Financial Reporting | Accounting Assignment
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Added on 2020-02-24
Financial Reporting | Accounting Assignment
Added on 2020-02-24
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IntroductionFinancial reporting has always been debatable topic in Australia and there have beenmany changes in the disclosure requirement. Australian Accounting Standards Board (AASB)has issued the differential reporting for the Tier 2 accounting entities and this has been issuedunder AASB 1053 “Application of Tiers of Australian Accounting Standards” (AustralianAccounting Standards Board, 2017). In this report there will be discussion of differential reporting system in Australia and itsimpact on the two main qualitative characteristics of the conceptual framework issued by theIAB. This report also points out the cost benefit implementing the reduced disclosurerequirement for the Tier 2 entities.Differential Reporting System in AustraliaThe AASB (Australian Accounting Standards Board) owns the responsibility ofdeveloping and maintaining the financial reporting standards that its private and public entitiesneed to follow for financial reporting. The differential reporting system in Australia is a notionthat restricts some entities to follow the particular requirements of accounting standards. There isreduced disclosure adopted for some entities by AASB for avoiding the unnecessary presentationof financial information and increasing the relevancy of required disclosures. The system inAustralia is largely based on the reporting entity concept and is largely applicable for small andmedium-sized enterprises (SME’s) (AASB Standard 1053, 2010). The reporting entity concept classifies ‘reporting entities’ as business enterprises that arerequired to develop complete GAAP based financial reports. On the other hand, non-reportingentities are required to develop simple and concise financial reports based on the nature of theirbusiness operations. The differential reporting regime of Australia has stated that non-reportingentities should develop special purpose financial statements that do not require compliance withAASB standards. The AASB has revised financial reporting requirements for SME’s that areprepared and developed under the ASIC Corporations Act 2001. The differential reportingsystem particularly aims at developing a separate reporting framework and guidelines for SME’sto develop their general purpose financial statements. The AASB differential reporting systemconsists of the following two stages:
Stage 1: It involves the development of reduce disclosure requirements for small andmedium sized companiesStage 2: It involves developing a revised differential reporting framework based on theconcept of reporting entity. The main objective behind the development of this system is to simplify the disclosure,measurement and recognition requirements for SME’s for reducing the burden and consequentcosts for them in developing financial reports (Chand and Cummings, 2008).Impacts due to use of Reduced Disclosure Requirements on the qualitative characteristicsof the financial information represented by the Tier 2 entities in their financial statementsIFRS provides the conceptual framework that every entity has to follow in their disclosurerequirement of the financial information in the annual report. The conceptual frameworkprovides most important qualitative characteristics of the financial information that has beenadhered by the entities while making the financial disclosure in their reports. The fundamentalqualitative characteristics of the financial have been divided into two main types.RelevanceFaithful RepresentationThe qualitative characteristics of the financial help the users of the financial report to easilyunderstand the annual report and make the decisions accordingly. Financial information can onlybe useful if it is relevant and represented with true faith in timely manner. So to check the impactof the reduced disclosure requirement for the Tier 2 entities on the qualitative characteristics offinancial information, let discuss the characteristics in detail and make comparison with thedisclosure changes made in the reduced disclosure:Fundamental qualitative characteristics·Relevance: Relevance financial information refers to such information that is user orientedand has capability to change the decisions of the users. As per the conceptual framework relevantfinancial information can make changes to the decision if it is predictive value, confirmativevalue or both. As per the reduced disclosure requirement issued by the AASB, the financialinformation must be concise to such extent that the user required data has been incorporated andno compromise has been made in such respect. The reduced disclosure for SME’s has resulted in
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