ATACF — U4

last updated: 12/08, 4.5 — notes to the statement of financial position | terms in yellow have definitions copied directly from WACE marking keys

features of all companies

continuity of existence, seperate legal entity, transferability of ownership, separation of ownership & management

continuity of existence

companies continue to exist through the sale of shareholdings rather than ceasing to trade in the case of a director’s death or otherwise exit from the company.

seperate legal entity

a company has the powers of an individual, meaning that it can do things such as:

• own and dispose of assets;

• enter into contracts, and;

• sue or be sued.

transferability of ownership

there is minimal restriction on the purchase and sale of shares in public companies, and while there is more restriction of this for proprietary companies, some form of transfer is generally still possible.

separation of ownership and management

the owners of a company are not directly responsible for its management. the company is run by managers who are held accountable to the owners (shareholders) through the company board.

advantages of a company / incorporation

limit of owners’ liability, capacity to contract in the business name, transfer of ownership, continuity of existence, taxation (flat rate), access to large amounts of capital, divorce of ownership and control

LARGE PROPRIETARY COMPANY — number of directors

must have at least one who resides in australia.

PUBLIC COMPANY — number of directors

must have at least three, of which at least two must reside in australia. is also required to have a company secretary, who must also reside in australia.

LARGE PROPRIETARY COMPANY — number of shareholders

must have at least one non-employee shareholder, and a maximum of fifty.

PUBLIC COMPANY — number of shareholders

must have at least one. there is no upwards limit.

LARGE PROPRIETARY COMPANY — name suffix

PTY LTD or Proprietary Limited

PUBLIC COMPANY — name suffix

LTD or Limited

LARGE PROPRIETARY COMPANY — raising equity

may raise equity from existing shareholders and employees. otherwise, can only seek funds from others who take it upon themselves to approach the company offering to invest in it.

PUBLIC COMPANY — raising equity

may raise equity from the public.

LARGE PROPRIETARY & PUBLIC COMPANY — auditing requirements

must produce audited financial statements and directors reports which are then lodged with the ASIC and sent to shareholders.

SMALL PROPRIETARY COMPANY — auditing requirements

only required to carry out audits if it is requested by either the ASIC or a shareholder(s) who holds at least 5% of the company’s shares.

a large proprietary company must satisfy at least two of the qualifiers…

• the consolidated revenue of the company (and any controlled entities) exceeds $25 million for the financial year

• the consolidated gross assets of the company (and any controlled entities) exceeds $12.5 million for the financial year

• the company (and any controlled entities) have more than fifty employees at the end of the financial year

constitution

a company’s own internal management rules.

a constitution defines…

• how internal affairs will be regulated

• how the replaceable rules have been displaced/modified

• the rights of shareholders

• the appointment, powers, remuneration, duties, and removal of directors

• the contract between the company, members, and directors

• the organisation of and voting at meetings

• how they will address dividends and share transfers

replaceable rules

a set of rules for internal management detailed in the CA2001 which may be replaced by the company through the establishment of their own constitution.

the replaceable rules outline:

• the conduct of meetings & voting

• the appointment, powers, duties, and remuneration of directors

• the terms & conditions for the company secretary

• the classes of, transfers to or from, and the dividend rights of shareholders

initial public offering (IFO)

when shares are offered to the public for the first time, at which a prospectus is required as by the CA2001.

prospectus

an invitation to the public to purchase shares in a company.

the function of the prospectus

provides information to potential investors regarding:

• the company’s assets & liabilities;

• the company’s profits & expected performance, and;

• details about the share offer,

allowing them to make informed decisions.

the prospectus includes…

• past financials and audit reports;

• future financials (budgets);

• the amount of share capital to be raised and the minimum subscriptions;

• personal information about the directors;

• relevant expert reports, and';

• the application form to purchase shares.

the prospectus is lodged with…

the ASIC.

before the prospectus can be issued to the public, it must…

be reviewed by each the ASIC and the ASX.

annual general meeting (AGM)

a yearly gather of a company’s interested shareholders, mandatory only for public companies (within 5 months of the EOFY).

affairs carried out at the AGM

the directors present an annual report and the shareholders vote on current issues

issues voted on by shareholders

• the directors’ recommendations for final dividends

• the appointment and remuneration of an external auditor

• any proposed changes to the constitution

• the number of directors

• directors’ remuneration

• the appointment and/or removal of directors

accounting standards

technical documents which outline how a business should complete specific elements of financial records in relation to business transactions.

the three main reasons for following accounting standards

1. allows external users to rely on the information in financial reports for their decision-making

2. assists directors in discharging (i.e. fulfilling) their obligations

3. facilitates government’s goal of maintaining investor confidence in the australian capital markets

accounting standards work to ensure the provision of information that…

• allows users to make and evaluate decisions about allocating scarce resources;

• assists directors in discharging their obligations in relation to financial reporting;

• is relevant to the assessment of performance, financial position, financing, and investment;

• is relevant and reliable;

• facilitates comparability, and;

• is readily understandable.

accounting standards facilitate the operation of the australian economy by…

• reducing the cost of capital;

• enabling australian entities to effectively compete overseas, and;

• being clearly stated and easy to understand

general purpose financial reports (GFPRs)

reports produced for the assistance of external users in making decisions about the allocation of scarce economic resources

the role of an external auditor is to…

perform independent audits of financial statements and form opinions as to whether they are a true and fair view of the company’s performance and position. they then provide an audit report which is included in the company’s annual report.

the purposes of an external audit is to…

• protect external users by separating ownership and control;

• give confidence to stakeholders that the financial statements of reporting entities can be relied on for decision-making, and;

• ensure that reporting entities’ information systems and records are properly maintained

the CA2001 requires auditors to report…

to the ASIC any significant contraventions of the act and/or any problem(s) which the company will not adequately fix.

the 5/7 rule

to preserve the independence of external auditors, one who has had a significant role in the audit of a listed company for five successive financial years is ineligible to continue until ≥ 2 successive financial years of non-involvement.

the regulatory bodies which influence company reporting are…

the FRC, the ASIC, the IASB, the AASB, the ASX, and lobby groups.

the role of the financial reporting council (FRC) is to…

oversee the activities of the AASB, with their main responsibility being the oversight of the AASB budget. they act as an advisory body to the AASB.

functions of the FRC

• monitor the process of adopting IASBs

• provide reports and advice to the federal treasurer on the process of setting accounting standards

• approve and monitor the AASB’s plans, budget, and staffing arrangement

the FRC does not have the power to…

direct the AASB in developing accounting standards or veto any proposed standards.

the role of the australian securities and investments commission (ASIC) is to…

act as the regulator of consumer credit, markets, and financial services in australia, ensuring fairness and transparency of australian financial markets to encourage investor and consumer confidence.

the ASIC’s involvement in accounting standards

• issues interpretations of them in the form of practice notes

• monitors reporting entities’ compliance with them

• enforces and administers them under the CA2001

• may refer practice issues to the AASB for the consideration of possible amendments or changes to be made to them

the functions of the international accounting standards board (IASB)

• aims to develop global standards which require transparent and comparable information in GPFRs

• works with national accounting standard setting organisations

• is solely responsible for setting international financial reporting standards (IFRSs)

the role of the australian accounting standards board (AASB) is to…

refer to the IASB in developing and issuing accounting standards for public-sector entities in australia.

the AASB aims to…

• develop a conceptual framework for the evaluation of proposed accounting standards;

• develop accounting standards for the application by public and non-for-profit sectors, and;

• contribute to the development of a single set of international accounting standards, as is the ultimate goal of the IASB.

if a proposed standard is not based on an existing international standard…

the AASB must carry out a cost-benefit analysis of its implementation.

the australian securities exchange (ASX) is…

a business group which provides for the listing and transfer of equities of listed public companies.

the main role of the ASX is to provide…

• a system for trading securities in the australian market;

• regulation of public companies, requiring compliance with accounting standards in the production of GPFRs, and;

• surveillance of public companies to ensure that any and all regulations are followed.

lobby groups are…

organisations—business groups, user groups, and professional accounting associations—which lobby for the goals and interests of their relevant ‘small individual’.

lobby groups aim to…

ensure that accounting standards reflect the current and anticipated issues in accounting practice and capital markets.

lobby groups work by…

• being appointed either as a member of or to a committee or an advisory group established by the FRC or AASB;

• having a member employed by or who is a consultant to the AASB;

• being involved in setting accounting standards, or;

• engaging in general public debate on issues in regards to accounting standards.

the term ‘the framework’ refers to…

the conceptual framework for the preparation and presentation of financial statements.

the role of the framework is to…

set out concepts that underlie the preparation and presentation of financial reports, thus setting out the objectives, underlying assumptions, qualitative characteristics, and elements of financial reports, as well as the recognition criteria of said elements.

the purpose of the framework is to…

• assist the AASB in developing future and reviewing current accounting standards;

• promote harmonisation in presenting financial information;

• guide the preparation and auditing of financial reports, and;

• help users to interpret information provided in financial reports.

a reporting entity is…

an entity for which there exist users of their financial reports who are dependant on said reports as their sole or primary source for information to guide decisions about allocating scarce economic resources.

the qualitative characteristics of financial information are…

qualities that info should have in order for it to be considered useful for the economic decision-making of users. if information does not comply with the fundamental characteristics, it cannot be useful.

the fundamental qualitative characteristics of financial information

relevance, materiality, and faithful representation.

the enhancing qualitative characteristics of financial information

comparability, verifiability, timeliness, and understandability.

relevant information…

influences users’ decisions by helping them to evaluate or predict events, or to confirm or correct their earlier evaluations.

material information…

could influence users’ decisions if it was omitted or misstated. considers the size and/or nature of the item.

faithfully represented information…

is complete, neutral, and free from error.

comparable information…

facilitates comparison across both time and entity. users should be informed of accounting policies and of any changes made to them.

verifiable information…

would be agreed upon as useful by multiple different users.

timely information…

is made available in sufficient time to influence the decision-making of users.

understandable information…

is clear, concise, and able to be understood by users who are assumed to have a basic knowledge of accounting.

the three useful types of information needed by users as defined by the framework are…

• the economic resources of the company;

• any claims made against the company, and;

• any changes that occur to said resources or claims.

income is defined in the framework as…

increases in economic benefits in the form of inflows or enhancements of assets or decreases of liabilities which result in increased equity—unrelated to contributions from equity participants.

expenses are defined in the framework as…

decreases in economic benefits in the form of outflows or depletions of assets or incurrences of liabilities which result in decreases equity—unrelated to distributions to equity participants.

assets are defined in the framework as…

resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

liabilities are defined in the framework as…

present obligations of the entity resulting from past events, the settlement of which is expected to result in an outflow of economic benefits from the entity.

equity is defined in the framework as…

the residual interest in the assets of the entity after deducting all of its liabilities.

the framework’s recognition criteria for the key items included in financial statements

• it is probable that any future economic benefits associated with the item will flow to or from the entity

• (or, for income and expenses, an increase or decrease in future economic benefits has arisen)

• the item has a cost or value that can be measured reliably

the corporations act 2001 (CA2001) is…

a federal statute which mandates compliance with accounting standards on a national basis, creating consistent regulation for companies in australia. it is administered by the ASIC.

the functions of the CA2001 are to…

• establish the role of the ASIC, the FRC, and the AASB;

• regulate the ASX;

• set rules for the registration of incorporated bodies, and;

• protect the interests of all who have a business relationship with a company.

the purpose of the CA2001 is…

to set clear rules for formation and regulation of companies and other incorporated bodies in australia.

shares

capital divided into pieces of small monetary value

bonus shares

dividends provided as shares issues out of reserve accounts rather than cash. valued at market price.

preference shares

provide shareholders some right or preference, e.g. priority payment of dividends over other share classes.

redeemable preference shares

preference shares which, according to the terms of their issue, may be redeemed at the option of the company or members or on a fixed date.

oversubscription

occurs when more potential investors apply for shares than there were shares available. the difference is then repaid to the unsuccessful investors.

regulation of share capital issue for public companies

the company must advise the ASIC of any share issue within 28d by lodging a form 484 detailing their quantity, classification, and portion each unpaid/paid. it must advise the ASIC of any changes made to its share structure in the annual report.

final dividends

‘recommended’ or ‘proposed’ by the directors at the end of the financial year, only at the AGM are they actually declared and thus paid.

interim dividends

‘declared’ by directors at some point during the financial period and thus paid either on the same day or at a specified later date.

dividends

the distribution of retained earnings to shareholders, expressed either as a percentage of the paid-up share capital or as a number of cents per share.

preference dividends

dividends paid to holders of preference shares. can be cumulative, non-cumulative, or participating.

cumulative preference dividends

if unable to be paid for a year, the amount unpaid accumulates over time until the company can pay it. also known as dividends in arrears.

non-cumulative preference dividends

if unable to be paid for a year, the amount unpaid is voided and does not carry over into subsequent years.

participating preference dividends

the receipt of some share of profit as an extra dividend, once their holders’ initial dividends and all ordinary dividends have been paid.

unqualified auditor’s report

produced once an auditor is satisfied that a company has no issues with their reporting and information systems.

qualified auditor’s report

produced by an auditor when there exist any deficiencies in order to bring them to the attention of management.

an ‘except for’ qualification in a qualified auditor’s report

issued when financial statements are presented fairly except for a deficiency of material effect

an ‘adverse’ qualification in a qualified auditor’s report

issued when financial statements are not presented fairly, with the deficiency being of highly material effect

a ‘disclaimer of opinion’ in a qualified auditor’s report

issued when the auditor is unable to form an opinion about financial statements due to a lack of evidence or limited scope of the audit.

the powers of directors are…

• managing company’s business;

• executing negotiable interests;

• conferring power;

• delegating their powers, and;

• inspecting books for legal proceedings.

the board of directors is…

responsible to the shareholders for the formation, policies, and running of the company.

company directors have the duty…

• of care & diligence (be informed about operations and position)

• to act in good faith (honestly and in the company’s interests)

• not to use the position improperly (personal gain or company harm)

• to disclose conflicts of interest (to the rest of the board)

company secretary

someone who acts as an assistant to the board; taking meeting minutes, arranging and circulating the agenda, and ensuring compliance with the CA2001. they may also be a director.