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Lecture 2 Regulation of Financial Reporting in Australia
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Transcript of Lecture 2 Regulation of Financial Reporting in Australia
Lecture 2Lecture 2Regulation of Financial Regulation of Financial Reporting in AustraliaReporting in Australia
AASB
Lecture OverviewLecture Overview
Review of important concepts (module 1) Financial reporting decisions Impact of information Asymmetry
Financial reporting discretion (2.1) Current accounting regulations (2.2) International harmonisation of
accounting standards (2.2) Rationale for regulation (2.3)
Review of Important Review of Important ConceptsConcepts
Financial Reporting Decisions
Impact of Information Asymmetry
Scope of Financial Scope of Financial ReportingReporting
Financial reporting covers more than just financial/company accounting (preparation of financial statements). Although this is an important part of it.
Financial reporting also includes disclosures that may or may not be contained in the financial statements
Examples of disclosures Environmental disclosures, notes to the
accounts regarding the valuation of assets, press releases
Financial Reporting Financial Reporting DecisionsDecisions
Financial reporting decisions relate to application of the accruals system as well as disclosure related choices
Five types of financial reporting decisions Expensing versus Capitalisation of Costs Accounting Methods Accounting Estimates Disclosure versus Recognition Disclosure Policy
Information AsymmetryInformation AsymmetryInformation AsymmetryInformation Asymmetry
Occurs when some parties to a business transaction have an information advantage
adverse selection one party has knowledge not possessed by
the other
moral hazard arises when some parties cannot observe all
the actions of the other parties to the transaction
Summary:Summary:Information AsymmetryInformation Asymmetry
Adverse selectionAdverse selection(Financial reporting to convert(Financial reporting to convert inside info to outside info.)inside info to outside info.)
Moral hazardMoral hazard(Accounting to monitor the(Accounting to monitor thebehaviour of managers)behaviour of managers)
The Fundamental Problem The Fundamental Problem of Financial Accounting of Financial Accounting TheoryTheoryProvision of relevantProvision of relevantinfo. to aid investorinfo. to aid investorDecision makingDecision making
Provision of reliableProvision of reliableinfo. to controlinfo. to controlmanagement behaviourmanagement behaviour
Relevance and Relevance and ReliabilityReliability
A trade-off Ability of financial reporting to
overcome information asymmetry problems depends on its degree of relevance and reliability
Regulation of financial reporting can increase (decrease?) relevance and (especially) reliability
Possible solutionsPossible solutions
1. Let market forces determine what information is supplied
2. Regulate the provision of financial information
Financial Reporting Financial Reporting DiscretionDiscretion
(module 2.1)(module 2.1)
Financial Reporting Financial Reporting DiscretionDiscretion
Accountants and managers have substantial discretion when making financial reporting decisions
Decisions impact: Numbers in Financial Statements What information is disclosed Decisions of financial statement users
Relates to: Unregulated financial reporting decisions Choices available within regulated financial reporting
decisions
Is financial reporting Is financial reporting neutral and unbiased?neutral and unbiased?
Depends on: Amount of discretion available to
managers How managers exercise their
available discretion efficient motivations (unbiased) opportunistic motivations (biased)
Concept of self interest
Self InterestSelf Interest
An important concept that helps us understand the way the world works
Financial reporting and its regulation are affected by the self interest of the individuals involved
Individuals form into groups to help achieve their objectives
Are accounting Are accounting regulations neutral and regulations neutral and unbiased?unbiased?
Individuals are involved in the standard setting process scope for self interest to get in the way of
“neutral and unbiased” accounting regulations the individuals that will be regulated by the
new accounting standards can have an impact on the standard setting process
Adverse economic and social consequences must be considered
Current Accounting Current Accounting RegulationsRegulations(module 2.2)(module 2.2)
The Development of The Development of Accounting Regulation in Accounting Regulation in AustraliaAustralia
Pre World War 2 - close links with the UK Subsequent influences:
Development of accounting standards in 1970s
ASRB (now AASB) shifted control of accounting regulation from profession to government in 1984
Corporations Law application of AASB standards compulsory continuous disclosure applies
History of Accounting History of Accounting RegulationRegulation
Three Time Periods: 1. A largely unregulated period (pre
1970) 2. A period of professional regulation
non-compliance problems 3. Current period of regulation by
legislation (post 1984)
Current Sources of Current Sources of Accounting Regulations Accounting Regulations in Australiain Australia
FRC - Financial Reporting Council oversight of the standard setting process
AASB - Aust. Accounting Standards Board technical deliberations about new and
changed accounting standards http://www.aasb.com.au/
UIG - Urgent Issues Group
International International Harmonisation of Harmonisation of
Accounting StandardsAccounting Standards(module 2.2 cont.)(module 2.2 cont.)
Globalisation of Globalisation of businessbusiness
An increasing fact of business Global capital and product markets
Impact on financial reporting Need for internationally comparable
financial statements?
Advantages of internationally Advantages of internationally comparable accounting comparable accounting standardsstandards
Presentation of high quality, transparent and comparable financial information is likely to:
reduce investment risk in foreign companies / lower cost of capital
encourage cross-border investment and result in better allocation of savings to investments
How to achieve How to achieve internationally comparable internationally comparable financial statementsfinancial statements
One set of rules / accounting standards? Where does this leave AASB?
If so, who’s rules? International Accounting Standards Board US (FASB/SEC) other
Should any variation between countries remain? Adoption versus consistency with global set of
standards? IASB is currently embarking on a program of
convergence of accounting standards world-wide
International International ConvergenceConvergence
The IASB “cooperates with national accounting standard setters to achieve convergence in accounting standards throughout the world”
The AASB has a specific function “to participate in and contribute to the development of a single set of accounting standards for world-wide use”
AASB Policy of AASB Policy of International Convergence International Convergence and Harmonisationand Harmonisation
International convergence – “working with other standard-setting bodies to develop new or revised standards that will contribute to the development of a single set of accounting standards for world-wide use”
International harmonisation – a process which leads to Australian accounting standards being compatible with IASs
What is Harmonisation ?What is Harmonisation ?
Harmonisation refers to a process which involves national standard setters adopting or adapting IAS or ensuring their national standards are consistent with IAS
AASB has been adapting Australian approved accounting standards to ensure that they are consistent with IAS
This is different to simply adopting IAS
AASB Harmonisation AASB Harmonisation ProgramProgram
AASB standards amended to be consistent with, but not identical to IAS involves amending existing standards
to conform with existing IAS adopting / adapting existing IAS for
areas not currently addressed by standards in Australia
harmonise new standards with new / revised IAS
Status of AASB Status of AASB HarmonisationHarmonisation
Most of AASBs amended to comply with IAS
Difficulties in coming to agreement on certain standards
Full harmonisation not always achieved
Some awaiting IASB completion of IAS
NewsflashNewsflash
Australia will ADOPT International Accounting Standards from January 2005!
First country in the world to make such a statement
However, the European Union has stated that it will require all listed companies to prepare consolidated financial statements in accordance with IAS from 2005
Who will benefit from Who will benefit from International International Convergence?Convergence?
Primarily, large companies Currently to list in the US involves
companies preparing either a separate set of accounts using US GAAP or a conversion table which provides a translation of key figures from Australian to US GAAP
Rational for Rational for RegulationRegulation
(module 2.3)(module 2.3)
Some Important Some Important QuestionsQuestions
Should financial reporting be regulated?
If so: Who should control the
regulatory process? How much regulation is
enough?
Arguments for and Arguments for and against regulationagainst regulation
For: markets for information are inefficient and
subject to failure investors need protection from misleading
information enhanced uniformity / comparability
Against: markets for information are efficient regulation leads to decreased relevance of
financial reporting
Theories of RegulationTheories of Regulation Regulation of financial reporting
“protects the public” maximisation of social welfare
Regulation of financial reporting is controlled by the accounting profession self interest of accountants
Regulation of financial reporting is controlled by company managers self interest of all individuals involved
A political processA political process
Financial reporting regulations have many economic and social consequences
Various interested parties lobby the standard setters (self-interest)
Standards are not set in a political vacuum
To be discussed more thoroughly next lecture…..
For TutorialsFor Tutorials Required reading
Text chapter 2 Text chapter 6, pp. 192 - 195
Optional reading (harmonisation) Selected reading 2.1 Remainder of chapter 6
Self assessment questions Questions 1 - 7 from module 2 Answers in tutorials