Australian External Reporting Regulation - Assignment Example

Name: Course: College: Tutor: Date: An overview of Australian external reporting regulation Financial accounting is a course of action that involves collecting and processing financial information to enhance decision making within an organization and other external parties. Financial accounting is heavily controlled to safeguard the information rights of outsiders who are not engaged in the day –to-day running of an organization. According to the framework of grounding and presenting financial statements discharged by the Australian Accounting Standards Board (AASB) in July 2004, users of general finance statements include; governments and government agencies, financiers, suppliers, investors (present and potential), employees, customers and the general public. Some users do not have the influence to command exact information to satisfy their requirements. They rely on general purpose financial statements that generally meet the information requirements of common users towards satisfying their information needs. The statements need to meet the terms and accounting standards outlined by the AASB. An example is the financial statements and the corresponding notes contained inside an annual report issued to shareholders in an annual general meeting (Deegen 2010). Principal bodies involved in formulating, interpreting and/or putting into effect accounting policies in Australia are; the Australian Securities and Investments Commission (ASIC), the Financial Reporting Council (FRC), the Interpretations Agenda Committee, the Australian Securities Exchange (ASX) and the Australian Accounting Standards Board (AASB). Over a period of the past 10-13 years, the government of Australia has been regulating the development of accounting standards. The elimination of bodies such as the Australian Accounting Research Foundation (AARF) has reduced Australian accounting profession self-governance. The commonwealth parliament passed the new accounting standards development deal effective from 1 January 2000 in October 1999. They increased the functions of the AASB by disbanding the Public Sector Accounting Standards Board. However, the AASB currently depends on standards formed by the International Financial Reporting Standards (IFRS) (Deegen 2010). The Australian Securities and Investments Commission (ASIC) was established in July 1998 with an intention to increase its mandate. It replaced the Australian Securities Commission (ASC) that was founded in 1969 replacing the National Companies and Securities Commission (NCSC). ASIC is in charge of corporation regulation in Australia. The commission is self-governing of state parliaments or state ministers and accounts directly to the commonwealth parliament and the treasurer. ASIC administers the corporations act. The act outlines the duties of company directors. This includes their character, order of preparation, lodgment and circulation of financial statements (Deegen 2010). The Australian Accounting Standards Board (AASB) was established on 1 January1991. The board consists of a consultative group, focus groups, project advisory panels and interpretation advisory panels. The board’s functions are outlined in the ASIC act under section 227. According to section 334 of the corporations act, the main function of the board is to craft accounting standards that can be legally enforced. Other functions are; development of an abstract framework, and to take part in and add to the enactment of a unified position of accounting standards worldwide. As a result of the disbandment of the PSASB in 2000, the AASB standards apply to all types of entities. Majority of the standards were reviewed in 2003-2004. The board reports to the FRC. The board has one fulltime chairperson and nine other members selected by the FRC. The Interpretations Agenda Committee oversees and evaluates matters of enclosure in the AASB’s job plan (Deegen 2010). The Financial reporting Council (FRC) oversees the activities of the AASB. The council has 18 members nominated by stakeholders including the chairperson. Section 225 of the ASIC act outlines the powers and functions of the FRC (Deegen 2010). The Australian Securities Exchange (ASX) is a nationally operating stock exchange. The ASX develops and imposes regulations on other companies listed on its exchange. It is regulated by the ASIC. It has listing rules in each capital city. Absconding from conforming to the regulations may lead to removal from the board. The rules ensure information in disseminated efficiently and in a timely manner (Deegen 2010). The FRC resolved to position Australia to adapt accounting standards created by the International Accounting Standards Board (IASB) in 2002. These are the International Financial Reporting Standards (IFRS). This was due to the European Union’s decision to adopt the IASB standards regarding the preparation of consolidated financial reports. In Australia the IFRS are under the AASB standards. The AASB standards are broader. This led to a significant change in some standards and slight changes in others (Deegen 2010). An audit report provides a sovereign outlook of financial information regarding their true and fair view, compliance with the corporations act and compliance with the accounting standards. The report establishes reliability of the financial information. The report is prepared by auditors. The auditors are not in charge of the preparation of financial statements. The auditor’s undertaking is to decrease potential bias and errors that may be introduced into the financial statements. Just like the accounting standards, auditing standards have a legal backing (Deegen 2010). Arguments for and against regulation Financial reporting and capital markets activities are heavily regulated. There are many regulation acts and standards and more are often developed. Views on the call for the regulations vary and range from those who support to those who are against such regulations. Those supporting financial reporting regulation indicates that accounting information falls under the definition of a public good. When available, people can use such information and pass it on to others. People who use the information without paying for it are free-riders. Free-riding understates demand since people know they can access the information without paying for it. This is a disincentive to producers of the information. If unregulated, the producers will under produce the information. Thus, need for heavy regulation to mitigate the impacts of market failure (Ramanna and Sletten 2009). Regulation, further, plays a major role in safeguarding the privileges of individual investors relying on the information to make investment decisions. All potential individual investors may not obtain the required information unless they have power over of limited resources essential to the entity. The proponents also argue that regulations create a level playing field. Everybody, on the precepts of fairness, should have access to the same information. This boosts external stakeholders’ confidence from fears of insider trading (Ramanna and Sletten 2009). Those who are against the regulations indicate that accounting information ought to be treated like other goods with the forces of demand and supply left to run freely. According to Smith and Watts (1982), in the nonexistence of regulations, there are concealed economics-based incentives for an organization to make available plausible information about its operations and performance to certain parties external to the organization; or else the costs of organization’s operations would rise. In the absence of regulations, conflicts among parties interested in an organization would necessitate production of accounting information to quell such conflicts. This includes conflicts between managers and creditors. It has been argued that managers of an organization are best placed to establish the kind of information to be conveyed to increase the assurance of external stakeholders. Regulation restricts the kind of methods to be relied upon thus reduce efficiency of providing information. Also in the nonexistence of regulation, external audit reports would convey credible information to interested parties. Without rules, entities would nonetheless be aggravated to reveal good and bad news, for instance, in the case of ‘markets for lemons’. In view of the current trends in accounting, there is need for regulation. Regulation ensures that interests of external stakeholders are fully taken care of. Regulations are indispensible ‘finger prints’ to the external stakeholders that information relayed to them is credible. Control criterion and consolidation According to AASB 127, control is the authority to preside over the financial and operating activities of an entity so as to get hold of benefits from its activities. Control allegedly exists when the parent holds straightforwardly or otherwise (via subsidiaries) over a half of the voting muscle of an entity unless, in special circumstances, it can be undoubtedly demonstrated that such ownership does not amount to control. When assessing control, the being and outcome of prospective voting rights presently exercisable or adaptable are considered. Voting power is derived from the share warrants or call options, debt or equity apparatus changeable to ordinary shares or other similar apparatus that have ability, if exercised and convertible, to bestow the entity’s voting clout or lessen another party’s voting muscle over the financial and operating strategies of another entity (potential voting rights). Potential voting rights contribute to control under all the facts and circumstances of an entity that affect potential voting rights apart from the objective of administration and the financial capacity to put into effect or convert such rights. RPG Ltd has three out of five seats in the board of directors of Speedx Ltd. Further, RPG Ltd takes lead on all business decisions pertaining Speedx Ltd. According to the guidelines set by the AASB127 paragraphs 13&14, RPG Ltd has what it takes to preside over the financing and operating activities of Speedx Ltd. RPG Ltd has more than half (three/five) of the voting power of Speedx Ltd and takes lead on all business decisions at Speedx Ltd. The voting rights are currently exercisable. However, according to the AASB 127 paragraph 32&33, RPG Ltd can lose control of Speedx Ltd. This can occur through; Government, an administrator, court or regulator takes over control of Speedx Ltd, Speedx Ltd enters into a contractual agreement, RPG Ltd enters into two or more arrangements/transactions with Speedx Ltd. The loss of control means RPG Ltd writes away the benefits (including any goodwill) and liabilities of Speedx Ltd at their moving amounts at the date when control is lost. RPG Ltd derecognizes the carrying amount of any non-controlling concerns in Speedx Ltd at the date when management is lost (including any constituents of supplementary inclusive income linked to non-controlling concerns). On the other hand, RPG Ltd recognizes the just worth of the consideration received, if any, from the transaction, occasion or circumstances that predisposed to the thrashing of control. If the transaction that resulted in the loss of control involves an allotment of shares of Speedx Ltd to owners (Mr. S and Mrs. X) in their capacity as owners, that allotment recognizes any investment retained in Speedx Ltd at its pale value at the date when control is lost. RPG Ltd recognizes as profits or loss, or relocates directly to retained earnings if required according to other Australian Accounting Standards, complete income in relation to Speedx Ltd and recognizes any resulting disparity as a positive or negative in profit or loss attributable to RPG Ltd (AASB 127, paragraph, 34). RPG Ltd has sufficient voting rights to validate its control over Speedx Ltd. RPG Ltd and Speedx Ltd are involved in the same industry. This represents a form of a business combination. In light of this, consolidation is necessary. Goodwill In a bargain purchase, AASB 3 defines goodwill as the excess of the total of; the consideration moved measured in accordance with AASB 3 that generally calls for fair-value as at the date of acquisition, the sum of any non-controlling interest in the acquiree measured according to AASB 3. Depending on the nature of the business combination, the fair-value as at the acquisition data of the acquirer’s up to that time held equity interest in the acquiree, less the net amounts of identifiable assets obtained and liabilities assumed measured according to AASB 3 as at the acquisition date. Paragraph 33 of AASB 3 indicates that in a business combination in which the RPG Ltd and Speedx Ltd (or its former owners) swap only equity interests, the acquisition-date fair value of the Speedx Ltd’s equity interests may be more dependably computable than the acquisition-date fair value of the RPG Ltd’s equity interests. If so, RPG Ltd shall establish the quantity of goodwill by using the fair value as at the acquisition date of Speedx Ltd’s equity interests in place of the fair value as at the acquisition date of the equity interests moved. To settle on the quantity of goodwill in a business amalgamation in which no concern is conveyed, RPG Ltd shall use the fair value as at the acquisition date of its interest in Speedx Ltd settled on using an estimation procedure instead of the fair value as at the acquisition date of the consideration moved. Intra-group transactions adjustments It is important to make adjustments for intra-group transactions in order to identify errors and omissions in book entries. This enables finding the accurate balance at the end. Business combination Valuation entries Details Amount ($) Inventory 43,000 Goodwill 150,000 Plant 95,000 Investment 290,000 Retained earnings 80,000 Reserve 20,000 Pre-acquisition elimination entry Details Amount ($) Amount ($) Inventory 40,000 Plant 90,000 Other paid capital 90,000 Capital 290,000 Retained earnings 80,000 Reserve 20,000 Consolidation worksheet adjustments Consolidation worksheet Details Trial balance Adjustments Canary Ltd Rodin Ltd Dr. Cr. Stock 3,000 4,500 2,000 Depreciation 7,500 6,000 6,000 Tax 600 Reference list AASB 127 Consolidated and separate financial statements. [14 September 2012]. Available from: http://www.aasb.gov.au/admin/file/content105/c9/AASB127_03-08_COMPjul11_07-11.pdf AASB 3 Business combinations. [14 September 2012]. Available from: http://www.comlaw.gov.au/Details/F2011C00021/Html/Text#param4. Deegen,C 2010. Australian financial Accounting. McGraw-Hill Irwin, NSW. Karthik Ramanna and Ewa Sletten 2009. Why do countries adopt International Financial Reporting Standards? Harvard business school. Smith and Watts 1982. Insider trading. Available from: http://faculty.chicagobooth.edu/dennis.carlton/research/The%20Regulation%20of%20Insider%20Trading.pdf Read More