Accounting (Year 12) - Regulation of Accounting for Companies
A Reporting Entity are those reasonably expected to have Users who depend on the general purpose financial reports (GPFR's) for the information that will be useful to them for making and evaluating decisions about the allocation of scarce resources.
This concept is explained in the Statement of Accounting Concept One (SAC1) from the Australian Accounting Standards Board. Characteristics of a Reporting Entity: 1) There is a separation of management from the bulk of owners and shareholders (e.g. In a public company, directors manage the company while shareholders are the owners). 2) The entity has financial significance, it is a major employment and taxation contribution in the economy (e.g. Woolworths Ltd). 3) The entity is of economic and political importance (e.g. a large oil company or charitable agency).
Entity Stakeholders and their Information Needs
The entity's stakeholders are those with a personal or on behalf of other groups have an interest or concern in the running and performance of the business. Entity stakeholders can be divided into 3 groups: Resource providers, Recipients of goods and services, and Parties performing a review or oversight of the entity. These groups are provided with information through the published General Purpose Financial Reports (GPFR's) of the reporting entity. Each of these groups and their information needs are discussed below.
1. Resource Providers
Several groups serve as resource providers to an entity:
Employees are interested in the ability of the entity to pay their wages, job benefits and if the entity can offer job security.
Lenders (Institutions that lend money to the entity, e.g. Banks), Creditors and Suppliers (those who provide goods and services to the entity) are concerned whether they should grant credit to the entity based on the risk and the ability of the entity to repay debts.
Investors (shareholders) need to be able to determine whether to invest in the the entity's business based on future profitability, their potential return and growth of their investment.
2. Recipients of Goods and Services
These are the groups of individuals who benefit from the provision of goods and services by the reporting entity.
Customers are concerned whether the entity will continue to provide quality products/ services, honour warranty periods and continue production of a certain product/ provide a particular service.
3. Parties Performing a Review or Oversight Function
These parties include:
Government Bodies (e.g. Australian Securities and Investments Commission
ASIC, and Australian Taxation Office (ATO) are concerned about information that will assist them determine if the entity is operating within the prescribed rules.
Trade Unions are concerned as to whether a business entity can pay increased wages and employee benefits, and provide job security.
Special Interest Groups that act on behalf of the Public (e.g. Green Peace).
Accounting Standards are legal guidelines on specific accounting matters that influence the way General Purpose Financial Reports are compiled. AASB 101 paragraph 10 requires Australian public companies and other reporting entities to produce for public access a number of financial reports.
There are 3 main reasons for these Standards and their Purposes are:
1. To provide protection to external users of reports (e.g. creditors and investors):
To assist creditors and investors to analyse and make informed decisions about entities. - To facilitate the provision of financial information.
To provide for comparable reports so that users can compare over time and between entities.
2. Facilitate the Australian Capital Market by creating confidence in processes:
To promote market efficiency
Ensuring the capital markets operate effectively through increasing confidence of creditors and investors in financial reports.
3. Assist directors and managers to discharge their duties:
Assist preparers of financial reports by giving them a framework and benchmarks.
Facilitate accountability of directors.
Promote accurate reporting.