ARA

• Accounting


  The process of identifying, measuring and communicating economic information about an entity to a variety of users for decision-making purposes
• Users of Accounting Information

  • Resource providers (investors, lenders, suppliers, employees, members, donors, government)
  • Recipients of goods and services (customers, beneficiaries e.g. taxpayers, community)
  • Parties performing a review or oversight function (regulatory agencies (e.g. ATO), advisors, analysts, labour unions, media, community groups)
  • Management and governing bodies
• Information needs of users

  • Financial (profitability, efficiency, liquidity, gearing/capital structure, market performance)
  • Non-financial (corporate governance/compliance, social and environmental impact)
• Components of a GPFR


  • Statement(s) of Financial Performance
  • Profit or Loss & Other Comprehensive Income
  • Statement of Financial Position
  • Statement of Cash Flows
  • Statement of Changes in Equity
  • Notes to the Accounts
• Objective of general purpose financial reporting

  To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity
• Management does not rely on GPFR, they can obtain their info internally (note also: they prepare GPFR)
• Accrual accounting


  Depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period
• Qualitative Characteristics of Useful Financial Information


  • FUNDAMENTAL QCs
  • Relevance
  • Faithful representation
  • ENHANCING QCs
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Relevance


  Information is relevant if it is capable of making a difference to decisions made by users
• Materiality


  Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of GPFR make on the basis of those reports
• Faithful representation


  Financial statements represent economic phenomena in words and numbers, and must faithfully represent the phenomena it purports to represent
• Qualities of faithful representation

  • Complete
  • Neutral
  • Free from error
• Comparability


  Information should be comparable with other entities / other reporting periods
• Verifiability

  Different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation
• Timeliness


  Having info available in time to be capable of influencing decisions
• Understandability


  Presenting clear and concise information, assuming users have reasonable knowledge or access to someone else who does
• Financial statements are prepared for a specified period of time, at least annually
• Financial statements are prepared on the assumption the entity will continue in operation for the foreseeable future, with neither the intention nor need to liquidate
• Elements of Financial Statements

  RELATING TO AN ENTITY'S FINANCIAL POSITION: Assets, liabilities, equity,

  RELATING TO AN ENTITY'S FINANCIAL PERFORMANCE: income, expenses
• Definition of an Asset

  A present economic resource controlled by the entity as a result of past events
• Implications if company does intend to liquidate
• Elements of Financial Statements

  GPFS portray the financial effects of transactions and events by grouping them into broad classes according to their economic characteristics
• Elements related to an entity's financial position

  • assets, liabilities and equity
• Elements related to an entity's financial performance

  • income and expenses
• Cash flows reflect income and expenses and changes in assets, liabilities and equity, so cash flows have no unique elements
• Asset


  A present economic resource controlled by the entity as a result of past events
• Asset


  • An economic resource is a right that has the potential to produce economic benefits
  • Examples of rights: To receive cash, goods or services from another party, Use of a physical object or intellectual property
• Potential to produce economic benefits


  Potential does not need to be certain, Examples of economic benefit could entitle or enable the entity to: Inflow of cash or some other economic resource, Produce goods or services, Sold or leased to another entity, Used to settle debts
• Control


  The present ability of the entity to direct the use of the economic resource and obtain the economic benefits that may flow from it, and prevent others from directing the use / obtaining the benefits, The ability to enforce legal rights, including ownership, demonstrate control but ownership is not essential, Exposure to significant variations in the amount of economic benefits produced by an economic resource may be an indication of control
• Result of past events

  Most commonly an acquisition (i.e. a transaction / exchange / construction)
• Liability


  A present obligation of the entity to transfer an economic resource as a result of past events
• Obligation


  A duty or responsibility that an entity has no practical ability to avoid, Typically established by contract or legislation and is legally enforceable by another party, May arise from entity's customary practices, published policies or specific statements (constructive obligation)
• Transfer of an economic resource


  The obligation must have the potential to require the entity to transfer an economic resource to another party, Potential does not need to be certain (likelihood may, in fact, be low), Obligation could require the entity to: Pay cash, Deliver goods or provide services, Transfer resources if a specified uncertain future event occurs
• Result of past events

  The entity must have obtained economic benefits or taken an action that requires (or has the potential to require) the entity to transfer an economic resource that it would otherwise not have had to transfer, No present obligation exists if no economic benefit has been obtained, A present obligation may accumulate over time, A present obligation can exist even if settlement cannot be enforced until some point in the future
• Can't have liability unless something was purchased first
• Unit of account


  Refers to how assets and liabilities are grouped together for recognition, measurement and disclosure purposes, The descriptions used in financial statements for resources and obligations which have similar economic characteristics and risks, Relevant in providing useful information
• Executory contracts


  Contracts create rights and obligations, If entity performs its obligation first, contract gives rise to an asset, If other entity performs its obligation first, it gives rise to a liability, A contract that is equally unperformed gives rise to neither an asset or a liability
• Equity


  The residual interest in the assets of the entity after deducting all its liabilities, Equity = Assets less Liabilities, Equity does not necessarily reflect the value of the entity, Equity is either: contributed by investors (contributed equity, share capital, issued capital, paid-up capital) or the net result of accumulated profits of the entity (retained profits and other reserves)
• 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, A key characteristic of income is that it is earned: As the performance obligation is satisfied (over time or at a point in time), The entity provides a good, a service or a resource, Examples include: sales, fees, rent revenue, interest revenue, Net assets will increase (assets (e.g. cash or receivables) will increase or liabilities (e.g. unearned revenue) will decrease)
• Expenses


  Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims, A key characteristic of an expense is that a resource is consumed: inventory disappears, labour is utilised, PPE is used, Examples include: cost of sales, wages, rent, depreciation, Net assets will decrease (assets (e.g. cash, inventory, PPE) will decrease or liabilities (e.g. payables, provisions) will increase)