ACF Validation 1

• The Corporations Act 2001 controls all aspects of company formation and certain aspects of company operation
• Purpose of the Corporations Act 2001:

  • Defines and gives legal existence to a company
  • Sets out the director’s duties of a company
  • Sets out the external audit requirements of a public company
  • Sets out and defines the different types of companies permitted to exist under the act
  • Requires that the financial report for a financial year of public and large proprietary companies must comply with the AASB accounting standards
  • Groups companies into either proprietary companies or public companies
• Companies

  An organisation established under the Corporations Act 2001 as a separate legal entity.

  • Can into legal agreements with own name, can own property with own name, can sue/be used with own name.
• Company Directors

  • Elected by shareholders, act on their behalf.
  • Corporations Act outlines what directors can do - i.e, right to issue shares, borrow money, etc.
• • Company director duties:
  • Directors must carry out their duties with reasonable care and diligence.
  • Directors must act in the best interest of the company.
  • Directors must not make improper use of their position to gain an advantage for themselves or another.
  • Directors must not make improper use of information to gain an advantage for themselves or another.
  • Directors must ensure that a company does not trade when it is insolvent.
• Prospectus

  • Document issued by a public company that invites the public to purchase the shares or debentures of that company.
  • Must contain all information that an investor would reasonably expect it to contain in order to make an informed assessment.
• • Prospectus includes:
  • Company’s financial information
  • Number of shares that are being offered for sale and the offer price.
  • Key facts about the company directors.
  • An application form that investors wishing to apply must complete and return.
  • Copy of prospectus must be lodged with Australian Securities and Investments Commission.

• ASIC

  • Administers the Corporations Act and a number of other laws
  • Enforces the AASB accounting standards
  • Interprets accounting standards and issues these interpretations in documents known as regulatory guides
• AASB

  • Statutory Functions:
  • To develop a conceptual framework to evaluate proposed standards.
  • To make accounting standards under section 334 of the Corporations Act.
  • To produce accounting standards for other purposes.
  • To participate in and help with the development of a single set of accounting standards for use worldwide.
• Accounting Standards

  • Set of rules that companies listed on the ASX and some other organisations must follow when they prepare accounting reports for their owners.
  • Issued by the AASB.
• • Accounting Standards Purpose:
  • Help investors by ensuring accounting reports of public companies contain relevant and reliable information on the company performance.
  • Assist directors of companies in performing their duties.
  • Give confidence to investors who want to invest money on the ASX.
• Reporting Entity

  • An organisation that must follow the AASB standards
• • Reporting entities are required to or chooses to prepare financial statements:
  • Balance sheet/statement of financial position
  • Statement of comprehensive income
  • Statement of cash flows
  • Statement of changes in equity
• Conceptual Framework:

  • Sets out the qualities of a good financial statement and defines assets, liabilities, equity, income and expenses.
• • Conceptual framework purpose:
  • Assist AASB in standards development and in the review of existing standards.
  • Assist AASB in promoting harmonisation of regulations, standards and procedures relating to financial information presentation.
  • Assists preparers of financial reports in applying standards and in dealing with new reporting issues not already covered by a standard.
  • Assist auditors in deciding if financial reports conform with standards.
  • Provide interested individuals with information about the AASB’s approach to the standards formulation.
• • Qualitative Characteristics of Financial Statements:
  • Relevance - financial information is capable of making a difference to the decisions made by users.
  • Materiality - affects relevance of information. If is material, then is omitting/misstating information which can influence user decisions.
  • Faithful representation - information in a financial statement fairly and accurately presents the events that occurred in a business for a period of time.
• Enhancing qualitative characteristics

  • Comparability - enables users to identify and understand similarities/differences between information.
  • Understandability - users should be able to comprehend the information.
  • Verifiability - different, knowledgeable users of a financial statement can agree that the way the information is faithfully presented.
  • Timeliness - information is available to decision makers in time to influence their decisions.
• • Assets: a present economic resource controlled by the entity as a result of past events.
  • Business has a right to an economic resource.
  • Has the potential to produce economic benefits.
  • Has control over an asset.
• • Liability: a present obligation of the entity to transfer an economic resource as as result of past events.
  • An obligation is a duty to another party that cannot be avoided.
  • Business has a duty to transfer an economic resource.
  • Exists because of a transaction that took place on a past date.
• Income: increases in assets or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
• ASX

  • Provides for the listing and transfer of equities of listed public companies.
  • Requires listed companies to produce GPFS in accordance with accounting standards.
  • Provides system of trading in the Australian market, provides regulation of public companies and provides surveillance of public companies to ensure regulations are being followed.
• Auditors

  • External auditors will performance an independent audit of the financial statements and form an opinion as to whether the financial statements are a true and fair view of the company’s performance and position.
• Financial Reporting Council

  • Supervises the Australian Accounting Standards Board
  • Monitors the process of adopting international accounting standards
  • Gives advice to the Federal Treasurer on the standard setting process
  • Gives advice to the AASB
  • Cannot direct AASB in relation to accounting standards development
• Company Constitution

  • A set of rules for the management of a company.
  • Is a contract between the company, the shareholders and directors.
• Replaceable Rules

  • Corporations Act contains these set of rules which can be used to manage a company.
  • Covers:
  • the appointment and removal of directors
  • how a shareholder can obtain the right to inspect the accounting records
  • how voting is to be carried out at a meeting of shareholders
  • who has the authority to approve the payment of dividend
• • Large proprietary companies:
  • Large proprietary company satisfies any two of the following:
  • Total revenue for a financial year is $50 million or more
  • Total gross assets for the financial year is $25 million or more
  • Has 100 employees or more
  • At least 1 shareholder, max of 50 non-employee shareholders
  • Must have at least 1 director
• • Public company:
  • Must have at least 1 shareholder.
  • Must have at least 3 directors.
• Current assets

  Cash and cash equivalents, receivables, investments, inventory, other receivables.
• Non-current assets

  Property plant and equipment, goodwill, investments
• Current liabilities

  Income tax payables (or taxation payables if also gst control), trade and other payables
• Non-current liabilities


  Long term borrowings, debentures
• Equity


  Share capital, other components of equity, retained earnings
• Statement of comprehensive income

  revenue, less cost of sales, equals gross profit. add other income, less other expenses, less finance costs, equals profit before income tax. less income tax, equals profit for the period. OTHER COMPREHENSIVE INCOME. add gain on asset revaluation, equals total comprehensive income for the period.
• Revenue


  Sales - sales returns - discount allowed
• Cost of sales

  Cost of sales + freight inwards - discount received
• Other expenses

  Wages, rent, insurance, doubtful debts, freight outwards, depreciation
• Statement of changes in equity for year ended

  Balances, CHANGES DURING THE YEAR: share issue, share issue costs, bonus shares, dividends paid, total comprehensive income, transfer to/from general reserve, balances.
• The classification of assets and liabilities allows report users to to evaluate:

  1. Business stability;
  2. Liquidity - the business's ability to meet obligations as they fall due;
  3. Leverage/ Gearing - comparison of the business debt financing to equity financing.
• Asset revaluation is not include in profit after tax as:

  Land hasn't been sold, so it hasn't affected revenue yet.
• Final dividend

  Recommended by directors, approved by shareholders at AGM then paid out.