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 Financial Accounting

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 To my beautiful daughter Cassie for being the
best daughter a dad could ever have

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 Craig Deegan
Financial Accounting
8e

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Copyright © 2016 McGraw-Hill Education (Australia) Pty Ltd

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National Library of Australia Cataloguing-in-Publication Data

Author: Deegan, Craig Michael
Title: Financial accounting / Craig Michael Deegan.
Edition: 8th edition.
ISBN: 9781743764022 (pbk.)
Notes: Includes index.
Subjects: Accounting—Australia.
Accounting—Standards—Australia.
Financial statements—Standards—Australia.
Dewey Number: 657.021894

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dee64022_Prelims_i-xxiv.indd iv 05/20/16 12:55 PM

ABOUT THE AUTHOR

Craig Deegan

CRAIG DEEGAN, BCom (University of NSW), MCom (Hons)

(University of NSW), PhD (University of Queensland), FCA,
is Professor of Accounting in the School of Accounting
at RMIT University in Melbourne. Craig has taught at
both undergraduate and postgraduate level for about
three decades. Prior to working in the university sector
Craig worked as a chartered accountant. His research
has tended to focus on various social and environmental
accountability and financial accounting issues and has been
published in a number of leading international accounting
journals, including: Accounting, Organizations and
Society; Accounting and Business Research; Accounting,
Accountability and Auditing Journal; Accounting and
Finance; British Accounting Review; Critical Perspectives
on Accounting; Journal of Business Ethics; Australian
Accounting Review; and The International Journal of
Accounting. According to Google Scholar, Craig’s work accounting journals and he has been the recipient
has attracted approximately 12,000 citations making him of various teaching and research awards, including
one of the most highly cited researchers internationally teaching prizes sponsored by KPMG, and the Institute of
within the accounting and/or finance literature. Chartered Accountants in Australia. He was the inaugural
Craig has regularly provided consulting services recipient of the Peter Brownell Manuscript Award, an
to corporations, government, and industry bodies on annual research award presented by the Accounting and
issues pertaining to financial accounting and corporate Finance Association of Australia and New Zealand. He
social and environmental accountability, he was former was also awarded the University of Southern Queensland
Chairperson of the Triple Bottom Line Issues Group of Individual Award for Research Excellence.
the Institute of Chartered Accountants in Australia, for Craig is also the author of the leading financial
a number of years was involved in developing the CPA accounting theory textbook, Financial Accounting Theory,
Program of CPA Australia, and for many years was a now in its fourth edition. Financial Accounting Theory is
judge on the Australian Sustainability Reporting Awards. widely used throughout Australia as well as in many other
He is on the editorial board of a number of academic countries.

about the author v

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CONTENTS IN BRIEF

PART 1 THE AUSTRALIAN ACCOUNTING ENVIRONMENT 1

Chapter 1 An overview of the Australian external reporting environment 2
Chapter 2 The conceptual framework for financial reporting 48

PART 2 THEORIES OF ACCOUNTING 83

Chapter 3 Theories of financial accounting 84

PART 3 ACCOUNTING FOR ASSETS 139

Chapter 4 An overview of accounting for assets 140
Chapter 5 Depreciation of property, plant and equipment 180
Chapter 6 Revaluations and impairment testing of non-current assets 202
Chapter 7 Inventory 234
Chapter 8 Accounting for intangibles 258
Chapter 9 Accounting for heritage assets and biological assets 300

PART 4 ACCOUNTING FOR LIABILITIES AND OWNERS’ EQUITY 343

Chapter 10 An overview of accounting for liabilities 344
Chapter 11 Accounting for leases 376
Chapter 12 Accounting for employee benefits 427
Chapter 13 Share capital and reserves 457
Chapter 14 Accounting for financial instruments 481
Chapter 15 Revenue recognition issues 548
Chapter 16 The statement of profit or loss and other comprehensive income,
and the statement of changes in equity 585
Chapter 17 Accounting for share-based payments 625
Chapter 18 Accounting for income taxes 656

PART 5 ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS 695

Chapter 19 The statement of cash flows 696

PART 6 INDUSTRY-SPECIFIC ACCOUNTING ISSUES 741

Chapter 20 Accounting for the extractive industries 742

PART 7 OTHER DISCLOSURE ISSUES 779

Chapter 21 Events occurring after the end of the reporting period 780
Chapter 22 Segment reporting 794

vi Contents in brief

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 Chapter 23 Related party disclosures 820
Chapter 24 Earnings per share 839

PART 8 ACCOUNTING FOR EQUITY INTERESTS IN OTHER ENTITIES 869

Chapter 25 Accounting for group structures 870
Chapter 26 Further consolidation issues I: accounting for intragroup transactions 924
Chapter 27 Further consolidation issues II: accounting for non-controlling interests 966

PART 9 FOREIGN CURRENCY 1007

Chapter 28 Accounting for foreign currency transactions 1008
Chapter 29 Translating the financial statements of foreign operations 1028

PART 10 CORPORATE SOCIAL-RESPONSIBILITY REPORTING 1049

Chapter 30 Accounting for corporate social responsibility 1050

ONLINE CHAPTERS
Chapter 31 Further consolidation issues III: accounting for indirect ownership interests
Chapter 32 Accounting for investments in associates and joint ventures

Appendix A Present value of $1 1122

Appendix B Present value of an annuity of $1 1124
Appendix C Calculating present values 1126

Contents in brief vii

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CONTENTS IN FULL

About the author v

Contents in brief vi
Preface xvii
Acknowledgments xviii
AACSB statement xix
How to use this book xx
Digital resources xxii
Credits xxiv

PART 1 THE AUSTRALIAN ACCOUNTING ENVIRONMENT 1

CHAPTER 1 AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT 2

Accounting, accountability and the role of financial accounting 3 Learning objectives 2

Financial accounting defined 4 Summary 43
Users’ demand for general purpose financial statements 4 Key terms 43
Sources of external financial reporting regulations 6 End-of-chapter exercises 43
The process of Australia adopting accounting standards issued Review questions 44
by the International Accounting Standards Board 25 Challenging questions 44
Structure of the International Accounting Standards Board 34 References 46
International cultural differences and the harmonisation of accounting
standards 37
Accounting standards change across time 38
The use and role of audit reports 38
All this regulation—is it really necessary? 39

CHAPTER 2 THE CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING 48

Australia’s use of the IASB conceptual framework 49 Learning objectives 48

What is a conceptual framework? 49 Summary 78
Benefits of a conceptual framework 50 Key terms 79
Current initiatives to develop a revised conceptual framework 50 End-of-chapter exercises 79
Structure of the conceptual framework 52 Review questions 79
Building blocks of a conceptual framework 54 Challenging questions 80
Measurement principles 73 References 81
A critical review of conceptual frameworks 74
The conceptual framework as a normative theory of accounting 77

viii CONTENTS IN FULL

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 PART 2 THEORIES OF ACCOUNTING 83
CHAPTER 3 THEORIES OF FINANCIAL ACCOUNTING 84

Introduction to theories of financial accounting 85 Learning objectives 84

Why discuss theories in a book such as this? 85 Summary 126
Definition of theory 86 Key terms 127
Positive Accounting Theory 87 End-of-chapter exercises 127
Accounting policy selection and disclosure 101 Review questions 128
Accounting policy choice and ‘creative accounting’ 102 Challenging questions 131
Some criticisms of Positive Accounting Theory 103 Further reading 134
Normative accounting theories 105 References 134
Systems-oriented theories to explain accounting practice 109
Theories that seek to explain why regulation is introduced 122

PART 3 ACCOUNTING FOR ASSETS 139

CHAPTER 4 AN OVERVIEW OF ACCOUNTING FOR ASSETS 140

Introduction to accounting for assets 141 Learning objectives 140

Numbering of Australian Accounting Standards 141 Summary 173
Definition of assets 142 Key terms 173
General classification of assets 149 End-of-chapter exercises 174
How to present a statement of financial position 150 Review questions 174
Determination of future economic benefits 153 Challenging questions 176
Acquisition cost of assets 157 References 179
Accounting for property, plant and equipment—an introduction 158
Assets acquired at no cost 169
Possible changes in the requirements pertaining to financial
statement presentation 170

CHAPTER 5 DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT 180

Introduction to accounting for depreciation of property, plant and equipment 181 Learning objectives 180
Depreciable amount (base) of an asset 182 Summary 195
Determination of useful life 183 Key terms 196
Method of cost apportionment 184 End-of-chapter exercises 196
Depreciation of separate components 187 Review questions 196
When to start depreciating an asset 188 Challenging questions 198
Revision of depreciation rate and depreciation method 188
Land and buildings 189
Modifying existing non-current assets 191
Disposition of a depreciable asset 191
Depreciation as a process of allocating the cost of an asset over its useful life:
further considerations 193
Disclosure requirements 194

CONTENTS IN FULL ix

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 CHAPTER 6 REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 202

Introduction to revaluations and impairment testing of non-current assets 203 Learning objectives 202
Measuring property, plant and equipment at cost or at fair value—the choice 203 Summary 227
The use of fair values 204 Key terms 228
Revaluation increments 205 End-of-chapter exercises 228
Treatment of balances of accumulated depreciation upon revaluation 206 Review questions 229
Revaluation decrements 209 Challenging questions 231
Reversal of revaluation decrements and increments 210 References 233
Accounting for the gain or loss on the disposal or derecognition of a revalued
non-current asset 212
Recognition of impairment losses 216
Further consideration of present values 221
Offsetting revaluation increments and decrements 223
Investment properties 223
Economic consequences of asset revaluations 224
Disclosure requirements 226

CHAPTER 7 INVENTORY 234

Introduction to inventory 235 Learning objectives 234

Definition of inventory 235 Summary 251
The general basis of inventory measurement 235 Key terms 252
Inventory cost-flow assumptions 242 End-of-chapter exercises 252
Reversal of previous inventory write-downs 250 Review questions 253
Disclosure requirements 251 Challenging questions 254
References 257

CHAPTER 8 ACCOUNTING FOR INTANGIBLES 258

Introduction to accounting for intangible assets 259 Learning objectives 258

Which intangible assets can be recognised and included in the statement Summary 287
of financial position? 261 Key terms 287
What is the initial basis of measurement of intangible assets? 262 End-of-chapter exercises 288
General amortisation requirements for intangible assets 264 Review questions 289
Revaluation of intangible assets 267 Challenging questions 293
Gain or loss on disposal of intangible assets 268 References 298
Required disclosures in relation to intangible assets 268
Research and development 269
Accounting for goodwill 279
Is the way we account for intangible assets an improvement over what
we did in Australia prior to the introduction of IFRS in 2005? 286

CHAPTER 9 ACCOUNTING FOR HERITAGE ASSETS AND BIOLOGICAL ASSETS 300

Introduction to accounting for heritage assets and biological assets 301 Learning objectives 300
Accounting for heritage assets 301 Summary 336
Accounting for biological assets 320 Key terms 337
End-of-chapter exercises 337
Review questions 337
Challenging questions 338
References 341

x  CONTENTS IN FULL

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 PART 4 ACCOUNTING FOR LIABILITIES AND OWNERS’ EQUITY 343
CHAPTER 10 AN OVERVIEW OF ACCOUNTING FOR LIABILITIES 344

Liabilities defined 345 Learning objectives 344

Contingent liabilities 347 Summary 366
Contingent assets 350 Key terms 366
Classification of liabilities as ‘current’ or ‘non-current’ 350 End-of-chapter exercises 366
Liability provisions 351 Review questions 367
Some implications of reporting liabilities 356 Challenging questions 371
Debt equity debate 358 References 375
Accounting for debentures (bonds) 360
Hybrid securities 365

CHAPTER 11 ACCOUNTING FOR LEASES 376

An overview of recent developments in the accounting requirements Learning objectives 376

pertaining to accounting for leases 377 Summary 416
The core principle and scope of the new accounting standard on leasing 383 Key terms 418
Exemptions for leases of 12 months or less, and for low-value assets 383 End-of-chapter exercises 418
What is a lease? 384 Review questions 419
When to recognise a lease 387 Challenging questions 421
Accounting for the service component of a contract that includes a lease 388 References 425
The meaning of ‘lease term’ 388
Accounting for leases by lessees 390
Accounting for leases by lessors 401
Implications for accounting-based contracts 413

CHAPTER 12 ACCOUNTING FOR EMPLOYEE BENEFITS 427

Overview of employee benefits 428 Learning objectives 427

Categories of employee benefits 430 Summary 450
Accounting for employee benefits 431 Key terms 450
Employees’ accrued employee benefits and corporate collapses 449 End-of-chapter exercises 450
Review questions 452
Challenging questions 453
References 456

CHAPTER 13 SHARE CAPITAL AND RESERVES 457

Introduction to accounting for share capital and reserves 458 Learning objectives 457
Different classes of shares 459 Summary 476
Accounting for the issue of share capital 460 Key terms 476
Accounting for distributions 467 End-of-chapter exercises 477
Redemption of preference shares 468 Review questions 478
Forfeited shares 470 Challenging questions 480
Share splits and bonus issues 472 References 480
Rights issues and share options 473
Required disclosures for share capital 475
Reserves 475

CONTENTS IN FULL xi

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 CHAPTER 14 ACCOUNTING FOR FINANCIAL INSTRUMENTS 481

Introduction to accounting for financial instruments 482 Learning objectives 481

Financial instruments defined 483 Summary 539
Debt versus equity components of financial instruments 488 Key terms 539
Set-off of financial assets and financial liabilities 492 End-of-chapter exercises 540
Recognition and measurement of financial assets 495 Review questions 541
Recognition and measurement of financial liabilities 509 Challenging questions 544
Derivative financial instruments and their use as hedging instruments 512 References 547
Compound financial instruments 535
Disclosure requirements pertaining to financial instruments 537

CHAPTER 15 REVENUE RECOGNITION ISSUES 548

New accounting standard on revenue recognition 549 Learning objectives 548

Definition of income and revenue 550 Summary 575
Recognition criteria for revenue from contracts with customers 551 Key terms 576
Measurement of revenue 552 End-of-chapter exercises 576
Income and revenue recognition points 555 Review questions 580
Accounting for sales with associated conditions 559 Challenging questions 582
Interest and dividends 563 References 584
Unearned revenue 566
Accounting for construction contracts 566
Summary of the steps to be taken when recognising revenue 574

CHAPTER 16  HE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME,

T
AND THE STATEMENT OF CHANGES IN EQUITY 585

Introduction to the statement of profit or loss and other comprehensive income 586 Learning objectives 585
Profit or loss disclosure 589 Summary 617
Statement of changes in equity 603 Key terms 618
Prior period errors 604 End-of-chapter exercises 618
Changes in accounting policy 607 Review questions 618
Profit as a guide to an organisation’s success 613 Challenging questions 620
Future changes in the requirements pertaining to how we present References 624
information about comprehensive income 615

CHAPTER 17 ACCOUNTING FOR SHARE-BASED PAYMENTS 625

Introduction to accounting for share-based payments 626 Learning objectives 625

Background to the release of AASB 2 626 Summary 652
Overview of the requirements of AASB 2 628 Key terms 652
Equity-settled share-based payment transactions 629 End-of-chapter exercises 652
Cash-settled share-based payment transactions 643 Review questions 653
Share-based payment transactions with cash alternatives 647 Challenging questions 654
Possible economic implications of AASB 2 649
Disclosure requirements 650

xii CONTENTS IN FULL

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 CHAPTER 18 ACCOUNTING FOR INCOME TAXES 656

Introduction to accounting for income taxes 657 Learning objectives 656

The balance sheet approach to accounting for taxation 658 Summary 686
Tax base of assets and liabilities: further consideration 664 Key terms 687
Deferred tax assets and deferred tax liabilities 667 End-of-chapter exercises 687
Unused tax losses 669 Review questions 689
Revaluation of non-current assets 672 Challenging questions 691
Offsetting deferred tax liabilities and deferred tax assets 679 References 694
Change of tax rates 679
Evaluation of the assets and liabilities created by AASB 112 680

PART 5 ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS 695

CHAPTER 19 THE STATEMENT OF CASH FLOWS 696

Comparison with other financial statements 697 Learning objectives 696

Defining ‘cash’ and ‘cash equivalents’ 701 Summary 727
Classification of cash flows 703 Key terms 728
Format of statement of cash flows 704 End-of-chapter exercises 728
Calculating cash inflows and outflows 709 Review questions 731
Contractual implications 721 Challenging questions 735
Potential future changes to the statement of cash flows 722 References 740

PART 6 INDUSTRY-SPECIFIC ACCOUNTING ISSUES 741

CHAPTER 20 ACCOUNTING FOR THE EXTRACTIVE INDUSTRIES 742

Overview of accounting for exploration and evaluation expenditures under AASB 6 743 Learning objectives 742
Extractive industries defined 744 Summary 772
Alternative methods to account for preproduction costs 745 Key terms 773
Abandoning an area of interest 748 End-of-chapter exercises 773
Accumulation of costs pertaining to exploration and evaluation activities 748 Review questions 773
Basis for measurement of exploration and evaluation expenditures 749 Challenging questions 775
Impairment and amortisation of costs carried forward 750 References 776
Restoration costs 752
Sales revenue 754
Inventory 755
Disclosure requirements 755
Does the area-of-interest method provide a realistic value for an entity’s reserves? 764
Research on accounting regulation pertaining to pre-production expenditures 764
Other developments in extractive industry reporting 767
The development of a new accounting standard for extractive activities 769

PART 7 OTHER DISCLOSURE ISSUES 779

CHAPTER 21 EVENTS OCCURRING AFTER THE END OF THE REPORTING PERIOD 780

What is an ‘event after the reporting period’? 781 Learning objectives 780
Types of events after the reporting period 782 Summary 789
Disclosure requirements 787 Key terms 789
End-of-chapter exercises 789
Review questions 789
Challenging questions 790

CONTENTS IN FULL xiii

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 CHAPTER 22 SEGMENT REPORTING 794

Advantages and disadvantages of segment reporting 795 Learning objectives 794

An introduction to AASB 8 799 Summary 811
Defining an operating segment 801 Key terms 812
Defining a reportable segment 803 End-of-chapter exercises 812
Measurement of segment items 806 Review questions 815
Required financial disclosures 807 Challenging questions 817
Reconciliation of segment information to financial statements 808 References 819
Non-financial disclosures 809
Is there a case for competitive harm? 811

CHAPTER 23 RELATED PARTY DISCLOSURES 820

Introduction to related party disclosures 821 Learning objectives 820

Related party relationship defined 821 Summary 836
AASB 124 Related Party Disclosures 822 Key terms 836
Section 300A of the Corporations Act 2001 831 End-of-chapter exercises 836
Examples of related party disclosure notes 835 Review questions 836
Challenging questions 837
References 838

CHAPTER 24 EARNINGS PER SHARE 839

Introduction to earnings per share 840 Learning objectives 839

Computation of basic earnings per share 840 Summary 858
Diluted earnings per share 851 Key terms 859
Linking earnings per share to other indicators 857 End-of-chapter exercises 859
Review questions 861
Challenging questions 864
References 867

PART 8 ACCOUNTING FOR EQUITY INTERESTS IN OTHER ENTITIES 869

CHAPTER 25 ACCOUNTING FOR GROUP STRUCTURES 870

Introduction to accounting for group structures 871 Learning objectives 870

Rationale for consolidating the financial statements of different legal entities 872 Summary 910
History of Australian Accounting Standards that govern the preparation Key terms 911
of consolidated financial statements 873 End-of-chapter exercises 911
‘Investment entities’: exception to consolidation 877 Review questions 915
Alternative consolidation concepts 878 Challenging questions 919
The concept of control 879 References 923
Direct and indirect control 885
Accounting for business combinations 887
Gain on bargain purchase 897
Subsidiary’s assets not recorded at fair values 898
Previously unrecognised identifiable intangible assets 903
Consolidation after date of acquisition 906
Disclosure requirements 908
Control, joint control, and significant influence 909

xiv CONTENTS IN FULL

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 CHAPTER 26 FURTHER CONSOLIDATION ISSUES I: ACCOUNTING FOR INTRAGROUP TRANSACTIONS 924

Introduction to accounting for intragroup transactions 925 Learning objectives 924

Dividend payments from pre- and post-acquisition earnings 925 Summary 949
Intragroup sale of inventory 932 Key terms 950
Sale of non-current assets within the group 942 End-of-chapter exercises 950
Review questions 957
Challenging questions 960

CHAPTER 27 FURTHER CONSOLIDATION ISSUES II: ACCOUNTING FOR NON-CONTROLLING INTERESTS 966

Introduction to accounting for non-controlling interests 967 Learning objectives 966

What is a non-controlling interest? 967 Summary 990
Non-controlling interests to be disclosed in the consolidated Key terms 990
financial statements 968 End-of-chapter exercises 991
Calculating non-controlling interests 969 Review questions 1001
Challenging questions 1003

PART 9 FOREIGN CURRENCY 1007

CHAPTER 28 ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS 1008

Introduction to accounting for foreign currency transactions 1009 Learning objectives 1008
Foreign currency transactions 1009 Summary 1020
Determination of functional currency and presentation currency 1013 Key terms 1021
Longer-term receivables and payables 1014 End-of-chapter exercises 1021
Translation of other monetary assets such as cash deposits 1015 Review questions 1022
Qualifying assets 1016 Challenging questions 1025
Hedging transactions 1018
Foreign currency swaps 1019

CHAPTER 29 TRANSLATING THE FINANCIAL STATEMENTS OF FOREIGN OPERATIONS 1028

Introduction to translating the financial statements of foreign operations 1029 Learning objectives 1028
Reporting foreign currency transactions in the functional currency 1029 Summary 1043
Translating the accounts of foreign operations into the presentation currency 1036 Key terms 1043
Consolidation subsequent to translation 1041 End-of-chapter exercises 1043
Review questions 1045
Challenging questions 1045

CONTENTS IN FULL xv

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 PART 10 CORPORATE SOCIAL-RESPONSIBILITY REPORTING 1049
CHAPTER 30 ACCOUNTING FOR CORPORATE SOCIAL RESPONSIBILITY 1050

Introduction to social-responsibility reporting 1051 Learning objectives 1050

Social and environmental reporting defined 1053 Summary 1112
What are the responsibilities of business (to whom and for what)? 1055 Key terms 1113
Evidence of public social and environmental reporting 1061 End-of-chapter exercises 1113
Why report? 1063 Review questions 1113
To whom will the organisation report? 1074 Challenging questions 1116
What information shall be reported? 1075 References 1118
How (and where) will the information be presented? 1077
Other international initiatives to assist corporate social and environmental
performance 1101
Social auditing 1104
The critical problem of climate change 1107
Personal social responsibility 1111
Concluding remarks 1112

ONLINE CHAPTERS
CHAPTER 31 FURTHER CONSOLIDATION ISSUES III: ACCOUNTING FOR INDIRECT OWNERSHIP INTERESTS
CHAPTER 32 ACCOUNTING FOR INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

Appendix A 1122
Appendix B 1124
Appendix C 1126
Glossary1128
Index1137

xvi CONTENTS IN FULL

dee64022_Prelims_i-xxiv.indd xvi 05/20/16 12:55 PM

PREFACE
This is the eighth edition of a book that was originally
published in 1995. Since the first edition of this book was
published we have seen extensive changes in relation to
the practice and regulation of general purpose financial
reporting. These changes continue to occur and this book
has always attempted to carefully explain the nature of
the changes as well as the potential economic and social
consequences which might result from such changes.
In the period of time between when the seventh
edition of this book was published, and the writing of this
eighth edition was completed (writing was completed in
March 2016) there have been some rather significant
changes in regulation and guidance pertaining to external
reporting. These changes have been incorporated
within this eighth edition and some of the major changes
we cover relate to such areas as financial statement
presentation, The Conceptual Framework for Financial
Reporting, accounting for leases, revenue recognition,
financial instruments, and corporate social-responsibility
reporting. Because many of these changes are significant
we will provide critical comparisons of the ‘old’ and ‘new’
requirements.
Each chapter of this eighth edition contains learning
objectives, chapter summaries and a comprehensive end-
of-chapter exercise. A glossary of key terms is provided
towards the back of the book. The book provides material
that will enable the reader to gain a thorough grasp of the
contents and of the practical application of the majority
of financial accounting requirements currently in place
in Australia. In the discussion of these requirements,
numerous worked examples, with detailed solutions, are
provided throughout the text.
As well as addressing how to apply the various
accounting requirements, this text also encourages
readers to critically evaluate the various rules and
guidelines. The aim is to develop accountants who are
not only able to apply particular accounting requirements,
but who will also be able to contribute to the ongoing
improvement of accounting requirements. The view taken
is that it is not only important for students to understand
the rules of financial accounting, but also to understand
the limitations inherent in many of the existing accounting
requirements. For this reason, reference is made to various
dee64022_Prelims_i-xxiv.indd xvii
research studies that consider the merit, implications, and
costs and benefits of the various accounting requirements.
Also, various newspaper articles discussing different
aspects of the accounting requirements are reproduced
for consideration and discussion. The permission of
copyright holders to reproduce this material is gratefully
acknowledged.
Social-responsibility reporting continues to be an
important area of accounting, and one that is rapidly
developing. Its importance is further highlighted by the
growing evidence of climate change, species extinction,
and large scale poverty, hunger and social inequities in
many countries. While this book predominantly considers
financial accounting and reporting, Chapter 30 focuses
on social-responsibility reporting and provides the most
up-to-date and comprehensive material available on this
important topic with additional material being added on
the important topic of Climate Change—both from an
accounting and scientific perspective—as well as the
inclusion of commentaries on various alternative reporting
frameworks.
Writing a text like this is an extremely time-consuming
exercise and it has been very gratifying that the effort
involved has been rewarded by so many institutions
across Australia (and also some outside Australia) electing
to prescribe previous editions of this book as part of their
accounting programs. Given the success of all previous
editions, every effort has been made to ensure that this
eighth edition is equally valuable to students and teachers,
and that it has been substantially and thoroughly revised.
Preface xvii
05/20/16 12:55 PM
ACKNOWLEDGMENTS
There are many people who must be thanked for their
contribution to the eighth edition of this book. First, our
thanks to the following reviewers of the current edition:
Bobae Choi, University of Newcastle; Sally Chaplin,
Queensland University of Technology; Victoria Clout,
University of New South Wales; Sajan Cyril, Australian
Catholic University; Colin Dolley, Edith Cowan University;
Peter Dryden, Federation University; Hermann Frick,
University of Queensland; Syed Haider, Victoria
University; Andrew Jackson, University of New South
Wales; Arifur Khan, Deakin University; Eric Lee, Monash
University; Janet Lee, Australian National University;
Jinghui Liu, Southern Cross University; Tracey McDowall,
Deakin University; Balachandran Muniandy, La Trobe
University; Puspalila Muniandy, Deakin University;
Gregory Phillip, University of Newcastle; Pranil Prasad,
University of the South Pacific; Maria Prokofieva, Victoria
University; Glenn Rechtschaffen, University of Auckland;
Natasja Steenkamp, Central Queensland University;
Grantley Taylor, Curtin University; Suzanne Mary Taylor,
QUT Business School; Maria Tyler, CQUniversity Mackay
campus; Effiezal Aswadi Abdul Wahab, Curtin University.
This book has also been improved during the course of
the first seven editions by the feedback received from many
people and I would like to acknowledge the contribution that
they have previously made. These people include:
Maria Balatbat, University of New South Wales; Peter
Baxter, University of the Sunshine Coast; Poonam Bir,
Monash University; Phil Cobbin, University of Melbourne;
Lome Cummings, Macquarie University; Matt Dyki, Charles
Sturt University, Wagga Wagga campus; Natalie Gallery,
Queensland University of Technology; John Goodwin,
RMIT University; Deborah Janke, University of Southern
Queensland; Maurice Jenner, University of Southern
Queensland; Graham Jones, Flinders University; Peter
Keet, RMIT University; Janet Lee, Australian National
University; Steven Lesser, Charles Sturt University,
Wagga Wagga campus; Stephen Lim, University of
Technology Sydney; Janice Loftus, University of Sydney;
Wei Lu, Monash University; Diane Mayorga, University
of New South Wales; Kellie McCombie, University of
Wollongong; Malcolm Miller, University of New South
xviii Acknowledgments
dee64022_Prelims_i-xxiv.indd xviii
Wales; Lee Moermon, University of Wollongong; Gary
Monroe, Australian National University; Richard Morris,
University of New South Wales; Anja Morton, Southern
Cross University, Lismore campus; Karen Ness, James
Cook University; Cameron Nichol, RMIT University; Gary
Plugarth, University of New South Wales; Lisa Powell,
University of South Australia; Jim Psaros, University of
Newcastle; Michaela Rankin, Monash University; Andrew
Read, University of Canberra; Kathy Rudkin, University
of Wollongong; Dan Scheiwe, Queensland University
of Technology; Mark Silvester, University of Southern
Queensland; Stella Sofocleous, Victoria University of
Technology; Jenny Stewart, Griffith University; Seng
The, Australian National University; Len Therry, Edith
Cowan University; Matthew Tilling, University of Western
Australia; Irene Tutticci, University of Queensland; Mark
Vallely, University of Southern Queensland; Trevor
Wilmshurst, University of Tasmania; Victoria Wise,
University of Tasmania; Ann-Marie Wyatt, University of
Technology Sydney.
Thanks also go to many of my colleagues at RMIT
University for their friendship and encouragement. The team
at McGraw-Hill Education (Australia) also deserve a great
deal of thanks for helping in the preparation of this book.
Lastly, but certainly not leastly, thanks again go to my
16-year-old daughter Cassandra for all the love and support
she gives me in whatever I seem to be doing and for
continually helping me to put everything into perspective. As
I have said before, she is indeed my finest work (and my most
valuable ‘asset’) and represents that aspect of my life of which
I am most proud.
The publisher would also like to thank the following
digital contributors: Victoria Clout, Parmod Chand, Maria
Prokofieva, Jackie Liu, Maria Balatbat, Eric Lee and
Matt Dyki.
05/20/16 12:55 PM
AACSB STATEMENT

McGraw-Hill Education is a proud corporate member of AACSB1 International. Understanding the importance and value
of AACSB accreditation, Financial Accounting has sought to recognise the curricula guidelines detailed in the AACSB
standards for business accreditation by connecting content and exercises to the general knowledge and skill guidelines
found in the AACSB standards.
The statements contained in Financial Accounting and in its digital resources are provided only as a guide for the
users of this text. The AACSB leaves content coverage and assessment within the purview of individual institutions,
the mission of the institutions, and the faculty. While Financial Accounting and the teaching package make no claim of
any specific AACSB qualification or evaluation, we have, within Financial Accounting identified chapters as containing
content and labelled activities according to the general knowledge and skills areas.2

1
The Association to Advance Collegiate Schools of Business [http://www.aacsb.edu/accreditation/standards.asp]
2
AACSB International 2008, ‘Eligibility procedures and accreditation standards for business accreditation’, www.aacsb.edu

AACSB statement xix

dee64022_Prelims_i-xxiv.indd xix 05/20/16 12:55 PM

HOW
CHAPTER 6TO USE THIS BOOK
REVALUATIONS AND
IMPAIRMENT TESTING OF
NON-CURRENT ASSETS
LEARNING OBJECTIVES (LO) assets and liabilities identified as arising in a lease contract . . . The new approach would treat all lease contracts
as the acquisition of a right to use the leased item for the lease term. Thus, the lessee would recognise the
6.1 Be able to measure the cost of property, plant and equipment. following:
6.2 Understand the meaning of ‘fair value’. (a) an asset representing its right to use the leased item for the lease term (the right-of-use asset)
6.3 Understand how and when to revalue an item of property, plant and equipment in accordance with (b) a liability for its obligation to pay rentals.
AASB 116 Property, Plant and Equipment. The above position was ultimately embraced when IFRS 16 was issued in January 2016 (and AASB 16 was released
6.4 Understand how and when to revalue an intangible asset in accordance with AASB 138 Intangible in Australia in February 2016). Financial Accounting in the Real World 11.1 provides an insight into how the news
Assets. media was reporting the implications of a new accounting standard on leasing.
6.5 Understand the meaning of ‘recoverable amount’ and be able to calculate it.
6.6 Understand the difference in accounting treatments for upward revaluations to ‘fair value’, as
opposed to write-downs to ‘recoverable amount’.
6.7 Understand what an ‘impairment loss’ is and know when and how to account for one in accordance 11.1 FINANCIAL ACCOUNTING IN THE REAL WORLD
with AASB 136 Impairment of Assets.
6.8 Understand how to account for revaluations that reverse previous revaluation increments or Effect on retailers from proposed new rules around lease accounting
decrements.
In 2008, following spectacular corporate collapses like that of Enron, the International Accounting Standards Board
6.9 Understand how to account for accumulated depreciation when a non-current depreciable asset is
(IASB) outlined a proposal that operating leases should be included on a company’s balance sheets in the interest of
revalued, and understand that, subsequent to revaluation, new depreciation charges will be based
transparency for creditors and investors around corporate debt. The IASB was forced into a rethink after a backlash
on the revalued amount of the non-current asset.
from major retailers including Woolworths and Wesfarmers, denouncing the original proposals as complex and
6.10 Know how the profit on disposal of a revalued non-current asset is determined and understand how costly.
asset revaluations can affect an organisation’s profits owing to changes in depreciation expenses Under the latest changes to lease accounting rules put forward by the IASB, retailers such as Woolworths,
and in final gains or losses on the sale of the revalued asset. Wesfarmers, Myer, David Jones, JB Hi-Fi, Harvey Norman, Specialty Fashion and Premier Investments will have to
calculate the net present value of future lease commitments and recognise them as debt on their balance sheets.
Learning objectives
6.11 Understand the meaning of a ‘cash-generating unit’ and why it is relevant to calculating depreciation
and impairment losses. Instead of recognising rent payments as costs incurred, retailers will have to expense theoretical amortisation and
financing costs. This will boost earnings before interest, tax, depreciation and amortisation but will reduce pre-tax and
Each chapter
6.12 Be starts
able to explain with
possible a listthatofmight
motivations
revalue its non-current assets to fair value.
thedrive
chapter’s learning
an organisation to elect, or not elect, to
net profits, as the amortisation and financing costs will exceed rental payments, especially for faster growing retailers

objectives. Theserequirements
6.13 Know the disclosure flag what youtoshould
pertaining know
asset revaluation and when
impairmentyoulosses.have
with relatively new leases. According to a report by Morgan Stanley, the impact on retailers will be ‘considerable’,
blowing out gearing levels and reducing return on capital employed, but will vary from retailer to retailer.
worked through the chapter. Make these the foundation for Reactions to the proposed rules include a report by Morgan Stanley predicting a considerable but varied impact
on retailers including reduced capital return and a blow out of gearing levels. The report says Myer, Specialty
your exam revision by using them to test yourself. The end-of- Fashion and The Reject Shop will be more affected than Kathmandu and Fantastic Furniture as the former have
significant and long-term lease liabilities. Also new retailers like Lovisa, who are early into lease terms will probably
chapter assignments also link back to these learning objectives.
202 PART 3: ACCOUNTING FOR ASSETS
be impacted more than established leaseholder retailers.
Morgan Stanley analyst Tom Kierath says investors aren’t as aware of the change to lease accounting rules as
they should be.
We would then debit the machine account by $5 000 and credit the revaluation surplus by $5 000. This would cause
Chapter introduction
the carrying amount of the asset to be $14 000, which is its fair value. That is, the journal entry would be:
Examples of the financial impact on Myer, Woolworths and Wesfarmers of the new rules clarify their expected
effect.
Myer: net debt $340 million but net present value (NPV) of lease liabilities is $2.2 billion. Debt would rise to
Each chapter begins with an excellent5 000 overview of the material
dee64022_ch06_202-233.indd 202 05/10/16 01:26 PM

Dr Machine $2.5 billion.

Financial accounting in the real world
to
Cr
beRevaluation
covered, surplus
and places it in the broader context 5 000
of how Woolworths: net debt $3 billion but NPV of leases is $15 billion. Debt would rise to $18 billion.
Wesfarmers (Coles, Bunnings, Target, Officeworks): net debt $4 billion and NPV of leases is $12 billion.
topics in various chapters interrelate.
Subsequent depreciation after a revaluation is based on the revalued amount of the non-current asset. It should be Accounting is often a major and controversial part of news
Patricia Stebbens, a KPMG audit partner, believes that some companies will have to renegotiate their debt
noted that an entity cannot account for a downward revaluation simply by increasing the amount of the accumulated covenants with their banks because rule changes would increase gearing ratios.
depreciation by the amount of the revaluation decrement, even though the net effect would be the same. Worked items that hit the headlines. Excerpts from the media put
However, Angus Thompson, the research director of the Australian Accounting Standards Board, believes that
Example 6.1 illustrates the use of the ‘net method’—which nets off accumulated depreciation against the asset prior to
recognition of the fair value increment or decrement.
various aspects of accounting under the spotlight, emphasising
as the new rules are likely to take effect no earlier than January 2018, affected parties have sufficient preparation
time. Although there has been a mixed reaction to the new rules, Thompson is confident of the benefits of increased
how integral it is to business life. They also help students gain
transparency around gearing.

WORKED EXAMPLE 6.1: Revaluation of a depreciable asset using the net-amount method aSOURCE:
wider grasp
Adapted of accounting
from ‘Retailers
23 April 2015, p. 21
byaccounting
face hit from proposed lease presenting opposing
changes’, by Sue viewpoints
Mitchell, The Australian Financial Review,

Assume that, as at 1 July 2018, Farrelly Ltd has an item of machinery that originally cost $40 000 and has accumulated in relation to hot topics. Some show accounting in a historical
depreciation of $15 000. Its remaining life is assessed to be five years, after which time it will have no residual value.
While completing a regular revaluation of all machinery, Farrelly decided on 1 July 2018 that the item should be
context; others relate to contemporary issues.
revalued to its current fair value, which was assessed as $45 000. 382 PART 4: ACCOUNTING FOR LIABILITIES AND OWNERS’ EQUITY

REQUIRED
Provide the appropriate journal entries to account for the revaluation using the net-amount method.
Figures
SOLUTION Figures provide a graphical representation of how events
dee64022_ch11_376-426.indd 382 05/12/16 06:57 AM

The total revaluation increment will represent the difference between the carrying amount and the fair value of the
asset at the date of the revaluation. In this case it would be:
and actions link.
$45 000 - ($40 000 - $15 000) = $20 000
The appropriate journal entries on 1 July 2018 would be:

Dr Accumulated depreciation—machinery 15 000

Tables
Cr Machinery 15 000
Dr Machinery 20 000 Tables provide useful checklists.
Cr Revaluation surplus 20 000

According to AASB 116, future depreciation should be based on the revalued amount of the asset. The depreciation
charge for the year to 30 June 2019 would be $9 000 (the new carrying amount of $45 000 divided by the remaining
Worked examples
useful life of five years). Where the depreciation charges for any financial period have changed materially owing to a
revaluation, the financial effect of the change (that is, the increase or decrease in the depreciation charges) should
Abewide range of detailed scenarios and solutions, some
disclosed in the notes to the financial statements for that financial period.

fairly straightforward and some more complex, are provided

While the demonstrated procedure (applying the net-amount method by which the accumulated depreciation for an
throughout the
asset is adjusted to zero text
upon andis are
revaluation) a great
the general approachlearning aid,
to be followed for helping
revaluations of property, plant and
to reinforce
equipment, AASB 116,how the
paragraph theory
35(a), is
provides an applied
alternative in
treatment. practice
This treatment and
requirestheir
that both the gross
amount of the asset and the accumulated depreciation of the asset be adjusted. This method is sometimes used where
relevance to actual situations.
reference is made to newer assets than those being revalued. Specifically, paragraph 35(a) of AASB 116 states that
when an item of property, plant and equipment is revalued, the accumulated depreciation at the date of the revaluation
can be restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount
of the asset after revaluation equals its revalued amount. This approach is referred to as the ‘gross method’. The gross
method of revaluation is applied in Worked Example 6.2.

xx How to use this book

CHAPTER 6: REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 207

dee64022_ch06_202-233.indd 207 05/10/16 01:26 PM

dee64022_Prelims_i-xxiv.indd xx 05/20/16 12:55 PM

 assets may be understated but should never be overstated in the financial statements. The recoverable amount of an
asset is defined as the higher of an asset’s net selling price and its value in use.
Where an upward revaluation of property, plant and equipment is undertaken, the asset is to be revalued to its
fair value. Revaluations should be undertaken as part of a process that revalues the entire class of assets to which the
revalued non-current asset belongs.
Where an asset is revalued upwards, the increase in the recorded value of the asset is not treated as part of profit
or loss but is transferred to a revaluation surplus and included as part of ‘other comprehensive income’. The only
exception to this rule is where the revaluation increment reverses a previous revaluation decrement, in which case
the revaluation increment will be treated as part of the financial period’s profit or loss to the extent that it reverses the
previous decrement that was included as an expense within profit or loss.
Where an asset is revalued downwards, the decrease in the recorded value of the asset is to be treated as an
expense and included within profit or loss. The only exception to this rule is where the revaluation decrement reverses
a previous revaluation increment, in which case the revaluation decrement will be debited against (deducted from) the
existing revaluation surplus and the related movement included as a reduction to ‘other comprehensive income’.
When a revaluation of a depreciable non-current asset is undertaken, the most common approach is to adopt the
‘net method’ whereby we credit any existing accumulated depreciation against the non-current asset to be revalued,
and subsequently increase the non-current asset account (debit the account) by the amount of the revaluation.
Where a revalued non-current asset is subsequently sold, the gain or loss on disposal is to be measured as the
difference between the carrying amount of the revalued asset as at the time of the disposal, and the net proceeds, if
any, from disposal. The gain or loss must be recognised in the profit or loss for the financial year in which the disposal
of the non-current asset occurs.
The chapter has also considered how revaluations can, at times, loosen certain accounting-based debt covenants,
such as restrictions written around an organisation’s debt-to-assets ratio.

KEY TERMS
Mr Anderson informs you that the directors intend to revalue the property, plant and equipment during the year. The
company has not revalued any assets in the past.

Disclosure requirements LO 7.8

accumulated depreciation 206
REQUIRED
asset revaluation 203
debt-to-assets ratio 224
independent valuation 225
recoverable amount 203
revaluation decrement 206
Where the information is material, paragraph 36 of AASB 102 requires that the financial statements disclose the (a) amount
carrying How would you account for theprudence
203 revaluation 209
of the above assets? revaluation increment 205
following information: (b) What would the relevant journal entries be? LO 6.1 6.2 6.3 6.9
(a) the accounting policies adopted for measuring inventories, including the cost formulas used;
(b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; END-OF-CHAPTER EXERCISES
SOLUTION TO END-OF-CHAPTER EXERCISE
(c) the carrying amount of inventories carried at fair value less costs to sell; (a) In undertaking the revaluations, decisions must be made about what constitutes the relevant classes of
(d) the amount of inventories recognised as an expense during the period; Anderson assets.
Pty LtdAs is we
an Australian
know, when diversified
an item ofindustrial
property,company
plant andwith its majoris business
equipment revalued,activity being
AASB 116 to manufacture
requires that
(e) the amount of any write-down of inventories recognised as an expense in the period; flotation devices for babies
the entire class ofand toddlers.
property, plant Over
andthe past decade,
equipment the business
to which that assethas been very
belongs mustprofitable
be revalued.and Increments
the directors,
(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories Simon Anderson and Lisa Anderson,
and decrements have kept
are not permitted payment
to be of dividends
offset within to assets.
a class of a minimum to allow
As shown the company
below, to diversify
it is considered that
recognised as an expense in the period; into other two
activities.
classes The
of following is ainlist
assets exist ofcase:
this property,
landplant
usedand equipment
in the held by
organisation’s the company:
operations; and buildings used in the
(g) the circumstances or events that led to the reversal of write-downs of inventories; and organisation’s operations. The calculations for determining increments and decrements are as follows:
(h) the carrying amount of inventories pledged as securities for liabilities. Carrying Current
See Exhibit 7.1 for an example of an accounting policy note, in this case provided by Wesfarmers Ltd in its 2015 amount ($) fairIncrement/
value ($)
Annual Report. Property, plant and equipment Carrying amount Current fair value (decrement)
Factory (NSW) ($) ($) ($)
Land Property, plant and equipment 100 000 150 000
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Exhibit 7.1
Accounting Buildings Land
Inventories – Cost – Factory (NSW) 10070000
000 150 000 50000
80 000
policy note
Recognition and measurement from the 2015 – Factory
– Accumulated (Qld)
depreciation 150(20
000
000) 120 000 (30 000)
–
Inventories are valued at the lower of cost and net realisable value. The net realisable value of Annual Report Buildings—net
Factory (Qld)
inventories is the estimated selling price in the ordinary course of business less estimated costs to sell. of Wesfarmers Land – Factory (NSW) 50
150000
000 80 000 30000
120 000
Key estimate: net realisable value Ltd Buildings – Factory (Qld) 80 000 70 000 (10 000)
The key assumptions, which require the use of management judgement, are the variables affecting – Cost 125 000 70 000
costs recognised in bringing the inventory to location and condition for sale, estimated costs to sell and – Accumulated depreciation (45 000) –
(b) The relevant journal entries are as follows:
the expected selling price. These key assumptions are reviewed at least annually. The total expense
relating to inventory write-downs during the year was $46 million (2014: $19 million). Any reasonable 228 PARTDr Land—factory
3: ACCOUNTING (NSW)
FOR ASSETS 50 000
possible change in the estimate is unlikely to have a material impact.
Costs incurred in bringing each product to its present location and condition are accounted for as
End-of-chapter
Cr
Dr
exercise
Revaluation surplus
Loss on revaluation of land 30 000
50 000

follows: Cr Land—factory (Qld) 30 000

• Raw materials: purchase cost on a weighted average basis.
A comprehensive exercise and worked solution is provided at
Dr Accumulated depreciation (NSW) 20 000
The plant and
dee64022_ch06_202-233.indd 228 equipment originally cost Townend $600 000 in 2016, but due to market conditions 05/10/16the
01:26fair
PM
• Manufactured finished goods and work in progress: cost of direct materials and labour and a the end of each chapter. These are a great revision aid; work
Dr Accumulated depreciation (Qld) 45 000
value of the plant and equipment has increased. The directors of Townend Ltd are concerned about the effects
Cr Buildings—factory (NSW) 20 000
proportion of manufacturing overheads based on normal operating capacity, but excluding of the higher carrying value on profits—owing to the higher depreciation it is reducing profits. They ask you, the
borrowing costs. Work in progress also includes run-of-mine coal stocks for resources, consisting through them before tackling the more challenging questions
Cr Buildings—factory (Qld) 45 000
accountant, to reverse the previous revaluation. Being ethical in nature, what would you do? LO 6.3, 6.12
of production costs of drilling, blasting and overburden removal. 18. Bad Dr CompanyBuildings—factory (NSW) that it acquired in 2017
30at
000
• Retail and wholesale merchandise finished goods: purchase cost on a weighted average basis, to ensure you are on the right track.
Cr
Ltd has some machinery
Revaluation surplus
a cost of $4 000 000. In 2018 it is concerned
about high reported profits—the labour union is considering pushing for additional 30 000wages, but Bad Company Ltd
after deducting any settlement discount and including logistics expenses incurred in bringing the
doesDrnot wantLoss onthem—and
to pay revaluationisofconsequently
buildings considering ways
10 000
to reduce profits. Recently, it has acquired some
inventories to their present location and condition. Cr Buildings—factory (Qld) 10 000
identical machinery to that acquired in 2017. The machinery has been acquired in a liquidation sale of a business
Volume-related supplier rebates, and supplier promotional rebates where they exceed spend on that is in the hands of the bank (owing to the business defaulting on a loan) and the cost is $500 000. After this
promotional activities, are recognised as a reduction in the cost of inventory. purchase, Bad Company Ltd writes down to $500 000 the machinery acquired in 2017 at a cost of $4 000 000. Is
this an appropriate course of action? LO 6.3, 6.4, 6.10, 6.12
Exhibits
SOURCE: Wesfarmer’s Ltd 2015 Annual Report
REVIEW QUESTIONS
19. Petersen Ltd has the following land and building in its financial statements as at 30 June 2018:

These features contain extracts from actual company reports or 1. What effect will an asset revaluation have on subsequent periods’ $ profits? Explain your answer. LO 6.10
2. Residential
Explain the land,
difference in the accounting treatment for 1 revaluation
000 000 increments and revaluation decrements. Do you
documents, or provide a commonly used format for accounting. considerland,
Factory that at
this
at cost
difference
valuation is ‘conceptually sound’? LO900
2016 6.6000
SUMMARY
They highlight the relevance of the chapter content to the 3. Buildings,
When should a revaluation
at valuation 2016increment be included as part profit or loss? LO 6.6, 6.8
of000
800
4. Accumulated
For the purposes (100 000) amount’ determined? LO 6.5
of AASB 116 or AASB 136, how is ‘recoverable
depreciation
practice
The of accounting,
chapter addressed provide
the topic of accounting another
for inventory. Inventory element
is defined tofor the
as assets held topics
sale in the ordinary
course of business, in the process of production for sale, or to be used in the production of goods; and other property
5. When would you determine the recoverable amount for a cash-generating unit rather than for an individual item of
property, plant2018,
At 30 June the balanceLO
and equipment? of6.11
the revaluation surplus is $400 000, of which $300 000 relates to the factory
covered
or and
services for sale, help
including to reinforce
consumable learning.
stores and supplies. land and $100 000 to the buildings. On this same date, independent valuations of the land and building are
CHAPTER 6: REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 229
obtained. In relation to the above assets, the assessed fair values at 30 June 2018 are:
CHAPTER 7: INVENTORY 251

Chapter summary Review questions $

Residential land, previously recorded at cost 1 100 000

Key points of the chapter are summarised in this section. Check These questions ask you to reflect on key topics within the
Factory land, previously
dee64022_ch06_202-233.indd
229
revalued in 2016
Buildings, previously revalued in 2016
700 000
900 000
05/10/16 01:26 PM

chapter, and help cement your learning.

dee64022_ch07_234-257.indd 251 05/11/16 09:41 AM

through it carefully to make sure you have understood topics REQUIRED

covered before moving on. Provide the journal entries to account for the revaluation on 30 June 2018. Petersen Ltd classifies the residential
land and the factory land as different classes of assets. LO 6.3, 6.4, 6.6, 6.9

Key terms CHALLENGING QUESTIONS

Key terms are bolded in the text the first time they are used, 20. What, if anything, is the difference between recoverable amount and fair value? Where revaluations are undertaken,
can a reporting entity use ‘value in use’ as the basis for the revaluation? LO 6.3, 6.5, 6.6
defined in the margin at that point, and listed at the end of 21. Kanga Cairns Ltd owns two blocks of beachfront land, acquired in 2015 for the purposes of future residential
each chapter. They also appear in the glossary at the end development. Block A cost $250 000 and Block B cost $350 000.
Valuations of the blocks are undertaken by an independent valuer on 30 June 2017 and 30 June 2019. The
of the book. assessed values are:

2017 valuation 2019 valuation

($) ($)
Block A 230 000 290 000
Block B 370 000 340 000

REQUIRED
Assuming asset revaluations were undertaken for the land in both 2017 and 2019, provide the journal entries for
both years. LO 6.3, 6.8

CHAPTER 6: REVALUATIONS AND IMPAIRMENT TESTING OF NON-CURRENT ASSETS 231

Challenging questions
These questions require a detailed problem analysis and help
dee64022_ch06_202-233.indd 231 05/10/16 01:26 PM

to build problem-solving and critical thinking skills.

How to use this book xxi

dee64022_Prelims_i-xxiv.indd xxi 05/23/16 12:35 PM

 A D V A N T A G E L E A R N I N G AT T H E S P E E D O F Y O U

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CREDITS
International Accounting Standards Board
Copyright © IFRS Foundation. All rights reserved.
Reproduced by McGraw-Hill Education (Australia) Pty Limited
with the permission of IFRS Foundation®. Reproduction and
use rights are strictly limited. No permission granted to third
parties to reproduce or distribute.
The International Accounting Standards Board, the IFRS
Foundation, the authors and the publishers do not accept
responsibility for any loss caused by acting or refraining
from acting in reliance on the material in this publication,
whether such loss is caused by negligence or otherwise.
xxiv Credits
dee64022_Prelims_i-xxiv.indd xxiv
Australian Accounting Standards Board
Copyright © Commonwealth of Australia 2016
All legislation herein is reproduced by permission but
does not purport to be the official or authorised version.
It is subject to Commonwealth of Australia copyright. The
Copyright Act 1968 permits certain reproduction and
publication of Commonwealth legislation. In particular,
s.182A of the Act enables a complete copy to be made
by or on behalf of a particular person. For reproduction or
publication beyond that permitted by the Act, permission
should be sought in writing from the Australian Accounting
Standards Board. Requests in the first instance should
be addressed to the Administration Director, Australian
Accounting Standards Board, PO Box 204, Collins Street
West, Melbourne, Victoria, 8007.
05/20/16 12:55 PM
PART 1
THE AUSTRALIAN
ACCOUNTING
ENVIRONMENT
CHAPTER 1 An overview of the Australian external reporting environment
CHAPTER 2 The conceptual framework for financial reporting

dee64022_ch01_001-047.indd 1 05/10/16 11:02 AM

CHAPTER 1
AN OVERVIEW OF
THE AUSTRALIAN
EXTERNAL REPORTING
ENVIRONMENT
LEARNING OBJECTIVES (LO)
1.1 Understand the meaning of ‘financial accounting’ and its relationship to the broader areas of
accounting and accountability.
1.2 Be able to explain who is likely to be a user of general purpose financial statements.
1.3 Understand the scope of regulation relating to Australian external financial reporting.
1.4 Understand the sources of accounting regulation within Australia and thus be able to explain
the general functions of the Australian Securities and Investments Commission, the Australian
Accounting Standards Board, the Financial Reporting Council and the Australian Securities Exchange.
1.5 Be aware of the requirements within the Corporations Act that require the preparation of a Directors’
Declaration, Directors’ Report and a Declaration by the Chief Executive Officer and Chief Financial Officer.
1.6 Be able to explain the central requirement that financial statements be ‘true and fair’.
1.7 Be able to explain the general functions of the International Accounting Standards Board and its
direct relevance to Australian accounting standard-setting.
1.8 Understand the relevance of the IFRS Interpretations Committee to Australian financial reporting.
1.9 Understand the role of an accounting standard and the process by which it is developed.
1.10 Understand that accounting standards change across time, meaning that profits calculated in past
years are not directly comparable with current profit calculations.
1.11 Be able to explain the idea of ‘differential reporting’.
1.12 Understand the role of the auditor and the auditor’s report.
1.13 Understand the magnitude of changes that occurred in 2003 and 2004 to Australian Accounting
Standards as a result of the Financial Reporting Council’s strategic decision that Australia produce
financial statements that comply with standards being issued by the International Accounting
Standards Board.
1.14 Be aware of some of the perceived benefits of international standardisation of financial reporting.
1.15 Be aware of some research which suggests that international standardisation of accounting ignores
international differences in culture.
1.16 Understand that the practice of financial accounting is quite heavily regulated within Australia and be
aware of some of the arguments for and against the regulation of financial accounting.

2 PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT

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Accounting, accountability and the role LO 1.1
of financial accounting
In this book we focus on financial accounting, and particularly financial accounting undertaken by larger-sized
organisations (which we will generally refer to as reporting entities) that are required to adopt accounting standards. But
before we launch into doing some ‘financial accounting’ it is useful to briefly consider how financial accounting relates
to the broader area of ‘accounting’, and how accounting relates to the idea of ‘accountability’.
Financial accounting represents only a part of the broader area of ‘accounting’. So what is ‘accounting’? Simply
stated, accounting can be defined as the provision of information about aspects of the performance of an entity to a
particular group of people with an interest, or stake, in the organisation—we can call these parties stakeholders. But what
‘aspects of performance’ should ‘accounting’ address? What ‘accounts’ are stakeholders entitled to? This really depends
upon judgements we make about the organisation’s responsibilities and accountabilities. For example, 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.
We also need to consider the breadth of stakeholders who should be provided with an ‘account’—for example,
should it be restricted to shareholders and/or creditors, or do employees, local communities and others also have a right
to be provided with particular information about an organisation?
Gray, Owen & Adams (1996) developed an accountability model that explains how organisations should deal with
stakeholders and proposes that since a firm’s activities affect the wellbeing of a wide range of stakeholders, the firm is
morally responsible, and therefore accountable, to these stakeholders. In more practical terms, Gray et al. (1997, p. 334)
provide a broader notion of accountability:

Accountability is concerned with the relationships between groups, individuals, organisations and the rights
to information that such relationships entail. Simply stated, accountability is the duty to provide an account
of the actions for which one is held responsible. The nature of the relationships—and the attendant rights to
information—are contextually determined by the society in which the relationship occurs.

From this definition, we can see that accountability involves two responsibilities or duties, namely:

1. to undertake certain actions (or to refrain from taking actions) in accordance with the expectations of a group of
stakeholders; and
2. to provide a reckoning or account of those actions to the stakeholders
(Gray, Owen & Adams 1996)

Therefore, the broad role of ‘accounting’, and of a corporate report (and corporate reporting) is to inform relevant
stakeholders about the extent to which the actions for which an organisation is deemed to be responsible (which in itself
is a controversial issue as people can have very different views about the responsibilities of organisations) have actually
been fulfilled. Reporting provides a vehicle for an organisation to fulfil its requirement to be accountable. Such accounts
do not all have to be prepared in financial terms. For example, if an organisation is considered to be accountable for
its water consumption, or its greenhouse gas emissions, then such ‘accounts’ may be presented in physical terms. If a
company is considered to be responsible for the people who are making their products in developing countries then
it might produce ‘accounts’ about how the organisation is ensuring that factory workplaces in developing countries are
safe for the employees.
Of course, different people will have different views about the responsibilities of organisations, and therefore will
hold different views about what ‘accounts’ should be produced by an organisation. That is, they will have different views
about the extent of ‘accounting’ that should be applied.
Organisations will have many different responsibilities. These differing responsibilities will lead to many different
accountabilities. If we are to accept a very restricted view that organisations are accountable only for their financial
performance, then we would believe that organisations need only provide financial accounts. But if we are to accept
that organisations are responsible for their social performance and their environmental performance, then we would
also expect the organisation to produce social accounts and environmental accounts. The social accounts and the

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dee64022_ch01_001-047.indd 3 05/20/16 01:51 PM

 environmental accounts would be of interest to a much broader group of stakeholders than would financial accounts.
Financial accounts would primarily be of interest to existing and potential investors, lenders and other creditors. However,
we also acknowledge that there will be other stakeholders with an interest in financial accounts.
This book focuses on financial accounting, and in particular, on the rules (standards) used to generate general
purpose financial statements. However, it needs to be acknowledged that not all ‘accounts’ prepared by an organisation
will be, or should be, of a financial nature. Therefore, the purpose of this brief section is merely to emphasise that
financial accounting is just one form of ‘accounting’, and it provides information primarily about only one aspect of
performance—financial performance—and the information is generally of major interest to those stakeholders with a
financial interest in the organisation. If we are also seeking to find out information about an organisation’s social and
environmental performance—and such information would be of interest to a broader group of stakeholders—then we
will also have to look at other ‘accounts’ released by the entity using broader methods of ‘accounting’. Chapter 30 of
this book specifically addresses these other forms of accounts. Specifically, it looks at frameworks used to compile social
reports, environmental reports and what have been referred to as sustainability reports. That chapter also explores
the idea of accountability in greater depth. At this point you, the reader, should take a little time out to consider what
responsibilities you think organisations should embrace and what sort of ‘accounts’ they should produce. Indeed, you
can reflect on what the term ‘accounting’ means to you.
From the above discussion we can see that ‘accounting’ is actually a very broad activity, or discipline, which is tied to
the concept of accountability. We therefore caution against narrow definitions of accounting, as appear in many (other)
textbooks, which define accounting in terms of it simply being a process of identifying, measuring and communicating/
reporting economic information to permit informed decisions to be made. Accounting can be a much richer process than
just this. (As another example of a narrow definition, Weygandt et al. 2013, p. 4, define accounting as ‘an information
system that identifies, records and communicates the economic events of an entity to interested users’.)

LO 1.1 Financial accounting defined

As we have noted above, in this book our focus is on one aspect of accounting known as financial accounting,
which can be considered to be a process involving the collection and processing of financial information to meet
the decision-making needs of parties external to an organisation and who have an interest in the financial performance
of the entity.
Financial accounting can be contrasted with management accounting. Management accounting focuses on providing
information for decision making—with such information also typically being provided in financial terms—by parties within
the organisation (that is, for internal as opposed to external users) and it is largely unregulated. Financial accounting, by
contrast, is subject to many regulations.
Because management accounting relates to the provision of information for parties within an organisation—such as
preparing budgets for managers that focus on the likely future costs and revenues associated with particular products
or services—the view is taken that there generally is no need to protect the information needs or rights of these parties
as, being insiders, they can relatively easily access the information they require.
By contrast, it is generally accepted that the information rights of outsiders, who are not involved in the day-to-day
operations of an organisation (such as the shareholders of a listed company), must be protected. Because financial
statements prepared for external parties are often used as a source of information for parties contemplating transferring
resources to an organisation, it is arguably important that certain rules be put in place to govern how the information
should be compiled. That is, the adoption of a ‘pro-regulation’ perspective to protect the interests of parties external to
a firm requires some regulation relating to the accounting information that such firms should disclose. (We will consider
pro-regulation and ‘free-market’ perspectives in more detail towards the end of this chapter.)

LO 1.2 Users’ demand for general purpose financial statements

General purpose financial statements may be used by an array of user groups for many purposes. However,
under the Conceptual Framework for Financial Reporting issued by the Australian Accounting Standards Board
(a conceptual framework of accounting seeks to satisfy a number of objectives including identifying the objectives of
general purpose financial reporting as well as the qualitative characteristics that financial information should possess),
general purpose financial statements are primarily directed towards the information needs of ‘existing and potential

4 PART 1: THE AUSTRALIAN ACCOUNTING ENVIRONMENT

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investors, lenders and other creditors’. Specifically, paragraph OB2 (‘OB’ indicates that the paragraph comes from the
chapter of the conceptual framework that deals with the objectives of general purpose financial reporting) states that:

The objective of general purpose financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions about providing
resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and
providing or settling loans and other forms of credit.

In identifying the ‘primary users’ of general purpose financial reports, paragraph OB5 of the conceptual
framework states:

Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide
information directly to them and must rely on general purpose financial reports for much of the financial
information they need. Consequently, they are the primary users to whom general purpose financial reports
are directed.

The Conceptual Framework for Financial Reporting also acknowledges that there are other potential users of
financial reports (for example, management, regulators and other members of the public), but they are not deemed to
be the ‘primary’ users of general purpose financial reports and hence these ‘secondary’ users are not the focus of the
prescriptions provided within the conceptual framework. As paragraphs OB9 and OB10 state:

OB 9 The management of a reporting entity is also interested in financial information about

the entity. However, management need not rely on general purpose financial reports because
it is able to obtain the financial information it needs internally. special purpose
OB 10 Other parties, such as regulators and members of the public other than investors, financial statement
lenders and other creditors, may also find general purpose financial reports useful. However, A financial statement
those reports are not primarily directed to these other groups. designed to meet the
needs of a specific
Some parties with an interest in the financial affairs of an entity might be in a position to successfully group or to satisfy a
specific purpose. Can
demand financial statements that satisfy their specific information needs. For example, a bank might
be contrasted with
demand, as part of a loan agreement, that a borrowing organisation provide information about its a general purpose
projected cash flows. Such a financial statement would be considered a special purpose financial financial statement,
statement—in this case, a financial statement prepared specifically to satisfy the needs of the bank. which is intended to
Other parties with interests in the affairs of an organisation might not have the necessary power meet the information
to demand financial statements that specifically address their own information requirements, having needs common to
users who are unable
instead to rely on financial statements of a general nature released by the reporting entity to meet
to command the
the needs of a broad cross-section of users, such as investors, potential investors, employees, preparation of reports.
employee groups, creditors, customers, consumer groups, analysts, media, government bodies and
lobby groups. These financial statements are referred to as general purpose financial statements,
as opposed to special purpose financial statements. As noted above, general purpose financial
statements are produced primarily to meet the needs of existing and potential investors, lenders and general purpose
other creditors; however, the reports will often also satisfy the information needs of a broader cross- financial statement
section of users, which might include employees, government, news media, researchers, interest Financial statements
that comply with
groups, and ‘the public’.
conceptual framework
In this book, we are concerned primarily with general purpose financial reporting. Our explanation requirements and
of general purpose financial statements is consistent with the definition used in accounting standards. accounting standards
For example, paragraph 7 of AASB 101 Preparation and Presentation of Financial Statements and meet the
defines general purpose financial statements in the following way: information needs
common to users
General purpose financial statements (referred to as ‘financial statements’) are those who are unable
intended to meet the needs of users who are not in a position to require an entity to prepare to command the
preparation of financial
reports tailored to their particular information needs.
statements tailored
specifically to satisfy
Examples of general purpose financial statements are the financial statements and supporting
all their information
notes included within an annual report presented to shareholders at a company’s annual general needs.
meeting (and thereafter typically made available to shareholders and other interested parties on the

CHAPTER 1: AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT 5

dee64022_ch01_001-047.indd 5 05/10/16 11:02 AM

 organisation’s website). Our focus in this book will be general purpose financial reporting practices that would typically
be used by private sector profit-seeking entities. However, in recent years there have been moves by governments
and government departments towards adopting the kind of accounting procedures that are used by business entities
in the private sector. Therefore much of our discussion can be applied to government, particularly government trading
enterprises that compete directly with private sector firms (for example, government-controlled organisations involved
in telecommunications, public transport and shipping). Nevertheless, there continue to be some differences between
the reporting practices of some government departments and those of private sector entities, and there are some
accounting standards that are dedicated to government bodies (such as AASB 1049 Whole of Government and General
Government Sector Financial Reporting).

LO 1.3 Sources of external financial reporting regulations

LO 1.4 There are four principal bodies involved in formulating, interpreting and/or enforcing accounting regulations
LO 1.5 within Australia, these being:
LO 1.6 1. the Australian Securities and Investments Commission
LO 1.11 2. the Australian Accounting Standards Board
3. the Financial Reporting Council
4. the Australian Securities Exchange.

The Australian Accounting Standards Board (AASB) is a government body. As we will see in the discussion to
follow, the Financial Reporting Council (FRC) oversees the activities of the AASB. The FRC was responsible for the
decision (made in 2003) that Australian reporting entities would adopt accounting standards issued by the International
Accounting Standards Board (IASB) for accounting periods beginning on or after 1 January 2005.
As with the AASB, the functioning of the Auditing and Assurance Standards Board (AUASB) is also overseen by the
Financial Reporting Council. Since July 2006, auditing standards released by the AUASB have had legislative backing
(as do the accounting standards issued by the AASB).
We will now give further consideration to each of the four main bodies involved in formulating and/or enforcing
accounting regulations within Australia.

1. Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) evolved from the Australian
Australian Securities
Securities Commission (ASC). The ASC was established in 1989 by the Australian Securities
and Investments
Commission (ASIC)
Commission Act 1989 (Cwlth), and it replaced the National Companies and Securities Commission
Body responsible (NCSC).
for administering The name of the ASC was changed to ASIC in July 1998 to reflect the increased responsibility
corporation legislation assigned to the ASC in relation to monitoring and regulating various investment products, including
in Australia. It is superannuation, approved deposit accounts and retirement savings accounts. The website of ASIC
independent of state
(www.asic.gov.au) provides an overview of its role. The information provided on the website about
ministers or state
parliaments and ASIC’s role is reproduced in Exhibit 1.1.
reports directly to an As indicated in Exhibit 1.1, ASIC is solely responsible for administering corporations legislation in
appointed Minister of Australia. It is independent of state ministers or state parliaments, and reports directly to an appointed
the Commonwealth Minister of the Commonwealth Parliament. Among other things, the Corporations Act, which is
Parliament.
administered by ASIC, outlines the responsibilities of company directors in relation to the nature of
their conduct, financial statement preparation, lodgement and distribution. Since the Corporations
Act enacts the majority of legislative requirements pertaining to financial accounting, this discussion
of ASIC will include a look at a number of the Act’s requirements. For those readers interested in reviewing the content
of the Corporations Act (as well as other Acts), free access to electronic versions is available at a site known as ComLaw
(www.comlaw.gov.au), which, according to the website, is an integral part of the Australian Law Online initiative to bring
the community low-cost or no-cost access to the law and is maintained by the Attorney-General’s department.
An important requirement of the Corporations Act is for directors of public companies, large proprietary companies,
organisations with securities listed on the Australian Securities Exchange and some small proprietary companies to
present shareholders with true and fair financial statements for a given financial year. (This and other requirements of

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the Corporations Act do not apply to organisations outside the ambit of the Act, for example, partnerships.) ‘Financial
statements for the year’ is defined at s. 295(2) of the Corporations Act. Specifically, s. 295(2) states:
The financial statements for the year are:
(a) unless paragraph (b) applies—the financial statements in relation to the company, registered scheme or
disclosing entity required by the accounting standards; or
(b) if the accounting standards require the company, registered scheme or disclosing entity to prepare financial
statements in relation to a consolidated entity—the financial statements in relation to the consolidated
entity required by the accounting standards.
Therefore the above requirements rely directly upon accounting standards, which are released by the AASB (and
which are generally developed at an international level by the IASB, which is based in London). To determine which
‘financial statements’ would be included in a financial report we can refer to Accounting Standard AASB 101 Presentation
of Financial Statements. Paragraph 10 of the standard states that a complete set of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(ea) comparative information in respect of the preceding period as specified in paragraphs 38 and 38A; and
(f) a statement of financial position as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in its financial statements,
or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D.
An entity may use titles for the statements other than those used in this standard. For example, an
entity may use the title ‘statement of comprehensive income’ instead of ‘statement of profit or loss and other
comprehensive income’.
Across time, terminology used in relation to financial statements has changed. For example, within AASB 101
Presentation of Financial Statements, reference is now made to the ‘statement of financial position’. This is equivalent to
what many people traditionally called a balance sheet.

WHAT WE DO Exhibit 1.1

ASIC is Australia’s corporate, markets and financial services regulator. The role
We contribute to Australia’s economic reputation and wellbeing by ensuring that Australia’s financial of ASIC
markets are fair and transparent, supported by confident and informed investors and consumers.
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.

OUR STRATEGIC PRIORITIES

ASIC’s priorities are:
1. Promoting investor and financial consumer trust and confidence:
• education—investor responsibility for investment decisions remains core to our system. We
empower investors and financial consumers through our financial literacy work

continued

CHAPTER 1: AN OVERVIEW OF THE AUSTRALIAN EXTERNAL REPORTING ENVIRONMENT 7

dee64022_ch01_001-047.indd 7 05/10/16 11:02 AM

 • gatekeepers—we will hold gatekeepers to account
• consumer behaviour—recognising how investors and consumers make decisions.
2. Ensuring fair, orderly and transparent markets:
• achieved through our role in market supervision and competition, and corporate governance.
3. Providing efficient and accessible registration:
• with a focus on small business and deregulation.

WHO WE REGULATE
We regulate Australian companies, financial markets, financial services organisations and professionals
who deal and advise in investments, superannuation, insurance, deposit taking and credit.
As the consumer credit regulator, we license and regulate people and businesses engaging in
consumer credit activities (including banks, credit unions, finance companies, and mortgage and
finance brokers). We ensure that licensees meet the standards—including their responsibilities to
consumers—that are set out in the National Consumer Credit Protection Act 2009.
As the markets regulator, we assess how effectively authorised financial markets are complying
with their legal obligations to operate fair, orderly and transparent markets. We also advise the Minister
about authorising new markets. On 1 August 2010, we assumed responsibility for the supervision of
trading on Australia’s domestic licensed equity, derivatives and futures markets.
As the financial services regulator, we license and monitor financial services businesses to ensure
that they operate efficiently, honestly and fairly. These businesses typically deal in superannuation,
managed funds, shares and company securities, derivatives and insurance.

OUR POWERS
The laws we administer give us the facilitative, regulatory and enforcement powers necessary for us
to perform our role. These include the power to:
• register companies and managed investment schemes
• grant Australian financial services licences and Australian credit licences
• register auditors and liquidators
• grant relief from various provisions of the legislation that we administer
• maintain publicly accessible registers of information about companies, financial services licensees
and credit licensees
• make rules aimed at ensuring the integrity of financial markets
• stop the issue of financial products under defective disclosure documents
• investigate suspected breaches of the law and in so doing require people to produce books or
answer questions at an examination
• issue infringement notices in relation to alleged breaches of some laws
• ban people from engaging in credit activities or providing financial services
• seek civil penalties from the courts
• commence prosecutions—these are generally conducted by the Commonwealth Director of
Public Prosecutions, although there are some categories of matters that we prosecute ourselves.

PROTECTING CONSUMERS AND INVESTORS

We have powers to protect consumers against misleading or deceptive and unconscionable conduct
affecting all financial products and services, including credit.

SOURCE: www.asic.gov.au

As we have noted above, the Corporations Act requires financial statements, as defined above, to be ‘true and fair’.
The requirement to produce true and fair financial statements is set out in s. 297 of the Corporations Act. Specifically, s.
297 requires that:
The financial statements and notes for a financial year must give a true and fair view of:
(a) the financial position and performance of the company, registered scheme or disclosing entity; and

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 (b) if consolidated financial statements are required, the financial position and performance of the
consolidated entity.
But why do we need a ‘true and fair’ requirement? The answer to this is that 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.
However, ‘materiality’ is an assessment calling for a high degree of professional judgement. It is not possible to give a
definition of ‘material’ that covers all circumstances. Paragraph 5 of Accounting Standard AASB 108 Accounting Policies,
Changes in Accounting Estimates and Errors provides that:
omissions or misstatements of items are material if they could, individually or collectively, influence the economic
decisions that users make on the basis of the financial statements. Materiality depends on the size and nature
of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a
combination of both, could be the determining factor.
The definition of materiality in AASB 108 is consistent with how the concept of materiality is utilised in the Conceptual
Framework for Financial Reporting (paragraph QC11) and also consistent with the definition of materiality provided in
other accounting standards.
The above definition of materiality makes reference to ‘users’. Of particular importance would be the accounting
knowledge or expertise of accounting that the users of general purpose financial statements are expected to possess.
In this regard, paragraph QC32 of the Conceptual Framework for Financial Reporting states:
Financial reports are prepared for users who have a reasonable knowledge of business and economic activities
and who review and analyse the information diligently. At times, even well-informed and diligent users may
need to seek the aid of an adviser to understand information about complex economic phenomena.
Moving on to other requirements of the Corporations Act, we note that directors of large and listed companies,
as well as some other entities, are required by the Act to attach to the company’s financial statements a Directors’
Declaration and a Directors’ Report. The Corporations Act also requires a declaration to be made by the chief executive
officer and the chief financial officer. We will consider each of these requirements, in turn, below.

Directors’ declaration
Within the Directors’ Declaration, required pursuant to s. 295(4) of the Corporations Act, directors must state whether,
in their opinion, the financial statements comply with accounting standards, and that the financial statements give a true
and fair view of the financial position and performance of the entity. Importantly, directors must also state whether or not
in their opinion there were, when the declaration was made out, reasonable grounds to believe that the company would
be able to pay its debts as and when they fall due. Specifically, s. 295(4) states:
The directors’ declaration is a declaration by the directors:
(c) whether, in the directors’ opinion, there are reasonable grounds to believe that the company, registered
scheme or disclosing entity will be able to pay its debts as and when they become due and payable; and
(ca) if the company, registered scheme or disclosing entity has included in the notes to the financial statements,
in compliance with the accounting standards, an explicit and unreserved statement of compliance with
international financial reporting standards—that this statement has been included in the notes to the financial
statements; and
(d) whether, in the directors’ opinion, the financial statement and notes are in accordance with this Act, including:
(i) section 296 (compliance with accounting standards); and
(ii) section 297 (true and fair view); and
(e) if the company, disclosing entity or registered scheme is listed—that the directors have been given the
declarations required by section 295A.
Should directors make such a declaration fraudulently, carelessly or recklessly, it is possible that they might become
personally liable for any outstanding debts of the company. Exhibit 1.2 reproduces the Directors’ Declaration in the
2015 Annual Report of BHP Billiton Ltd.

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Exhibit 1.2 In accordance with a resolution of the Directors of the BHP Billiton Group, the Directors declare that:
Directors’ (a) in the Directors’ opinion and to the best of their knowledge the financial statements and notes,
Declaration set out in sections 7.1 and 7.2, are in accordance with the UK Companies Act 2006 and the
of BHP Australian Corporations Act 2001, including:
Billiton Ltd (i) Complying with the applicable Accounting Standards; and
(reproduced (ii) Giving a true and fair view of the assets, liabilities, financial position and profit or
from 2015 loss of each of BHP Billiton Ltd, BHP Billiton Plc, the BHP Billiton Group and the
Annual undertakings included in the consolidation taken as a whole as at 30 June 2015 and
Report). of their performance for the year ended 30 June 2015;
(b) the financial report also complies with International Financial Reporting Standards, as disclosed
in note 41 ‘Basis of preparation and measurement’;
(c) to the best of the Directors’ knowledge, the management report (comprising the Strategic
Report and Directors’ Report) includes a fair review of the development and performance
of the business and the financial position of the BHP Billiton Group and the undertakings
included in the consolidation taken as a whole, together with a description of the principal
risks and uncertainties that the Group faces; and
(d) in the Directors’ opinion there are reasonable grounds to believe that each of the BHP Billiton
Group, BHP Billiton Ltd and BHP Billiton Plc will be able to pay its debts as and when they
become due and payable.
The Directors have been given the declarations required by Section 295A of the Australian
Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial
year ended 30 June 2015.
Signed in accordance with a resolution of the Board of Directors.
Jac Nasser AO—Chairman
Andrew Mackenzie—Chief Executive Officer
Dated this 10th day of September 2015

SOURCE: BHP Billiton Annual Report 2015

At this stage you, the reader, should try to obtain some recent corporate annual reports. Find the Directors’ Declaration
in each report. You will see that, in most cases, the declaration will be similar in form to the example shown here. As
we discuss other accounting requirements throughout this book, please make a point of referring to your collection of
recent annual reports to see how the companies in your sample are complying with the various requirements that we
are discussing. Referring to corporate annual reports as you progress through this book will serve to give the material
you read a more ‘real-world’ feel. Most large, listed, Australian companies provide copies of their annual reports on their
websites. Indeed, in recent years companies have provided their annual reports on their websites as an alternative to
posting them out to their shareholders. For example, see the websites of:

• BHP Billiton (www.bhpbilliton.com)

• Westpac Banking Corporation (www.westpac.com.au)
• AMP (www.amp.com.au)
• Australia and New Zealand Banking Group Limited (www.anz.com.au)
• National Australia Bank (www.nab.com.au)
• Commonwealth Bank (www.commbank.com.au).

The annual reports of corporations will typically be available by clicking on an ‘investors’ or ‘shareholders’ option (or
something similar) that is commonly shown on the home page of a company’s website.
Financial Accounting in the Real World 1.1 provides an extract from an article that emphasises that company
directors can be liable for the debts of a company if the directors sign the directors’ declaration stating that there are
reasonable grounds to believe that the organisation will be able to pay its debts as and when they become due and

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payable when perhaps there is evidence that they knew, or should have known, that the organisation was unable to pay
the debts as and when they become due.

Directors’ report
In the Directors’ Report, required pursuant to ss. 298–300A of the Corporations Act, directors must provide items of
information, such as the names of the directors, details of directors’ emoluments, the principal activities of the company,
review of operations during the year, significant changes in the state of affairs of the company, likely future developments
and results, significant post-reporting-date events and details about compliance with environmental laws.
The Directors’ Report often includes a great deal of information that is provided by corporations on a voluntary basis.
That is, while the Corporations Act stipulates the minimum level of disclosure that must be made in a Directors’ Report,
many organisations voluntarily produce additional information (which raises a number of interesting issues about why
they elect to disclose additional information when not required to—we will consider this again in Chapter 3). For example,
in recent years it has been common to find companies voluntarily providing information about community-based projects
in which they are participating, as well as employee-training schemes and safety initiatives, and company-promoted
environmental initiatives. Review the Directors’ Reports of a number of companies to see the variety of topics that are
addressed in these reports.

1.1 FINANCIAL ACCOUNTING IN THE REAL WORLD

High-stakes case for coal baron Tinkler
Gareth Hutchens

Liquidators have launched legal action against Nathan Tinkler after the coal baron allegedly allowed one of his
companies to trade while insolvent.
The action follows a decision by the NSW Supreme Court on Tuesday to approve a funding agreement between
Blackwood Corporation and the liquidators of Mulsanne Resources after Mulsanne failed to buy $28.4 million of
Blackwood shares last year, despite agreeing to do so.
Blackwood said in a statement that if the court finds Mulsanne’s directors liable for insolvent trading, it may make
compensation orders against them personally.
In a statement, Tinkler Group said: ‘The directors of Mulsanne strongly deny allegations of trading while insolvent
and will strongly defend any legal action instigated by the liquidators.’
In documents tendered in the NSW Supreme Court, Ferrier Hodgson said Mulsanne’s directors had no
reasonable grounds to believe the company could pay the $28.4 million when the time came to do so.

SOURCE: Extract from ‘High-stakes case for coal baron Tinkler’ by Gareth Hutchens, The Australian, 3 May 2013

The Directors’ Report also has to include an operating and financial review. The review should include information
that shareholders of the company would reasonably require to make informed assessments of the operations, financial
position and future strategies of the organisation. Specifically, s. 299A(1) of the Corporations Act states:

The directors’ report for a financial year for a company, registered scheme or disclosing entity that is listed
must also contain information that members of the listed entity would reasonably require to make an informed
assessment of:
(a) the operations of the entity reported on;
(b) the financial position of the entity reported on; and
(c) the ‘business strategies, and prospects for future financial years, of the entity reported on.

Declaration by the chief executive officer and chief financial officer

The chief executive and chief financial officers of entities with securities listed on the Australian Securities Exchange
are required to provide a written declaration to the board of directors that the annual financial statements are in
accordance with the Corporations Act and accounting standards and that the financial statements present a true and

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 fair view of the entity’s financial position and performance. Specifically, s. 295A(2) of the Corporations Act states that a
declaration is to be made that:

(a) the financial records of the company, disclosing entity or registered scheme for the financial year have
been properly maintained in accordance with section 286;
(b) the financial statements, and the notes referred to in paragraph 295(3)(b), for the financial year comply with
the accounting standards;
(c) the financial statements and notes for the financial year give a true and fair view (see section 297); and
(d) any other matters that are prescribed by the regulations for the purposes of this paragraph in relation to the
financial statements and the notes for the financial year are satisfied.

As we can see from the Directors’ Declaration provided in Exhibit 1.2, towards the end, the Directors’ Declaration
of BHP Billiton specifically notes that the directors received the declaration by the chief executive officer and the chief
financial officer.
Lastly, from time to time ASIC also releases regulatory guides (previously referred to as policy statements) that
relate to various issues, including financial reporting. For example, ASIC has released statements in relation to pension
accounting, related party transactions and valuing share options. To see current ASIC regulatory guides go to ASIC’s
website at www.asic.gov.au.

2. Australian Accounting Standards Board

While the Corporations Act, which is administered by ASIC, requires corporations to comply with accounting standards
(as per s. 296 of the Corporations Act), ASIC does not actually develop accounting standards. This responsibility is borne
by the Australian Accounting Standards Board (AASB).
The AASB began operations on 1 January 1991 and replaced the Accounting Standards
Australian Accounting Review Board. While its functions, membership and structure were changed in 2000 as a result
Standards Board of amendments included in the Corporate Law Economic Reform Program Act 1999 (Cwlth), the
Body charged
body charged with formulating accounting standards has retained the name ‘Australian Accounting
with developing a
conceptual framework
Standards Board’. The functions of the AASB are listed in s. 227 of the ASIC Act and include to:
for accounting
practices, making and
• develop a conceptual framework, not having the force of an accounting standard, for
formulating accounting the purpose of evaluating accounting standards and international standards;
standards, and • make accounting standards under section 334 of the Corporations Act for the purpose
participating in and of the national scheme laws;
contributing to the • formulate accounting standards for other purposes; and
development of
• participate in and contribute to the development of a single set of accounting standards
a single set of
accounting standards for world-wide use.
for worldwide use.
The AASB is responsible for ‘making’ accounting standards that have the force of law pursuant
to s. 334 of the Corporations Act, and also for ‘formulating’ accounting standards that are to be used
in the public and non-profit sectors (that is, by entities that are not governed by the Corporations Act). The difference
in terminology between ‘making’ and ‘formulating’ accounting standards can be explained as follows. When the AASB
develops accounting standards that have the force of the Corporations Act, it is said to be making standards. When it
develops accounting standards that are to be applied by entities other than those governed by the Corporations Act, it
is said to be formulating accounting standards.
For many years within Australia we had two sets of accounting standards: those that applied to corporations and
other entities that are governed by the Corporations Act (which had the prefix AASB); and another set that applied
to entities not governed by the Corporations Act (bearing the prefix AAS, which referred to Australian Accounting
Standards). Having two sets of accounting standards was a source of confusion for many people. To remove some of
this confusion it became the practice of the AASB to issue only one set of accounting standards (with the prefix AASB),
which have general applicability to the private, public and not-for-profit sectors. That is, the AASB adopted a ‘sector-
neutral’ approach to the development of accounting standards.
We will consider the full list of AASB accounting standards later in this chapter. It is worth re-emphasising here that
the majority of AASB standards underwent changes in 2003 or 2004 as Australia moved towards adopting accounting

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standards released by the IASB from 2005. We will focus on the AASB standards, which are mostly the same as the
standards issued by the IASB, throughout the balance of this book.
The AASB reports to the Financial Reporting Council (FRC). The FRC assumes an oversight function in regard to
the AASB, and appoints the 12 part-time AASB members. The part-time members of the AASB come from a variety of
backgrounds, including the private sector, government, academia, Big 4 accounting firms and independent consultancy.
Section 236B of the ASIC Act requires that a person may not be appointed a member of the AASB unless their ‘knowledge
of, or experience in, business, accounting, law or government qualifies them for appointment’. The full-time chairperson
of the AASB is appointed by the delegated Minister within the Federal Government. (By now it should be becoming clear
how much control the government is attempting to exert over accounting standard-setting.)
The structure of Australian accounting standard-setting can be summarised diagrammatically, as in Figure 1.1.
Referring to the diagram, the Federal Minister appoints the chairman of the Australian Accounting Standards Board
(AASB). The Chairman of the AASB is accountable to the Minister in respect of the operations of the AASB and the Office
of the AASB. The Office of the AASB provides technical and administrative services, information and advice to the AASB
and is responsible to the Minister for financial management of the Office of the AASB. The Chairperson of the AASB is
also the chief executive officer of the Office.
Figure 1.1 also identifies also identifies ‘focus groups’ as part of the AASB structure. These focus groups are further
divided into:
• User Focus Group; and
• Not-for-Profit (Private Sector) Focus Group.
According to the AASB website, the ‘User Focus Group’ was established to increase participation by analysts in the
accounting standard-setting process in order to enhance feedback from the perspective of a significant group of users
of financial statements. The purpose of the User Focus Group is to assist the AASB in raising awareness of how investors
and investment professionals, equity and credit analysts, credit grantors and rating agencies use financial statements
and of their information needs.
The AASB’s Not-for-Profit (Private Sector) Focus Group is designed to increase participation by those involved with
these entities in the accounting standard-setting process and to enhance feedback from the perspective of a significant
group of preparers and users of financial statements. The Not-for-Profit Focus Group comprises members who have
expertise in, and are involved in, charitable and related organisations; these members are a key source of information in
this area and provide feedback to the AASB on selected projects.

Figure 1.1
Organisational structure Diagrammatic
representation
The Minister of the structure
of Australian
accounting
standard-setting
Financial Australian Office of the Australian
Reporting Accounting Accounting
Council Standards Board Standards Board

Focus groups

Project
advisory panels

Interpretation
advisory panels

SOURCE: Adapted from © Australian Accounting Standards Board (AASB) www.aasb.com.au

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 As we can see from Figure 1.1, the AASB also has ‘project advisory panels’. Experts in a particular field or topic area
are invited to join an advisory panel to provide advice that will assist the AASB in progressing specific standard-setting
projects. Panels work with AASB staff to develop agenda materials for consideration by the Board.
Interpretations advisory panels are another important component of the AASB structure. Interpretations are required
from time to time in respect of how particular accounting requirements are to be interpreted and applied in the Australian
context. As stated on the AASB website: ‘Interpretations are issued by the AASB to provide requirements concerning
urgent financial reporting issues’. At the international level there is the IFRS Interpretations Committee—which functions
under the auspices of the IASB—which was specifically established to provide official Interpretations of the standards
being released by the IASB and, therefore, being used within Australia. We discuss the IFRS Interpretations Committee
in greater depth later in this chapter.
According to the AASB website, one of the features of the ‘Interpretations model’ is that the AASB decides on a
topic-by-topic basis whether to appoint an advisory panel, which would be constituted as a committee of the AASB.
The role of advisory panels is limited to preparing alternative views on an issue and, where appropriate, presenting
recommendations for consideration by the AASB.
Each Interpretations Advisory Panel normally includes between four and eight members, including the AASB chairman
and at least one other AASB member. Panel members are appointed on the basis of their professional competence and
practical experience in the topic area. The AASB seeks to ensure that the perspectives represented include those of
preparers, users, auditors and regulators.
Where an Interpretations Advisory Panel makes a recommendation, the process would generally be as follows:
(a) If an issue proposal relates to an Australian equivalent to IFRS, the Panel will either:
• recommend that the AASB take no action and give reasons, or
• recommend to the AASB that the issue be referred to the IFRS Interpretations Committee for consideration for
inclusion in its work program.
Decisions by the AASB in respect of all rejected issue proposals relating to Australian equivalents to IFRSs will be
sent to the IFRS Interpretations Committee for information and be published on the AASB website. Where the AASB
refers an issue proposal to the IFRS Interpretations Committee:
(i) if the IFRS Interpretations Committee adds the issue to its work program, the AASB will adopt the IFRS
Interpretations Committee decisions, and
(ii) if the IFRS Interpretations Committee does not add the issue to its work program, the AASB will assess the
reasons for its rejection and, depending on the significance of the issue in Australia and before publishing
an agenda rejection statement on the AASB website, decide whether further action, if any, should be taken
by the AASB. The AASB may decide to add the issue to its work program and establish an advisory panel.
However, the AASB considers that a unique domestic interpretation of an Australian equivalent to IASB
requirements will be required only in rare and exceptional circumstances.
(b) If the issue proposal relates to domestic requirements that relate only to not-for-profit entities in the public and/or
private sectors, the Panel will either:
• recommend that the AASB take no action and give reasons, or
• 
recommend that the issue be added to the work program and, if required, a panel be established to prepare
recommendations for consideration by the AASB.
The AASB website lists the various Interpretations on issue. Organisations that are required by law to follow AASB
Accounting Standards are also required to follow the Interpretations released by the AASB. This is made explicit in
AASB 1048 Interpretation of Standards. We will consider AASB 1048 again later in this chapter when we discuss the
IFRS Interpretations Committee’s functions more fully.
Having discussed the organisational structure of the AASB, we now turn our attention back to accounting standards.
Section 231 of the ASIC Act requires the AASB to carry out a cost–benefit analysis of the impact of a proposed accounting
standard before making or formulating that standard (to the extent ‘to which it is reasonably practicable to do so in the
circumstances’). Of course, working out the costs and benefits of an accounting standard can be a very difficult, and
sometimes political, exercise. Section 231 of the ASIC Act states that:
(1) The AASB must carry out a cost–benefit analysis of the impact of a proposed accounting standard before
making or formulating the standard. This does not apply where the standard is being made or formulated

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 by issuing the text of an international standard (whether or not modified to take account of the Australian
legal or institutional environment).
(2) The AASB must carry out a cost–benefit analysis of the impact of a proposed international accounting
standard before:
(a) providing comments on a draft of the standard; or
(b) proposing the standard for adoption as an international standard.
(3) The AASB has to comply with subsections (1) and (2) only to the extent to which it is reasonably practicable
to do so in the circumstances.
(4) The Minister may direct the AASB to give the Minister details of a cost–benefit analysis carried out under
this section. The AASB must comply with the direction.
In the context of developing accounting standards, we are left in no doubt that the FRC’s views carry considerable
weight in the standard-setting process. Section 232 of the ASIC Act states that:

In performing its functions, the AASB must follow the broad strategic direction determined by the FRC under
paragraph 225(2)(c). [emphasis added]

Once the AASB makes an accounting standard, which as we know is generally the equivalent of a standard issued
by the IASB, it is the responsibility of the Commonwealth Parliament to either allow or disallow the standard. Before
being approved by parliament, standards released by the AASB are referred to as ‘pending’ accounting standards.
The accounting standards themselves will generally provide guidance on how a classification of items (for example,
inventory) should be identified, measured, presented and disclosed.
Once a pending accounting standard is approved by parliament, directors are required to ensure that a company’s
financial statements comply with the standard. This is in terms of s. 296 of the Corporations Act, which requires a
company’s directors to ensure that the company’s financial statements for a financial year are made out in accordance
with accounting standards.
As already noted, from 2004 there is also a requirement within the Corporations Act for the chief executive officer
and chief financial officer of listed companies to provide a written declaration to the board of directors to the effect that
the financial statements comply with accounting standards.
Most ‘small’ proprietary companies, however, are exempted from complying with accounting standards released by
the AASB. While the thresholds do change from time to time, at the time of writing, pursuant to the Corporations Act, s.
45A, a proprietary company is considered to be ‘small’ if it satisfies two of the following three tests:

1. Its gross operating revenue is less than $25 million (as determined by applying accounting standards).
2. Its gross assets are less than $12.5 million (as determined by applying accounting standards).
3. It has fewer than 50 equivalent full-time employees.

Section 296(IA) of the Corporations Act provides that:

the financial report of a small proprietary company does not have to comply with particular accounting
standards if:
(a) the report is prepared in response to a shareholder direction under section 293; and
(b) the direction specifies that the report does not have to comply with those standards.
The above requirement therefore needs to be read in conjunction with s. 293. Section 293 states:
(1) Shareholders with at least 5% of the votes in a small proprietary company may give the company a direction
to:
(a) prepare a financial report and directors’ report for a financial year; and
(b) send them to all shareholders.
(2) The direction must be:
(a) signed by the shareholders giving the direction; and
(b) made no later than 12 months after the end of the financial year concerned.
(3) The direction may specify all or any of the following:
(a) that the financial report does not have to comply with some or all of the accounting standards;
(b) that a directors’ report or a part of that report need not be prepared;
(c) that the financial report is to be audited.

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 Effectively, therefore, a small proprietary company does not have to apply accounting standards or have its financial
statements audited unless ASIC requests the company to do so, or if shareholders holding at least 5 per cent of the
voting shares request the company to do so. If a proprietary company is not considered small, it is classified as large,
and large proprietary companies are subject to more stringent disclosure requirements.
Public companies and large proprietary companies will typically have to prepare financial statements that comply
with accounting standards, have their financial statements audited and send them to the members (shareholders) of the
company (or make them available on the corporation’s website if the shareholder has not made a specific request to receive
a hard copy). The existence of this differential reporting requirement for small and large proprietary companies is based
on the assumption that the limited number of parties with a material interest in ‘small’ companies would conceivably be
able to request information to satisfy their specific needs. However, it is assumed that the majority of shareholders in ‘large’
companies do not have this ability. As organisations become larger there tends to be greater separation between ownership
and management (or, as this is often termed, between ownership and control) and owners tend to become more reliant on
external reports in order to monitor the progress of their investment. Further, as an entity increases in size, its economic and
political importance increases, and in general this increases the demand for financial information about the entity.
Differential reporting
In relation to the issue of differential reporting, we know from the above that the Corporations Act does provide some
reporting ‘let-outs’ for organisations such as small proprietary companies. However, many other organisations are
still required to produce financial statements that comply with accounting standards. Because so many organisations
were required to produce financial reports that complied with accounting standards, this arguably created a reporting
burden for some organisations in situations where there were questionable benefits to report users. With this is mind
the AASB released AASB 1053 Application Tiers of Australian Accounting Standards. AASB 1053 introduced a two-
tier reporting system for entities producing general purpose financial statements. Tier 1 general purpose financial
statements are financial statements that comply with all relevant accounting standards. Tier 2 comprises the recognition,
measurement and presentation requirements of Tier 1 but substantially reduced disclosure requirements. Because the
Tier 2 requirements do not change the recognition and measurement requirements being applied, the new differential
reporting approach is consistent with the position that has been taken by the AASB for a number of years—this being
that the same transactions and other events should be subject to the same accounting requirements to the extent
feasible (that is, transaction neutrality), and this principle should apply to all entities preparing general purpose financial
statements (whether for-profit or not-for-profit).
Each Australian Accounting Standard will specify the entities to which it applies and, where necessary, sets
out disclosure requirements from which Tier 2 entities are exempt. Complying with Tier 1 requirements will mean
compliance with International Financial Reporting Standards as issued by the IASB (IFRSs). Conversely, entities applying
Tier 2 reporting requirements would not be able to state that their reports are in compliance with IFRSs (because of the
reduced disclosure).
In identifying which entities shall apply Tier 1 reporting requirements, paragraph 11 of AASB 1053 states:
Tier 1 reporting requirements shall apply to the general purpose financial statements of the following types of
entities:
(a) for-profit private sector entities that have public accountability; and
(b) the Australian Government and State, Territory and Local Governments.

In relation to ‘for-profit private sector entities’ (which would include, for example, listed companies) we obviously
need to have some definition of ‘public accountability’ given its centrality to the above requirement. Appendix A of AASB
1053 defines it as follows:

Public accountability means accountability to those existing and potential resource providers and others
external to the entity who make economic decisions but are not in a position to demand reports tailored to
meet their particular information needs.

The above definition links directly to the definition of ‘general purpose financial statements’, which has been used
widely within financial reporting, and which has already been discussed earlier in this chapter. General purpose financial
statements are defined in AASB 1053 (and elsewhere, as we have already seen) as statements:

intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to
their particular information needs.

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 The definition of ‘public accountability’ reproduced above provides a general principle. Appendix A to AASB 1053
provides practical application guidance. It states:
A for-profit private sector entity has public accountability if:
(a) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments
for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including
local and regional markets); or
(b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This
is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds
and investment banks.
Paragraph B2 of Appendix B to AASB 1053 further states:
The following for-profit entities are deemed to have public accountability:
(a) disclosing entities, even if their debt or equity instruments are not traded in a public market or are not in the
process of being issued for trading in a public market;
(b) co-operatives that issue debentures;
(c) registered managed investment schemes;
(d) superannuation plans regulated by the Australian Prudential Regulation Authority (APRA) other than Small
APRA Funds as defined by APRA Superannuation Circular No. III.E.1 Regulation of Small APRA Funds,
December 2000; and
(e) authorised deposit-taking institutions.
In relation to which entities are required to apply Tier 2 reporting requirements, paragraph 13 of AASB
1053 states:

Tier 2 reporting requirements shall, as a minimum, apply to the general purpose financial statements of the
following types of entities:
(a) for-profit private sector entities that do not have public accountability;
(b) not-for-profit private sector entities; and
(c) public sector entities, whether for-profit or not-for-profit, other than the Australian Government and State,
Territory and Local Governments.
These types of entities may elect to apply Tier 1 reporting requirements in preparing general purpose
financial statements.

Therefore, for example, if a proprietary company is not deemed to be small (thereby not satisfying the ‘let-out’
provisions included at section 296(1A) of the Corporations Act) then it must, at the least, prepare Tier 2 financial
statements. Such financial statements would be referred to as complying with Australian Accounting Standards—
Reduced Disclosure Requirements. As paragraph 16 of AASB 1053 states:

Disclosures under Tier 2 reporting requirements are the minimum disclosures required to be included in general
purpose financial statements. Entities may include additional disclosures using Tier 1 reporting requirements as
a guide if, in their judgement, such additional disclosures are consistent with the objective of general purpose
financial statements.

The above requirements would also need to consider whether the organisation is a reporting entity and therefore
required to produce general purpose financial statements. Organisations producing financial statements that comply
with Tier 2 requirements are still considered to be producing general purpose financial statements. A reporting entity is
defined in AASB 1053 (and elsewhere) 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 its subsidiaries.

An organisation that is not a ‘reporting entity’ and does not have ‘public accountability’ would not be impacted by
the requirements of AASB 1053 to the extent that the organisation does not elect to produce general purpose financial
statements.

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 In relation to the disclosures from which Tier 2 entities are exempt, reference must be made to the ‘Application’
section of each Accounting Standard (which typically follows the ‘Objective’ section within the Accounting Standard)
and within this section there will be a sub-heading ‘Reduced Disclosure Requirements’. Under this sub-heading will be
a statement:

The following do not apply to entities preparing general purpose financial statements under Australian
Accounting Standards—Reduced Disclosure Requirements:

A list of relevant paragraphs would then be provided. Some Australian Accounting Standards are equally applicable
to both Tier 1 and Tier 2 entities. Therefore, such Standards do not provide reduced disclosures for Tier 2 entities. Also,
some Standards apply only to Tier 1 entities, but Tier 2 entities may elect to use them. Examples are AASB 8 Operating
Segments and AASB 133 Earnings per Share, which generally apply only to listed entities.
While Australian Accounting Standards are generally equivalent to standards issued by the IASB (IFRS), AASB 1053
represents a departure from what is occurring at the international level. In 2009 the IASB issued its International Financial
Reporting Standard for Small and Medium-sized Entities. The IASB standard allows small and medium enterprises
(SMEs) to depart from various recognition, measurement and presentation requirements incorporated within IFRS. By
contrast, the view adopted by the AASB (as reported in the Basis for Conclusions that supports AASB 1053) was that
since Australia has adopted full IFRSs, it would be logical to use the public accountability notion used by the IASB in
determining which entities in the for-profit sector should apply Australian Accounting Standards in full (the definition of
‘public accountability’ as used by the AASB is identical to that used by the IASB).The Reduced Disclosure Requirements
(RDR) reflected in AASB 1053 are fundamentally different from the approach adopted in the IFRS for SMEs because
the RDR involve applying the same recognition and measurement requirements as Tier 1, whereas the IFRS for SMEs
modifies the recognition and measurement requirements of full IFRSs. The implications of the IASB approach to SMEs
is that there will be disparities in the choice of accounting policies by different entities because precedence will be
given to the conceptual framework over full IFRSs as the source of guidance for determining accounting policies in the
absence of a specific requirement.
Other reasons identified by the AASB for why it elected not to adopt the IASB’s approach to differential reporting
included:

• the additional initial and ongoing costs of training and education for two sets of standards both for the profession
and at the tertiary level
• that some subsidiaries of publicly accountable entities would find it burdensome to apply the proposed IFRS for SMEs
in preparing their general purpose financial statements. They would need to prepare financial information based on
the recognition and measurement requirements of full IFRSs for the purposes of the parent entity consolidation
• entities seeking to access international capital markets would generally apply full IFRSs
• a loss of comparability across all types of entities’ general purpose financial statements within Australia
• adoption of the IFRS for SMEs may be seen as a retrograde step in a country that has already adopted full IFRS
recognition and measurement accounting policy options
• in the event that an entity moves to, or from, full IFRSs, there would be costs involved in migrating from the recognition
and measurement requirements of one Tier of reporting to another.

While AASB 1053 does represent a relatively major change to the Australian financial reporting environment, the
requirements embodied within AASB 1053 are likely to be amended in the not-too-distant future. As paragraph BC20
from the Basis for Conclusions to AASB 1053 states:

The Board regards AASB 1053 as a pragmatic and substantive response to the need to reduce the burden of
disclosure requirements on Australian reporting entities. However, the Board does not regard it as a complete
or final answer to that need. The Board intends continuing its deliberations on revising the differential reporting
framework with a view to ongoing improvements (including having regard to decisions made by the IASB in
relation to its IFRS for SMEs). The Board concluded that the reforms in AASB 1053 should not be delayed while
consideration of other possible areas of reform continues.

Apart from the issue of differential reporting as addressed in AASB 1053, some AASB accounting standards are
applicable only to specific classes of companies (for example, companies listed on the Australian Securities Exchange).
Further, ASIC may, from time to time and pursuant to the Corporations Act, release a Class Order that grants relief from

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certain Corporations Act provisions, such as the requirement to comply with all accounting standards. As we have
indicated in this chapter, from 2000 the AASB has also been responsible for issuing standards applicable to reporting
entities that are not governed by the Corporations Act (for example, large partnerships and government departments).
As noted above, and pursuant to s. 285(2) of the Corporations Act, AASB standards can apply to some entities
that are not of a corporate form—for example, to ‘disclosing entities’. This has had the effect of increasing the ambit
of accounting standards so that all disclosing entities need to comply with the majority of AASB accounting standards.
According to the Corporations Act, disclosing entities include:
(a) entities which have securities that are quoted on a stock market of a securities exchange;
(b) entities which have securities (except debentures) that have been issued pursuant to a prospectus;
(c) entities which have securities (except debentures) that have been issued as consideration for the acquisition
of shares pursuant to a takeover scheme;
(d) entities which have securities that have been issued pursuant to a Part 5.1 compromise or arrangement; and
(e) borrowing corporations.
Disclosing entities are required to comply with AASB accounting standards, with only a limited number of exceptions.
Hence, many forms of organisations other than companies are now required by law to follow the majority of AASB
accounting standards. This is despite the specific wording of some AASB standards.
Before the release of AASB accounting standards, or the release of components of the Conceptual Framework (to
be discussed in more detail in Chapter 2), the contents of the proposed releases are subject to critical review. In the
past, the typical process involved when the AASB developed an accounting standard was that, once a particular project
was initiated, relevant informed individuals were commissioned to develop a discussion paper or theory monograph.
This was done within Australia. This paper was then released for public discussion to determine whether key areas had
been addressed, particularly as they relate to the Australian context. After further consideration by the regulatory bodies,
a draft exposure draft was developed for review by selected parties. Once it was established that the draft document
appropriately addressed the issue of concern, an exposure draft was released for public discussion. After considering
public comments, a draft standard may have been released or, alternatively, a revised exposure draft may have been
developed. There was then a further period for comment, following which an accounting standard or concept statement
might finally have been released. Exposure drafts do not have the force of an accounting standard, but they do provide
an indication of future reporting requirements.
Central to the above process was that the development of the accounting standard was undertaken very much within
the Australian context, with due consideration given to international accounting standard developments. However, and
as a result of the decision made in 2003 by the FRC that Australia would adopt accounting standards developed by the
International Accounting Standards Board (such standards now being referred to as International Financial Reporting
Standards or IFRSs), the development of most accounting standards to be used within Australia is now not directly
under the control of Australian accounting standard-setters (except to the extent that the accounting standard relates to
domestic issues and there is no equivalent IFRS). AASB 1053 discussed earlier is one such example. There are various
costs and benefits associated with this delegation of responsibility to the IASB. (Try to think of what some of these costs
and benefits might be.)

The true and fair view: further considerations

Before the early 1990s, the directors of a company could elect not to comply with an accounting standard on the grounds
that applying the particular standard would cause the accounts not to present a true and fair view. The ‘old’ s. 298(2)
provided that:

where a company’s financial statements for a financial year would not, if made out in accordance with a
particular applicable accounting standard, give a true and fair view of the matters with which this division
requires the financial statements to deal, the directors need not ensure that the financial statements are made
out in accordance with that accounting standard.

The above requirement, which allowed directors to elect not to comply with an accounting standard if non-compliance
was deemed necessary to create true and fair accounts, was referred to as the ‘true and fair override’. The perspective
taken was that in some isolated cases, certain accounting standards might not be appropriate for a particular entity, and
application of the standards might actually make the financial statements misleading. However, this view was abandoned
some years later, and the corporations law was amended and the override withdrawn such that s. 296 of the Corporations

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Act requires that ‘[t]he financial report for a financial year must comply with accounting standards’ (although, as we
indicated earlier, there is a ‘let-out’ for small proprietary companies). Following the amendment, directors were therefore
required to comply with applicable accounting standards. If, in their view, compliance did not generate a true and fair
view, additional information had to be presented in the notes to the financial statements.
Numerous writers had argued that as the true and fair view requirement is not clearly defined, directors could invoke
the ‘true and fair override’ to justify not complying with particular accounting standards. Without a clear definition of ‘true
and fair’, it is difficult for ASIC or its predecessors, the ASC and the NCSC, to take action on the basis that the departure
did not enhance the truth and fairness of the accounts. As McGregor (1992, p. 70) stated:

The tendency of an increasing number of companies to seemingly avoid complying with approved Accounting
Standards at will has, in the past, been accompanied by an extreme reluctance on the part of the body
responsible for enforcing the law—in the main the National Companies and Securities Commission (NCSC)—
to pursue transgressors through the courts because of a perceived difficulty of successfully prosecuting the
companies against the ‘true and fair defence’. Henry Bosch, the former chairman of the NCSC, has said: ‘No,
there were no prosecutions, for the reason I gave Mr Scholes earlier on—that the true and fair overrides. I told
you of a particular case where there was a flagrant breach of an Accounting Standard—the goodwill standard.
I was advised that I would not win. It was also put that if we took the case and lost, the dam would burst and
everybody would see that what we were saying could not be sustained in court. It seemed too risky to go down
that road.’

At present, it appears unlikely that the true and fair override will be reintroduced. Further, if companies were permitted
to depart from accounting standards because they believed the departure was necessary to present a true and fair view,
then these same companies could not thereafter claim to be presenting financial statements in conformity with IFRS—
something that is claimed to be valuable to ‘the marketplace’.
So directors must comply with the applicable accounting standards. Nevertheless, 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 (the reference to ‘the Framework’ below relates to the
Conceptual Framework for Financial Reporting) 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 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.

As we can see from the above, AASB 101 includes a rebuttable presumption that if other entities in similar
circumstances comply with the requirement, the entity’s compliance with the requirement would not be so misleading
that it would conflict with the objective of financial statements set out in the Conceptual Framework.
A current problem is that our qualitative requirement (defined below) of true and fair is very unclear. 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. The Directors’ Declaration of BHP
Billiton, reproduced in Exhibit 1.2 above, shows how directors are required to state that the financial statements are
true and fair. The auditors of a company are also required to give an opinion on whether, in their opinion, the financial
statements are true and fair.
Exhibit 1.3 shows the opinion section of the auditor’s report from Commonwealth Bank of Australia 2015 Annual
Report. Apart from the audit opinion section, an audit report of a corporation also typically includes sections on the
respective responsibilities of directors and auditors.

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Another random document with
no related content on Scribd:
15. THE GIRL WHO MARRIED A STAR.
[16]

One night two pretty young maidens were sleeping on top of a

summer arbor. They were ill with monthly sickness. One said, “Kario,
I love that little bright star, and I wish it was my husband.” That same
night, while sleeping, the girl was taken away up in the heavens, to
live with her husband, he giving her instructions what to do and what
not to do. He could not always stay at home, as he was in the chase.
One of the instructions was that the woman should never dig up an
Indian turnip at slough-like places. While her husband was away, the
woman determined she would discover the mystery connected with
her husband’s injunction. When she had dug the turnip she saw what
the mystery was. She saw the people living on this earth looking like
crawling insects.
When she saw this she cried and cried and cried. She went to an
old woman for comfort. The old woman saw that the woman had
been crying; so she questioned her and found out her trouble. The
woman answered that she could easily be relieved of her trouble. So
she advised her to collect all the sinew she could find from the meat
her husband brought.
The girl told her husband she wanted all the sinew there was in all
the game he killed, even the very smallest piece. Her husband did as
she asked, not knowing her intention. When a very large number had
been made the woman took the sinew and went to the old woman,
who began to make what she had promised to make for her. “Come
back in a few days,” she said, “and I will have the thread ready for
you. Remember to come when your husband goes on a long chase.”
The husband started on a chase, and the girl went to the old
Woman’s lodge and told her that her man had gone. The old woman
got her sinew rope and fixed it around the woman’s waist and began
to let her down—down—down. She went with her first child on her
back. The place she started down was where she had dug up the
forbidden root. The twine was lacking about twenty or more feet. The
old woman was an old spider, it was found. Old Spider-Woman did
not have enough cobweb and sinew, so the woman hung on the
rope, not able to touch the earth.
When her husband returned he found his wife missing. He began
to look for her. He thought at once of his order, and so went out
where she usually dug. He found a stick in the grass. He discovered
the rope tied around the stick, and his wife and child hanging away
down near the earth. He picked up a stone and talked to the stone,
saying, “Do not harm the boy, but kill the mother.” Down—down—
went the stone, and struck the young mother on the head; it cut the
rope and her body fell; but the boy was safe. The boy stayed by his
mother’s body and fed himself at her breast for a time. Her body
began to decay.
The boy went off and got into a cornfield, not knowing that it was
corn. When lonesome he returned to his mother. The owner of the
field was an old woman. She saw the footprints in her field. She
wondered what it could be. She made a little ball and a crooked
stick, also a little bow and arrows. She thought if it was a girl she
would take the ball and crooked stick, but if it was a boy he would
take the bow and arrows. When the old woman looked she found the
little fellow had taken the bow and arrows.
The old woman was very joyful. The little fellow had done much
damage to her squash vines with his bow and arrows. She went out
and hid in the field, waiting for the little fellow. The boy came as
usual with his weapons and the old woman sprang out and caught
him, saying, “Oh, atine, atine; you are to come home with me.”
 She took the boy home and gave him food, such as fresh corn
mush, succotash, and squash. The boy seemed quite happy. When
the woman went out to work he amused himself with his arrows,
shooting little birds in the field, and on his grandmother’s return he
would bring the birds for her to eat. She was a happy grandmother,
proud of her little grandson. The boy grew larger. When he began to
make his own bows and arrows to his taste he began to bring home
larger game, such as deer and antelope. His grandmother was still
happier.
The boy’s grandmother was accustomed to place under a curtain
which was always closed, a big wooden pan of whatever they had to
eat, before she went to her work. The boy, noticing this, made up his
mind to find out what it was. While she was gone, he moved the
curtain and beheld a huge serpent with large yellow eyes. The boy
said within himself: “Ah! here is the one that eats up everything that
grandmother puts here.” He took his bow and arrows and shot and
shot, until he killed it.
The boy’s grandmother came in. The boy spoke up, and said:
“Grandmother, I have killed the bad one that ate up everything you
placed under that curtain.” The old woman appeared glad of it, but
was hurt at heart. She covered the serpent and placed it in a pool.
The serpent said that he could not do anything, because the boy was
gifted with a great mysterious power of his father. The dead serpent
was the husband of this grandmother.
The grandmother, wounded at heart, planned to have the boy
killed in some way. She forbade him to ever go into the timber near
by, because there were all sorts of dangers there. In this timber, she
said, was a bear that wanted to tear him into small strips. When the
old woman had gone he started out to the forbidden place. He found
the bear, captured him and thought he was strong and would do to
haul corn and wood for his grandmother. On her return she saw the
great, big black-bear tied. The boy spoke up, saying, “I have here a
strong animal which will work for us.” The old woman appeared to be
happy, but felt hurt that the boy could have captured the bear. She
was the owner of all animals around, both good and bad. She turned
the bear loose and explained the case to the boy, saying she could
not use the bear in any way.
One day the boy was gone all day and all night. His grandmother
now thought him dead. Roaming around, the boy found a tipi. In the
tipi were four strong-looking men. Around the fire was the meat of a
whole buffalo and an elk. The boy stood on one side looking at the
game. The men were playing with plum dice in a basket. The interest
of these men was very noticeable. One man’s nose got very dirty, but
he would not move to clean it. The boy outside did not like it. He took
his arrow and shot through the hole he was peeping through. The
arrow cleaned the man’s nose. The men rushed out and gave the
boy a hearty welcome, for they had already heard of his wonderful
doings. They took him in and gave him a whole buffalo to eat. He
began to eat, and ate as much as usual. The men began to ask why
he did not eat more. He said he could not, as he had had his fill. The
men ate heartily. They cleared the meat that was before them. The
men asked him to stay all night. They invited him to join them on a
hunting trip.
Next day they started. They killed an elk. They dressed it and
found a fœtus. As courtesy, the hunters took the fœtus and placed it
before the boy to take home with him. The boy was affected. He
asked them to remove the fœtus. He was standing by a tree. He
started up the tree. The men, seeing he was afraid of it, moved it,
little by little, toward him. They were afraid of him and were trying to
do everything to get rid of him. The boy was afraid of the fœtus. He
would not come down while it was in the way. The men came home.
By and by a man was sent out to see if the boy was there. Coming to
the spot he found the boy still there. The boy asked the man to
remove the fœtus. He refused. He went home and reported all he
had seen. In about four days the men came around and found the
boy still there. They found him very thin, and suffering for food and
water. He would not come down while the fœtus was there. The men
made a conditional offer,—if he would deliver up to them his
grandmother they would remove the fœtus. The boy said he would.
They removed the fœtus. The boy started home at once. He told his
grandmother what had happened and what he had done. Out of love
for his life he had given her up to these men.
The grandmother was happy on his return. She said she would
grant his request. About two days after, she and the boy started out
where the men were. They stopped at the entrance of the tipi until
they heard a voice from within asking them to step in. The boy said,
“Nawa, I have done what I agreed to do. Here is my grandmother.”
“Ah ho! Ah hi!” they replied, “you were honest and have done as you
agreed to do. That is the way for noble boys to do. As this is a
bargain for your life we will do all we can for you to turn our power
and skill over to you.” Now they began to teach the boy the
ceremony of catching eagles and of hunting. “It was our desire to
have your grandmother, and as you have been true to your
agreement, we are glad.” All were satisfied. The grandmother and
son then went home.
The next day the boy started out on the prairie for game. He met a
camp of Snakes, mostly deadly Rattlesnakes, and there were all the
other kinds of Snakes. They were glad to have him come. They
invited him in. They gave him the best seat. He knew what danger
there was to meet. So as he sat down he took out a smooth stone
which he used for sharpening his knife, and placed it in his anus.
The room was clean and there was a ridge around the fire for a
pillow. Time and again he noticed a Snake disappear and attack him
where he had defended himself. He knew it. They said: “He must be
hungry. Give him something.” They gave him a spleen. He took it
and looked at it. He replied that he could not eat it raw; so he poked
up the fire and threw the spleen in. It cracked and made the
audience wild. The spleen was the teeth of all these Snakes. The
boy knew the secret and could not be fooled so easily.
The Snakes, resting on the square pillow-like structure, demanded
of the boy that he relate some happenings or stories, to pass the
night pleasantly. He refused to be first. He agreed to take his turn
with them. They began. Each Snake had for his subject the life of
their guest and that of his grandmother. When all were through with
their stories the boy began his story: “Nesaru commanded the winds
to blow; at evening they stop, the trees stop rustling, the grass keeps
on for a while, but they all fall asleep.” This much of the story put a
part of them to sleep. “Nesaru sends hurricanes of trials and
hardships in our lives; the same to all kinds of trees and to large,
deep rivers; they rage and beat against their banks, the water gets
dirty, there comes on the gentle night, soft breezes, the trees quiet
down, the rivers are calmed, the waters clear up and they are
asleep.” This was the end of the boy’s story. The remainder of them
fell asleep.
The boy thought of how he was to have been treated, and he
decided to be avenged. He took from his belt his sharp knife and cut
along a straight line on the square structure, cutting off the head of
every Snake until he came to the last one, which slid away, saying
as he went, “Old-Woman’s-Boy, I will remember all.”
As the boy left he was very particular as to how he should carry
himself. Having gone many miles he thought all danger was over. He
placed his arrows around him, bidding them to awaken him when
danger was near.
While he was sleeping his enemy came. Before the arrow could
give the alarm the Snake entered his body. Grasping his knife he cut
his stomach open. Up went the snake’s head to his breast. He cut
his breast open. Up it went to his throat. He cut his throat open. Up it
went, into his head, and rested there. His father above knew all of
this. He sent a great wind which turned the boy’s head over, so that
his opened œsophagus turned toward the wind. Then came a hard
rain, filling every corner of his head. The Snake’s head would peep
out of the boy’s head, but the boy would say, “Old-Woman’s
Grandson is still alive.” There came a scorching heat, and the water
began to make the Snake peep out its head, but the boy would say,
“Old-Woman’s-Grandson is still alive.” It got too hot for the Snake. It
fled, and the boy sprang to his feet and caught it. “You will suffer
punishment, and you will always be ashamed and crawl on your
body in the dirt, your head down, avoiding all decent creatures that
Nesaru made.” He took the Snake and knocked his head on a flat
rock until it was flat and its eyes were close to its mouth.
 The reason the boy was afraid of the fœtus was that it was the
time of the year when all young animals are as yet unborn, and the
cluster of stars to which the boy’s father belonged is never seen at
this time to come up with the rest. The boy knew that his father could
not be present to help him, and so he did not dare to do anything to
help himself.

FOOTNOTES:
[16] Told by White-Bear.
 16. NO-TONGUE AND THE SUN AND
THE MOON.[17]
There was a young man in a village who wanted to be great. In
olden times the chief thing among the people was to be a great
warrior. The young men in those times used to go out among the
hills, and then find a place to stand and mourn. They used to stay
away from home four or five days without drinking or eating.
Now this particular young man went out alone, upon a high hill, to
mourn. In the afternoon a little bird came to him, and said: “This is
not the place where you should stand. I will show you where you
must stand.” So the little bird flew and the boy followed. The bird
stopped at a certain place, and the boy stood there. Late in the
evening a man came to the boy. The man was all painted red, and
he said to him: “I am glad to see you. You are going to be my son,
and I am going to take you with me now. All I want from you is your
tongue.” So the young man pulled his tongue out, cut it off and
handed it to the man. As he handed his tongue to the man he fell
down and died. It was now dark, and as the young man fell the Moon
rose and saw this young man fall down, and the Moon said to
himself: “That man who has killed this young man is always trying to
do something that is not right. I know who that man is; it is the Sun. I
know that he has taken this young man’s tongue.” So the Moon went
to the young man and touched his feet, and the young man waked
and sat up.
When No-Tongue saw the strange man he did not know what to
do. He was not the same man who had taken his tongue. This man
looked white, because he was the Moon. The Moon asked No-
Tongue why he had given away his tongue and to whom he had
given it. No-Tongue answered, “How can I talk without a tongue?”
The Moon said, “Speak, and tell me.” So the boy spoke, and he
found that he was able to talk. So he began to tell what the man
looked like. The Moon said he was sure that the man was the Sun.
Then the Moon spoke to No-Tongue, and said: “The Sun was trying
to kill you. No-Tongue, hereafter you shall be my son; but let your
other father, the Sun, come after you first. I must tell you what to say.
You will not be killed by the Sun. The Sun is coming for you to-
morrow morning, and when you go up to our dwelling place (the
heavens) he is going to show you some things that he has. You must
now be careful not to take the new things that he has, but you shall
take the old things. Take the old weapons. The Sun thinks a great
deal of these old weapons.” This is all that the Moon said. The Moon
then disappeared.
In the morning, the Sun came to No-Tongue and took him up into
the sky to his home, and said, “Now, my son, I want you to choose of
these things that I have here.” No-Tongue took the oldest things.
When the Sun saw that No-Tongue took the best things—the oldest
ones—he came out from his lodge crying, because this would give
No-Tongue a long life, and would also make him become great, and
this was what the Sun did not want of No-Tongue. He had thought
that No-Tongue would surely take the new things. But if No-Tongue
had taken the new things, that would have shortened his life and
made it impossible for No-Tongue to become great. Then the Sun
began to think of some way to kill No-Tongue, but he never could
take back the things No-Tongue had taken, having promised them to
him. As they came out from the Sun’s lodge the Sun said: “My son,
look. There is your home. Look all around you. You can see
everything plainly. When you go home, after two days have passed,
you must go on the war-path, and you will conquer old enemies. You
will have all you want. You are to be great. But when you, my son, go
home, give to me a white buffalo robe.” So the Sun went away.
When night came, the Moon came out and spoke to No-Tongue,
and asked what the Sun had said to him. No-Tongue told the Moon
all that the Sun had told him, and the Moon said, “Do not give him
the white buffalo robe, but give that to me, and get a dark-brown
robe for the Sun.” The Moon then began to tell No-Tongue what to
do. He told him to get some white clay and make powder out of it,
and then pour the white powder all over the robe, so that it would
look white. So No-Tongue did as he was told to do.
When the Sun received the white buffalo robe, which really was
not white, he was proud of it; furthermore, he was proud that his son
had obtained it for him. One day he hung the robe out, and the wind
was blowing hard. The wind shook all the white clay out of the robe,
so that the robe turned to a dark-brownish color. Then the Sun saw
that it was not a real white buffalo robe, and did not like it.
When the Moon and the Sun got together, the Sun said, “I am
sorry for what my son has done to me, and now my dear son is
going to kill him.” The Sun had a son who belonged to another tribe,
and this was the son who was to kill No-Tongue. So the Moon heard
all that the Sun had to say.
One night the Moon saw No-Tongue, and told the young man all
that the Sun had said. The Moon said that the Sun could not do
anything to kill him. The Moon said: “The man that you are to fight
with is going to try to shake hands with you, because he is your
cousin,—not a real cousin, but because you are the son of the Sun
and so is he,—so he is your cousin. He is the one who has been
selected to kill you. But do not be afraid; I shall be with you and will
help you all I can. Do not shake hands with the young man, your
cousin, and if you must shake hands, do not shake with your right
hand. Be very careful not to let him strike you first. If you should
shake hands with him, strike him. You must not let him strike you
first; and when you have killed him, cut his head off and put it under
a big stone that shall be near you, so that the Sun will not make him
live again. By placing the head under the stone the Sun will be
prevented from bringing him to life.” The Moon also said, “Be careful
to do what I have told you to do.” No-Tongue was glad. The Moon
also told No-Tongue that the young man he was to fight with was
named Little-Sun.
 Two days after this some warriors went out on the war-path.
Before they had gone far the Sun went to No-Tongue, and said: “My
son, I am glad you are going on the war-path; I want you to kill a
man for me. He is coming. He thinks he is great, but he is not. So kill
him for me.” The Sun said all of this, not meaning it, for he was
planning that Little-Sun might kill No-Tongue. So the warriors started
on the war-path, and in a few days they came to the place which
they thought would be a good place to remain for a while. The
leaders selected scouts to go out and look over the country. The
scouts went up a high hill, and there they met the spies of the enemy
coming up from the other side. These did not stop, but turned
straight back again, and went and told the enemy, and of course the
other scouts turned back and told their leaders that the enemy was
coming. So in the morning, the two sets of people came together,
and they fought a battle; but before starting the battle there was a
man who stood in front of the enemy’s line, and said, “No-Tongue, I
want you to come and shake hands with me, for you are amongst
those people.” No-Tongue went to him, and when they were nearly
together, everybody saw that the two were dressed so as to look
very much alike, but they did not know that they were to fight each
other; but the two knew that they were to fight, and that they were
both sons of the Sun. No-Tongue did what the Moon had told him to
do. He killed Little-Sun. Then No-Tongue’s people defeated the
enemy. They took many scalps, and returned home.
The Sun became mad at No-Tongue, because he had killed Little-
Sun, for the Sun had expected No-Tongue to be killed. The Sun had
tried three times to kill No-Tongue; so the fourth time, the Sun
himself was going to scalp No-Tongue, so that the people would
make fun of him. Then the Sun told his other son, Big-Sun, to try and
kill No-Tongue. No-Tongue was the only one living. He was the one
who had not treated his father, the Sun, right, for the Sun had not
treated No-Tongue right in the first place. But No-Tongue had been
assisted by the Moon.
The third time the Sun tried to kill No-Tongue, he changed himself
into a Buffalo, so that the Buffalo ran after No-Tongue, but the young
man, No-Tongue, ran into a mud-hole, and the Buffalo fell in too. No-
Tongue got out of the muddy place, but the Buffalo could not come
out, because he was so heavy. No-Tongue told a lot of men to get
some dried willows and to place them upon the back of the Buffalo.
This they did. They set the wood on fire, so that the Buffalo burned
up.
In the evening, when the Sun and Moon were together in the
heavens, the Sun said: “I shall do something to No-Tongue, some
way.” The Moon heard the Sun say this. Then the Sun said to the
Moon: “Just see what my son No-Tongue has done; he burned my
back. To-morrow morning I am going to scalp him, so the people in
the village will be afraid to see him, and so they will make fun of
him.”
Then the Moon went to No-Tongue in the night, and said: “My son,
you always like to be up early in the morning, singing. I want you to
get a good scalp to-night—one that has hair, just like this. Then kill a
dog and get some of its blood, put the blood inside the scalp, and put
the false scalp over your head so your hair will not show.”
The boy got the scalp with the hair on it, killed a dog, put some of
the blood in the scalp and hung it over his bed. Early in the morning,
before the Sun rose, the boy arose, put the scalp over his head,
went out, and sang some songs through the village. As the Sun
came up in the east the boy heard a noise, and the Sun took the
scalp off from the boy, so that the blood ran down. When the Sun
saw that he was satisfied. The boy went into the lodge, washed,
came out again, and the Sun saw that the boy had hair on, and that
he was not really scalped. When the Sun reached the Moon he told
him that he was going to let No-Tongue alone until he was old and
great, and that he was then going to take him up to his home.
The Moon came to No-Tongue and told him what the Sun, his
father, had said. Years went by, and No-Tongue lived peacefully.
Finally he became old and blind. At this time the people were about
to move away from this place to another place. The Moon came and
told old man No-Tongue that it was time his father, the Sun, was
coming after him to take him up to his home; and that he himself
would come with the Sun to take him up; that he should not be
afraid.
While they were breaking camp the old man took his clothes that
he used to wear in his early days, and put them on. He also painted
himself. He told the people to go on; that he himself would come
later. The people went on. The old man went up on the top of a hill,
made a circle of red sticks to represent the Sun, and another of white
sticks, to represent the Moon, for the west side. While he was doing
this the Sun and Moon came. The Sun wanted to know what the
Moon was doing there. No-Tongue said, “My father, the Moon is also
my father; he has helped me all along.” So the Sun was satisfied,
and the Sun took the old man up to his home.
Several days afterwards, four young men went to the place where
the old man had sat, and he was gone. The sticks were there as he
had left them, but No-Tongue was gone. He was never heard from or
seen again after that. He was called “No-Tongue,” for the Sun had
taken his tongue, but after he had failed to kill him, he gave him back
his tongue.

FOOTNOTES:
[17] Told by Standing-Bull.
 17. HOW BURNT-HANDS BECAME A
CHIEF.[18]
There was a large village in a beautiful valley near a large tract of
timber. It was in the winter time. Around the outside of the village and
over a knoll lived Stanapaat, or Burnt-Hands, a boy of about eleven
or twelve years, and his grandmother. The boys in the village came
over the knoll to urinate on the tipi of these poor people. In this
village lived one of the chiefs who had four daughters, the youngest
of which was very charitable toward these poor people. Her name
was Last-Child. She brought food to these folks whenever she could.
Red-Bear and Black-Bear were the first chiefs of this village. They
ruled their people as though they were slaves.
One day Red-Bear gave notice that the whole village was to turn
out on an elk hunt. The next day, the people complied with the
chief’s orders. The people, as they went through the timber in the
deep snow, slaughtered the elk in great numbers. Burnt-Hands with
other little fellows followed the chase. He watched the hunters
butchering their game. He wished he could kill and take home to his
grandmother the nice elk meat. He strode off in another direction,
looking around as he went. As he went on he struck a fresh track
with drops of fresh blood on clean snow, and there were no footprints
of a hunter following. He took up the trail and followed it for a long
distance. He found, to his great delight, a dead elk with two arrows
through its chest. “Ah ho! Ah ho! The great chief knows I am poor.
He has had mercy on me.” While he was looking all over the animal
he heard a voice. He looked up, and who was there but the two
chiefs—Red-Bear and Black-Bear.
Red-Bear gave an angry grunt and struck the boy in the face.
“Who are you and how did you find this elk? I never expected to find
such a worthless burnt-belly looking fellow as you.” Pulling his
arrows out of his quiver, he said, “My father will be glad to have you
for his meal,” and he shot two arrows through the boy. He dragged
him out on the ice to a large air-hole and said, as he dropped him,
“Father, I have done as you bid me.”
In this stream there lived a big White-Bear in a lodge. The young
cub heard something drop outside the lodge. He told his father. The
old one said, “Go out and see what it is.” The cub saw poor Burnt-
Hands in his ragged clothing and with wounds. The cub felt pretty
bad for the boy and told his father about him. The father told the cub
to bring the boy in. “What a poor boy you are!” said White-Bear. “I
know who you are, and how you were treated. I never expected to
eat a man from Red-Bear’s tribe. I commanded him to feed me on an
enemy. I will have great mercy on you. From now on you shall be my
son. You shall treat Red-Bear just as he has treated you. I will enjoy
his flesh. I will endow you with all the power I have. I will teach you
all, and you shall go back and do as I say.” White-Bear and Burnt-
Hands then sat down and began the bear ceremony, Burnt-Hands
learning everything and receiving his bundle of medicine and other
things. He was then shown the way out by the cub.
Burnt-Hands went on to his grandmother’s little home. When he
arrived there he called his grandmother to kindle the fire, as he had
come. Before this, when the boys found out that Burnt-Hands’
grandmother was worrying, they would come in, saying,
“Grandmother, I have come home,” just to tease her. The old woman
thought the boys were teasing her now when Burnt-Hands called.
She gave a pitiful cry, saying, “You boys ought to feel satisfied with
your teasing now.” “Oh, no, Grandmother! I am here! I was lost on
the chase. Following up an elk I strayed off to a place I knew nothing
about. I could not find my way home, so I stayed all night.” His
grandmother arose. When she had kindled the fire there sat her boy.
She rejoiced, for she was glad her boy was alive.
 Nobody in the whole village knew what had happened to Burnt-
Hands except Black-Bear, who had witnessed what Red-Bear did.
He did not like what Red-Bear had done, but he did not say anything.
One day the scouts, on picket duty, saw a large herd of buffalo.
The chiefs were notified. They gave notice that everybody should
turn out to the chase, and that Red-Bear wanted the hide of the
white buffalo that was in the herd. Burnt-Hands heard the call. He
told his grandmother to help him make arrows. He also promised her
the white buffalo robe. This was a secret surprise to his
grandmother, who did not know that he was anything more than a
“burnt-belly.”
The next day every one turned out to go on the chase. Burnt-
Hands started out on foot with his quiver. A kind young man on
horseback caught up with him, and asked him to get on behind him.
He did so. While they were riding, the young man told the boy about
the white buffalo. The boy asked his friend if he would put the meat
and his white hide on his horse for him. They made plans to be
together and help each other on the chase. The hunters had all
collected on a hill, talking and smoking their pipes. The two arrived
and sat around for a long while. Burnt-Hands began to inquire what
they were waiting for. They answered they were waiting for the
chiefs. “This will not do; if we wait here there may come up a bad
storm and we will go home empty handed. Come now, and let us
have our chase. Those chiefs will come later, and they will get their
share of the meat anyway. I want that white buffalo robe, and when
you have taken it off give it to this young man and he will take it
home for my grandmother.”
The men were all agreed to what Burnt-Hands said. They thought
Red-Bear would kill him and not themselves. They got on their
ponies and the chase began. The white buffalo was killed and the
chase ended. Burnt-Hands was walking along when his friend came
and gave him a ride to where they were butchering. He took him
where the white buffalo was and the men were standing around
looking at the animal. “What are you waiting for now?” said Burnt-
Hands. “Get to butchering and give me the hide!” When they had
begun, the chiefs came. They gave them a welcome and told Red-
Bear that Burnt-Hands had advised them to start the chase and had
already spoken for the hide. Red-Bear and Black-Bear said
everything would be all right, and that the boy could have the hide
and some meat.
The hunters were all on their way home. Red-Bear ordered them
to camp at a certain place. This they did. Burnt-Hands and his friend
came to the camp and found the meat cooking, and a comfortable
place made for the chiefs. “What is this place for? and are you afraid
to sit here?” said Burnt-Hands. “That place is for the chiefs,” said
they, “and that meat.” “Come,” said Burnt-Hands to his friend, “sit
here with me and enjoy the meat with me.” The young man, with the
rest, thought that Red-Bear would surely kill the boy this time. Burnt-
Hands and his friend sat down on the robes and ate the meat
prepared for Red-Bear. The chiefs came, and Red-Bear ordered
another place and food prepared for him. He did not dare to say or
do anything to the boy, suspecting his power as he did. Burnt-Hands’
friend and the others thought that Red-Bear had mercy on the poor
boy, since he did not hurt him.
Burnt-Hands went home with his friend and pulled off the meat
and the white buffalo hide. “Here, grandmother, is what I promised
you, and a lot of meat. You now know that I can hunt and bring home
game.” His grandmother was at once overjoyed. She thought about
the pretty girl who always showed them charity. She sent out for
Last-Child, who came in. “You have always been kind to us, and I
have always been thankful. I want you to have this hide, and to have
a robe made for yourself. You are young yet, and it will become you
more than me.” Burnt-Hands was talked about all over the village,
but they did not know that he had been blessed by a Bear.
A long time after this chase the chief gave out an order for
everybody to go on an elk chase. Red-Bear had been accustomed to
collect all the elk teeth. This was his object for the hunt. Burnt-Hands
heard the order and began to make preparations for the hunt. He
promised his grandmother an elk-tooth dress. Burnt-Hands told his
grandmother that if any trouble arose on his account she must flee
into the timber, and on through other timber, and there wait for him.
The next day the chase was to come off. The hunters had great luck
and were talking happily in the woods. There was a cry here and
there for Red-Bear to come and get his teeth. Burnt-Hands and his
friend were together. He told his friend to take the teeth out for him,
for he did not know how. His friend was a little afraid to do it, but
Burnt-Hands said it would be all right. The men, too, rather hesitated
to let him have the teeth. They told him that Red-Bear had spoken
for all the teeth; but he paid no heed to it, and told his friend to take
them. Burnt-Hands had collected a lot of teeth, and so had Red-
Bear. The hunters had chased the elk on to a smooth piece of ice
and had killed several there. Here, Burnt-Hands and Red-Bear saw
each other doing the same work. They met on the last elk, and
Burnt-Hands spoke and said: “You have enough teeth. You will keep
off and let me have these.” Red-Bear gave an angry grunt, and said,
“A child like you cannot have much to say.” As Red-Bear leaned over
to take the teeth Burnt-Hands took his war-club and struck him on
the head. He took him by the feet and dragged him to the air-hole.
“Father, this is what you asked of me.” A great yell was raised, and
war was made on the boy.
The boy fled to the village and peeped in, to see if his
grandmother had done what he had told her to do. She was gone,
and he followed her and found her beyond the second timber as he
had directed. “Now,” said he, “take one of these bear claws off my
wrist and open the little bag of paint.” This she did, and he began to
sing and perform the ceremony. He adorned his grandmother and
himself according to the instruction of his Bear father. The people
had all turned out to kill him for what he had done. Still others were
calling it wrong to harm the boy, and reminded the people of what
bad ruling Red-Bear had done.
Burnt-Hands and his grandmother had turned into Bears, and
were making a big noise, growling and grunting. Nearer and nearer
the warriors circled around the timber, shouting and yelling. The boy
told his grandmother to be first to attack. So she did so. She caught
Red-Bear’s brother and four or five others of his near relatives. “Now,
I will attack,” said Burnt-Hands, “for you must be tired.” He picked out
the leaders and the influential men of the village and scalped them
and tore them up. The warriors began to retreat. A cry was raised to
end the fight, as many had been killed, but how to stop the boy and
the old woman they did not know. They assembled and filled the
peace-pipe. They gave it to Last-Child to take to the boy and the old
woman. She took the pipe and came toward them, they growling
wildly. The boy knew it was the girl. He told his grandmother not to
charge at her. The boy accepted the peace-pipe and both smoked it.
This ended the fight.
Burnt-Hands asked his grandmother how old she would like to be.
She said, “About thirty-eight,” and so she was. The boy made
himself about twenty-two, and when all was quiet he married Last-
Child. Burnt-Hands came to be chief, and had Black-Bear as his
slave. The people lived happily under his rule.

FOOTNOTES:
[18] Told by White-Bear.
 18. HOW BURNT-HANDS BECAME A
CHIEF.[19]
Once there was an old woman and her grandson. They were very
poor; they had nothing. The boy’s name was Burnt-Hands. Some
warriors got together in the village and planned to go on the war-
path. Burnt-Hands heard of it. He told his grandmother that he
wanted to join the warriors on the war-path. She told the boy that
when he went he must never tell Coyote stories on the war-path.
She gave him a round burnt clay ball that had a handle to it. She told
Burnt-Hands to go; that the clay ball with the handle was his war-
club; that when on the way, when he should become hungry he
should place it upon the fire, put kernels of corn upon it, and roast
them.
These warriors went out to a camp in the woods. The young man
came up with them and lay down by them. The next day they went
and in the afternoon they sat down to rest. They made fun of the boy,
and said, “Now tell us some Coyote stories.” But the boy refused,
and said, “My grandmother told me not to tell Coyote stories while on
the war-path.” They coaxed the boy to sing, but he would not sing.
The boy was hungry. As he saw that the men were not moving on
he placed his clay ball upon the fire and put some kernels of corn
upon it and began to roast them. While he was doing this he said, “I
will tell some Coyote stories.” The boy began to tell how the enemy
came and attacked a certain war-party. At the same time he kept on
roasting his corn.