2,2019

Chapter 1
An overview of the Australian external reporting environment
Review questions
1.1 The main bodies responsible for regulating accounting disclosure in Australia are:
(i) Australian Securities and Investments Commission (ASIC)
On its website, ASIC describes some of its responsibilities as follows:

We are an independent Commonwealth Government body. We are set up under and

administer the Australian Securities and Investments Commission Act 2001 (ASIC Act),
and we carry out most of our work under the Corporations Act.

The Australian Securities and Investments Commission Act 2001 requires us to:
• maintain, facilitate and improve the performance of the financial system and entities
in it
• promote confident and informed participation by investors and consumers in the
financial system
• administer the law effectively and with minimal procedural requirements
• enforce and give effect to the law
• receive, process and store, efficiently and quickly, information that is given to us
• make information about companies and other bodies available to the public as soon
as practicable.

The Corporations Act, which is administered by ASIC, requires corporations to comply

with accounting standards (as per s. 296 of the Corporations Act). Hence, the law
administered by ASIC requires companies and other disclosing entities to comply with the
accounting standards issued by the AASB.

(ii) Australian Accounting Standards Board (AASB)

The role of the AASB is to develop a conceptual framework. It is also responsible for
‘making’ accounting standards that have the force of law under the corporations legislation,
as well as formulating accounting standards that are to be used by reporting entities that
are not governed by corporations legislation, inclusive of entities operating in the not-for-
profit sector and public sector entities. The AASB is also responsible for Interpretations
Advisory Panels, focus groups (user focus groups and not-for-profit focus groups) and
project advisory panels.
As indicated in Chapter 1, however, a great deal of the responsibility for developing
accounting standards released by the AASB is in the hands of the IASB, as is the
development of the conceptual framework. It is to be anticipated that only minor changes
would be made to standards being released by the IASB before they are subsequently
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 released within Australia as AASB standards (for example, the changes might involve
adding more explanatory material to the Australian standard, or to add additional
requirements in relation to not-for-profit or public sector entities). The AASB does release
accounting standards that are unique to Australia where there is believed to be a need for
accounting guidance and the issue has not been addressed by the IASB. The AASB reports
to the Financial Reporting Council (FRC). Once an AASB-released accounting standard is
in place, corporate directors are required to ensure that the company’s financial statements
comply with the requirements of the standard (where applicable).
(iii) Australian Securities Exchange (ASX)
The ASX provides numerous disclosure requirements for entities listed on the Australian
Securities Exchange. The principal aim is to help ensure that information is disseminated
in an efficient and timely manner. Failure to comply with the ASX Listing Rules may lead
to delisting from the exchange. The ASX disclosure requirements help to ensure that
information about listed entities is disseminated in an efficient and timely manner. The
disclosure requirements also reduce the likelihood of individuals prospering through access
to privileged information.

The ASX Listing Rules are divided into 20 chapters (details of the listing rules are available
on the ASX website at www.asx.com.au). Of particular relevance are Chapters 3 and 4 of
the Listing Rules, which relate to continuous disclosure and periodic disclosure,
respectively. Listing Rule 3.1 (relating to continuous disclosure) provides the general
principle that:
Once an entity is or becomes aware of any information concerning it that a
reasonable person would expect to have a material effect on the price or value of
the entity’s securities, the entity must immediately tell ASX that information.
The ASX also established the ASX Corporate Governance Council. The Principles
released by the Council, which are now referred to as Corporate Governance Principles
and Recommendations, were most recently amended and re-released in March 2014 and
can be accessed on the ASX website. Companies are required to provide a statement in
their annual report disclosing the extent to which they have followed the Corporate
Governance Principles and Recommendations in the reporting period. Where
companies have not followed all of the recommendations, they must identify the
recommendations that have not been followed, and give reasons for not following them.
This is often referred to as an ‘if not, why not?’ approach to disclosure.
(iv) Financial Reporting Council (FRC)
The FRC oversees the operations of the AASB. It also appoints the members of the
AASB (other than the chairperson). The FRC, however, is not to direct the development
of accounting standards by the AASB, or to veto accounting standards that are released
by the AASB.
1.8 Generally accepted accounting procedures (GAAPs) are those rules and practices that have
changed and developed over time and are accepted at a point of time by the majority of

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 accountants. Across time, generally accepted accounting practices become incorporated
within accounting standards, with accounting standards being developed through a
consultative process in which many parties from Australia and elsewhere give their
viewpoints through formal submissions and other avenues. Accounting standards constitute
a subset of GAAPs. The contents of the conceptual framework would also be accepted as
part of GAAP.

1.10 The ‘true and fair’ requirement is a qualitative reporting requirement. A current problem is
that our qualitative requirement to present true and fair financial statements is very unclear
as there is no definitive explanation of what it means. There is no legal definition of ‘true
and fair’. Even though the Corporations Act requires directors to make sufficient
disclosures to ensure that financial statements present a ‘true and fair’ view, it provides no
definition of the concept. Nor has the Australian accounting profession provided definitive
guidelines relating to truth and fairness.
It is generally accepted that it would be unrealistic to assume that specific disclosure rules
or accounting standards could be developed to cover every possible transaction or event.
For situations not governed by particular rules or standards, the ‘true and fair view’
requirement is the general criterion to assist directors and auditors to determine what
disclosures should be made and to consider alternative recognition and measurement
approaches. Although there is no definition of ‘true and fair’ in the Corporations Act—
which is perhaps somewhat surprising—it would appear that for financial statements to be
considered true and fair, all information of a ‘material’ nature should be disclosed so that
readers of the financial statements are not misled. Also, there would be a general
assumption that the financial statements comply with the relevant accounting standards and
other generally accepted accounting principles. However, ‘materiality’ is an assessment
calling for a high degree of professional judgement.

1.12 The IFRS Committee is a committee of the IASB. It is the official ‘interpretative arm’ of
the IASB. The IASB website states that the IFRS Interpretations Committee reviews, on a
timely basis, accounting issues that are likely to receive divergent or unacceptable
treatment in the absence of authoritative guidance, with a view to reaching consensus on
the appropriate accounting treatment. While the IFRS Interpretations Committee provides
guidance on issues not specifically addressed in IFRSs, it also provides Interpretations of
requirements existing within IFRSs. The Interpretations cover both newly identified
financial reporting issues not specifically addressed in IFRSs and issues where
unsatisfactory or conflicting interpretations have developed, or seem likely to develop in
the absence of authoritative guidance, with a view to reaching consensus on the appropriate
treatment.
Given that so many countries have now adopted IFRSs, a central objective of the IFRS
Interpretations Committee is to achieve consistent Interpretations of IFRSs by IFRS-
adopters internationally. If IFRSs were interpreted differently within each country, the
purpose and benefits of promoting one set of global accounting standards would be
diminished. Indeed, the aim of global uniformity in interpreting financial reporting

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 requirements has meant that many national standard-setters have disbanded their own
domestic Interpretations committees. For example, within Australia, the AASB disbanded
the Urgent Issues Group (which was formerly the Australian equivalent of the IFRS
Interpretations Committee) because the AASB considered that disbanding the UIG helped
to ensure that IFRSs are being adopted consistently on a worldwide basis.
Within Australia, Interpretations issued by the IFRS Interpretations Committee, and then
in turn by the AASB, are given the same authoritative status as accounting Standards. The
Interpretations can be found on the websites of the IASB and AASB.

1.16 There are a number of potential impediments to the international standardisation of

accounting standards, including:
 Harmonisation or standardisation requires the release of many exposure drafts, new
accounting standards, and the revision of many existing accounting standards. This
in itself is very costly. However, there are many other ‘indirect’ costs. For example,
preparers must learn the new rules, as must readers (including analysts and
regulators). The costs for a company to switch to IFRS can be significant and could
be an impediment to a country embarking on a process of harmonisation.
 To date, there is limited empirical support for the view that standardising domestic
accounting standards with International Financial Reporting Standards will actually
lead to inflows of foreign capital. Without such evidence, various parties within a
particular country may be less inclined to support the standardisation process.
 A great deal of existing research has sought to explain international differences in
accounting standards on the basis of differences in cultures between countries
(although as countries embrace IFRS these differences obviously decline). That is,
culture seems to explain international variation in accounting standards. For
example, some countries may have cultures that are inclined towards secrecy (and
therefore, limited disclosures), whereas other countries may have cultures inclined
towards transparency (and therefore greater disclosures). To impose the same
accounting standards on all (with a particular level of disclosure) ignores these
cultural differences and may, in the long run, provide a reason why standardisation
may be more successful in some countries than others.

1.19 If directors believe that particular accounting standards are not appropriate, they have the
option of highlighting this fact and explaining why. Specifically, paragraph 23 of AASB 101
Presentation of Financial Statements states:
In the extremely rare circumstances in which management concludes that
compliance with a requirement in an Australian Accounting Standard would be so
misleading that it would conflict with the objective of financial statements set out
in the Framework, but the relevant regulatory framework prohibits departure from
the requirement, the entity shall, to the maximum extent possible, reduce the
perceived misleading aspects of compliance by disclosing:
(a) the title of the Australian Accounting Standard in question, the nature of the
requirement, and the reason why management has concluded that complying
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 with that requirement is so misleading in the circumstances that it conflicts
with the objective of financial statements set out in the Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to achieve a fair presentation.

1.33 Arguably, we cannot (or at least, should not), consider the practice of accounting without
giving some attention to corporate responsibilities and accountabilities. The broader
(narrower) our perspective of corporate responsibilities, the broader (narrower) our
perspective of the accountabilities of an organisation, and therefore the greater (fewer) the
amount and variety of accounts we believe should be provided. As we increase our
perspectives of corporate responsibilities (and therefore, increase our perceptions of
accountability), the broader the group of stakeholders to whom we believe we need to
provide an ‘account’ about our performance.

As the chapter states, if we were to accept that an entity has a responsibility (and an
accountability) for its social and environmental performance, then we, as accountants,
should accept a duty to provide ‘an account’ (or a report) of an organisation’s social and
environmental performance—perhaps by way of releasing a publicly available corporate
social responsibility report. If, by contrast, we considered that the only responsibility an
organisation has is to maximise its financial returns (profits), then we might believe that
the only account we need to provide is a financial account.

Chapter 2
The Conceptual Framework for Financial Reporting
Review questions

2.3 A reporting entity can be defined as:

An entity in respect of which it is reasonable to expect the existence of users who
rely on the entity’s general purpose financial statements for information that will
be useful to them for making and evaluating decisions about the allocation of
resources. A reporting entity can be a single entity or a group comprising a
parent and all of its subsidiaries.
The above definition is provided in AASB 1053 and is consistent with the definition in the
IASB/AASB conceptual framework. General purpose financial statements should be
prepared when there are users whose information needs have common elements, and those
users cannot command the preparation of information to satisfy their individual
information needs. If an entity is not deemed to be a ‘reporting entity’ then it will not be
required to produce GPFSs, nor will it necessarily be required to comply with all
accounting standards.
Whether an entity is classified as a reporting entity is determined by the extent to which
users (of financial information relating to that entity) have the ability to command the

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 preparation of financial statements tailored to their particular information needs. Such a
determination depends upon professional judgement. When information relevant to
decision making is not otherwise accessible to users who are judged to be dependent upon
general purpose financial statements to make and evaluate resource-allocation decisions,
the entity is deemed to be a reporting entity. Where dependence is not readily apparent,
Statement of Accounting Concept No. 1 (SAC 1) suggests that factors that might indicate
a reporting entity include:
• the separation of management from those with an economic interest in the entity—as
the spread of ownership and/or the separation of management and ownership
increase, so does the likelihood of an entity being considered to be a reporting entity
• the economic or political importance/influence of the entity to/on other parties—as
the entity’s dominance in the market and/or its potential influence on the welfare of
external parties increase, so does the likelihood of an entity being considered to be a
reporting entity
• the financial characteristics of the entity—as the amount of sales, value of assets,
extent of indebtedness, number of customers and number of employees increase, so
does the likelihood of an entity being considered a reporting entity.

2.6 The objective of having a conceptual framework would broadly be to make general purpose
financial reporting consistent with a given (stated) objective of such reporting. A
conceptual framework should also act to ensure that general purpose financial statements
are consistent with each other in terms of objectives of reporting, the qualitative
characteristics that any related information should possess, key definitions and recognition
criteria. A conceptual framework should assist in ensuring that accounting standards are
not developed in an ad hoc manner. A conceptual framework will also act to make
accounting standard setters more accountable for their decisions, as well as making the
accounting standard-setting process more economical.
2.9 The fundamental qualitative characteristics identified in the IASB Conceptual Framework
for Financial Reporting are ‘relevance’ and ‘faithful representation’. In discussing the need
for information to be relevant and faithfully represented, paragraph QC17 of the IASB
conceptual framework states:
Information must be both relevant and faithfully represented if it is to be useful.
Neither a faithful representation of an irrelevant phenomenon nor an unfaithful
representation of a relevant phenomenon helps users make good decisions.
Relevance is a fundamental qualitative characteristic of financial reporting. Under the
IASB conceptual framework, information is regarded as relevant if it is considered capable
of making a difference to a decision being made by users of the financial statements.
Specifically, paragraph QC 6 states:
Relevant financial information is capable of making a difference in the decisions
made by users. Information may be capable of making a difference in a decision even

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 if some users choose not to take advantage of it or are already aware of it from other
sources.
There are two main aspects to relevance. For information to be relevant it should have both
predictive value and confirmatory value (or feedback value), the latter referring to
information’s utility in confirming or correcting earlier expectations.
Closely tied to the notion of relevance is the notion of materiality. This is embodied in
various conceptual framework projects. General purpose financial statements are to include
all financial information that satisfies the concepts of relevance and faithful representation
to the extent that such information is material.
The other primary qualitative characteristic (other than relevance) is ‘faithful
representation’. According to the IASB conceptual framework, to be useful, financial
information must not only represent relevant phenomena, but it must also faithfully
represent the phenomena that it purports to represent. According to paragraph QC 12 of
the IASB conceptual framework:
To be a perfectly faithful representation, a depiction would have three characteristics.
It would be complete, neutral and free from error. Of course, perfection is seldom, if
ever, achievable. The Board’s objective is to maximise those qualities to the extent
possible.
In terms of the three characteristics of ‘complete’, neutral’ and ‘free from error’, that
together reflect faithful representation, paragraphs QC13, 14, and 15 of the IASB
conceptual framework state:
QC13 A complete depiction includes all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions and
explanations. For example, a complete depiction of a group of assets would include,
at a minimum, a description of the nature of the assets in the group, a numerical
depiction of all of the assets in the group, and a description of what the numerical
depiction represents (for example, original cost, adjusted cost or fair value).
QC14 A neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised, de-
emphasised or otherwise manipulated to increase the probability that financial
information will be received favourably or unfavourably by users. Neutral
information does not mean information with no purpose or no influence on
behaviour. On the contrary, relevant financial information is, by definition, capable
of making a difference in users’ decisions.
QC15 Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon, and
the process used to produce the reported information has been selected and applied
with no errors in the process. In this context, free from error does not mean
perfectly accurate in all respects. For example, an estimate of an unobservable
price or value cannot be determined to be accurate or inaccurate. However, a

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 representation of that estimate can be faithful if the amount is described clearly
and accurately as being an estimate, the nature and limitations of the estimating
process are explained, and no errors have been made in selecting and applying an
appropriate process for developing the estimate.
Hence, from the above we should understand that financial information that faithfully
represents a particular transaction or event will depict the economic substance of the
underlying transaction or event, which is not necessarily the same as its legal form. Further,
faithful representation does not mean total absence of error in the depiction of particular
transactions, events or circumstances because the economic phenomena presented in
financial statements are often, and necessarily, measured under conditions of uncertainty.
Hence, most financial reporting measures involve various estimates and instances of
professional judgement. To faithfully represent a transaction or event an estimate must be
based on appropriate inputs and each input should reflect the best available information.

2.10 Enhancing qualitative characteristics are complementary to fundamental qualitative

characteristics. Enhancing qualitative characteristics distinguish more useful information
from less useful information. The enhancing qualitative characteristics are comparability,
verifiability, timeliness and understandability. These characteristics enhance the decision-
usefulness of financial reporting information that is relevant and faithfully represented. As
paragraph QC 4 of the IASB conceptual framework states:
If financial information is to be useful, it must be relevant and faithfully represents
what it purports to represent. The usefulness of financial information is enhanced if it
is comparable, verifiable, timely and understandable.

2.11 According to the IASB conceptual framework, to be useful, financial information must not
only represent relevant phenomena, but it must also ‘faithfully represent’ the phenomena
that it purports to represent. According to paragraph QC 12 of the IASB conceptual
framework:
To be a perfectly faithful representation, a depiction would have three characteristics.
It would be complete, neutral and free from error. Of course, perfection is seldom, if
ever, achievable. The Board’s objective is to maximise those qualities to the extent
possible.
In terms of the three characteristics of ‘complete’, neutral’ and ‘free from error’, that
together reflect faithful representation, paragraphs QC13, 14, and 15 of the IASB
conceptual framework state:
QC13 A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary descriptions and explanations.
For example, a complete depiction of a group of assets would include, at a
minimum, a description of the nature of the assets in the group, a numerical
depiction of all of the assets in the group, and a description of what the numerical
depiction represents (for example, original cost, adjusted cost or fair value).
QC14 A neutral depiction is without bias in the selection or presentation of financial
information. A neutral depiction is not slanted, weighted, emphasised, de-

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 emphasised or otherwise manipulated to increase the probability that financial
information will be received favourably or unfavourably by users. Neutral
information does not mean information with no purpose or no influence on
behaviour. On the contrary, relevant financial information is, by definition, capable
of making a difference in users’ decisions.
QC15 Faithful representation does not mean accurate in all respects. Free from error
means there are no errors or omissions in the description of the phenomenon, and
the process used to produce the reported information has been selected and applied
with no errors in the process. In this context, free from error does not mean perfectly
accurate in all respects. For example, an estimate of an unobservable price or value
cannot be determined to be accurate or inaccurate. However, a representation of
that estimate can be faithful if the amount is described clearly and accurately as
being an estimate, the nature and limitations of the estimating process are
explained, and no errors have been made in selecting and applying an appropriate
process for developing the estimate.
Hence, from the above paragraphs we should understand that financial information that
faithfully represents a particular transaction or event will depict the economic substance of
the underlying transaction or event, which is not necessarily the same as its legal form.
Further, faithful representation does not mean total absence of error in the depiction of
particular transactions, events or circumstances because the economic phenomena
presented in financial statements are often, and necessarily, measured under conditions of
uncertainty. Hence, most financial reporting measures involve various estimates and
instances of professional judgement. To faithfully represent a transaction or event an
estimate must be based on appropriate inputs and each input should reflect the best
available information.

2.23 Materiality is closely tied to the qualitative characteristic of relevance. The IASB/AASB
conceptual framework states that:
Information is material if omitting it or misstating it could influence decisions that
users make on the basis of financial information about a specific reporting entity. In
other words, materiality is an entity-specific aspect of relevance based on the nature
or magnitude, or both, of the items to which the information relates in the context of
an individual entity’s financial report. Consequently, the Board cannot specify a
uniform quantitative threshold for materiality or predetermine what could be
material in a particular situation.
Considerations of materiality also provide a basis for restricting the amount of information
provided to levels that are comprehensible to financial statement users. It would arguably
be poor practice to supply hundreds of pages of potentially relevant and representationally
faithful information to financial statement readers—this would result only in an overload
of information. Nevertheless, assessing materiality is very much a matter of judgement and
at times we might see it being used as a justification for failing to disclose information that
could be deemed to be potentially harmful to the reporting entity.
The definition of materiality provided in the conceptual framework is consistent with that

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 provided in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Generally speaking, if an item of information is not deemed material (which is, of course,
a matter of professional judgement), the mode of disclosure or even whether or not it is
disclosed at all should not affect the decisions of financial statement readers.
Paragraph 8 of AASB 108 explains that where an item or an aggregate of items is not
material, application of the materiality notion does not mean that those items would not be
recognised, measured or disclosed. It means, rather, that the entity would not be required
to recognise, measure or disclose those items in accordance with the requirements of an
accounting standard.
In deciding whether an item or an aggregate of items is ‘material’, the nature and amount
of the items usually need to be evaluated together. It might be necessary to treat as material
an item or an aggregate of items that would not be judged to be material on the basis of the
amount involved, because of their nature. An example is where a change in accounting
method has taken place that is expected to affect materially the results of subsequent
financial years, even though the effect in the current financial year is negligible. Again, if
an item is not deemed to be material, the general principle is that you do not have to use a
particular accounting standard to account for it.

2.24 If an item is deemed to be material then it is perceived as likely to influence the economic
decisions of the readers of financial statements. This has implications for the recognition,
measurement and disclosure of the item. Specifically, if an item is deemed to be material
then relevant accounting standards must be applied in respect of the item. Conversely, if
an item is not material, then it does not have to be accounted for in accordance with an
accounting standard. That is, if an item is not deemed to be material the mode of disclosure
should not affect the decisions of financial statement readers. Where an item or an
aggregate of items is not material, application of the materiality notion does not mean that
those items would not be recognised, measured or disclosed. It means, rather, that the entity
would not be required to recognise, measure or disclose those items in accordance with the
requirements of an accounting standard. As Paragraph 8 of AASB 108 Accounting Policies,
Changes in Accounting Estimates and Errors states:

Australian Accounting Standards set out accounting policies that the AASB has
concluded result in financial statements containing relevant and reliable information
about the transactions, other events and conditions to which they apply. Those
policies need not be applied when the effect of applying them is immaterial.
However, it is inappropriate to make, or leave uncorrected, immaterial departures
from Australian Accounting Standards to achieve a particular presentation of an
entity’s financial position, financial performance or cash flows.

2.31 This question should stimulate good debate. Students should provide arguments to support

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or oppose global uniformity in accounting standards and conceptual frameworks.
Arguments in support of global uniformity would include:
 support international transfer of capital
 provide an accounting framework for countries that do not have the expertise or
wealth to develop their own accounting framework
 reduce accounting costs for multinational companies and companies seeking to be
listed on foreign stock exchanges
 reduce duplication of work being undertaken by standard setters throughout the
world
 enable the transfer of accounting staff between countries
 allow comparison of results being generated by organisations in different countries.
Arguments in opposition to global uniformity would include:
 There are cultural, religious, political and historical differences that have been
shown by researchers to explain why people in different countries demand different
types of information. Globalisation ignores such differences.
 Globally, there are variations in business laws, criminal laws, and so forth. Such
international variations in laws will be a result of differences in history, cultures,
religions, and so forth. While we are apparently prepared to accept international
differences in various laws, groups such as the IASB expect there to be global
uniformity in regulations relating to accounting disclosure—that is, uniformity in
accounting standards. Does this make sense?
 Centralising the development of accounting standards with a limited number of
members meeting in one location means that many local needs may be ignored.

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