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Financial Accounting Practices in Australia

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Added on  2023/06/11

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The report presents analysis of some of the accounting practices carried out in Australia. It starts with identification and discussion of some of the main source of the regulation to financial reporting in Australia. This is followed by discussion of some of the procedures followed while preparing accounting standards in the country. It also highlights how the accounting standards are being enforced within Australia. This is not all; the report discusses critically how users of the financial information presented in the general purpose financial report have identical needs which are all met through the GPFR.

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Financial Accounting 1
FINANCIAL ACCOUNTING
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Financial Accounting 2
Introduction
The report presents analysis of some of the accounting practices carried out in Australia. It starts
with identification and discussion of some of the main source of the regulation to financial
reporting in Australia. This is followed by discussion of some of the procedures followed while
preparing accounting standards in the country. It also highlights how the accounting standards
are being enforced within Australia. This is not all; the report discusses critically how users of
the financial information presented in the general purpose financial report have identical needs
which are all met through the GPFR. It also highlights some of the limitations associated with
Present Value as the key measurement base in producing decision-useful information for the
users of financial statements. It is then concluded with a discussion of some of the limitations of
the AASB 138 in providing useful information for decision making by different users of the
financial information.
Identification and discussion of the main sources of regulation of the financial reporting in
Australia
According to Henderson et al (2015), Australia has a different accounting and financial
disclosure system than UK or US. The financial reporting needs are fixed in accordance with the
types of entities involved based on the level of interest the community have on an institution.
The types of entity can primarily be classified into one of the following;
(i) Disclosing entities- this classification is mainly for listed companies or listed
managed venture organizations which have known interest undertaking. These
companies have registered securities or issue shares to the public in addition to other
securities based on the circulation of a prospectus.
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Financial Accounting 3
(ii) Large proprietary companies and unlisted corporations- This refers to registered
companies that have gross working capital of 10 million dollars or above, gross
possessions of 5 million dollars and above or companies that have a workforce of 50
or more employees.
(iii) Small registered corporations
Under the company laws, all companies that fall under the first two categories are expected to
maintain accurate accounts of their monetary transactions. According to Horngren et al (2012),
these transactions are maintained for the resolve of preparing financial accounts and auditing of
the financial records. They are also required to prepare annual financial statements in exception
of small proprietary companies. The end of year financial records comprises of the Income
Statements, cashflow statements as well as the balance sheet. All the issues to be revealed in the
statements are provided for in the accounting standards developed by the Australian Accounting
Standards Board (AASB) and enforced under the Corporation Laws. This law also requires the
companies to prepare a consolidated financial statement which occurs in situations where the
entity controls more than one entity as an obligation for the accounting standards. The end of
year financial reports must then be disseminated to all the supporters of the company and then
registered with the ASIC offices for review (Adams & Simnett 2011).
The maintenance and development of the accounting standards in Australia involves a series of
steps which calls for public participation where necessary and additional discussions with
significant stakeholders in corporation. The public involvement procedure takes place in form of
drafting the bookkeeping standards and being released for commentaries for 90 days. At the end
of the three months period of exposure, the board considers the civic comments presented and
makes a decision upon the changes necessary to make the accounting policies and standards
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Financial Accounting 4
better for all stakeholders. Once the comments are aligned with the standards, the notice of the
decisions is published with the Australia Gazette for the Commonwealth and a copy tabled in the
Australian Legislature.
Australian Accounting Standards Board (AASB)
This board is a government agency that is in charge of developing and preserving financial
reporting principles that can be applied to entities in public and private segments with the
economy of Australia. The agency also participates in developing global financial standards and
also enhances participation of Australians in setting the global accounting standards. The posers
of AASB are set off under the ASIC Act of 2001.
The standards made by AASB contain the application clause that specifies the entities affected
by the standards. In the financial report, all companies must include the standards listing (AASB
1034) as required by the Corporation laws for such reports (Adams & Simnett 2011). However,
there are other standards whose application are restricted while the rest are expressed to apply
the reporting entities especially for borrowed or listed corporations the application of the
accounting standards in this context
Australian Securities and Investment Commission (ASIC)
This is an sovereign government body whose role is to regulate corporate operations. It is also
the body responsible to regulate companies and financial services by enforcing laws relating to
the same. This control ensures that the Australian creditors, debtors, financiers, consumers and
investors are protected against fraud and other irregularities arising from the operation of a
company. The body was established in 1998 after a recommendation from the Wallis Inquiry.

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Financial Accounting 5
The law empowers ASIC by ensuring that it is responsible for registration of companies and
business names which can easily be searched on the internet. All registered bodies, companies,
business names, foreign companies, associations, non-registered entities and managed
investment schemes can be searched online. The information available includes historical and
current information about the entity such as addresses, directors, former names and their unique
identification numbers. Thus, these powers enable this body to regulate companies under the
following areas of responsibility. These responsibilities include corporate governance, consumer
protection, securities and derivatives, financial literacy and services as well as insurance.
Procedures for Preparing Accounting Standards in Australia
In Australia, accounting standards have had a long history of amendment. The policies were
initially established by expert accounting entities and enforced under the ethical codes. However,
from 1966, several accounting boards (Australian Accounting Research Foundation, ASB and
Public Sector Accounting Standards Board) jointly operated as a unitary body to consolidate
both private and public sector accounting (Cortese, Irvine & Kaidonis 2010). The accounting
procedures changed in 1984 after the establishment of the Accounting Standard Review Board
(ASRB) to determine the right accounting system for registered companies. The body was then
re-established to become the Australian Securities Commission after merging with PSASB. The
regulatory changes of the accounting entities in Australia also included the establishment of the
Financial Reporting Council which was accountable to overseeing the activities of AASB which
operates under the Corporation Act of 2001.
The accounting standards in Australia is slightly different from the global accounting standards
in the manner under which some entries like depreciation, income tax, and financial instruments
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Financial Accounting 6
are reported. Generally, the financial statements reports are prepared with the intentions of
meeting specific informational needs (Jones 2011). The specific needs include those presented
separately within the financial sector as well as other regulatory documents such as the
prospectus. For illustration, in the case of depreciation, the financial reporting standards require
that the term amortization is used instead even though the two have the same meaning. On the
other hand, deferred tax accounting method is generally used to account for income tax in
Australia.
How Accounting Standards Are Enforced in Australia
The main element of Australian financial regulatory framework is derived from the Wallis
Committee of Inquiry which comprises of three main agencies.
(i) Australian Securities and Investment Committee (ASIC)
ASIC is mandated to manage and impose a variety of financial jurisdictive provisions involving
to the financial sector intermediaries, fiscal markets and other financial merchandises like
insurance, retirements, deposit taking institutions and investment companies.as explained in the
illustration above ASIC aim at protecting the markets and clients from scam, prejudiced
practices, manipulation, dishonesty and more specifically to encourage confidence among the
participants in the financial systems by the consumer and the investors (Deegan 2012).
Therefore, it is the work of this body to ensure that individual managers and staff exercise
honesty and fairness in running the company affairs when dealing with investor’s funds in
money lending, securities and futures markets.
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Financial Accounting 7
As part of the consumer protection role, ASIC is mandated to develop policies and guidelines in
regards to the laws under its administration. It should also educate companies on the rights and
responsibilities of licenses issued to them and monitor compliance by the participants of the
financial systems. ASIC should provide accurate and comprehensive information on the
companies and corporate activities operating in the financial market by rating their performance
on the assessment of corporate compliance with the laws (Walker 2010).
ASIC is responsible for implementing the necessary controls of the Financial Services Reforms
Act of 2001 (FSR Act) that was passed with the aim of streamlining market honor and consumer
safety across the financial service trade (Cortese, Irvine & Kaidonis 2010). The provision of the
FRS Act enhances the harmonization of corporate licensing, disclosure and the behavior of
financial service providers. The financial framework is quite flexible to allow different the
treatment of different financial products where necessary. For example, the rudimentary deposit
taking services can be subjected to less rigorous regulations than the other multifaceted venture
products.
The various methods of certifying for futures and securities exchanges and clearing systems
were swapped with a single licensing rule for financial markets in Australia. The licensees have
the primary duty for maintaining sanity of the markets operations as indicated in the licensing
deed (Deegan 2012). ASIC is thus authorized to guide the ministry on issues of licensing and
those that require assessment of the level of compliance.
(ii) Australian Prudential Regulatory Authority (APRA)
The APRA is an integrated financial regulator that is responsible for corporations that are
entitled for deposit taking such as banks, credit unions and building societies. It also regulates

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Financial Accounting 8
friendly societies, insurance companies dealing with general and life policies as well as
retirement institutions. APRA is responsible for developing prudential standards and policies that
balance the competition, contestability, financial efficacy and safety as well as viable neutrality.
Deposit taking entities in Australia are controlled under the single license by APRA and are
protected under the provision of ‘depositor’s protection’ provided in the Banking Laws of 1959
(Deegan 2012). This law empowers APRA to perform its duties in the interest of the depositor.
The body has the authority to set prudent standards, issue enforceable directions to its members
appoint investigative managers to authorized deposit taking institutions and revoke licenses of
institutions that does not comply with the set standards. To some extent, APRA can take control
of the institution themselves or apply for court order to close down the ADI.
Under the provision of ‘depositor’s protection’ in the banking laws all investors have the primary
claim of the ADI in the process it’s would up. Since APRA’s aim is to support the interest of the
depositors, all ADIs are required to file assets in the country that are equal or more than the total
liabilities (Zeff & Nobes 2010). However, this type of arrangement does not provide a guarantee
to the security of the depositor’s funds which forces the depositor to seek recourse from APRA
or the administration.
In case a company becomes financially weak for a general underwriter or a life company,
friendly society or a retirement fund, there are higher chances that the impact would be
detrimental to the interest of the members and the policyholders. APRA has the right to arbitrate
in the administration of the distressed company with the help of other relevant financial
institution on the ground of public interest, compensating members of the losses of funds and
investigating any fraudulent activities.
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Financial Accounting 9
(iii) Reserve Bank of Australia (RBA)
The reserve bank has the overall responsibility of ensuring that the monetary policies and the
financial system are stable. RBA is not responsible to defend the welfares of the bank savers and
investors or of bank creditors. Instead, the bank is tasked with handling the threats that are likely
to affect the financial stability that ay spill over to the economy and negatively affect consumer’s
purchasing power and stakeholder’s assurance. In case of financial pressures, the RBA maintains
its unrestricted role of rendering the last resort for supporting urgent fluidity. However, there are
certain circumstances where the RBA may consider lending money to the financial institutions
facing difficulties especially when the institution is under the supervisory of APRA. APRA’s
judgment and recommendation on the situation of the suffering financial institution highly
determines the threat level and the possible intervention to ensure that the institutions retain its
financial stability (Jones 2011).
Under the auspice of the Payments Systems Board, the RBA is also mandated to promote
competition, efficiency and safety in the Australia payment systems with the support of strong
supervisory controls. For example, if the RBA assessment indicates that there is a need to
advance the scope of admittance, efficiency or safety of the compensation system, it can elect a
specific structure that adheres with the subjects of the regulation (Cortese, Irvine & Kaidonis,
2010). In addition, the government envisages that the powers imposed on the RBA should be
exercised within a wider co-regulatory approach at the same time safeguarding the operators in
the private sector.
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Financial Accounting 10
Critical Discussion That Explains Why Users of Financial Information in the General
Purpose Financial Report Have Identical Information Needs Met Through Preparation of
the GPFR
The main idea of financial reporting is usually to offer relevant information about a specific firm
which considered by numerous users such as potential and existing investors, creditors and
lenders for decision making purpose (Hunter, Webster & Wyatt 2012). Given that different users
of the financial statement has relatively similar information needs, it is crucial to explain
information needs of the above users and further provide analysis on how their needs are closely
related. First, potential or existing investors require financial reporting to assist them while
making decision on which is the best and appropriate steps to take with their investments within
the reporting entity; that is, whether to purchase more shares, hold their existing one or to sell
them. Basically, investors need the information in assessing the organization’s probability for
profitability and success (Bonsón, Cortijo & Escobar 2009). Similarly, existing investors need
the information in determining whether the firm is profitable and whether to improve, drop or
continue with it. To be more specific, the report provide information on total returns which is
crucial for investors in making decision on selling, holding or buying equity as well as debt
instruments.
Lenders on the other hand might require general purpose financial report in decision-making.
They utilize the information in the report to assess the firm’s capacity or capability in paying
liabilities once they come due. Other creditors on the other hand, like the lenders are interested in
the report to help them assessing the capacity of the organization in settling its debts once they
come due. In fact, they are usually interested in organization’s liquidity or its capacity of the firm
in settling its short-run or current debts (Hunter, Webster & Wyatt 2012).

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Financial Accounting 11
Other important users of the GPFR are the government agencies. Government agencies,
particularly the tax authorities or collectors are interested in general purpose financial report or
the information there in for regulatory and taxation purposes. Taxes are usually calculated on the
basis of the results of operations as well as the other tax bases (Bonsón, Cortijo & Escobar
2009). Therefore, the government might use the information in the report to understand how
much taxpayers made in order to make decision on the tax due. Secondly, organization’s
management might require the general purpose financial report in making-decision on how much
amount of supplies would be purchased, whether the firm has adequate amount of the cash, how
much amount of cash was made in the previous year as well as in assessing whether the firm was
able to meet its targets.
In this case, it is evident that users of financial information in the general purpose financial
report have identical information needs of making decision. Therefore, their expectations on
returns mostly rely on their evaluation of uncertainty, amount and timing of future cash inflows
to an organization (Barth & Landsman, 2010). In fact, all users of the financial information
require the information in the general purpose financial report to assist them in assessing
prospects for the future cash inflows. In assessing an organization’s prospects for the future cash
inflows, the potential and existing investors, lenders as well as other creditors require the
information on resources of the firm, claims against an organization as well as how successfully
and proficiently an organization’s management has been satisfying their function to utilize the
organization’s resources. Some of these roles include protecting organization’s resources from
the unfavorable economic aspects like technological or price variations and ensuring that an
organization complies with all the relevant regulations, laws and the contractual provisions
(Laux 2008). The information on the management’s responsibilities is crucial for decision-
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Financial Accounting 12
making by different users of such information such as potential and existing investors, lenders as
well as other creditors with some voting right or otherwise influence the management’s actions.
Basically, a good number of the potential and existing investors, lenders as well as other
creditors could not need reporting firms to offer information directly and should depend on the
GPFR for more information they might need. This is based on the fact that these are the main
users to who the GPFRs are directed. The GPFRs usually offer information set which would
meet all then needs of maximum number of users.
Limitations of Present Value as a measurement base in generating decision-useful
information
Despite the AASB recommending use of present value as the base measurement for liabilities
and assets, there are numerous limitations associated with this technique especially when it is
used as measurement base in generating decision-useful information for the users of financial
statements. This is based on the notion that first, while measuring assets and liabilities using
present value, there are some discounting issues which might arise including the income taxes,
employees benefits provision, financial instruments and impairment of the assets (Borle, Singh &
Jain 2008). As a result of this, it becomes a bit hectic for the users of financial users to rely on
the information provided through prevent value in decision-making. Furthermore, present value
as the measurement of based in generating decision-useful information for the users of the
financial information has its share of limitation since opponents of its use argue that the
application of present value leads in decreased reliability of the accounting information.
Basically, present value calls for several estimates or estimation on amount and timing of the
future cash inflows, economic conditions and interest rate. Use of such estimations pose major
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Financial Accounting 13
threats to reliability of the accounting information by either through differing opinions as to the
future situations or via introduction of the biasness in the estimations. Hence, the technique
results in generation of worthless information being provided to the users of the financial
information which is said to sufficiently damage reliability of such information in decision-
making process.
Present value as the base measurement of the liabilities and assets also pose major drawbacks
since the measure include some difficulties in allocating cash flows of the system to individuals
assets which is said to make the systems and difficulties estimating the cash flows. This makes
it’s a bit hectic in estimating the most appropriate discount rate that was employed in discounting
cash flows within the reporting firm (Borle, Singh & Jain 2008). This makes the information
presented worthless to users of the financial information in making decision since if they tend to
rely on this information, they might end up making wrong decision regarding the viability of a
specific investment venture. Additionally, the present value employs different assumptions
which are linked to the economic valuation and which could be viewed to be a bit problematic
when it comes to decision-making. Hence, with the underlying assumption related to present
value measurement, it would be a bit hectic for different users of these financial information to
rely on the information provided through this technique since they might end up making
erroneous decisions which might hurt them in future. Therefore, there is need to employ a better
evaluation technique which would offer decision-useful information to different users of the
financial information
Limitations of the AASB 138 in Providing Information Useful for Decision Making by
Different Financial Statements Users

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Financial Accounting 14
AASB 138 main objective is usually to give some advocate to treatment of the intangible assets
which are not necessarily sorted out precisely in other standards. The standard usually needs an
organization to recognize all its intangible assets on if some specified criteria were met. It also
gives specification on how to weigh resounding sum of the intangibles with some requirements
for specified disclosure on the intangibles (Milburn 2012). Despite the fact that this standard
offer crucial information to the financial users regarding the intangible assets within a given
firm, it has its limitations in regards to provision of relevant information useful in decision-
making to users of the financial information. First, the AASB 138 does not account for some
intangibles which might be confined on or in physical matters like compact disc, film or legal
documentation (Hunter, Webster & Wyatt 2012). This makes its difficult in determining
whether the assets incorporated are intangible. In turn, this makes it’s a bit hectic for the users of
financial information to make decision, on the overall amount of the intangible assets a specified
firm possesses.
The AASB 138 is also said to a disadvantage in providing decision-useful information based on
the manner in which it defines intangible assets Milburn 2012).. Basically, the criterion of the
separability which is used in defining intangible assets under the AASB 138 offer some
hindrances of the information provided which is considered useful for decision-making. The
standard require for separability which implies that the probable assets like reputation, human
resources client relationships, the manner in which the organization’s job conveys to the society
as well as labor relations could not be recognized as the intangible assets (Hunter, Webster &
Wyatt 2012). This makes it’s a bit confusing to users of the financial information since they
wonder which of the information would assists in decision-making. The concept makes it a bit
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Financial Accounting 15
hectic in for the financial users to understand which of the assets could be categorized as
intangible assets.
Another limitation of the AASB 138 in providing useful information for decision-make to user
of the financial information is that the paragraph 63 of the standard provide some restrictions on
the recognition of the internally produced brands, publication of the titles, mastheads, items
same in substance and customer lists (Laux 2008). This restriction would make it difficult for
the financial information users to rely on the information provided in the statement regarding
intangible assets being relied on in making-decision. In fact, it make it a bit tricky for the
information being used in decision-making since the information would be misleading and could
mislead users of the financial information in making wrong decision on investment, giving
finance to the firm and so forth.
There is also a limitation of the AASB 138 being unreliable in providing reliable information to
be used in decision-making by users of the financial information. This is based on the fact that
one of the requirements in the standard recommends that the firm should have active market to
be in a position of applying revaluation method (Milburn 2012). Under this requirement the
standard permits the intangibles being attained in the commercial assortment being in a position
of being measures at the fair value without any active market. Such information is confusing
since some users of the financial information wonder why the firm did not apply the AASB 13
instead, which is said to deal with Fair value Measurement. Hence, this makes the information
being provided by the AASB 138 less important as decision-useful information to users of the
financial information.
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Financial Accounting 16
Another limitation of the AASB 138 is viewed in paragraph 57 which offer criteria related with
internally generated intangibles. Here, users of the financial information might wonder why the
fair value could not be used as the upper limit on the capitalization of the costs. This makes it’s
the information provided non-useful or unreliable being relied on to make decision by financial
information users (Huffman 2013). There is also limitation where the AASB 138 paragraph 54
restricting recognition of research arising from internal project as intangible assets. This
restriction would make it difficult for the users of the financial information to make attractive
decision regarding the organization’s performance Milburn 2012).

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Financial Accounting 17
Reference Lists
Adams, S & Simnett, R (2011), ‘Integrated Reporting: An opportunity for Australia's notfor
profit sector,’ Australian Accounting Review, 21(3), 292-301.
Barth, ME & Landsman, WR (2010), ‘How did financial reporting contribute to the financial
crisis?,’ European accounting review, 19(3), 399-423.
Bonsón, E, Cortijo, V & Escobar, T (2009), ‘Towards the global adoption of XBRL using
International Financial Reporting Standards (IFRS),’ International Journal of Accounting
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Borle, S, Singh, S & Jain, DC (2008), ‘Customer lifetime value measurement,’ Management
science, 54(1), 100-112.
Cortese, CL, Irvine, HJ, & Kaidonis, MA (2010), ‘Powerful players: How constituents captured
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(Vol. 34, No. 2, pp. 76-88). Elsevier.
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Henderson, S, Peirson, G, Herbohn, K & Howieson, B (2015), Issues in financial accounting.
Pearson Higher Education AU.
Horngren, C, Harrison, W, Oliver, S, Best, P, Fraser, D & Tan, R (2012), Financial accounting.
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Financial Accounting 18
Huffman, A (2013), ‘Value relevant asset measurement and asset use: Evidence from IAS 41,’
USA: David Eccles School of Business, University of Utah.
Hunter, L, Webster, E & Wyatt, A (2012), ‘Accounting for expenditure on intangibles,’ Abacus,
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Jones, M (2011), Creative accounting, fraud and international accounting scandals. John Wiley
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Laux, J (2008), ‘Accounting Issues: An Essay Series Part V—Intangible Assets,’ Journal of
College Teaching & Learning, 5(1), 61-68.
Milburn, JA (2012), ‘Toward a measurement framework for financial reporting by profit-
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