Essay on Topic 2 Tutorial Answers

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Topic 2: Conceptual framework, statement of financial position (balance sheet)

TUTORIAL Questions and Problems

1. Text, page 458, Discussion question 3

3. ‘One of the major changes in both corporations legislation and accounting standards is the adoption of the reporting entity concept.’
This comment was made in a presentation at an accounting conference. One of the directors of your entity, a Brisbane-based company that is a wholly owned subsidiary of a Sydney-based company, was at the presentation and was concerned at his lack of knowledge of this concept.
Explain to the director what is meant by the ‘reporting entity’ concept, the steps the company needs to take to determine whether it is a reporting entity, and the potential impact of this concept on financial reporting. Discuss as well whether or not the reporting entity concept should be abandoned.

Currently, a reporting entity is defined in SAC 1 as an entity in which it is reasonable to expect the existence of users who depend on general-purpose financial reports for information to enable them to make decisions about the allocation of scarce resources, i.e. economic decisions. Note that these users do not have power to command that the entity supply them with information. Hence, they are not entitled to special-purpose financial reports. The users that are expected to exist are in three categories:
1. Resource providers. This category includes employees, lenders, creditors, suppliers and investors. In the case of non-business entities, the category includes donors, members of clubs, taxpayers and ratepayers.
2. Recipients or consumers of goods and services, i.e. customers, beneficiaries, taxpayers and ratepayers.
3. Parties performing a review or overseeing function. These include parliaments, governments, regulatory agencies, labour unions, employer groups, media, and special-interest community groups, e.g. environmental and conservation groups.
SAC 1 provides certain guidelines to be used to assess whether an entity is or is not a reporting entity. These are:
1. Separation of management from economic interest
2. Economic or political importance/influence
3. Financial characteristics.
See section 17.3 of the chapter for further discussion of these guidelines. The consequences of being a reporting entity is that the entity must prepare a general-purpose financial report which must comply with accounting standards issued by the AASB.
Should the reporting entity concept be abandoned? In 2007, proposals were put forward to do away with the reporting entity concept in favour of using a size and public accountability test for determining which entities should prepare a general purpose financial report. If an entity is publicly accountable and satisfies the size test, it must prepare general purpose financial reports which comply fully with the Australian equivalents of full IFRSs. If an entity is not publicly accountable and does not satisfy a size test, then it should use merely the Australian equivalents to the IFRS for small and medium entities (SMEs). See figure 17.3 in the text.
Following negative feedback on the IASB’s proposals, the AASB has tackled the problem differently by issuing AASB 1053, Application of Tiers of Australian Accounting Standards in June 2010, which has adopted a Tier 1 and Tier 2 system of financial reporting, to be applied on or after 1 July 2013. When preparing general-purpose financial statements, those entities in Tier 1 shall apply full International Financial Reporting Standards (IFRSs) as adopted in Australia, and those in Tier 2 can adopt Reduced Disclosure Requirements (RDR). The RDR involves compliance with the recognition and measurement requirements of IFRSs, as already adopted in Australia, but with disclosures substantially reduced compared with those that would be required under full IFRSs.