Question

Institutional Arrangements for Setting Accounting Standards in Australia:

A legal wrangle developed between the Australian Taxation office and Hampton Ltd (HL) concerning the treatment of disputed income tax payments. This prompted Australian Securities and the Investments Commission (ASIC) to seek a formal ruling on the dispute and call for full disclosure of the effects of tax disputes in the company’s financial statements.

The excerpts of the letter received from ASIC stated that: If you are a preparer of financial statements, or a company director, you need to ensure that the general purpose financial reports you are releasing are in compliance with accounting standards released by the AASB. Please also note that these standards are the result of a long and extensive due process which directly involved in public consultation.

Having read this letter, one of the Board of Directors directed the Company Finance Director to send him a brief explanation about accounting standards due process.

The Finance Director in the company for which you are an accountant has required you to:

1. Explain general purpose financial statements.                                                                            
2. Explain the due process employed by the AASB in the preparation of accounting standards.                                                                                                                                                             

Briefly describe how to obtain public consultation.           

Answer 1

The Solution is broken down in Three Parts.

1. Explanation of General Purpose Financial Statement
2. Process Employed by AASB in preparation of Accounting Standards
3. Explanation of how AASB obtains public consultation in brief

Part - I

Explanation of General Purpose Financial Statement

Reporting Framework normally prepared and designed to meet common financial needs of broader range of users is called General Purpose Financial Reports/ General Purpose Framework.

General Purpose Financial Statement usually consists of

• Position Statement / Balance Sheet
• Income Statement / Statement of Profit and Loss
• Cash Flow Statement
• Statement of Changes in Equity
• Notes to Accounts and explanatory materials form part of General Purpose Financial Statements.

Users of General Purpose Financial Statement

• Resource Providers
• Recipients of Goods and Services
• Parties engaging in Oversight Function

Types of Information Pertinent to Users' Needs

• Performance [ Income Statement Referred ]
• Financial Position [ Position Statement Referred ]
• Financing and Investing [ Cash Flow Statement Referred ]
• Compliance [ General Notes and Expanatory Statements ]

Noteworthy Points

• General Purpose Financial Statements is a part of General Purpose Financial Reports, i.e former is a sub set of latter.
• Accounting Standards applies to General Purpose Financial Statement and all entities must ensure its compliance.

Part - II

Process Employed by AASB in preparation of Accounting Standards

• Identification of technical issue by IASB/IFRIC/AASB or by Australian Entity/Individual

Any technical issue with regard to financial reporting that is material and of utmost importance can taken up and proceeded with further.

• Consideration and Discussion

If the technical issue is taken up as worthy it is taken up by AASB for discussion

• Add Issue to Agenda

Project Proposal is developed. This is nothing but evaluation of the possible benefits that accrue by undertaking the issue, resources available to further development and possible costs of not taking up this issue is discussed and made a note in Minutes of Meeting of AASB.

• Research and Consider Issue

If the agenda is placed, i.e. [ It's believed to be worthwhile issue ]

Discuss Agenda Papers with staff of AASB and proceed with extensive research. Issues are jointly considered along with New Zealand Accounting Standards Board.

• Consolation with Stakeholders

Research is done, public comments are invited. After Public Comments are duly received discussion with them are held.

Reach to public is done with help of following documents.

1. Exposure Drafts (EDs)
2. Invitations to Comment (ITCs)
3. Draft Interpretations
4. Discussion Papers (DPs)

Discussion is conducted in the following manner.

1. Roundtable discussions
2. Focus Groups
3. Project Advisory Panels
4. Interpretation Advisory Panels

• Issue Standard / Guidance Note or Other Pronouncements

Standard is issued for all entities under the ambit to follow. AASB considers both not-for-profit and profit oriented needs so that the standard is comprehensive.

• Submission to International Organizations
• Comments from Stakeholders in Australia
• Implementation and Compliance

Part - III

Explanation of how AASB obtains public consultation in brief

it is very essential to seek for inputs and feedback from general public, so that the standard deals with the underlying issue effectively by critical analysis of issues from various persons.

Methods to reach out to public for their consultation

• Exposure Drafts (EDs)

Before a standard becomes a law and is binding a draft of the required Accounting Standards are published in public domain for public to access and go through it and give constructive feedback to AASB.

• Invitations to Comment (ITCs)

Public after reading the exposure drafts give feedback. The document which invites public to do same is ITCs

• Draft Interpretations

Deconstructed Standard with illustrations for easy comprehension.

• Discussion Papers (DPs)

Similar to a research paper contains numerous interpretations and knowledge base to analyse the exposure draft.