ACCT2011

Reporting on Business Performance

Module 6: Provisions; Ethics

These notes only summarise key points

Textbook reading is essential

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 Provisions

Text Readings:
Deegan Chapter: Ch 10 pp 380-383 & 390 –394

Other Readings:
– AASB Conceptual Framework paragraphs 4.26 – 4.47, 5.7
– AASB137: Provisions, Contingent Liabilities and Contingent Assets

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 Ethics

Textbook Readings:
– H&P Chapters:
– Ch 26, pp. 961-973.

Other Readings:
– APES 110 Code of Ethics for Professional Accountants

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 Learning objectives

Provisions
1. Describe which provisions should be treated as liabilities and
apply the appropriate accounting treatment (Deegan LO 10.4
pp 380-383).
2. Discuss the nature of a contingent liability and understand how
it should be disclosed in the notes to an entity’s financial
statements (Deegan LO 10.7 pp 390-394).

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 Learning objectives

Ethics
1. Explain the nature of ethics (H&P LO 26.1).
2. Distinguish between rules-based and values-based ethics (H&P
LO 26.2).
3. Describe the foundational ethical principles and their
application (H&P LO 26.4).
4. Describe the fundamental ethical principles of the accounting
profession (H&P LO 26.6).
5. Incorporate ethics into decision making in a way that reflects
ethics in a systematic and justifiable manner (H&P LO 26.7).

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Provisions

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 Definition & recognition of elements of financial
statements for liabilities
Does the item have all three essential characteristics
of a liability?

Yes No
Does the liability meet both the Details might appear in the notes
recognition criteria? or in the annual report

Yes No
Liability recognised in the entity’s
In some cases, separately disclosed
balance sheet.
in the notes (Not recognised, no
(In other words, a journal entry is
journal entry)
required.)

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 Introduction Source: https://www.wesfarmers.com.au/docs/default-
source/reports/2023-annual-report.pdf?sfvrsn=42fae1bb_8

See pages 134 & 174

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Introduction

Very Low UNCERTAINTY Very High

Borrowings Provisions Contingent

liabilities
Accruals

Accounts
payable

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 Objective 1

Describe which provisions should be treated as liabilities and

apply the appropriate accounting treatment
(Deegan LO 10.4 pp 380-383)

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 Liability provisions

Definition:
– A provision is a liability of uncertain timing or amount (AASB
137 para 10).
Recognition:
– A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as
a result of a past event;
(b) it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation;
and
(c) a reliable estimate can be made of the amount of the
obligation.
– If these conditions are not met, no provision shall be recognised
(AASB 137 para 14).

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 Liability provisions
Present obligation means:
– A duty or responsibility to act/perform in a certain way
towards an external party
– not always necessary to know who the external party is
– Many obligations are legally enforceable (eg., arise from
contracts such as accounts payable for goods received)
– Many obligations also arise from normal practices such as a
duty to behave in a particular way (known as a constructive
obligation).

AASB 137 para 10

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 Definition and recognition criteria

– A mere intention to sacrifice economic benefits does not amount

to an obligation. An obligating event must leave the entity with
no realistic alternative to settling the transaction.

AASB 137 para 17

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 Provisions

– Many types of items meet the definition and recognition criteria

of liabilities.
– These include e.g., provisions for warranties, refunds,
– Where no present obligation exists to an external party a
liability does not exist.
– e.g. setting aside a reserve for a future event

Refer to AASB 137 Appendix C Examples

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 Provisions: Amount to be recognised
– Amount recognised is based on best estimate of the
expenditure required to settle the obligation (para 36)
– Often requires professional judgment (para 38).
– Need to consider risks and uncertainties when calculating
expected value (para 39).

Source: https://www.wesfarmers.com.au/docs/default-
See page 153 source/reports/2023-annual-report.pdf?sfvrsn=42fae1bb_8

Refer to Worked Example 10.2 Deegan pp 381-382

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Provisions: Amount to be recognised
– Present value calculations are used
when the effect of the time value of
money is material (para 45).
– Material means the omission or
misstatement of an amount would
influence users’ decisions (AASB 108,
para 5). So, if more than 12 months
but the amount involved is not
material, it is acceptable not to do
present value calculations.
Present value calculations are normally
done for periods greater than 12
months if the time value of money
effects are material. Refer to the key
concepts you learnt in Module 5.

Refer to Worked Example 10.3 Source: https://www.wesfarmers.com.au/docs/default-

source/reports/2023-annual-report.pdf?sfvrsn=42fae1bb_8
See page 152

Deegan pp 382-383
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 Worked Example 10.3 Deegan

pp 382-383
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 Objective 2

Discuss the nature of contingent liabilities &

accounting treatment
(Deegan LO 10.7 pp 390-394)

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 Contingent liabilities
Definition:
– A contingent liability is(AASB 137 para 10):
a) a possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly
within the control of the entity; or
b) a present obligation that arises from past events but is not
recognised because:
i. it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient
reliability.

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 Contingent liabilities: Accounting treatment

– A contingent liability is not recognised in financial statements

(AASB 137 para 27).
– Note disclosure is required unless the possibility of an outflow of
resources is remote (AASB 137 para 28).
– For each class of contingent liabilities where the possibility of
outflows is higher than remote, estimate of financial effects,
uncertainties and reimbursements are disclosed in the notes to
financial statements (AASB 137 para 86).

Source:
See page 115 https://investor.qantas.com/FormBuilder/_Resource/_module/do
LLG5ufYkCyEPjF1tpgyw/file/annual-reports/2022-Annual-
Report.pdf
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 AASB 137
Appendix B:
Decision Tree
This is a visual
tool to assist you
to understand
AASB 137.

Written exam
questions will
require written
answers.

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 Ethics

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 Objective 1

Explain the nature of ethics

(H&P LO 26.1)

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 What are ethics?

– Concerned with behaviour, and what is good and right for human
beings.
– What conditions, attributes and characteristics do we need in
order to do the best we can in a particular situation?
– Not only individuals, but communities

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 Relevance of ethics in the context of accounting
– Recognising that ethics is also about power and how it is
exercised.
– Provides valuable insights into what might be ‘good’
behaviour in accounting practice because accountants are
often in more powerful positions than their clients.
– Understanding what skills and attributes accountants need and
how they exercise those skills and attributes.
– Makes ethics a highly relevant and practical matter for
accountants to understand.

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 Objective 2

Distinguish between rules-based and values-based

approaches to ethics
(H&P LO 26.2)

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 Bases for ethical judgments
Two approaches for making ethical judgements:
1. Right/wrong perspective
– When we make ethical judgements with reference to specific
rules or law.
– Binary perspective—either right or wrong—black or white.
2. Good/bad perspective
– When we make ethical judgements with reference to an
individual’s value judgements, not to rules.
– Allows for grey areas.

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 Objective 3

Describe the foundational ethical principles

and their application
(H&P LO 26.4)

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 Foundational ethical principles

– Multicultural societies have differences in values and customs,

but this does not mean ‘anything goes’.
– Three shared ethical principles from which communities derive
values:
1. Beneficence – the duty to do good and avoid harm.
2. Justice – the duty of universal fairness or equity.
3. Respect for persons – the duty to respect the rights and
dignity of others.

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 Objective 4

Describe the fundamental ethical principles of the

accounting profession
(H& P LO 26.6)

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 Ethical principles of the Australian accounting
profession
– ‘Code of Ethics for Professional Accountants’.
– Three general messages:
1. The Code is mandatory for all members of the three
professional bodies:
– non-compliance can lead to disciplinary proceedings.
2. Some jurisdictions may have requirements and guidance that
differ from the Code.
3. Members should also be guided by the spirit of the Code.

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 Fundamental principles of The Code

Integrity:
– To be straightforward and honest in all professional and
business relationships.
Objectivity:
– To not allow bias, conflict of interest or undue influence of others
to override professional or business judgment.
Professional competence and due care:
– To maintain professional knowledge and skill at the level
required to ensure that clients or employers receive competent
professional services.
– To act diligently in accordance with applicable technical and
professional standards when providing their services.

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 Fundamental principles of The Code

Confidentiality:
– To respect confidentiality of information acquired as a result of
professional and business relationships and not disclose such
information to third parties without proper and specific
authority, unless there is a legal duty to disclose.
– To not use confidential information to their personal or third
party advantage.
Professional behaviour:
– To comply with relevant laws and regulations; and
– To avoid any action that discredits the profession.

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 Latest developments
– The Accounting Professional & Ethical Standards Board (APESB) issued a
restructure Australian Code of Ethics for Professional Accountants
(including Independence Standards) in November 2018.
– The restructured Australian Code will be effective from 1st January
2020.
– Auditor independence sections are now included as Independence
Standards.
– A strong focus on independence, professional judgement and
professional scepticism.
– New guidance on professional judgement and professional
scepticism.
– Important to obtain an understanding of facts and circumstances when
exercising professional judgement.
– Clarifies that compliance with the fundamental principles supports the exercise
of professional scepticism.

You will use professional skepticism in ACCT3600

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 Disciplinary proceedings

– Disciplinary procedures of two major Australian professional

accounting bodies are similar:
– They begin with a complaint about a member.
– In CPA Australia, written complaints are referred to the
Manager Professional Conduct.
– If it is believed there is a case to answer, the complaint is
referred to the One Person Tribunal or the Disciplinary
Committee.
– Several different penalties may be imposed:
– Fines, censure, reprimand, suspension, expulsion, publication of
complaint and penalty details.

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 Objective 5

Incorporate ethics into decision making in a systematic and

justifiable manner
(H&P LO 26.7)

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 Ethical decision making

– Values can be applied in the context of two core skills in ethics:

– Decision making (we will focus on this aspect in ACCT2011).
– Policy (rule) making.
– Decision making is about:
– Attempting to resolve a specific problem that is occurring at
a specific time, at a specific place.
– Most decisions need to be:
– Systematic
– Justifiable

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 Ethical decision making

– Decision making requires:

– Adoption of a process that encourages consideration of the
various ethical dimensions of a problem.
– Consideration of potential short-tem and long-term
consequences for ourselves and others.
– Many different decision-making models offered by
philosophers, academics, professional bodies.
– The American Accounting Association (AAA) model of ethical
decision making is one example.
– We will apply the steps provided by the AAA on the next slide
to some accounting/professional problems.

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 Ethical decision making
Steps in the AAA model of ethical
decision making (p.972):
– Determine the facts
– Define the ethical issue
– Identify the major principles,
rules and values
– Specify the alternatives
– Compare value and
alternatives—see if a clear
decision emerges
– Assess the consequences
– Make your decision

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 Next Module 7

Revenue

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