Corporations Law

Corporations Law

Short Anwers

a) Any entity which is considered a reporting entity is required to prepare a report in accordance with the requirements of the Corporations Law.

Briefly explain why you agree or disagree with the above statement.

A reporting entity is defined as an entity for which there are users who rely on the financial statements, generated from its financial information, as their major source of financial information . These financial statements are used in the decision making process of both internal and external users, and therefore this information must be both accurate and of appropriate detail. In order for a general standard to be established across the accounting industry, it is important for a set of standards to be upheld by all. Therefore I agree with the statement.

Under section 298 of the Corporations Law, it is stated that all companies which are reporting entities must adhere to the accounting standards issued by the Australian Accounting Standards Board (AASB) . The generation of statements of financial position, financial performance and cash flow are all required under the section and they assist in giving an unbiased picture of the company’s current position. With the use of the International Accounting Standards Board’s conceptual framework, these reporting entities prepare reports using underlying principles in order to clearly articulate relevant information to those with a vested interest in the business. The outcome will be a reduction in the amount of asymmetric information available to external users. Notable recent examples of falsifying financial reports include One.Tel and HIH.

If precise and specific financial reports are not produced in relation to the guidelines set by Corporations Law, it is under the AASB’s jurisdiction to enforce compliance. This compliance allows for a general standard to be upheld on a country-wide basis, and with the introduction of International Accounting Standards in 2005, on a world-wide basis.

Therefore, an entity which is considered a reporting entity is required to prepare a report in accordance with the requirements of the Corporations Law. Without the generation of these reports, a logical and comprehensible overview of the business could not be produced and analysed.

b) On June 28 2004, an advertising agency paid $20,000 for a computer system. The accountant for the advertising agency included the $20,000 payment as an expense in the financial reports prepared for the year ending 30 June 2004.

Using relevant accounting concepts, briefly explain why you agree, or disagree, with the accounting treatment adopted by the accountant for the above transaction. If you disagree, explain how the payment should have been accounted for.

I disagree with the way in which the accountant for the advertising agency chose to deal with this transaction. While the accounting process adopted for the transaction may be perfectly acceptable in relation to the International Accounting Standards Board’s conceptual framework, there is an alternative which is highly efficient when allowing for large purchases.

The process of accrual accounting, whereby revenues and expenses are recognized during the same period with no regard to the date of receipt or the payment of cash, allows for a more direct allocation of the expense over the life of the business . When revenue is reconciled to its expense, a more accurate portrayal of the company’s financial position and performance can be generated.

In the scenario posed in the question, the accountant was classifying transactions using the cash accounting method. Therefore, expenses are incurred when cash leaves the business and revenues as cash enters the business. This can skew financial reports as the total expense would occur in the year ending 30 June 2004 and revenue would be immeasurable.

In the case of the advertising agency the transaction must first be classified as either an increase in assets or an increase in expense. The question of the computer system’s future economic benefit will have to be posed before the transaction