Question

Part A Accounting Standard Setting, Regulation and Disclosure ACCOUNTING STANDARD SETTING (i) Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB? REPORTING ENTITY (ii) Do your own research and critically examine the concepts of small proprietary company, large proprietary company and reporting entity. What are the implications of being classified as either one of these three types of companies in terms of compliance and reporting requirements?

Answer 1

(i) The primary role of Australian Accounting Standards Board (AAAB) is to:

• Take the prime responsibility for identifying and dealing with domestic regulatory barriers to adopting or converging with IFRSs.
• Encourage national and regional regulators to participate in international convergence efforts in their own regulatory fields where this would help to facilitate financial reporting convergence.

Australian Accounting Standards, including Interpretations, are issued by the Australian Accounting Standards Board. They incorporate IFRSs (including Interpretations) issued by the IASB, with the addition of:

• paragraphs on the applicability of each Standard in the Australian environment;
• requirements specific to Australian entities (for example not-for-profit private or public sector entities); and
• additional disclosures that address domestic regulatory or other issues

Currently, Australian Accounting Standards apply to reporting entities and financial statements that are, or held out to be, general purpose financial statements. This is referred to as the ‘reporting entity’ concept. There is a differential reporting framework for general purpose financial statements:

• Tier 1 applies all Australian Accounting Standards. This tier applies to for-profit entities that are publicly accountable, where compliance also ensures compliance with IFRS as issued by the IASB.
• Tier 2 (often known as ‘reduced disclosures regime’) retains the recognition and measurement requirements of Australian Accounting Standards, but with reduced disclosure requirements. For-profit entities that do not have public accountability may elect to apply this tier.

Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?

Modern economies rely on cross-border transactions and the free flow of international capital. More than a third of all financial transactions occur across borders, and that number is expected to grow.

Investors seek diversification and investment opportunities across the world, while companies raise capital, undertake transactions or have international operations and subsidiaries in multiple countries.

In the past, such cross-border activities were complicated by different countries maintaining their own sets of national accounting standards. This patchwork of accounting requirements often added cost, complexity and ultimately risk both to companies preparing financial statements and investors and others using those financial statements to make economic decisions.

Applying national accounting standards meant amounts reported in financial statements might be calculated on a different basis. Unpicking this complexity involved studying the minutiae of national accounting standards, because even a small difference in requirements could have a major impact on a company’s reported financial performance and financial position—for example, a company may recognise profits under one set of national accounting standards and losses under another.

IFRS are set up in view of overcoming the above challenges.

Through almost 87% of world's jurisidiction are using IFRS, but they are not manadatory in all jusisdiction since every country has their own standards of accounting.

Large & Small Proprietory Companies

From financial years commencing on or after 1 July 2019, a proprietary company is defined as 'large' for a financial year if it satisfies at least two of the below criteria:

• the consolidated revenue for the financial year of the company and any entities it controls is $50 million or more
• the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more, and
• the company and any entities it controls have 100 or more employees at the end of the financial year.

If the company does not meet at least two of the above criteria, it is 'small'.

Reporting entities are all entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources.

Compliance and Regulatory Requirements

Large proprietary companies must prepare and lodge a financial report and a director's report for each financial year. The accounts must be audited unless ASIC grants relief.

A Small Proprietary Company does not have any financial accounts and/or reporting obligations except when it is controlled by a foreign company (i.e., is a subsidiary of a company registered in a jurisdiction outside Australia) and is not consolidated into accounts lodged with ASIC by a registered foreign company or it is directed to do so under sec. 293 (shareholder direction) or sec. 294 (ASIC direction).

If a particular entity is defined as a reporting entity it is required to prepare a GPFR. This means that all Australian Accounting Standards must be applied in the preparation of the financial report.