AYN417

Topic 4: Financial Statements External Reporting

Suggested Solutions

[To gain the maximum learning benefit from this learning activity, it is highly
recommended that you have attempted all of the tutorial questions and
participate in the tutorial(s) prior to reviewing the solution]
Tutorial questions
Chapter 14: Q1, 4, 13; PQ 14.5; 14.7
Chapter 15: Q4, 7, 9, PQ 15.6, 15.7, 15.8*, 15.9
Case study: Continuous disclosure q. 1, 2, 3, 6
Chapter 14
1. What do the terms financial performance and financial position mean
and how do they relate to the objective of general-purpose financial
reporting?
Financial performance is discussed in the Conceptual Framework, as relating to the
return that the entity has produced on its economic resources. Profit is frequently
used as a measure of financial performance.
Information about income and expenses during a financial period plus changes in
assets, liabilities and equities will enable users to assess past performance and make
reasonable predictions about the ability of a company to continue to generate profits
from its operating activities. Information about financial performance is largely
contained in the Statement of Profit or Loss and Other Comprehensive Income and
notes thereto. Its content is regulated by AASB 101 Presentation of Financial
Statements.
Financial position is discussed in the Conceptual Framework as relating to the
entitys economic resources, the claims against the entity and the effects of
transactions and other events that change an entitys economic resources and claims.
Information about financial position is largely contained in the Statement of Financial
Position (or balance sheet) and notes thereto. Its content is also regulated by AASB
101 and provides information concerning:

Resources controlled. Predictions about the ability of an entity to continue to

operate and generate positive cash flows are enhanced by information about
assets.
Financial structure. Details of how the entity is financed through debt or
equity help users determine future distributions of cash flows and the capacity
of the entity to attract resources in the future. A debt-laden company has more
of its future cash flows committed to interest and principal repayment than does
a company largely financed by its shareholders. Such an entity will also have a
more limited capacity to borrow additional funds should this become necessary.
Capacity to adapt. Information about the realisable value, current state of
repair and any restrictions on use of assets enables users to assess the capacity
of the entity to adapt to economic or environmental change.
Liquidity The availability of cash in the near future after taking into account any
financial commitments due over this period.
Solvency. Availability of cash over the longer term in order to meet debts when
they fall due.

4. What should be included in the directors report and the auditors

report?
(a) Director's Reports.

AYN417

Topic 4: Financial Statements External Reporting

Under the Corporations Act, the annual financial report for a company, registered
scheme or disclosing entity must be accompanied by a directors' report (s.298).
Minimum requirements for the annual directors' report are set down in ss.298-300A.
The amount of detail necessary in the report depends on the nature of the company or
registered scheme. The content of the report consists of two main parts general
information about operations and activities (required by s.299), and specific
information (required by s.300).
(b)

Auditor's Report

According to s.307, the auditor who conducts an audit of the financial report must
form an opinion about the following matters:

whether the financial report is in accordance with the Corporations Act

whether the financial report is in accordance with accounting standards
whether the financial report gives a true and fair view
if additional information was included to give a true and fair view, whether that
additional information was necessary
whether the auditor has been given all information, explanation and assistance
necessary for the conduct of the audit
whether the company has kept financial records sufficient to enable the
financial report to be prepared and audited
whether the company has kept other records and registers as required by the
Act.

The auditor's report must express the opinion of the auditor as to whether the financial
report is in accord with the Act, specifically s.296 (compliance with accounting
standards) and s.297 (true and fair view). If the auditor is of the opinion that the
financial report does not give a true and fair view, and is not in accord with the Act or
with accounting standards, the auditor must state the reasons for that opinion in the
report. Furthermore, if the financial report does not comply with an accounting
standard, the auditors report must quantify the effect that non-compliance has on the
financial report.
13.

Outline the concept of materiality as it applies to financial

reporting.

Materiality is a concept essential to the preparation and presentation of general

purpose financial statements. The Corporations Act's requirement that financial
statements present a 'true and fair' view does not mean that the financial statements
must be absolutely accurate to the last cent or absolutely complete in terms of the
information disclosed. Rather, the notion of 'true and fair' is one of reasonableness,
whereby the user can assume that the financial statements contain no material errors
or omissions. The notion of materiality guides the margin of error acceptable, the
degree of precision required and the extent of disclosure required. Material is defined
in paragraph 5 of AASB 108 as:
omissions or misstatements of items are material if they could, individually or
collectively, influence the economic decisions that users make on the basis of the
financial statements. Materiality depends on the size and nature of the omission or
misstatement judged in the surrounding circumstances. The size or nature of the item,
or a combination of both, could be the determining factor.
Accounting standards apply only where information resulting from their application is
material. Thus, preparers need to make judgements as to whether the information

AYN417

Topic 4: Financial Statements External Reporting

provided by the application of a standard such as AASB 117 Leases is material to

report users. If a company's sole lease arrangement is deemed to be immaterial in
respect of either its financial performance or financial position, the requirements of
AASB 117 need not be applied.
Question 14.5
Accounting policies and accounting estimates
(a) accounting estimate
(b) accounting policy
(c) accounting estimate (the policy is to depreciate non-current assets see (b)
estimates are then required regarding: useful life; residual value; and pattern of
benefits)
(d) accounting policy
(e) accounting estimate (i.e., an accounting estimate that is determined by applying a
policy of estimating warranty provisions as a % of sales based on the prior period
%)

AYN417

Topic 4: Financial Statements External Reporting

Question 14.7
Events occurring after the end of the reporting period
A. Classification of events
Date

Event

Condition at 30 June
2017
None as vehicles
destroyed after 30
June 2017
Inventory on hand at
cost of $153,000

17 July

Firebombing of
vehicles

18 July

Selling price
reduction for
product X

15
August

Charge of
environmental
damage lodged

None as leak occurred

after 30 June 2017

21
August

Unrecorded
purchase
invoices
Debenture offer

Accounts payable and

inventory

30
August

None as debentures
issued after 30 June
2017

New information
Future losses
Net realisable value
of inventory only
$76,500
(50% x $153,000)
Future fines
($350,000) plus
legal costs and
clean-up costs (>
$250,000)
Understatement of
both items by
$37,650
Future cash flow
effects and increase
of liabilities

Classificat
ion
Nonadjusting
Nonadjusting
NonAdjusting

Adjusting
NonAdjusting

B. Adjusting journal entries

Date
2017
30 June

Account

DR

Inventory
Accounts payable
(Recognition of unrecorded invoices)

37,650

CR
37,650

Note Disclosures
Note X:

Events occurring after the end of the reporting period

On 17 July 2017, a firebomb destroyed a number of transport vehicles resulting in

disruption of delivery schedules and an uninsured loss of $100,000.
On the 18 July, a major competitor released a new product which results in the
significant decline in net realisable value of Product X of 50%. This will necessitate an
inventory write down of $76,500.
On 15 August 2017, the company was charged with environmental damages arising
from a leakage of toxic materials from the storage tanks on 3 July 2017. Possible
losses from fines, legal and clean-up costs could be in excess of $600,000. The
directors will vigorously defend the claim of negligence.
On 30 August 2017, the company offered 3,000 10% $100 debentures for public
subscription. The debentures are secured by floating charge over the companys
assets and are redeemable on 1 October 2020.

AYN417

Topic 4: Financial Statements External Reporting

Chapter 15
4. Is there a required or fixed format for the presentation of the Statement
of Financial Position?
No. AASB 101 does not prescribe a required order or format for the Statement of
Financial Position. AASB 101 simply lists items that are sufficiently different in nature
or function to warrant separate presentation in the Statement of Financial Position.
However, reference is made in AASB 101 to the Implementation Guidance on IAS 1
Presentation of Financial Statements distinguishes between current and non-current
items.
7. Is there a required or fixed format for the presentation of the Statement
of Profit or Loss and Other Comprehensive Income?
No. AASB 101 does not prescribe a required order or format for the Statement of Profit
or Loss and Other Comprehensive Income. However, a company must chose 1 of 2
presentations. According to AASB 101, a company may present either:
1. A single Statement of Profit or Loss and Other Comprehensive Income with profit
or loss and other comprehensive income presented in two sections (the two
sections are to be presented together with the profit or loss section presented
first followed directly by the other comprehensive income section); or
2. A separate statement of profit or loss immediately followed by a Statement of
Comprehensive Income.
Itshouldben,wvraimchustbeodlnfaSmCprehvsicoI.
9. What items comprise other comprehensive income?
Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or
permitted by other accounting standards (AASB 101). According to AASB 101, the
items of other comprehensive income include:
(a) Changes in a revaluation surplus (see AASB 116 Property, Plant and
Equipment and AASB 138 Intangible Assets);
(b) Measurements of defined benefit plans (see AASB 119 Employee Benefits);
(c) Gains and losses arising from translating the financial statements of a foreign
operation (see AASB 121 The Effects of Changes in Foreign Exchange Rates);
(d) Gains and losses from investments in equity instruments measured at fair
value through other comprehensive income in accordance with paragraph
5.7.5 of AASB 9 Financial Instruments;
(e) The effective portion of gains and losses on hedging instruments in a cash
flow hedge (see AASB 139 Financial Instruments: Recognition and
Measurement); and
(f) For particular liabilities designated as at fair value through profit or loss, the
amount of the change in fair value that is attributable to changes in the
liabilitys credit risk (AASB 9).

AYN417

Topic 4: Financial Statements External Reporting

Question 15.6 Statement of Profit or Loss and Other Comprehensive Income

(classify expenses by nature)
[Comparative information must be disclosed in respect of the preceding period for all
amounts reported in the current period's financial statements in accordance with
AASB 101. However this information is not provided in the question].
VENUS LTD
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2017
$
Revenue*
5,765,900
Other income**
115,000
Changes in inventories of finished goods and work in
(390,500)
progress
Raw materials used
(4,000,00
0)
Employee benefits expense***
(800,000)
Depreciation and amortisation expense
(343,500)
Other expenses
(228,700)
Finance costs
(82,400)
Profit before income tax
35,800
Income tax expense
(10,740)
Profit for the year
25,060
Other comprehensive income
Total comprehensive income for the year
25,060
Workings:
*Revenue:
Sales
Sales returns and allowances
Interest
Dividends
Sundry
**Other income
Proceeds on sale of land
Cost of land sold
***Employee
benefits
expense
Salaries and wages
Other employee benefits

$
5,725,000
(56,100)
72,500
23,000
1,500
5,765,900
300,000
(185,000)
115,000
675,000)
(125,000)
(800,000)

AYN417

Topic 4: Financial Statements External Reporting

Question 15.7
Statement of profit or loss and other comprehensive
income (classify expenses by function)
[Comparative information must be disclosed in respect of the preceding period for all
amounts reported in the current period's financial statements in accordance with
AASB 101. However this information is not provided in the question].
PLUTO LTD
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2017
Revenue
Other income*
Cost of sales
Distribution costs
Marketing costs
Administrative costs
Finance costs
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for the year

$
1,800,000
20,000
(1,072,000
)
(116,000)
(54,000)
(104,000)
(40,000)
434,000
(130,200)
303,800
303,800

Note: The amount of dividends paid ($10,000) and the related amount per share must
also be disclosed either in the Statement of Changes in Equity or in the notes (AASB
101, paragraph 107).
Workings:
*Otherincom:
Procedsmfalpnthyi
Canrygimoutfpldche

$
60,
(40,
20,

AYN417

Topic 4: Financial Statements External Reporting

Question 15.8*
Statement of Financial Position
[Comparative information must be disclosed in respect of the preceding period for all
amounts reported in the current period's financial statements in accordance with
AASB 101. However this information is not provided in the question].
ASTEROID LTD
Statement of Financial Position
as at 30 June 2018
$'000
ASSETS
Current assets
Trade and other receivables*
3,320
Inventories
8,000
Total current assets
11,320
Non-current assets
Property, plant and equipment**
22,975
Goodwill
20,000
Total non-current assets
42,975
Total assets
54,295
LIABILITIES
Current liabilities
Trade and other payables***
Short-term borrowings
Current tax payable
Total current liabilities
Non-current liabilities
Long-term borrowings
Total non-current liabilities
Total liabilities

10,000
10,000
17,695

Net assets

36,600

1,800
5,500
395
7,695

EQUITY
Share capital****
Reserves
Retained earnings
Total equity
Workings:

34,500
500
1,600
36,600
$'000

*Trade and other

receivables
Accounts receivable
Allowance for doubtful debts

3,185
(80)
3,105
215
3,320

Prepayments
**Property, plant and
equipment:
Land
Buildings
Accumulated depreciation
Fixtures and fittings

$'000
*** Trade and other
payables
Accrued expenses
Accounts payable
Dividend payable

50
1,000
750
1,800

****Share capital
5,100
20,00
0
(3,000
)
1,250

17,00
0

Share capital
Calls in advance

33,75
0
1,000

Calls in arrears

(250)
34,50

AYN417

Topic 4: Financial Statements External Reporting

0

Accumulated depreciation

(375)

875
22,97
5
Question 15.9 Statement of Changes in Equity
[Comparative information not provided in the question].
COMET LTD
Statement of Changes in Equity
for the year ended 30 June 2016
Share
General
Reval.
Retained Total
capital
reserve
surplus
earnings
$
$
$
$
$
Balance at 1 July
3,600,00
100,000
240,000
680,000 4,620,00
2015
0
0
1
Total comprehensive
560,000
300,000
860,000
income for the year
Dividend paid
(80,000)
(80,000)
Issue of share capital
100,000
100,000
Transfer to general
400,000
- (400,000)
reserve
Balance at 30 June
3,700,00
500,000
800,000
500,000 5,500,00
2016
0
0
nsIufficieotrmfawpvdhqsnermtipa.
1.80,x7%e(arftmoun)=56
Case study: Continuous disclosure and frequency of reporting
1 What is continuous disclosure in the case of publicly-listed companies?

ASX listing rule 3.1: 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 entitys securities, the entity must immediately
tell the ASX that information.

There are several exceptions: including trade secrets, confidential information

or when the information relates to an incomplete proposal or negotiation.

Explain the term reporting cycle

Reporting cycle commences from the time an entity reports half-yearly to

its members and ends with the filing of its annual financial report with ASIC
and ASX.

3. What reporting cycle is required to be adopted by publicly listed companies in

Australia?

^4.

Publicly-listed companies in Australia are required to adopt the following

reporting cycle:
Half-Yearly: Report to ASIC: Lodge report with ASIC within 75 days after end
of half-year
Annually:
Report to members and ASIC: Reports lodged with ASIC are
also lodged with ASX.

Explain how CD rules are required to be interpreted?

AYN417

Topic 4: Financial Statements External Reporting

A substance over form approach is required but companies can rely on
exceptions to avoid/delay disclosure.

^5 How are the CD interpretations / decisions the same as those required daily in
corporations?

6.

The process adopted by directors in the preparation of external financial

reports is highly likely to involve, amongst other things, discussions,
interpretations and deliberations about the impact of accounting standards,
company law and expected market reaction to published financial
statements.

How would the adoption of quarterly reporting assist in improving the

transparency of financial reporting? Justify your response

Quarterly reporting would improve regularity of financial reporting by

improving the timeliness of financial information but at a cost. However
regularity (timeliness) and transparency are essentially different issues.
There is no guarantee that more regular information would necessarily be
better quality (more reliable) information.

It is arguable if quarterly reporting will have the effect of reducing

continuous disclosure costs.

Some mining companies and certain other entities are required to report
quarterly cash flow information to the ASX

^ = additional detail