Holmes Institute HI6025 Accounting Theory Assignment

This document presents a comprehensive solution to an Accounting Theory assignment, addressing key concepts within the Australian external reporting environment and the conceptual framework of accounting. It begins by clarifying the role of the Australian Securities and Investments Commission (ASIC) in enforcing accounting standards and discusses differential reporting, particularly in the context of small and medium-sized entities. The assignment then delves into the fundamental qualitative characteristics of financial information, providing examples of relevance and faithful representation, including scenarios where information may be relevant but not faithfully represented, and vice versa. Finally, the solution examines the responsibilities of directors in large listed Australian companies regarding compliance with accounting standards, emphasizing their obligations in financial reporting and the importance of maintaining accurate financial records and ensuring transparency to stakeholders. The document serves as a valuable resource for students studying accounting theory, offering insights into key concepts and practical applications within the Australian context.

Running head: ACCOUNTING THEORY
ACCOUNTING THEORY
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Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................2
Question 3..................................................................................................................................3
References..................................................................................................................................5

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Question 1
The Australian Securities and Investments Commission (ASIC) is the legal body that
is responsible for enforcing various accounting standards issued by Australian Accounting
Standard Board (AASB) Under Corporation Act 2001. The primary role of the ASIC is to
enforce company and financial services legislative rules and regulations to protect consumers,
lenders, investors, and creditors in Australia (Aasb.gov.au, 2020). ASIC deals with various
vital responsibilities areas such as corporate governance, insurance, financial literacy and
services, consumer protection and securities and derivatives. ASIC referred to as the regulator
of Australia’s markets and financial services. The legal body is responsible for improving the
performance financial system in Australia and even efficiently enforce various laws.
Differential reporting refers to a situation where some business entities have the
freedom to prepare financial statements without taking into consideration all the required
accounting standards. This practice has been seen in Australia and assumed to be one of the
significant reason that strengthens financial reporting in the country. Differential reporting
mainly deals with the reporting system that aims to decrease burden of accounting reporting
of those entities that comes under the category of both public and private sector. The
differential reporting system aims to reduce the burden of the entities by decreasing the
essential requirements that are needed for preparing the financial statements. The differential
reporting system in Australia is mainly related to Small and Medium-sized entities.
Question 2
Information is relevant but not faithful
One example where the information presented in the financial report is relevant, but
not faithful might be the asset that is measured at their historical cost. The historical cost is
the default value that is assigned to an asset. Historical cost of an asset does not affect true

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economic cost. The asset that is recognized at historical cost might result in profits that are
not sustainable for an extended period.
Information is not relevant but faithful
In this case, we can take an example of an investment that has been recognized in the
balance sheet is sometimes not relevant but faithful. Investment is recorded at cost price in
the balance sheet; however, while doing any accounting treatment; we are required to take the
present market value of the investment.
Information is both relevant and faithful
An example of financial information that reflects both relevance and faithfulness in
the financial report is the company’s equity capital that includes retained earnings and funds
contributed by its shareholders. This item is the ownership interest in a company and is
recorded by adopting the entire required accounting standard that is both relevant and
faithful.
Question 3
It is essential for all companies to comply with the accounting standards and must
appropriately use the application of standards. Directors of the company need to take
reasonable steps to make sure that the company is complying with all obligations related to
the Corporations Act 2001 that reflected keeping of financial records and financial reporting.
The directors of company are responsible for presenting financial statements at annual
general meetings that must comply with all required accounting standards. It is the
responsibility of the director to maintain financial records that reflects all company’s
transaction and financial position and performance of company. If the accounting standards
are appropriate, the director has to gain adequate knowledge related to the inappropriate
application. It must try to rectify it before presenting the financial report in front of the

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shareholders. The directors need to ensure that a true and fair financial statement is prepared
and audited. The director must have adequate skills and diligence for understanding
accounting report that needs to be disclosed to public. It is prime responsibility of director to
question the financial treatments used in financial reports for ensuring that all accounting
treatment are true and fair and can be disclosed to all stakeholders of the company.

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References
Aasb.gov.au, 2020. Australian Accounting Standards Board (AASB) - Home. [online]
Aasb.gov.au. Available at: <https://aasb.gov.au/> [Accessed 18 April 2020].