Issues in Financial Accounting, 16th Edition Solution Manual

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–9781488611643,Henderson,Issues in Financial Accounting16e1Chapter1INSTITUTIONAL ARRANGEMENTS FORSETTING ACCOUNTING STANDARDS INAUSTRALIALEARNING OBJECTIVESAfter studying this chapter you should be able to:1identify the main sources of regulation of financial reporting;2identify the major developments in the institutional arrangements for accountingstandard-setting;3explain the present accounting standard-settingarrangements;4explain the process of developing accounting standards and concepts statements inAustralia;5explain the process of developing interpretations; and6explain the process of enforcing accounting standards and interpretations.

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–9781488611643,Henderson,Issues in Financial Accounting16e2QUESTIONS1The three main sources of regulation governing accounting policies and financialreporting practices in Australia are government legislation, the Australian SecuritiesExchangeLtd(ASX)ListingRules,andaccountingstandardsandotherpronouncements issued by the Australian Accounting Standards Board (AASB).Government Legislation:In the private sector, the most important legislation specifying financial reportingrequirements is theCorporations Act 2001. In particular, the Corporations Act specifiesgeneral requirements that require the financial report to comply with accountingstandards and to present a true and fair view. The form and content of the statement ofcomprehensive income, statement of financial position, statement of changes in equityand statement of cash flows are considered in accounting standards issued by theAustralian Accounting Standards Board (AASB) that are discussed in later chapters ofthis book.ASX Listing Rules:The listing rules of the ASX apply only to entities whose securities are listed on theASX. The disclosure requirements of the ASX are contained in Chapter 3 (continuousdisclosure), Chapter 4 (periodic disclosure) and Chapter 5 (additional reportingonmining and exploration activities) of the listing rules. The listing rules specify thedetaileddisclosureoffinancialinformationandrequirethedisclosureofsomeinformation not required by the Corporations Act (e.g.various disclosures relating tothe 20 largest holders of each class of quoted equity securities).If a listed companydoes not comply with the ASX Listing Rules, it may be delisted.The ASX has alsoissuedCorporate Governance Principles and Recommendationsasamended in 2014through its Corporate Governance Council.There areeightguidelinestowhich29recommendationsareattached.Theguidelinesandassociatedrecommendations are not mandatory. However, the listing rules include two mandatoryrequirements relating to the corporate governance guidelines. First, ASX Listing Rule4.10.3 requires listed entities to disclose in their annual reports the extent to which theyhave followed the guidelines during the reporting period. Second, ASX Listing Rule12.7 requires that companies included in the S&P/All Ordinaries Indexhave an auditcommittee andthat companies included in the S&P/ASX 300 Indexhave an auditcommittee that is constituted in accordance with theCorporate Governance Principlesand Recommendations.Accounting Standards and Other Pronouncements Issued by the AASB:The third source ofregulation governing financial reporting is accounting standards and

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–9781488611643,Henderson,Issues in Financial Accounting16e3interpretationspreparedbytheAustralianAccountingStandardsBoard(AASB).Accountingstandardsandinterpretationsareconcernedwithbothaccountingmeasurement and disclosure. Authority is provided to AASB accounting standards bythe Corporations Act.TheAccounting Professional and EthicalStandards Board(APESB) provides similar authority for Australian accounting standards viaAPES 205‘Conformity with Accounting Standards’ (para. 5).2The role of the ASX’sCorporate Governance Principles and Recommendationsasamended in 2014is to provide a voluntary code of best practice corporate governance toguide listed companies. There areeightprinciples supported by 29recommendationsprovided to listed companies. The guidelines and associated recommendations are notmandatory. However, the listing rules include two mandatory requirements relating tothe corporate governance guidelines.First, ASX Listing Rule 4.10.3 requires listedentities to disclose in their annual reports the extent to which they have followed theguidelines during the reporting period. Second, ASX Listing Rule 12.7 requiresthatcompanies included in the S&P/All Ordinaries Indexhave an audit committee andthatcompanies included in the S&P/ASX 300 Indexhave an audit committee that isconstitutedinaccordancewiththeCorporateGovernancePrinciplesandRecommendations.The guidelines arealways a ‘work-in-progress’ as their application and relevance needto be monitored as business practices and community expectations change over time.3The Australian Professional and Ethical Standards Board (APESB) was established asan initiative of CPA Australia and thethenICAA(now CAANZ)primarily to developand issue appropriate professional and ethical standards for their membership.(The IPAhas subsequently become a member.)The APESB has reviewed existing professional and ethical standards such as the oldCode of Professional Conduct and Miscellaneous Professional Statements (APS series)and guidance notes (GN series). The subsequent APES series of ethical and professionalstandards approved by the APESB are mandatory for accountants who are members ofCPA Australia,theICAA andtheIPA.The specific professional standard and ethical standardAPES 205‘Conformity withaccountingstandards’requiresmembers tocomplywithaccountingstandardsasfollows:4.3Members who are involved in, or are responsible for, the preparation and/orpresentationofFinancialStatementsofaReportingEntityshalltakeallreasonable steps to ensure that the Reporting Entity prepares General PurposeFinancial Statements.

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–9781488611643,Henderson,Issues in Financial Accounting16e45.1Members shall take all reasonable steps to apply Australian Accounting Standardswhen they prepare and/or present General Purpose Financial Statements thatpurport to comply with the Australian Financial Reporting Framework.5.2Where Members are unable to apply Australian Accounting Standards pursuant toparagraph 5.1, they shall take all reasonable steps to ensure that any departurefrom Australian Accounting Standards, the reasons for such departure, and itsfinancial effects are properly disclosed and explained in the General PurposeFinancial Statements.5.5Members in Public Practice shall take all reasonable steps to ensure that Clientshave complied with Australian Accounting Standards when they perform an AuditorReviewEngagementoracompilationEngagementofGeneralPurposeFinancial Statements which purport to comply with the Australian FinancialReporting Framework.Compliance withAPES205is mandatory for members of the professional accountingbodies, and non-compliance represents a breach of the code of ethics issued by theAccounting Professional and Ethical Standards Board. Failure by members to complywith the requirements ofAPES205could result in disciplinary proceedings beingbrought against them, which could result in the imposition of a fine or expulsion fromthe professional body.4The present institutional arrangements for accounting standard-setting in Australiaaresummarised in Figure 1.1in Chapter 1.Financial Reporting Council:The Financial Reporting Council (FRC) is a statutory body under theAustralianSecurities and Investments Commission Act 2001. It is the peak body responsible for thebroad oversight of the accounting and auditing standard-setting process in Australia.The FRC is also responsible for monitoring the effectiveness of auditor independencerequirements in Australiaand has an oversight function of the Auditing and AssuranceStandards Board (AUASB).In general, the FRC has responsibility for oversight of the AASB and for presentingreportsandadviceontheAustralianaccountingstandard-settingprocesstotheMinister.The role of the FRC includes:appointment of the members of the AASB (except for the full-time Chair who isappointed by the Minister);approving and monitoring the AASB’s priorities, business plan, budget andstaffing arrangements;determining the AASB’s broad strategic direction;

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–9781488611643,Henderson,Issues in Financial Accounting16e5giving the AASB directions, advice or feedback on matters of general policy andthe AASB’s procedures; andmonitoring the development of international accountingand auditingstandards,working to furtherthedevelopment of a single set ofaccountingand auditingstandardsfor world-wide use and promoting the adoption of thesestandards.Although the FRC has wide-ranging powers,the FRCcannotbecome involved in thetechnical deliberations of the AASB. For example, the FRC does not have the power toveto a standard formulated or recommended by the AASB, nor direct the AASB inrelation to the development or making of a particular standard.Under section 235A of theAustralian Securities and Investments Commission Act 2001,members of the FRC are appointed by theMinisterand hold office on terms andconditions determined by theMinister.<www.frc.gov.au>.Australian Accounting Standards Board:TheAustralianAccountingStandardsBoard(AASB)beganoperationsin1991,replacing the Australian Accounting Standards Review Board (ASRB). At this time, theASRB was Australia’s sole standard-setting body for the private sector and its activitieswere complimented by the Public Sector Accounting Standards Board (PSASB) whichdeveloped accounting standards applicable to all other reporting entities.The passage ofCLERP in October 1999 resulted in the activities of the PSASB merging into those ofthe AASB.The reconstituted AASB is an Australian government agencyunder the AustralianSecuritiesandInvestmentsCommissionAct.Ithasresponsibilityformakingaccounting standards applicable not only to entities coming under the jurisdiction of theCorporations Act but also for entities in the public sector and the remainder of the non-corporate sector. The AASB’s major functions are specified in section 227(1) of theAustralian Securities and Investments Commission Act as follows:1)to develop a conceptual framework, not having the force of an accounting standard,for the purpose of evaluating proposed accounting standards and internationalstandards;2)to make accounting standards under section 334 of theCorporations Act 2001forthe purposes of the national scheme laws;3)to formulate accounting standards for other purposes;4)to participate in and contribute to the development of a single set of accountingstandards for worldwide use; and5)to advance and promote the main objectives of Part 12 of the Act as set down insection 224,which include reducing the cost of capital, enabling Australian entities

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–9781488611643,Henderson,Issues in Financial Accounting16e6tocompeteeffectivelyoverseasandmaintaininginvestorconfidenceintheAustralian economy.The Ministerappoints the chairof the AASB, and the chair is subsequently accountableto the Minister regarding the operations of the AASB. The AASB comprisesninepart-time members plus the full-time chair. Member appointments to the AASB are made bythe FRC from nominations received from a number of bodies including CPA Australia,the ICAA, the Business Council of Australia and the ASX. In addition, the AASBpresently hasone observer–the member of the International Accounting StandardsBoard, the Australian representative of theIFRSInterpretations Committee.Meetingsof the AASB are open to the public.<www.aasb.com.au>.The Office of the AASB:TheGovernance Review Implementation (AASB and AUASB) Bill 2008was passed byParliament in June 2008.Inter alia, the Bill established the Office of the AASB tosupporttheoperationsoftheAASBthroughtheprovisionoftechnicalandadministrative services, information and advice. The chief executive officer of theOffice is the chairof the AASB, who is also responsible to the Minister for the financialmanagement of the Office.The Minister:The Minister is one of three Treasury Ministers from the Federal Government.5The AASB will typically issue material for public comment and discussion withstakeholders in the form of:Discussion Papers (DP) outlining a wide range of possible accounting policies ona particular topic;Exposure Drafts (ED) of a proposed standard or amendment to a standard;Invitations to Comment (ITC) that seek feedback on broad proposals; orDraft Interpretations of a standard.At present, constituents’ comments on the materials issued by the AASB are obtainedfromthe followingavenues: Focus Groups, Project Advisory Panels,InterpretationAdvisory Panels, and the Academic Advisory Panel.Focus Groups:There are currently two Focus Groups–the User Focus Group and the Not-for-ProfitFocus Group. In general, these groups serve as a resource to the AASB in formulatingstandard-setting priorities, advising on specific agenda projects and providing feedbackto assist on developing standards. The User Focus Group generally comprises eight to

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–9781488611643,Henderson,Issues in Financial Accounting16e710 investment and credit professionals and the Not-for-Profit Focus Group compriseseight to 10 professionalswith expertise and involvement in charitable and relatedorganisations.Project Advisory Panels:Input is also received from Project Advisory Panels that work with the AASB staff todevelop agenda material relating to specific standard-setting projects for considerationby the Board. Invitations are issued to experts in a particularfield or topic area to join aProject Advisory Panel.Interpretation Advisory Panels:As part of the process of issuinginterpretations, the AASB decides,on a topic-by-topicbasis,whether to appoint anInterpretationAdvisory Panel. The role of the AdvisoryPanel is limited to preparing alternate views on a specific issue and,where relevant,recommendations for consideration by the AASB. An Interpretation Advisory Panelnormally comprises between four and eight members. These members include theAASB Chair, at least one other AASB member, and other members appointed on thebasis of their professional competence and practical experience in the topic area.Members are typically drawn from a register of potential Interpretation Advisory Panelmembers maintained by the AASB.Academic Advisory Panel:In 2015 the AASB established an Academic Advisory Panel, whichischaired by theacademic member of the AASB and consistsof six other academics from aroundAustralia.One aim of the Academic Advisory Panel is to increase the level ofcommunicationbetween the AASB and the research community. Standard settersaroundtheworldareincreasinglyseekingobjectiveevidencetoinformtheirdeliberations, and the Academic Advisory Panel assiststhe AASB by bringing relevantresearch findings to its attention and encouraging researchers toexplore topics ofmutual interest with the AASB.6(a)Thedue process used to develop an accounting standard is summarised in Figure1.2inChapter1. The first step isidentification of a technical issueto be added tothe AASB’s work program. This can happen in one of three ways:1)Inclusion in the AASB’s program of issues on the International AccountingStandardsBoard’s(IASB)andtheInternationalFinancialReportingInterpretations Committee’s (IFRIC) work programs;2)Inclusion in the AASB’s program of issues on the International Public SectorAccounting Board’s (IPSASB) work program; and

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–9781488611643,Henderson,Issues in Financial Accounting16e83)Inclusion in the AASB’s work program of issues identified by AASB Boardmembers and staff, as wellas Australianorganisations andindividuals.(Issues relating to for-profit entities are normally referred to the IASB orIFRIC for consideration, while issues relating to not-for-profit entities may bereferred to the IPSASB or addressed domestically.)The second step involves the development of aproject proposalby the AASB.This contains an assessment of the potential benefits of the project, the potentialcosts of not undertaking it, resource availability and timing. After reviewing theproposal the AASB makes a decision on whether to place the project on its agenda(and therefore work program).Once an issue is included on the AASB’s agenda, the third step involves thepreparation ofagenda papersby AASB staff. Agenda papers consider the scopeof issues, alternative approaches, and the timing of outputs. They are preparedusing material drawn from the IASB, IPSASB, the New ZealandAccountingStandards Board, and other such organisations.The fourth step involves the exposure of the results of the research conducted instep three to facilitatepublic comment and discussion with stakeholdersin theform of:Discussion Papers (DP) outlining a wide range of possible accounting policieson a particular topic;Exposure Drafts (ED) of a proposed standard or amendment to a standard;Invitations to Comment (ITC) that seek feedback on broad proposals; orDraft Interpretations of a standard.Feedback from the public and stakeholders may be obtained through round-tablediscussionswithstakeholders,FocusGroups,ProjectAdvisoryPanels,Interpretation Advisory Panels, and the Academic Advisory Panel.The fifthstep involves Board discussion of the results of the feedback receivedon an agenda item. There are two possible outcomes from this discussion:1)A standard is not issued. In this situation, the Board notes its view in theminutes of a meeting or in a formal Board agenda decision.2)Anaccounting standard is issued.(b)StudentsshouldvisittheWorkinProgresspageontheAASBwebsite<www.aasb.gov.au>.7(a)The due process used by the AASB to develop accounting standards is outlined inthe answer to Question 6(a).

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–9781488611643,Henderson,Issues in Financial Accounting16e9(b)Currently, theAASB issues interpretations asa means ofproviding timelyguidance on urgent financial reporting issues. For example,AASB Interpretation2‘Members’ Shares in Co-operative Entities and Similar Instruments’ deals withhow todetermine the economic substance of ‘shares’ issued by co-operativeentities to their members.For example, often a co-operative entity’s constitutionrequires the entity to buy-back its shares from a member who decides to leave theco-operative.As the entity cannot avoid buying-back the share, this suggests thatthe share instrument is more in the nature of a liability than an equity instrument(even though it is called a ‘share’).Interpretation 2 provides guidance on how toclassify such ‘shares’.Thedue process used to develop an interpretation has a much shorter timeframethan the due process necessary to develop an accounting standard. To illustrate,the AASB will issue an interpretation as follows:Interpretation Advisory Panelsmay be formed, as required on a topic-by-topicbasis. The role of a panel is to prepare alternative views on the issue and,where appropriate, make recommendations to the AASB.The due process will include publishing the composition of each panel and itsrecommendation on the AASB’s website for an appropriate period. Where theAASB proposes to issue an interpretation, the proposedinterpretation will befurther exposed on the AASB’s website for an appropriate period before theAASB considers it for formal adoption.8AASB Interpretations are designed to provide timely guidance to preparers of financialstatements on various financial reporting issues. For example, sometimes after anaccounting standard is issued, problems occur in its implementation where diversity inpractice arises because financial statement preparers interpret the requirements of thestandard in diverse ways. In addition, financial reporting problems may arise which donot warrant either amendments to an existing standard or the preparation of a newstandard. In these cases, it may have been appropriate to resolve the problems byissuing an interpretation to clarify, explain or elaborate upon existing standards. Thus,interpretations have a much narrower scope than accounting standards.They do notintroduce‘new’requirements,rathertheyclarifytheapplicationoftheexistingrequirements in the relevant accounting standards.9An answer to this question should identify the differences betweenaccountingstandardsandaccountinginterpretations as follows:(a)ScopeAccounting standards address much broader issues/topics than interpretations.Accountingstandardsprescribeaccountinganddisclosurerequirements

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–9781488611643,Henderson,Issues in Financial Accounting16e10relating to a broad area/topic, for example,AASB 137‘Provisions, ContingentLiabilities and Contingent Assets’.Interpretations prescribe accounting and/or disclosure requirements relating tovery specific/narrow issues, for example,Interpretation 132‘Intangible Assets–Web Site Costs’.(b)Context/FrameworkAASBevaluatesproposedaccountingstandardsinthecontextoftheconceptual framework.Interpretations are prepared in thecontext of existing accounting standards andthe conceptual framework.(c)Due ProcessAccounting standards are developed by the AASB after an extensive dueprocess, including consultation with a broad range of constituents, and thepreparation of discussion papers, exposure drafts and draft standards.Interpretations are prepared after a much less extensive due process, whichdoes not involve the samelevel ofconstituent consultation, or preparation ofdocuments for public comment.(d)Approval Process/Veto PowerAfter an accountingstandard isfinalised by the AASB, it may be disallowedby Parliament within 15 sitting days of it being tabled in Parliament.There is no such veto power in relation to interpretations.(e)AuthorityAASB Accounting Standards: TheCorporations Act 2001requires reportingentities to comply with AASB Accounting Standards and ASIC enforcescompliance with those standards.Additional authority is derived fromAASB1057‘Application of Australian Accounting Standards’ (accounting standardsandinterpretations)andAASB1048‘InterpretationofStandards’(interpretations).Interpretations: Paragraph 5 ofAPES 205‘Conformity with AccountingStandards’APS1requires members of CPA Australia andCAANZto complywith accounting standards and AASB Interpretations. CPA Australia andCAANZenforcecompliancewithAustralianAccountingStandardsandAASB Interpretations.TheCorporations Act 2001does not explicitlyrequirecompliance withinterpretations, but ASIChas indicated support for the interpretations byattendingandparticipatinginmeetingsoftheInterpretationsAgendaCommittee as an observer. Effectively, interpretations have the same authorityas accounting standards.

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–9781488611643,Henderson,Issues in Financial Accounting16e1110The AASB’s Interpretations model has been effective since 1 January 2008 and itsmajor features are as follows.1)Interpretation Advisory Panels may be formed, as required on a topic-by-topic basis.The role of a panel is to prepare alternative views on the issue and,whereappropriate, make recommendations to the AASB.2)A public register of potentialInterpretation Advisory Panel members is maintainedon the AASB website and it is from this register that Panel members are drawn.3)Interpretations of IASB accounting standards are made by IFRIC.WhereAASBaccounting standards are equivalent to IASB accounting standards, the IFRICInterpretations will be relevant in Australia. Additionally, if an issue arises thatrelates to the interpretation of an AASB accounting standard that is equivalent to anIASB accounting standard, it will be forwarded to IFRIC for consideration andpossible inclusion in its work program. However, if an issue arises in relation to anAASB accounting standard that does not have an IASB equivalent, the issue will beresolved by the AASB.4)The due process will include publishing the composition of each panel and itsrecommendation on the AASB’s website for an appropriate period. WheretheAASB proposes to issue an interpretation, the proposed interpretation will be furtherexposed on the AASB’s website for an appropriate periodbefore the AASBconsiders it for formal adoption.11The reasons for why the AASB would create the Academic Advisory Panel can bedetermined from examining the role of the Panel as specified in its Charter.The Charterstates:The role of the Panel is to contribute to meeting the AASB’s strategies,particularlywithregard to influencing the Australian financial reporting framework and influencinginternational standard setting with evidence-based research.In fulfilling this role, the Panel is to facilitate:communication with the academic community and contacts with relevant academicsontopics of interest to the AASB;matching up academics with AASB access to data and constituents and, in turn,helpingto obtain grants and other resources;prioritising AASB research projects;identifying academic papers that could be provided/presented to the AASB, whichcould be on current projects or possible future projects;an academic-in-residence program;AASB staff conducting seminars for students, especially at Graduate and PhDlevels;building relationships with relevant journals;access to relevant research databases;participating in relevant AASB liaison; and

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–9781488611643,Henderson,Issues in Financial Accounting16e12building the relationship with the AFAANZ board.12There are three groupsresponsible for enforcing the accounting standards issued by theAASB. They are:the accounting bodies; the Australian Securities and InvestmentsCommission; and governments. The enforcement mechanisms employed by each ofthese groups are considered in turn.Accounting Bodies:The profession’s attitude towardsaccounting standards has changed from regardingthem merely as recommendations during the 1960s to making them mandatory in the1990s.The Australian Professional and Ethical Standards Board (APESB) was established in2006 as an initiative of CPA Australia and thethenICAA(now CAANZ)primarily todevelop and issue appropriate professional and ethical standards for their membership.Of these professional standardsand ethical standards,APES 205‘Conformity withaccountingstandards’requiresmembers tocomplywithaccountingstandardsasfollows.4.3Members who are involved in, or are responsible for, the preparation and/orpresentationofFinancialStatementsofaReportingEntityshalltakeallreasonable steps to ensure that the Reporting Entity prepares General PurposeFinancial Statements.5.1Members shall take all reasonable steps to apply Australian Accounting Standardswhen they prepare and/or present General Purpose Financial Statements thatpurport to comply with the Australian Financial Reporting Framework.5.2Where Members are unable to apply Australian Accounting Standards pursuant toparagraph 5.1, they shall take all reasonable steps to ensure that any departurefrom Australian Accounting Standards, the reasons for such departure, and itsfinancial effects are properly disclosed and explained in the General PurposeFinancial Statements.5.5Members in Public Practice shall take all reasonable steps to ensure that Clientshave complied with Australian Accounting Standards when they perform an AuditorReviewEngagementoracompilationEngagementofGeneralPurposeFinancial Statements which purport to comply with the Australian FinancialReporting Framework.Compliance withAPES205is mandatory for members of CPA Australia and the ICAA,and non-compliance represents a breach of theCode of Professional Conductof theaccounting bodies. Failure by members to comply with the requirements ofAPES205

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–9781488611643,Henderson,Issues in Financial Accounting16e13could result in disciplinary proceedings being brought against those members, whichcould result in a fine or expulsion from the professional body.Australian Securities and Investments Commission:Accounting standards issued by the AASB are supported by theCorporations Act 2001.This law applies only to those entities required to report under theCorporations Act2001.Under section 296 of theCorporations Act 2001,the governing board of a company isrequired to comply with AASB accounting standards in preparing financial reports.Failure to comply is an offence under the Corporations Act which could lead toprosecution by ASIC.Governments:A standard-setting board cannot issue accounting standards that are legally binding ongovernments. It is the responsibility of the relevant legislatures to require compliancewith accounting standards. Various pieces of legislation require the use of accountingstandards in the preparation of financial reports by reporting entities in the publicsector. For example, Commonwealth statutory authorities and some Commonwealthdepartmental authorities are required to comply with accounting standards as a result ofguidelines issued pursuant to theAudit Act 1902.The various Australian States andTerritories have similar pieces of legislation.13The objective of this question is simply to allow studentsto observe a practical exampleof enforcement in action.ASIC regularly issues media releases drawing attention tovarious restatements of financial statements and other similar issues and so these shouldbe relatively easy for students to find.For their chosen example, students should clearly identify what is the matter on whichASIC and the relevant company have disagreed and, where sufficient information isavailable, which accounting treatment the company adoptedand which was preferredby ASIC (and why this treatment was preferred).Students might observe that in the majority of cases the companies concerned maycontinue to suggest that their treatment was the correct or appropriate one but that theywill voluntarily restate their accounts as suggested by ASIC.Reasons why ASIC may publish theseexamplesisto demonstrate to companies and thecommunitythatitisseriousabout,andactivein,monitoringcompliancewithaccounting standards.Such an approach is a much cheaper and less antagonistic form

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–9781488611643,Henderson,Issues in Financial Accounting16e14of regulation compared, say, to ASIC seeking to enforce compliance through the courts.14(a)ASIC conducts regular reviews of reporting entities’ financial statements to ensurethat investors, creditors and other users of those statements are provided with relevant,reliable, andcomparable decision useful information.The quality of financial reportingis evaluated by ASIC on the basis of reporting entities’ compliance with Australianaccounting standards.The reviews assist ASIC in meeting its legislative obligations andsignal to financial statement preparers and users that ASIC takes its responsibilitiesseriously.The reviews can also serve an educative purpose by assisting entities tounderstand the application and interpretation of reporting regulations.(b)Accounting for the extractive industries is covered in Chapter 19.However, studentscan be encouraged to consider how the nature of the mining and renewable energyindustries can impact on financial reporting practices.For example, most students arelikelytounderstand thatminingis highly risky because offactors such as theuncertaintiesassociatedwithfindingeconomicallyrecoverablereservesandthefluctuations associated with the market prices for commodities.Consequently, the valueof mining companies’ assets can be highly sensitive to these risks and so issues of assetcarrying value and potential impairment are of considerable importance to miningcompanies.For instance, during 2016, many Australian entities that mined iron ore andproduced steel were forced to undertake significant impairment of their assets as a resultof the collapse of the market price for iron.15(a)Non-IFRS financial information refers to financial informationthat has not beenprepared in accordance with Australian accounting standards.Other names for non-IFRS financial information include ‘non-statutory profits’ and ‘underlying profits’.IFRS financial information (sometimes also called ‘statutory profits’) is financialinformation prepared in accordance with Australian accounting standards.Typically,non-IFRS financial information is prepared by converting IFRS financial informationtowhat an entity’s management believes is a more appropriate measure of financialperformance.Non-IFRS financial information often excludes unusual write-offs andfair value adjustments.The general objective of these adjustments is to provide theusers of the financial statementswith information about the ‘true’ (as perceived bymanagement)operationalperformanceoftheentity.Ithasbecomeincreasinglycommon for entities to report both IFRS and non-IFRS financial information in theirannual reports.(b)As managers determine what items are included in non-IFRS financial information,there is the potential for them to overstate the performance of the entity or to ‘dressup’performancetorepresentwhateverpicturemanagementdesires.Usually,profitdisclosed using non-IFRS financial information is higher than under IFRS.In addition,

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–9781488611643,Henderson,Issues in Financial Accounting16e15managers across entities are likely to make different choices about how non-IFRSfinancialinformationisdeterminedand thisrisksreducingthecomparabilityoffinancial information across entities.As noted in the ASIC Regulatory Guide 230,ASIC has been concerned that some entities have given undue prominence to their non-IFRS financial information over the IFRS financial information which has the potentialto mislead financial information users.(c)The most significant item of concern to ASIC was the labelling of some items innon-IFRSprofitas ‘extraordinary items’.Such terminologyis not part of IFRS(although it was used many years ago).Extraordinary items implies that the specificrevenue or expense referred to is in some way very unusual in its size or that it occurshighly infrequently.As such, the implication is that extraordinary items should not beconsideredbyfinancialstatementusersasbeingrepresentativeoftheentity’sperformance or financial position.ASIC is right to be concerned because often itemsthat are labelled as ‘extraordinary’ are items such as impairments which are really acommon type of expense.The other concern expressed in the media release is thatentities should be careful to ensure that non-IFRS financial information is clearlydistinguished from IFRS financial information.The reasons for this concern were notedin the answer to (b) above.16(a)Continuous disclosure obligations require the Company to keep the market fullyinformed of information which may have a material effect on the price orvalue of thecompany’s securities and to correct any material mistake or misinformation in themarket. The Company discharges these obligations by releasing information to theASX in the form of an ASX release or disclosure in other relevant documents (forexample, the Company’s Annual Report).ASX ListingRule3.1 iskey to the continuous disclosure regime: it stipulates that ‘oncean entity is or becomesawareof any information concerning it that a reasonable personwould expect to have a material effect on the price or value of the entity’s securities,the entity must immediately tell ASX that information’(ASX Listing Rule 3.1).There are someexceptionsfrom continuous disclosure that include:A reasonable person would not expect theinformation to be disclosed.The information is confidential and ASX has not formed the view that theinformation has ceased to be confidential.One or more of the following applies:oIt would be a breach of law to disclose the information.oThe information comprises matters of supposition or is insufficientlydefinite to warrant disclosure.

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