Roles of Regulatory Agencies in Australian Financial Reporting

This document discusses the roles of various regulatory agencies in the Australian financial reporting framework. It covers the Financial Reporting Council, Australian Accounting and Standards Board, IFRS Interpretations Committee, ASIC, and Australian Stock Exchange. The document provides insights into their functions, objectives, and impact on the financial reporting system.

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Question 1
The roles of the various regulatory agencies in the Australian context are discussed below.
a) Financial Reporting Council (FRC) – The FRC is the apex body with regards to ensuring
the effectiveness of Australian financial reporting framework. The framework of
operation for FRC has been highlighted in ASIC (Australian Securities and Investments
Commission) Act 2001 (Part 12) (Arens et. al., 2013). One of the key objectives for FRC
is that accounting standards should contain the provision of information that tends to allow
prudent decision making by the external users, allows directors to fulfil their reporting
obligations and permits a correct assessment of the financial performance of the
underlying entity. The accounting standard should also be such that enhance the
competitiveness of Australian reporting entities. Further, FRC also aims to regulate the
auditing standards so that these allow for comprehensive and accurate opinion besides
ensuring that auditor report is reliable and understandable (FRC, 2019). As a result,
confidence of market participants is retained. In wake of the above objective, FRC
maintains oversights over the auditing and accounting processes for standard setting meant
for both private and public sectors. Also, it provides strategic advice with regards to audit
quality in context of Australian auditors. Further, it also advises the Minister with regards
to matters that impact the Australian financial reporting framework (FRC, 2016).
b) Australian Accounting and Standards Board (AASB) – AASB is a government agency in
Australia whose functions are outlined in ASIC Act 2001. One of the main functions of
AASB is to facilitate conceptual framework development with the underlying purpose of
proposed standards evaluation. Another function of AASB is to formulate requisite
accounting standards as per s. 334, Corporations Act 2001. Also, AASB formulates
accounting standards for other purposes as well. AASB represents Australia with regards
to contribution towards harmonisation of accounting standards through the coordination
with relevant bodies from other nations (AASB, 2019). Additionally, through the
formulation and implementation of accounting standards, it is expected that Part 12 listed
main objectives are promoted and fulfilled. These objectives include maintenance of
investor confidence in Australian economy, lowering cost of capital for various entities
coupled with enabling Australian entities to compete successfully on a global platform.
With regards to the objectives, vision of AASB is crucial which highlights increasing
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stakeholder confidence not only in Australian economy but also external reporting and
capital standards (Deegan, 2014).
c) IFRS Interpretations Committee – The IFRS Interpretations Committee has been
formulated as per the IFRS Foundation Constitution. It was earlier called as the
International Financial Reporting Interpretations Committee (IFRIC). One of the key roles
of this committee is to interpret IFRS application and thereby advice and extend guidance
to various entities with regards to financial reporting issues which the IFRS specifically
addresses through the application. Also, it takes various requests from IASB (International
Accounting Standards Board) and fulfils these (Elliott and Elliott, 2017). The committee
acts as medium between IFRS and the national accounting standard bodies (including
AASB) so as to bring about harmonisation of accounting standards. The IFRS
Interpretations Committee also publishes various draft interpretations so that public
opinion may be solicited on the same. This is done only after approval from IASB. While
finalising interpretation, the committee considers the various public comments in a timely
manner. Before publishing the final interpretation, the committee needs to obtain approval
from the IASB board. It is apparent that IFRS Interpretations Committee plays a vital role
in interpretation of IFRS application and IASB drafts. Further, it also acts as a potent
medium of communication between the national accounting standard setters and the
international accounting standard setters i.e. IASB and IFRS (IASplus, n.d.).
d) ASIC is the key enforcer of provisions and regulations of Corporations Act 2001. The
main role of ASIC is highlighted below (Deegan, 2014).
 Regulate and maintain the financial systems
 Taking extensive measures to enhance the performance of the financial system
 Promotion and encouragement of the participation of the investors/ consumers to
invest and become a part of the financial system
 Minimize the procedural procedures so as to enforce the law in the more effective
manner as well as to seek the civil penalties in case of breach of provisions of
Corporations Act from the honourable courts
 To preserve and process the provided confidential information
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 Providing the various essential information about various companies as well as
financial firms to the public so that the investor can receive an authentic and
transparent information before taking any investment decision
 To take numerous actions which are imperative for the enforcement of the law
ASIC also provide platforms to the companies to register their financial service and credit
licensees so as to provide ease of accessibility of information to the public. It also registers
auditors and liquidators and other investment related schemes. One of the pivotal roles of
ASIC is to maintain the integrity of the financial markets by resisting the defective disclosure
document of the financial product or service.
e) Australian Stock Exchange (ASX) works as a market operator, payment facilitator and
provides educational information to the retail investors. It shows strong emphasis on
educating the visitors, investing public and various potential visitors on it’s website. ASX
also provides free resources for the first-time investors to understand the public markets
and asset classes along with various investment strategies (Caanz, 2016). The main role of
the ASX is highlighted below (Deegan, 2014).
 It allows companies to raise capital: It is Australia’s largest stock exchange which
allows companies to issue their securities such as shares to the public. Investor can
trade their securities once they are registered in ASX.
 ASX provides the platform for both buyers and sellers to trade their securities
electronically.
 The essential role is to provide a system to transfer the ownership of the securities to
others.
 ASX also sets various listing rules for the companies that need to be followed. These
instil confidence in the financial markets.
Question 2
Two common inventory cost flow systems that are adhered by reporting entities are perpetual
and periodic. The key difference between the two systems is that in case of perpetual
inventory system, there is continuous tracking of inventory which is unlike periodic inventory
system where physical inventory count is taken at periodic intervals (Damodaran, 2015). The
key differences between the two inventory cost flow systems with regards to different aspects
are highlighted below (Petty et. al., 2015).
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 Accounts: In the perpetual system, inventory related transactions lead to continuous
updates to the inventory ledger or general ledger. This is unlike the periodic system
where till the time there has been a physical count, no entry in the cost of goods sold
would be highlighted.
 Computer Systems: The transactions under the perpetual system cannot be recorded
manually and require computer systems which tend to result in real time tracking of
the inventory items. This is unlike the periodic system which relies on physical
inspection and used primarily for small inventories that can be easily counted.
 Cost of goods sold: As the inventory transactions are continuously updated and
recorded in case of perpetual system, hence the cost of goods sold is also update
automatically thereby reflecting the cost of goods sold at any point of time. This is not
the case for periodic inventory system where cost of goods sold cannot be estimated
before the accounting period ends as the physical count takes place at that time only.
This makes reporting on a shorter period difficult in periodic inventory.
 Purchases: With regards to perpetual inventory system, recording of inventory
purchases is reflected in the form of merchandise account or raw materials inventory
besides maintaining a unit count for the various inventory items. This is not the case
in periodic inventory system where inventory record and unit information does not
exist as the various purchases are represented in a single account i.e. purchase asset.
 Investigation of transactions: Considering the records of inventory maintained in great
detail in perpetual inventory, detection of any errors regarding inventory is
comparatively easier than periodic inventory system. This is because in case of
periodic inventory system, limited data is available with regards to the physical count
of inventory which is carried out at the end of each accounting period.
Considering the above differences between perpetual and periodic inventory system, it is
evident that the former is more suitable for complex and huge modern businesses. The
periodic inventory system ought to be selectively used in small organisations when physical
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count of inventory is quite convenient and also the inventory cost does not fluctuate too
much.
Question 3
There are three main systems of inventory used to compute the cost of goods sold and closing
inventory. One of these is FIFO (First in First Out) which implies that the inventory which is
purchased the earliest needs to be disposed first. Another alternative system is LIFO (Last in
First Out) which implies that the inventory which is purchased the latest needs to be disposed
first. Yet another alternative system is weighted average where at the selling point is
assumed to be the weighted average of the inventory present at the time the sale is made
(Damodaran, 2014).
The above three systems tend to lead to varying alternative depending upon whether the cost
of the inventory is rising. When the cost of inventory is rising, then using FIFO would tend to
result in higher closing inventory and thereby tend to lower the cost of goods sold. This is
because the cost of goods sold would not constitute of the inventory that is the most
expensive. In case of LIFO, the closing inventory would be low while cost of goods sold
would be quite high (Brealey, Myers & Allen, 2014). This is because the closing inventory
would comprise of the earliest and cheapest purchases. On the contrary, the cost of goods
sold tends to be exaggerated as it highlights the usage of the most expensive inventory
purchase. A balanced view is presented by the weighted cost method in such cases. As a
result, in case of significant changes in inventory cost, it is recommended to choose the
average weighted method over FIFO and LIFO (Parrino and Kidwell, 2014).
Also, it is imperative to consider that the impact of FIFO, LIFO and weighted average tends
to differ with the choice of inventory cost flow system i.e. periodic or perpetual. In case of
periodic inventory system, the cost of goods sold is determined at the closing time only
considering the available transactions of inventory and method chosen. This is not the case
with perpetual inventory where the rules of LIFO, FIFO and weighted average are applicable
for individual transactions as well. As a result, these inventory valuation techniques tend to
produce different results in case of perpetual and periodic inventory system (Deegan, 2014).
Question 4
a) It is known that the periodic inventory system is used here. The computation of the closing
inventory and cost of goods sold as per FIFO method is shown below (Petty et. al., 2015).
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Explanation: As per FIFO, the inventory bought first is sold first. As a result, the closing
inventory of 2,000 would comprise of the inventory that has been purchased at the end. Thus,
this corresponds to purchases on 21 December, 2016 which remain sold with a value of $
30,000. As a result, cost of goods sold = $132,000 - $ 30,000 = $ 102,000
b) It is known that the periodic inventory system is used here. The computation of the closing
inventory and cost of goods sold as per weighted average cost method is shown below
(Damodaran, 2014).
Explanation: As per weighted average cost, the inventory is represented at the average buying
cost. In the given case, total 10,000 units of inventory exist which has been purchased at a
cost of $132,000. Hence, average cost = (132000/10000) = $ 13.20
Hence, value of closing inventory = $ 13.2 *2000 = $ 26,400
Cost of goods sold = $ 132,000 - $ 26,400 = $ 105,600
c) It is known that the periodic inventory system is used here. The computation of the closing
inventory and cost of goods sold as per LIFO method is shown below (Brealey, Myers and
Allen, 2014).
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Explanation: As per LIFO, the inventory bought last is sold first. As a result, the closing
inventory of 2,000 would comprise of the inventory that has been purchased at the beginning.
Thus, this corresponds to opening inventory of 1000 units and purchase of 1000 units on 1
December, 2016.
Hence, value of closing inventory = 1000*10 + 1000*12 = $ 22,000
Cost of goods sold = $132,000 - $22,000 = $110,000
Question 5
a) It is known that the perpetual inventory system is used here. The computation of the
closing inventory and cost of goods sold as per FIFO method is shown below (Damodaran,
2015).
Closing inventory = 1*$18 + 10*$21 = $228
Cost of goods sold = $110 + $110 + $220 + $180 +$54 + $198 = $ 872
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b) It is known that the perpetual inventory system is used here. The computation of the
closing inventory and cost of goods sold as per weighted average cost method is shown
below (Parrino and Kidwell, 2014).
Closing inventory = 11*19.91 = $219
Cost of goods sold = $103.33 + $330.67 + $208 + 219 = $861
c) It is known that the perpetual inventory system is used here. The computation of the
closing inventory and cost of goods sold as per LIFO method is shown below (Petty et. al.,
2015).
Closing inventory = 9*$22 + 2*$18 = $234
Cost of goods sold = $100 + $300+ $22 + $216 +$210 + $18 = $ 866
References
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AASB (2019). About the AASB [online] Available at: https://www.aasb.gov.au/About-the-
AASB.aspx [Accessed 31 March. 2019]
Arens, A., Best, P., Shailer, G. and Fiedler,I. (2013). Auditing, Assurance Services and Ethics
in Australia, 2nd ed., Sydney: Pearson Australia
Brealey, R. A., Myers, S. C. and Allen, F. (2014) Principles of corporate finance, 6thed. New
York: McGraw-Hill Publications
Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3rd ed., Sydney: John
Wiley & Sons
Damodaran, A. (2015). Applied corporate finance: A user’s manual (3rd ed) New York:
Wiley, John & Sons.
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Elliott, B. and Elliott, J. (2017) Financial Accounting and Reporting, 18th ed., Harlow :
Financial Times Prentice Hall
FRC (2016). Role and Composition of the FRC. [online] Available at:
http://www.frc.gov.au/about_the_frc/annual-reports/annual-report-2015-16/1-role-and-
composition-of-the-frc/ [Accessed 31 March. 2019]
FRC (2019). Core Objectives of the FRC. [online] Available at:
http://www.frc.gov.au/about_the_frc/objectives/ [Accessed 31 March. 2019]
IASplus (n.d.). IFRS Interpretations Committee. [online] Available at:
https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/ifrs-ic [Accessed 31 March. 2019]
Parrino, R. and Kidwell, D. (2014) Fundamentals of Corporate Finance (3rd ed.) London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M. and Nguyen, H. (2015).
Financial Management, Principles and Applications (6th ed.) NSW: Pearson Education, French
Forest Australia
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