Week 1 Lecture-2.pdf

Yue Cai Lecturer: BUSN7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Introduction Yue Cai Offic...

Yue Cai Lecturer: BUSN7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Introduction Yue Cai Office: Room 2044, PAP Moran Bld (26B) Email: [email protected] Consultation hours: Thursday 1:30pm to 3:30pm 2 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Teaching Team Course lecturers Yue Cai (first 6 weeks) Xiu-Ye Zhang (weeks 7 to 12) Room 2044, PAP Moran Bld (26B) Room 2045, PAP Moran Bld (26B) [email protected] [email protected] Consultation hours: Thursday 1:30pm to 3:30pm Tutors: – Yi Gong [email protected] – Yilin Zhao [email protected] 3 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Prescribed textbook Loftus, J., Leo, K., Boys, N., Daniliuc, S., Luke, B., Ang, H., and Byrnes, K., 2020. Financial Reporting, 4th, Wiley Purchase options: – Purchase direct from Wiley: » Hard copy » E-book » You do not need to purchase the WileyPLUS version Library copy: – https://ebookcentral.proquest.com/lib/anu/detail.action?pqorigsite=primo&docID=7099270 4 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Course administration Students taking this course are expected to commit at least 10 hours a week to completing the work. This will include: – 2 hours a week: lecture – 1 hour a week: tutorial – 7 hours a week: private study You should review lecture notes and address any issues you do not understand during the lecture. You are expected to attend lectures having already read the specific reference material. 5 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Assessment Tutorial Participation: 5% – You are required to attend your assigned tutorial each week, be prepared, and actively participate in class discussions as appropriate. Participation will be assessed during every week during the semester. The halved sum of the best ten marks will be considered the overall tutorial participation mark. In-tutorial presentations 10% – Students will be allocated a week in which they present their findings to the tutorial questions. The expected length of the presentation is 20 minutes. Marks will be given based on the tutor’s assessment (50%) and students’ assessment of the presentation (50%). In-class test: 35% – The in-class test will be held in class in week 6. The in-class test is worth 35% toward the final mark. Testable contents include materials from Lectures 1 to 5, inclusive. Final examination: 50% – The final examination will be in-person. The examination will be based on Weeks 7, 8, 9, 10, 11 and 12 topics. 6 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Tutorials All tutorial questions provided on Wattle are to be attempted before the tutorial. Please come prepared! You will be expected to have prepared tutorial work beforehand so that, in tutorials, the tutor will only need to address any problem you might have. The solutions to the questions will be made available on Wattle each Monday after the previous week’s tutorials. 7 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Course details This course covers: the characteristics of the Australian accounting environment and its financial reporting requirements for companies accounting for non-current assets (revaluation, impairment) accounting for intangible assets and contingent liabilities accounting for financial instruments and foreign currency transactions accounting for income tax accounting for leases a comprehensive coverage of consolidation issues accounting for owners’ equity (share capital and reserves) 8 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C Lecture 1 Accounting regulation and the conceptual framework Revenue recognition (Chapters 1 and 16) 9 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Chapter 1 Accounting regulation and the conceptual framework 10 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Sources of accounting regulation The major sources of regulation of financial reporting in Australia are: – The Corporations Act 2001 – Australian Accounting Standards – The Conceptual Framework for Financial Reporting (Conceptual Framework) – Australian Stock Exchange (ASX) Listing Rules 11 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The Corporation Act 2001 The Corporations Act 2001 is an Act of the Commonwealth of Australia that sets out the laws dealing with business entities in Australia at the federal and interstate levels. The Act is the primary basis of Australian corporations law. The Australian Securities and Investments Commission (ASIC) is an independent commission of the Australian Government. The role of the ASIC is to enforce and regulate company and financial services laws: – Administers and monitors implementation of the Corporations Act and investigates and prosecutes breaches – Promotes confidence in the financial system More information in the ASIC Act. 12 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The Corporation Act 2001 The Corporations Act requires the preparation of a financial report and a Directors’ Report for each financial year by: – All disclosing entities & public companies – All public companies – All large proprietary companies » In limited circumstances, some small proprietary companies may be required to prepare a financial report and directors’ report if directed to do so by shareholders or the ASIC – All registered schemes Disclosing entities are required by the Corporations Act (Sections 302 & 320) to also prepare half-yearly reports. Such reports are also required by ASX Listing Rules (Chapter 4). Accounting standard AASB 134 prescribes the minimum content of an interim financial report. 13 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The Corporation Act 2001 Disclosing entity: With few exceptions, entities whose securities are listed on a securities exchange are disclosing entities. Public company: Investments that are open to the public (e.g. exchange listed companies). Proprietary company: A private company, i.e., investments are not open to the public. Registered scheme: Registered scheme refers to a managed investment scheme that is registered under 601EB of the Corporations Act. 14 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The Corporation Act 2001 Proprietary company: – No more than 50 non-employee shareholders – Cannot raise funds from the public, but required to have share capital Proprietary companies are classified as either large or small. As noted above, only large proprietary companies are required by the Corporations Act to provide a financial report and directors’ report. A proprietary company is defined as “small” if it satisfies the definition of a proprietary company and meets at least two of the following criteria: – Consolidated revenue for the financial year is < $50 million. – Consolidated gross assets at the end of the financial year are < $25 million. – Fewer than 100 employees at the end of the financial year. 15 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The Corporation Act 2001 Sec. 297 requires that an entity’s financial statements must provide a true and fair view. Sec. 296 of the Corporations Act 2001 requires compliance with Australian accounting standards. The Act does not define the meaning of “true and fair.” AASB 101, para. 15 states “application of [accounting standards], with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.” 16 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Australian Accounting Standards The Australian Accounting Standards Board (AASB) is an Australian Government agency that develops and issues accounting standards and develops a conceptual framework for the purpose of evaluating proposed standards. The Financial Reporting Council (FRC) is a statutory body responsible for overseeing the effectiveness of financial reporting in Australia. – The FRC has no power to either direct the AASB in the development of particular standards or veto a standard formulated and recommended by the AASB. Under the direction of the FRC, the AASB adopted International Financial Reporting Standards (IFRSs) in 2005. IFRSs are created by the International Accounting Standards Board (IASB). Australian accounting standards are identical to their international equivalents, with the exception that: – AASBs contain additional paragraphs relevant to public sector and not-for-profit entities, and paragraphs related to reduced disclosure requirements (RDR), discussed below. 17 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  International Financial Accounting Standards IFRS standards are widely adopted around the world: approximately 120 nations and jurisdictions. A major exception is the USA, which requires the use of its own standards for all domestic public companies (created by the Financial Accounting Standards Board). – However, the use of IFRS standards is permitted for listing by foreign companies. China's national standards are substantially converged with IFRS Standards, and China has committed to adopt IFRS Standards for reporting by at least some domestic companies although there is no timetable for completion of the process. 18 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Australian Accounting Standards As a result of adopting international standards, there are three sources of AASB standards: – AASB 1-99: equivalent to IFRS standards issued by the IASB » have the same number as the equivalent IASB standard – AASB 101-199: equivalent to IAS standards issued by the International Accounting Standards Committee (IASC) prior to 2001 (predecessor to the IASB) » have the same number (+100) as the IAS standards on which they are based – AASB 1001-1099: no international equivalents » have the same number as the previous AASB standard 19 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Standards versus Interpretation In addition to IFRS (standards), the IASB also issues interpretations. Interpretations frequently provide additional guidance on the application of accounting standards, or provide requirements concerning urgent financial reporting issues. IRFS interpretations are adapted by the AASB to suit the Australian environment. These interpretations have the force of law. (AASB 1048 Interpretation of Standards) 20 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  AASB two-tier differential reporting Financial reports that comply with AASB are known as general purpose financial statements (GPFS) General purpose financial statements are those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs. (AASB 101, par. 7) In Australia, there are two “tiers” of reporting requirements: – Tier 1 requires full application of all standards and interpretations – Tier 2 allows significantly reduced disclosure by applicable entities. Tier 1 applies to – For-profit private sector entities that have public accountability. – Australian government and state, territory, and local governments Tier 2 applies to – For-profit private sector entities that do not have public accountability. – Not-for-profit private sector entities – Public sector entities other than the Australian government and state, territory, and local governments. 21 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Public accountability Public accountability – an entity has public accountability if: (a) its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or (b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. AASB 1053, Appendix A 22 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Australia Stock Exchange Listing rules help ensure that information is disseminated in an efficient and timely manner. Failure to comply may lead to removal from the Board. ASX Listing Rules are divided into 20 chapters - keys are Chapter 3 (continuous disclosure) and Chapter 4 (periodic disclosure). Listing Rule 3.1 provides the general principle that: – once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell the ASX that information. 23 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Conceptual Framework Prescribes the nature, function and limits of financial reporting. The conceptual framework is not a standard. Its purpose is to provide a coherent set of principles: – assists with standard consistency – assists preparers to deal with issues not addressed by a standard – assists all parties in interpreting statements. The framework must be adhered to by preparers of general-purpose financial reports (GPFRs). 24 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Conceptual Framework Prior to 2020, the conceptual framework included the framework issued by the IASB and Statement of Accounting Concept SAC 1. Effective 1 Jan 2020, the AASB has adopted a new framework – Conceptual Framework for Financial Reporting – which replaced both the old framework and SAC 1. While the old framework will still apply for some entities during a transition period, in this course we will focus on the newly revised framework. 25 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The objectives of GPFR The objective of general purpose financial reporting forms the foundation of the Conceptual Framework. The objective of GPFR is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions involve decisions about: – (a) buying, selling or holding equity and debt instruments; – (b) providing or settling loans and other forms of credit; or – (c) exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. 26 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The objectives of GPFR Many existing and potential investors, lenders and other creditors cannot require reporting entities to provide information directly to them and must rely on general purpose financial reports for much of the financial information they need. Consequently, they are the primary users to whom general purpose financial reports are directed. However, general purpose financial reports do not and cannot provide all of the information that existing and potential investors, lenders and other creditors need. Those users need to consider pertinent information from other sources, for example, general economic conditions and expectations, political events and political climate, and industry and company outlooks. General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders and other creditors to estimate the value of the reporting entity. 27 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Qualitative characteristics of financial reporting Two types of characteristics of financial reporting are identified in the current Framework: – Fundamental (essential): » Relevance (including materiality) » Faithful representation – Enhancing (not essential): » Comparability » Verifiability » Timeliness » Understandability. 28 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Qualitative characteristics of financial reporting Relevance - information is relevant if: – It is capable of making a difference in the decisions made by the capital providers as users of financial information – It has predictive value, confirmatory value or both. – It is capable of making a difference whether the users use it or not. Faithful representation - is attained when the economic phenomenon is depicted completely, neutrally and free from material error. – A depiction is complete if it includes all information necessary for faithful representation. – Neutrality is the absence of bias intended to attain a predetermined result. 29 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Qualitative characteristics of financial reporting Comparability enables users to identify similarities and differences between two sets of economic phenomena. Verifiability helps assure users that information faithfully represents the economic phenomena that it purports to represent. Timeliness means having information available to decision-makers before it loses its capacity to influence decisions. Understandability enables users to comprehend its meanings. 30 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Elements of financial statements Assets Liabilities Statement of Financial Position (i.e. The Balance Sheet) Equity Income Statement of Profit and Loss (i.e. The Income Statement) Expenses 31 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Definition of Assets Each of the five elements is defined in the Conceptual Framework(“CF”). Definition of asset: – ‘An asset is a present economic resource controlled by the entity as a result of past events’. (CF 4.3) The term “economic resource” is defined as: – “… a right that has the potential to produce economic benefits.” (CF 4.4) This definition consists of three key terms: – Right – Potential to produce economic benefits – Control 32 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Rights The Conceptual Framework specifies that the rights, in order to be an asset of the entity, must: – both have the potential to produce for the entity economic benefits beyond the economic benefits to all other parties … and be controlled by the entity (CF 4.9) Therefore, rights to access public goods that are available to all parties are typically not assets. A single physical object (such as a machine) or a non-physical object (such as intellectual property) often gives rise to multiple rights, e.g., the right to use and the right to transfer. Strictly speaking, the “economic resource” is the collection of rights rather than the object itself. However, “describing the set of rights as the physical object will often provide a faithful representation of those rights in the most concise and understandable way.” (CF 4.12) 33 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Potential to produce economic benefits Paragraph 4.14 of the Conceptual Framework states: – “An economic resource is a right that has the potential to produce economic benefits. For that potential to exist, it does not need to be certain, or even likely, that the right will produce economic benefits. It is only necessary that the right already exists and that, in at least one circumstance, it would produce for the entity economic benefits beyond those available to all other parties.” Examples of potential economic benefits: – receive contractual cash flows; – exchange economic resources with another party on favourable terms; – produce cash inflows or avoid cash outflows; – receive cash or other economic resources by selling the economic resource; – extinguish liabilities by transferring economic resources. (CF 4.17) The “economic resource” is the right to potential economic benefits, not the future economic benefits themselves. (CF 4.17) 34 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Control Paragraph 4.20 defines control as follows: – “An entity controls an economic resource if it has the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it. Control includes the present ability to prevent other parties from directing the use of the economic resource and from obtaining the economic benefits that may flow from it. It follows that, if one party controls an economic resource, no other party controls that resource.” NB: Control is not equivalent to Ownership: – An entity can control an economic resource but not own it, e.g. a long-term lease. – An entity might only own 51% of the voting stock of another entity, but this is sufficient to give it control over 100% of the other entity's assets. 35 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Definition of Assets Which of the following meets the definition of an asset? – A machine owned by the company. – A machine leased (long-term) by the company. – Highly experienced employees. – Intellectual property protected by a patent. – Your education. – The “Google” brand name. 36 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Definition of Liabilities Definition of liability: – A liability is a present obligation of the entity to transfer an economic resource as a result of past events. (CF 4.26) For a liability to exist, three criteria must all be satisfied: – the entity has an obligation – the obligation is to transfer an economic resource; – the obligation is a present obligation that exists as a result of past events. (CF 4.27) An obligation is defined as “… a duty or responsibility that an entity has no practical ability to avoid. An obligation is always owed to another party (or parties).” (CF 4.29) A legal debt is a liability, however, not all liabilities are legal debts, e.g., an obligation can also be imposed by customary practices (constructive obligation). (CF 4.31) 37 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Definition of Equity Definition of equity: – ‘the residual interest in the assets of the entity after deducting all its liabilities’ (CF 4.63) – Equity = Assets –Liabilities – Represents accounting’s measure of the value of the company to the owners, also known as book value. 38 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Definition of Income and Expenses Definition of income (i.e. revenue and gains): – “Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.” (CF 4.68) Definition of expenses: – “Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.” (CF 4.69) 39 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Recognition of five elements Recognition is the process of capturing for inclusion in the statement of financial position or the statement(s) of financial performance an item that meets the definition of one of the elements of financial statements—an asset, a liability, equity, income or expenses. (CF 5.1) Thus, to be recognised, an item must satisfy the definition of one of the five elements. However, not all items that meet the definition of one of the five elements are recognised. 40 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Recognition criteria An asset or liability is recognised only if recognition of that asset or liability and of any resulting income, expenses or changes in equity provides users of financial statements with information that is useful, i.e. with: – relevant information about the asset or liability and any resulting income, expenses or changes in; and – a faithful representation of the asset or liability and of any resulting income, expenses or changes in equity. (CF 5.7) 41 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Disclosure versus recognition Recognition means to record the event or transaction in the body of the financial statements. Disclosure means to provide information about the event or transaction outside the body of the financial statements, e.g., in the Notes to the financial statements. It is common to disclose events that meet the definitions but fail the recognition criteria. 42 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Measurement “Elements recognised in financial statements are quantified in monetary terms. This requires the selection of a measurement basis. A measurement basis is an identified feature—for example, historical cost, fair value or fulfilment value – of an item being measured.” (CF 6.1) Two categories of measurement basis, – Historical cost: The initial value of the costs incurred in acquiring or creating the asset – Current value: Reflects conditions at the measurement date. It includes » Fair value: Price to be received to sell an asset or paid to transfer a liability. » Value in use (asset)/fulfilment value (liabilities): PV of future cash flows or other economic benefits » Current cost: Cost of an equivalent asset/consideration that would be received for an equivalent liability. 43 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Chapter 16 Revenue Recognition 44 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Introduction AASB 15 Objective: “to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer” (Paragraph 1) The standard shall be applied to all contracts with customers, except: lease agreements insurance contracts financial instruments and other contractual rights or obligations non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. 45 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The definition of income and revenue AASB 15 defines income as “increases in economic benefits during the accounting period in the form of inflows or enhancement of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants” (Appendix A) Key concepts: Increase in economic benefits during the current period. Result in either increases in Assets or decreases in Liabilities that result in an increase in equity Investments by equity holders are excluded from the definition. 46 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The definition of income and revenue AASB 15 defines revenue as “income arising in the course of an entity’s ordinary activities” (Appendix A). In contrast “Gains” are defined as income arising outside the “ordinary activities.” – Ordinary activities are not defined in the conceptual framework or AASB 15 but are generally viewed as activities relating to the company’s core business operations 47 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Revenue recognition and accruals An accrual is an accounting entry where revenue or expenses are recognised at times other than the receipt or payment of cash. For example, for revenue recognition, it is possible that revenue is recognised either (1) prior to receipt of cash, (2) simultaneous with receipt of cash, or (3) after receipt. 48 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Revenue recognition and accruals A liability is recreated when Recognise prior to receipt of cash cash is received because now Dr Accounts receivable 100 have a future obligation to either (1) do the work, or (2) Cr Revenue 100 return the cash. Same time as receipt Dr Cash 100 Cr Revenue 100 Recognise after receipt of cash Dr Cash 100 As the work is completed, the Cr Unearned revenue (L) 100 liability is converted into revenue. A key issue is deciding Dr Unearned revenue (L) 100 the timing of this conversion. Cr Revenue (R) 100 49 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue AASB 15 identifies five steps in recognising revenue: 1. Identify the contract or contracts with the customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligation. 5. Recognise revenue when (or as) the entity satisfies a performance obligation. 50 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 1: Identify the contract or contracts with the customer AASB 15 defines a contract as: “An agreement between two or more parties that creates enforceable rights and obligations” (Appendix A). For example, a contract for goods and services establishes rights and obligations for both the seller and the buyer. Seller Buyer Obligation: to deliver goods and services Obligation: to pay for the goods and Rights: to receive payment when goods and services when delivered services are delivered Rights: to receive goods and services A contract does not exist if each party to the contract has the unilateral enforceable right to terminate an unperformed contract without compensating the other party (Paragraph 12). 51 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 2: Identify the performance obligations in the contract. A performance obligation is defined in AASB 15 as: “a promise in a contract with a customer to transfer to the customer either: a) a good or service (or a bundle of goods or services) that is distinct; or b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.” (Appendix A) AASB 15 specifies two criteria that must both be met for a good or service to be distinct: a) the customer can benefit from the good or service on its own or together with other readily available resources; and b) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. (Paragraph 27) 52 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 3: Determine the transaction price When a performance obligation is fulfilled, an entity shall recognise as revenue the amount of the transaction price related to that performance obligation. AASB 15 defines the transaction price as: “The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties” (Appendix A). Consider the following in determining the transaction price: – variable consideration – deferred consideration – exchanges or swaps 53 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 3: Determine the transaction price Variable consideration Examples include rebates for large quantities of purchases, discounts, price concessions, refunds etc. Variable consideration can only be included in the transaction price if it is highly probable that its inclusion will not result in a significant reversal when the uncertainty is resolved. 54 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 3: Determine the transaction price Deferred consideration A financing component in the contract E.g. an interest-free credit period for customers Need to adjust for the consideration amount for the effect of the time value of money (ie, discounted present value) Loftus et al. (2020) Example 16.1 Chaise Ltd sells furniture and offers an interest-free period of 12 months to customers. Customer G purchases furniture on 30 June 2022. The current cash sales price of the furniture is $20 000. Customer G will pay $20 000 on 30 June 2023. Chaise Ltd determines that an appropriate discount rate for imputing interest to the transaction is 4% per annum. It determines that the present value of $20 000 to be received in 1 year’s time is $19 230. At 30 June 2023, Chaise Ltd would record the following entries: At 30 June 2022, Chaise Ltd would record the following entries: Dr Deferred interest (L) 770 Dr Receivable 20 000 Cr Interest revenue 770 Cr Revenue 19 230 Dr Cash 20 000 Cr Deferred interest (L) 770 Cr Receivable 20 000 55 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 4: Allocate the transaction price to the performance obligation When multiple performance obligations are identified in a contract with a customer, the entity must allocate the transaction price to each performance obligation. This is necessary because the revenue might be recognised at different times for various performance obligations. AASB 15 requires the transaction price to be allocated to the performance obligations in the contract by reference to their relative stand-alone selling prices (Paragraph 74). – That is, the price at which an entity would sell a promised good or service separately to a customer. The best stand-alone selling price is the observable price of a good or service when it is sold separately in similar circumstances and to similar customers. If a stand-alone selling price is not directly observable, an entity shall estimate such a price. Methods for estimating stand-alone prices can include: – adjusted market assessment approach – expected cost plus a margin approach If the transaction price of a package of goods and services allows for a discount, the discount is allocated based on the relative stand-alone selling price. 56 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 4: Allocate the transaction price to the performance obligation Example: multiple-element arrangements Customer A signs up a 2-year contract with X Ltd for a bundled service which includes phone call service and data access service. Customer A pays $1200 upfront. The price for each service if sold separately is: phone call service $900, and data access service $400. Calculate the allocation of discount. The stand-alone selling price of each service is a total of $1300. The transaction price of the contract is $1200. The discount is $100. The discount is allocated to each component of the contract based on the relative stand-alone price: 57 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 4: Allocate the transaction price to the performance obligation Example: multiple-element arrangements Journal entry at the inception of the agreement: Dr Cash 1200 Cr Deferred revenue – phone service (L) 831 Cr Deferred revenue – data access service (L) 369 The deferred revenue will be recognized when the services are delivered. As the services are available to the customer continuously over the 2-year contract period, the revenue is recognized using a straight-line basis over 2 years in accordance with the accounting standard. Each year, at financial year end, the following entries are made: Dr Deferred revenue – phone service (L) 415 Dr Deferred revenue – data access service (L) 185 Cr Revenue 600 58 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  The steps in recognising revenue Step 5:Recognise revenue when (or as) the entity satisfies a performance obligation Revenue is recognised when control passes to the customer. AASB 15 defines control as: – “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset” (Paragraph 33). Performance obligations may be satisfied (and the control is transferred) at a point in time or over time. 59 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Applying the recognition criteria for revenue: Sale of goods Example 1: X Ltd sells goods to Customer A. Major installation is required on site when the goods are delivered. Customer A will not accept the goods or pay until installation is completed. When should X Ltd recognize the revenue from the sale of goods? The installation is a performance obligation. X Ltd has not transferred the control of the goods to the customer and it is not probable that there will be inflow of economic benefit until the installation is completed. Therefore, X Ltd can only recognize revenue when the installation is completed. 60 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Applying the recognition criteria for revenue: Sale of goods Example 2 X Ltd sells goods to Customer A. The contract states that Customer A will hold the goods on consignment and will only pay when Customer A on-sells the goods to another customer. When should X Ltd recognize the revenue from the sale of goods? X Ltd has not transferred the control of the goods to Customer A on delivery. It is not probable that there will inflow of economic benefits as Customer A will only pay for those goods that it on sells to another customer. Therefore, X Ltd does not recognize any revenue until Customer A has on sold the goods. 61 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C  Applying the recognition criteria for revenue: Rendering of services The recognition of revenue for the rendering of services shall be determined by reference to the performance obligations satisfied over time if at least one of the criteria stated in paragraph 35 of AASB 15 are met: a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or c) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date 62 ANU RESEARCH SCHOOL OF ACCOUNTING | BUSN 7050 CORPORATE ACCOUNTING TEQSA PROVIDER ID: PRV12002 (AUSTRALIAN UNIVERSITY) CRICOS PROVIDER CODE: 00120C