22107 Lecture Notes - Lecture 2: International Accounting Standards Board, Financial Accounting Standards Board, International Financial Reporting Standards
UTS 2014 – Accounting for Business Decisions A
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Describe the conceptual framework of accounting.
The conceptual framework of accounting is the collection of concepts that guide the
manner in which accounting is practised.
The grammar or terms, explaining financial accounting language in the above LOs, are more
formally known as components of the conceptual framework of accounting.
LECTURE 2 – FINANCIAL STATEMENTS
Learning Objectives
Describe the three major forms of business.
A sole proprietorship is a business owned by one person.
o It is the most common type of business in AU. In a sole trader, owner maintains complete
control of the business, bears all the risk of failure and reaps all the rewards of success.
o For accounting purposes, a sole proprietorship is accounted for separately from the
proprietor’s personal affairs – this is an application of the economic entity assumption.
o For tax purposes, though, a sole trader’s business is not separated from the proprietor so
the income from the business is reported on the owner’s personal tax return.
A partnership is a business that is formed when two or more proprietors join together to
own a business.
o Can be established by either written or oral agreement and can include any no. of partners.
o Formed for various reasons such as joining proprietors with different skills, combining
resources and spreading financial risk of the business among several people.
o Like sole traders, it is considered a separate accounting entity from the individual partners.
o Like sole traders, partner’s share of partnership income is reported on individual tax return.
A company/corporation is a separate legal entity that is established by registering with ASIC.
Australian Securities and Investments Commission (ASIC) is the agency charged to protect
investors and maintain the integrity of securities markets.
o Once a company is formed, it sells shares to ‘shareholders’ who want to own a part of it.
o A main reason for formation – the ability to raise capital through sale of ownership interests.
o Like a sole trader + partnership, a company is accounted for separately from its owners.
o However, it is also taxed separately – income generated by a company is taxed on a
company tax return, not on the shareholders’ individual tax returns.
o Advantage of a company in AU is dividends are not ‘double taxed’ as in many other nations.
Most common type of company in AU is proprietary (private) company [indicated by ‘Pty’].
A public company is a company in which ownership is available to the public at large.
o Shares of public company may be bought + sold on open exchange such as the ASX.
o Such companies = said to be publicly listed. Examples - BHP Billiton, Telstra and David Jones.
From an accounting perspective, the major difference between different forms of businesses
is in the equity section of the statement of financial position.
Define generally accepted accounting principles and their origins.
Generally accepted accounting principles (GAAP) are the accounting standards, rules,
principles and procedures that comprise authoritative practice for financial accounting.
o When accounting for their economic activities, reporting entities must follow GAAPs.
o These principles have been developed over time by the AASB and enforced by the ASIC.
Australian Accounting Standards Board (AASB) is the standard-setting body whose mission
is ‘to develop and maintain high-quality financial reporting standards’.
o AASB is an Australian Government agency under the ASIC Act 2001.
UTS 2014 – Accounting for Business Decisions A
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o 1 of their functions is to produce accounting standards under S334 of Corporations Act 2001.
o High-quality accounting standards should lead to financial statements that are ‘presented
fairly’ or provide a ‘true and fair view’.
o In amendments to the Accounting Standard AASB 101, achievement of ‘fair presentation’ is
clearly stated – ‘’in virtually all circumstances, an entity achieves a fair presentation by
compliance with AU Accounting Standards. A fair presentation also requires an entity:
To select + apply accounting policies in accordance with AASB 108 Accounting Policies,
Changes in Accounting Estimates and Errors. AASB 108 sets out a hierarchy of authoritative
guidance that management considers in that absence of an Australian Accounting Standard
that specifically applies to an item; and
to present info, including accounting policies, in a manner that provides relevant, reliable,
comparable and understandable information; and
to provide additional disclosures when compliance with specific requirements in AU
Accounting Standards is insufficient to enable users to understand the impact of particular
transactions, other events & conditions on the entity’s financial position + performance.’’
Australia has adopted the International Financial Reporting Standards (IFRS) developed by
the International Accounting Standards Board (IASB) whose mission is to have a single set
of high-quality standards requiring transparent and comparable information.
Since adoption of IFRS is voluntary, effectiveness of IASB at accomplishing its mission has
been limited because the US and some other nations have retained their own GAAP.
But, IASB and the US Financial Accounting Standards Board have agreed to a commitment to
the convergence of US + international standards.
In the future, the world may use 1 set of global accounting standards set by a global board.
Describe the main classifications of assets, liabilities and equity in a classified statement
of financial position.
Most public corporations are much too large to report every account, so they prepare a
classified statement of financial position instead of a statement of financial position.
A consolidated statement of financial position groups together accounts of similar nature
and reports them in a few major classifications.
o A current asset is any asset (resource of a business) that is reasonably expected to be
converted to cash or consumed within one year of the statement of financial position date.
Current assets are listed in order of their liquidity, which refers to the speed with which a
resource can be converted to cash. Cash is listed first, followed by short-term investments,
account receivables, inventories and then finally other assets like prepaid insurance.
o According to UTS slides, assets that are expected to be converted to cash in a period longer
than one year are referred to as non-current or long-term or even fixed assets.
o Non-current assets are the resources that are used in a company’s operations for more than
one year and are not intended for resale.
Examples – property, plant + equipment, intangible assets and deferred tax assets.
o An intangible asset is a non-current asset that has no physical substance.
Examples – trademarks, patents, franchise rights, copyrights and goodwill.
Like fixed assets, intangible assets are subject to depreciation (technically, amortisation) and
are reported net of amortisation to date. Goodwill is an intangible asset that is generally the
difference between the price paid for a business and the identifiable assets acquired.
