Sydney Page 49 Reporting Entity Concept – The CF does not describe what constitutes a reporting entity, leaving it to individual jurisdictions – AASB 1053 applies Australian Accounting Standards to entities that have “publicly accountability”, shares or debt are publicly traded or holds assets in a fiduciary capacity (AASB 1053 paragraph 11 & Appendix A) – Reporting entities prepare General Purpose Financial Statements AASB Conceptual Framework 2019 Appendix The University of Sydney Page 50 Reporting Entity Concept Example 4 – Reporting entity Ocean Grove Ltd is a public company with its shares trading on a securities market. Required: Is Ocean Grove a reporting entity under the Conceptual Framework 2019 Discussion: Ocean Grove Ltd is a reporting entity because there would be many shareholders, lenders and creditors that would be unable to demand and obtain information to satisfy their own information needs. As its shares are traded on a securities market, Ocean Grove Ltd would have public accountability under AASB 1053. Accordingly, Ocean Grove Ltd would produce GPFS so financial statement users could make decisions about their resources. Adapted from “Financial Accounting” 9th ed Deegan (2020), page 65 49 50 26 The University of Sydney Page 51 We will discuss measurement and how accounting standards do not cover all transactions and events. Accordingly accountants use their professional judgement when preparing an entity’s financial statements via: 1. Conceptual Framework 2019 2. Choice of Accounting Policies; – why choice exists and – what influences the accounting policies chosen by entities Next topic – Topic 2 51