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Homework answers / question archive / PR-A3 Explain why non-reporting entities must prepare financial statements
PR-A3 Explain why non-reporting entities must prepare financial statements. Include in your response: i. General purpose for preparing financial statements ii. Legal obligations of businesses in relation to preparing financial statements i. General purpose for preparing financial statements ii. Legal obligations of businesses in relation to preparing financial statements. Include the specific act or legislation you referred to.
The accounting standards provide a framework for determining a consistent meaning of ‘financial position’ and ‘profit or loss’ in financial reporting across entities.
In the absence of any such framework, the figures disclosed in financial statements would lose their meaning and could be determined completely at the whim of the directors of individual entities. The profit or loss reported by an individual entity would vary greatly depending upon which individuals were responsible for the preparation of its financial statements.
This would not be consistent with the requirements of the Act for financial reports to give a true and fair view (s297), prohibiting the giving of false and misleading information (s1308), and only permitting dividends to be paid out of profits (s254T).
The following requirements of accounting standards that apply to all entities reporting under Chapter 2M are also relevant:
Hence, the recognition and measurement requirements of accounting standards must also be applied in order to determine the financial position and profit or loss of any entity preparing financial reports in accordance with the Act
As noted earlier, the recognition and measurement requirements of the accounting standards include requirements relating to depreciation of non-current assets, tax effect accounting, lease accounting, measurement of inventories, and recognition and measurement of liabilities for employee entitlements.
The provisions of accounting standards dealing with the classification of items as assets, liabilities, equity, income and expenses also apply. This would include the provisions of AASB 132 ‘Financial Instruments: Disclosure and Presentation’ concerning the classification of financial instruments issued as debt or equity.
Class Order [CO 05/639] Application of accounting standards by non-reporting entities allows non-reporting entities to take advantage of concessions to the measurement requirements of accounting standards. Examples of these concessions include the provisions of AASB 1 ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ and transitional provisions in new accounting standards.
Directors of non-reporting entities must also consider carefully the need to make disclosures which are not directly prescribed by accounting standards, but which may be necessary in order for the financial statements to give a true and fair view. Such disclosures could include certain significant related party transactions.
ASIC will look closely at cases where non-reporting entities have not complied with the recognition and measurement requirements of accounting standards.
Non-reporting entities which hold out their financial reports to be general purpose financial reports must comply with all requirements of accounting standards.