PREPARE FINANCIAL REPORTS FOR CORPORATE ENTITIES

Introduction to Company Accounting Chapter 1 Introduction to Company Accounting

Definition of a company 1.1 Definition of a company

What is a Company? An entity created by law and separate from the people who own and/or manage the company. Created under the provisions of the Corporations Act 2001.

Characteristics of a Company Separate legal entity Management and ownership are usually separated Limited liability of shareholders Legal existence and business not affected by change in shareholders

1.2 Types of Businesses

Common types of businesses Sole traders Partnerships Limited liability companies

Sole Traders Owned by a single person The proprietor has unlimited liability The owner takes the profits and bears all losses The life of a sole trader business ends when the owner either sells or closes the business

Partnerships Two or more partners Not a separate legal entity from its owners Legally partners are jointly liable for all debts Partners share all profits and bear all losses according to an agreed ratio. Terminates any time the ownership changes through retirement, death etc or a partner.

Limited Liability Company Limited liability means that shareholders are liable only to the value of their shareholding Directors and management are appointed by shareholders

Characteristics of a Company Perpetual succession Easier access to finance Subject to government control Higher establishment costs

Sole Trader Owner is manager Owner keeps all profits Minimal government controls Advantages Unlimited liability Unsecured finance may be difficult to obtain Disadvantages

Partnerships Disadvantages Partners share profits Combined expertise Greater access to capital Fewer gov’t controls than companies Advantages Some establishment costs Unlimited liability disputes between partners Cessation when composition of partners changes Disadvantages

Limited Liability Companies Limited liability Perpetual succession Easier access to finance Advantages Establishment costs Controls via the Corporations Act Disadvantages

1.3 Types of Companies

Proprietary Limited – Pty Ltd A proprietary limited company is: Limited by shares with each shareholder having limited liability or An unlimited company with a share capital

Proprietary Limited – Pty Ltd Minimum of 1 member and maximum of 50 non-employee shareholders Minimum of 1 director Cannot raise capital from the public Must have either Proprietary as part of its name or Pty Ltd Not required to hold an AGM

Public Company Limited - Ltd Minimum of 1 member – no maximum Must have at least 3 directors May raise funds from the public with the issue of a prospectus

Mining is a force for economic growth in Australia No Liability Company Mining is a force for economic growth in Australia Public companies – mining only Must have the words No Liability or NL after their name Have share capital but no right to force shareholders to pay a call. If the shareholder does not pay a call, the shares are automatically forfeited

Limited by Guarantee Public company No share capital Members guarantee to contribute in the event of liquidation

Unlimited Liability Companies No limit placed on the amount members may be required to pay.

Small and Large Proprietary Companies 1.4 Small and Large Proprietary Companies

Corporation Act The Corporations Act applies different levels of standards depending on whether a company is classified as small or large.

Large Proprietary Companies Defined as satisfying 2 of the following for the company and its controlled entities: Consolidated gross operating revenue > $10m for the financial year Consolidated gross assets > $5m Combined entities have at least 50 employees at the end of the financial year.

Large Proprietary Companies Must prepare accounts, have them audited and sent to shareholders and ASIC.

Small Proprietary Companies Not required to prepare formal financial statements Must maintain sufficient accounting records to allow annual accounts to be prepared and audited

Financial Reports GENERAL PURPOSE FINANCIAL REPORTS (GPFR) are required to be prepared according to the Accounting Standards to meet needs of a range of users eg shareholders, suppliers, customers SPECIAL PURPOSE FINANCIAL REPORTS (SPFR) are prepared to meet needs of a specific group who can command reports ot meet their needs eg. financiers

1.5 Registration

Choose a name and decide the type of company required. Prepare a constitution or adopt the Replaceable Rules. Allocate shares to founders, directors and company secretary. Establish the registers and minute book To register with ASIC

To Register with ASIC Lodge the application in writing. ASIC grants registration and issues a certificate of registration.

1.6 Company Constitution

Replaceable Rules These govern the internal management and dealings with shareholders.

1.7 Regulatory Bodies

Role of regulators Create and enforce rules so that the public have confidence in the financial markets. Stay abreast of new developments and adjust the rules accordingly.

Regulatory bodies ASIC ASX AASB FRC

Australian Securities and Investment Commission: ASIC Administers and enforces a range of legislative provisions relating to the financial sector. Aims to protect markets and consumers from manipulation, deception and unfair practices.

Additional roles of ASIC Develops policy and guidance. Monitors compliance. Provides comprehensive and accurate information of companies. Also monitors various banking codes of practice.

Australian Stock Exchange Provides a market place for shares. Applies listing rules to all companies listed on the exchange.

Australian Accounting Standards Board: AASB Approves or rejects accounting standards submitted to the Board. An approved accounting standard has the force of law.

Financial Reporting Council: FRC Oversees the standard setting process and acts as advisor to the AASB. Members are appointed by the Treasurer.

1.8 Accounting Standards

Accounting Standards The Australian Constitution allows the federal government to legislate for companies only. Approved AASB standards are now mandatory for companies under the Corporations law.

Accounting Conceptual Framework Accounting Standards The conceptual framework for accounting defines the nature, subject, purposes and broad content of accounting reports. A concept is developed, then a standard is produced to satisfy the need seen in the concept. Accounting Conceptual Framework Accounting Concept Accounting Standard Company Reports

International Accounting With increased globalisation, the pressure for a common set of global accounting standards has increased. International standards are issued by the International Accounting Standards Board (IASB)

Benefits of adopting IASB standards Assist cross-boarder comparisons by investors Reduce cost of capital Assist raising finance Assist listing on overseas markets

AASB series AASB 1-99: AASB equivalents to the International Financial Reporting Standards (same numbers) AASB 101- 199: AASB equivalents to the former International Accounting Standards. AASB 1001 – 1099: Australian accounting standards with no international equivalent (eg. AASB 1031 Materiality).

1.9 Financial Records

Financial Records Under the Corporations Law a registered business must comply with provisions dealing with keeping of company records: Official statements are true and fair Financial statements to be audited Records kept for 7 years

1.10 Company Registers

Company Registers Registers required to be kept under the Corporations Act and made available to the public.