Accounting Business Reporting for Decision Making

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158 Accounting: Business Reporting for Decision Making


financial statements for their decision-making. The factors taken into consideration when deciding if an


entity is a reporting entity include its size and indebtedness, the separation of the entity’s management and


ownership, and its economic or political significance. If an entity has indicators that suggest it is a reporting


entity, then the entity should prepare general purpose financial statements. Further, the financial statements


of a reporting entity should comply with specified accounting rules governing recognition, measurement,


presentation and disclosure requirements. If an entity is assessed as a non-reporting entity, then it can prepare


special purpose financial statements. For example, JB Hi-Fi Ltd is a reporting entity given its size and separa-


tion of ownership and management as its decision-making resides with management on behalf of the share-


holders. Conversely, a private school limited by guarantee may not be assessed as a reporting entity and may


produce special purpose financial statements. The reporting entity concept and its role in determining finan-


cial reporting requirements is currently being reviewed by the Australian Accounting Standards Board as


part of a project on differential reporting. This project includes a reconsideration of the role that the reporting


entity concept has on determining which entities must prepare general purpose financial statements.


What is the difference between general purpose financial statements and special purpose financial


statements? Statements that are purported to be general purpose financial statements must be prepared in


accordance with generally accepted accounting principles (GAAP), whereas special purpose financial


statements can be prepared without adhering to GAAP. GAAP is a set of rules and practices that guide


financial reporting.


A country’s GAAP is usually specified in accounting standards. Accounting standards detail specific


recognition, measurement, presentation and disclosure requirements applicable to various types of trans-


actions. For example, there are accounting standards governing accounting for inventory, accounting for the


acquisition of property, plant and equipment, and accounting for revenue. Historically, accounting standards


have varied by country. For example, Australia issued Australian accounting standards that were different to


the accounting standards issued in China, Japan, Germany and the United States. As markets have become


increasingly borderless, considerable progress has occurred in developing a set of acceptable international


accounting standards — International Financial Reporting Standards (IFRS). IFRS are particularly focused


on for-profit entities and are issued by the International Accounting Standards Board (IASB). At the time of


writing, more than 130 jurisidictions have adopted or converged their domestic standards with IFRS. Coun-


tries adopting IFRS include Australia, South Africa and all European Union countries. Countries substan-


tially converging their domestic standards with IFRS include China and India. Notable countries that have


not adopted or substantially converged their standards to IFRS are the United States and Japan.


A set of public sector accounting standards — International Public Sector Accounting Standards


(IPSAS) — issued by the International Public Sector Accounting Standards Board, are also available for


jurisdictions to adopt. In Australia’s case, rather than adopting IPSAS additional paragraphs have been


included in the Australian adopted IFRS to make them applicable to all entity types (e.g. for-profit, not-


for-profit, private sector and public sector entities) required to prepare general purpose financial state-


ments. References throughout this chapter and subsequent chapters are to IFRS.


Are there different versions of IFRS to use when preparing general purpose financial statements? The


IASB has issued IFRS as well as IFRS for Small and Medium-sized Entities (IFRS for SMEs). IFRS


for SMEs simplifies some of the recognition and measurement rules, omits topics not relevant to SMEs


and reduces disclosure requirements. The use of IFRS or IFRS for SMEs when preparing general pur-


pose financial statements depends on whether an entity has public accountability. Entities with public


accountability must prepare general purpose financial statements using IFRS. Public accountability is


applicable to entities with securities, debt or equity that are traded in a public market, or entities that


hold assets in a fiduciary capacity as their main business activity. For example, the shares of JB Hi-Fi


Ltd are traded on the ASX; therefore, JB Hi-Fi Ltd is subject to public accountability. IFRS for SMEs


are available for use by small and medium-size entities that are not subject to public accountability but


do publish general purpose financial statements.


Not all jurisdictions have accepted IFRS for SMEs. Some countries have followed a different path.


Australia, for example, has introduced differential reporting. In Australia, entities preparing general

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